Judge Nugent

12-05114 Discover Bank v. Hankins (Doc. # 13) - Document Text

SIGNED this 5th day of November, 2012.




ANITA LOUISE HANKINS, ) Case No. 12-10884
) Chapter 7
Debtor. )

Plaintiff, )
v. ) Adversary No. 12-5114

Defendant. )


If Discover Bank’s boilerplate dischargeability complaint states a cause of action under 11

Case 12-05114 Doc# 13 Filed 11/05/12 Page 1 of 15

U.S.C. § 523(a)(2) (A) that is plausible on its face, it will survive Anita Hankins’ motion to dismiss
for failing to state a claim. But if the complaint fails to plead enough facts to support its facial
allegations that she incurred credit card debt that she knew she could not pay and did not intend to
pay, it must be dismissed. Likewise, if Discover’s blanket allegation that all of Ms. Hankins’ charges
during the three months leading up to her filing were for luxury items under § 523(a)(2)(C)(i)(I)
lacks plausibility, it, too, must be dismissed. After careful review of the complaint, I conclude that
it is not facially plausible that the items charged were luxury items or that the statutory $600
threshold in (a)(2)(C)(i)(I) has been met. Even so, I conclude that the complaint states a cause of
action for excepting these and other charges from discharge under § 523(a)(2), though Discover will
have the burden of proving the debtor’s fraud because it can receive no benefit from the subpart (C)
presumption with respect to any of the charges. The presumption simply does not arise.

An adversary proceeding to determine the dischargeability of particular debts is a core
proceeding under 28 U.S.C. § 157(b)(2)(I) over which this Court may exercise subject matter

Facts as Pled in Complaint

Anita Hankins filed this bankruptcy case on April 12, 2012. The 90-day period preceding
the filing commenced on January 13, 2012. Discover filed this complaint on July 10, 2012. Discover
alleges that Hankins applied for and received a credit card account from Discover and owed

1 28 U.S.C. § 157(b)(1) and § 1334(b). Unless otherwise indicated, all statutory
references are to Title 11, U.S.C., as amended. Plaintiff Discover Bank appears by its attorney
Lawrence G. Reinhold. Defendant Anita Louise Hankins appears by her attorney Don W. Riley.


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Discover $11,325.93 on the petition date.2 Discover also alleges that Hankins’ schedules indicate
that she has monthly income of $200 and monthly expenses of $200. She listed $33,249 in credit
card debt on her schedules. The summary of schedules shows that Hankins has total assets of $2,617
and total liabilities of $33,734.3

The complaint lists 36 credit card charges made by Hankins in the 90 days preceding her
petition date and attached to the complaint is a running account statement itemizing the charges
comprising the total debt incurred between September 1, 2011 and March 21, 2012.4 Most charges
were to variety or discount stores, fast-food restaurants, grocers and retail giants Walmart and
KMart. She has a couple of small charges to jewelers, and two charges to the local Harley-Davidson
dealership, one of which is for $1,000. Other than the identification of the merchants in the account
statement, there are no allegations or description of the goods or services purchased by Hankins to
suggest that they were incurred for luxury items. Apart from the Harley dealership, none of the other
merchants would be considered “exclusive” or high-end establishments and the majority of charges
are less than $100. The account statement shows that Hankins made six monthly payments on her
account during the period September of 2011 to March of 2012: $102 on September 16, 2011; $103
on October 19, 2011; $101 on November 18, 2011; $112 on December 20, 2011 and in the 90 days
before she filed, Hankins made two payments: $161 on January 14, 2012; and $174 on February

2 There is no indication when Hankins opened her Discover account.
3 Discover erroneously alleges $141,147 in assets and $165,200 in liabilities.
4 Discover omits from its allegations, two additional charges on January 14, 2012 that

fall within the 90-day period, but they would not affect the outcome of the motion to dismiss if
they were to be included..

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20, 2012.5 During this same seven month period she was charging between $650 and $1,400 a
month. The 36 charges alleged by Discover as charges incurred for luxury items during the 90 day
period total $2,691.11; for these it contends it is entitled to the presumption of fraud and
nondischargeability under § 523(a)(2)(C).

Discover alleges that each of Hankins’ charges made within the 90-day period before her
petition is “a charge on the account for goods and services not reasonably believed to be reasonably
necessary for the maintenance and support” of the debtor, but does not detail why, for instance, a
$19 charge to the Golden Corral Restaurant (January 17, 2012), $48 at K-Mart (February 3, 2012),
or $71 at Dillon’s, a grocery store (March 20, 2012) constitute luxury charges. There are, however,
some charges that could be, including the $1,000 charge to Alef’s Harley-Davidson on March 13,
2012 and the $155 charge to One Day Jewelry on February 9, 2012.6 There are also sizeable charges
to discount retailers between November 25, 2011, Thanksgiving Day, and December 17, 2011,
suggesting that Hankins did a lot of Christmas shopping with her Discover card, but these charges
did not occur during the 90-day window. Finally, Discover alleges that Hankins was insolvent and
that each time she made a charge, she actually or impliedly represented that she intended to repay
Discover and that Discover justifiably relied on those representations.

Hankins moved to dismiss the complaint, claiming that it is implausible on its face, that

5 The actual monthly billing statements issued to Hankins are not provided to ascertain
the manner of calculating her monthly payments, but the Court suspects that the monthly
payments made by Hankins were the minimum monthly payments due under the terms of her
Discover account.

6 In addition to the $1,000 charge to Alef’s on March 13, 2012, a second charge of $44
on March 20 meets the aggregate $600 minimum to a single creditor under § 523(a)(2)(C)(i)(I) if
the goods or services qualify as luxury items. The One Day Jewelry charge, however, is the only
charge to this creditor during the 90-day period and is less than $600.


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Discover did not appear at the first meeting or do any other pre-complaint investigation or discovery,
and that Discover has failed to allege sufficient factual circumstances from which Hankins’
fraudulent intent could be inferred.7 Discover responds that the charges made inside the 90-day
period are presumed fraudulent and nondischargeable under § 523(a)(2)(C) and, though its brief is
terse to say the least, seems to argue that this presumption saves Discover from having to allege
actual factual circumstances concerning the fraud or the charges as being in the nature of luxury

Fed. R. Civ. P. 12(b)(6) Standards

I take Discover’s pleaded allegations as true, resolving all doubts in its favor. To determine
whether dismissal is appropriate, I must consider whether these claims are "facially plausible" based
upon the facts pled in the complaint.8 As the Tenth Circuit has noted, “[t]he burden is on the plaintiff
to frame a ‘complaint with enough factual matter (taken as true) to suggest’ that he or she is entitled
to relief” and these “[f]actual allegations must be enough to raise a right to relief above the
speculative level.”9 It is plainly insufficient to make conclusory allegations that parrot the language
of the statute without factual allegations to suggest defendant is liable.10 And as explained in
Ashcroft v. Iqbal, Rule 8(a)’s “short and plain statement of the claim” standard does alleviate the

7 Adv. Dkt. 8.

8 See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d
929 (2007) (complaint must plead enough facts to state a claim to relief that is plausible on its
face; the alleged claims must nudge "across the line from conceivable to plausible.").

9 Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008), quoting Twombly, 550

U.S. at 570.
10 Khalik v. United Air Lines, 671 F.3d 1188, 1191 (10th Cir. 2012), citing Twombly, 550
U.S. at 555.
12-05114 Doc# 13 Filed 11/05/12 Page 5 of 15

requirement of factual allegations.11


This credit card debt nondischargeability case is brought under § 523(a)(2)(A), the fraud
discharge exception. For a portion of the debt, some $2,700, Discover seeks to invoke the statutory
presumption of nondischargeabiliy applicable to debt incurred for luxury goods under §
523(a)(2)(C)(i)(I). Failing that, or for the balance of the $11,325 credit card debt, Discover falls
back on § 523(a)(2)(A), commonly referred to as the “actual fraud” exception to discharge. Without
the statutory presumption, it will be incumbent upon Discover to prove that at the time Hankins
incurred the credit card debt, she did not intend to pay it. Such cases generally turn on the facts and
circumstances of the particular case. Today, however, the defendant’s motion to dismiss under Rule
12(b)(6) asks this Court to determine whether Discover has sufficiently pled its presumptively
fraudulent claim and its actual fraud dischargeability claim.12 Thus, the Court will apply the
Twombly and Iqbal analysis articulated by the Supreme Court and Rule 12(b)(6) of the Federal Rules
of Civil Procedure in deciding the motion.

Credit Card Fraud and the § 523(a)(2)(A) Exception to Discharge; Presumed

Fraud under § 523(a)(2)(C)(i)

Section 523(a)(2)(A) excepts from discharge debts the debtor incurred by false pretenses,
false representations, or actual fraud, other than statements respecting the debtor’s financial
condition. A knowingly false representation must be relied upon by the creditor to its detriment, and

11 556 U.S. 662, 677-78, 129 S.Ct. 1937 (2009) (citing Twombly, pleading under Fed. R.
Civ. P. 8 demands more than unadorned “the-defendant-unlawfully-harmed-me” and naked
assertions devoid of factual enhancement).

12 Fed. R. Civ. P. 12(b)(6) is made applicable to adversary proceedings by Fed. R. Bankr.

P. 7012.
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that reliance must be justifiable.13 In the credit card context, the “representation” a debtor makes
when she charges a purchase is implied: she is essentially telling the creditor that while she isn’t
paying for the item or service she is purchasing now, she intends to.14 Mere use of the card to charge
something now that the debtor is otherwise unable to pay for now is not fraud; it is exactly what
credit cards are for. The only representation a debtor makes when she uses a credit card is that she
intends at the time she incurs the charge to pay it when billed. A court cannot infer that this
representation is fraudulent simply because the debt wasn’t paid. There needs to be more indication
of the debtor’s subjective intent, whether that is directly proven or inferred from the totality of

In the Kukuk case, the Tenth Circuit Bankruptcy Appellate Panel listed 12 nonexclusive
factors to determine a credit card debtor’s intent under the totality of the circumstances test:16

(1) the length of time between the charges and the filing of bankruptcy;
(2) whether the debtor consulted an attorney regarding bankruptcy prior to the charges;
(3) the number of charges made;
(4) the amount of the charges;
(5) the financial condition of the debtor at the time the charges were made;
13 Field v. Mans, 516 U.S. 59, 70-72, 116 S. Ct. 437, 133 L. Ed. 2d 351 (1995)
(Justifiable reliance is a less demanding standard than reasonable reliance; while it does not
require the creditor to investigate the accuracy of the representation, if the true facts are patently
apparent or the creditor has information that should serve as a warning to investigate further, the
reliance is not justified.).

14 In re Kukuk, 225 B.R. 778, 785 (10th Cir. BAP 1998).

15 Id. at 786. See also Flower Bros. v. Young (In re Young), 91 F.3d 1367, 1375 (10th Cir.

16 Id. at 786 [citations omitted].


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(6) whether the charges were above the credit limit of the account;
(7) whether the debtor made multiple charges on any given day;
(8) whether or not the debtor was employed;
(9) the debtor's employment prospects;
(10) the debtor's financial sophistication;
(11) whether there was a sudden change in the debtor's buying habits; and
(12) whether the purchases were made for luxuries or necessities.
Other than the number and amounts of Hankins’ charges and the debtor’s straitened financial
circumstances, Discover pleads few facts that would demonstrate the presence of most of these
factors. Though its brief is less than direct on the point, Discover appears to rely on the §
523(a)(2)(C)(i)(I) presumption that the charges for luxury or non-support items were fraudulent and
nondischargeable, at least as to those 36 credit card charges during the 90-day period preceding
Hankins’ filing.
To obtain the benefit of the presumption, however, the requirements of § 523(a)(2)(C)(i)(I)
must be met. A plaintiff proceeding under the statutory presumption must show the existence of six
elements: (1) a consumer debt; (2) owed to a single creditor; (3) aggregating more than $600; (4)
for luxury goods or services; (5) incurred by an individual debtor; and (6) on or within 90 days
before the filing of the petition.17 While luxury goods are not specifically defined by the Code, §
523(a)(2)(C)(ii)(II) specifies that necessities are excluded – “goods or services reasonably necessary

17 In re Alexo, 436 B.R. 44, 49 (Bankr. N.D. Ohio 2010).

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for the support or maintenance of the debtor . . .”18 In determining whether an item is a luxury good,
the circumstances surrounding the purchase, whether the item serves a significant family function,
and whether the purchase shows financial irresponsibility, may be considered.19 Even if the
elements of § 523(a)(2)(C)(i)(I) are met, the presumption of nondischargeability is a rebuttable


With these legal principles in mind, a careful review of the complaint is next. If its
allegations are all taken as true, does it state a claim that is plausible on its face? I first consider
whether Discover has sufficiently pled the statutory presumption of fraud and nondischargeability
under § 523(a)(2)(C) being mindful that the statutory presumption may only be invoked for the
credit card charges made during the 90 days before filing. Here, Discover includes each and every
credit charge during the 90-day period as a charge for a luxury good or service.21 With respect to
these 36 credit card charges totaling $2,691, Discover alleges for each transaction the following:
“On [date], [ ] days before the entry of the Order for Relief, [defendant] incurred a charge on the

18 In re Shaw, 294 B.R. 652, 655 (Bankr. W.D. Pa. 2003) (luxuries are extravagances or
self-indulgences); In re Vernon, 192 B.R. 165 (Bankr. N.D. Ill. 1996) (describing luxury goods
as extravagant, indulgent, or non-essential object)

19 In re Meyer, 296 B.R. 849, 865 (Bankr. N.D. Ala. 2003) (charges made at gas stations,
grocery stores, department stores, a pharmacy, and restaurants are not for luxury items).

20 See In re Kountry Korner Store, 221 B.R. 265, 269 (Bankr. N.D. Okla. 1998) (once
presumption is successfully invoked, burden shifts to debtor to disprove one element of fraud
required for nondischargeability); In re Shaw, 294 B.R. at 656 (debtor may successfully rebut the
presumption by showing that the debt was not incurred in contemplation of discharge in

21 See In re Pusateri, 432 B.R. 181, 203 (Bankr. W.D. N.C. 2010) (describing the inquiry
a creditor was required to make as to “indeterminate” charges incurred by debtor prior to filing
complaint alleging the charges to be nondischargeable luxury goods or services; criticizing
creditor for including all charges within 90 day period when some were obviously not luxury


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account for goods or services not reasonably believed to be reasonably necessary for the
maintenance and support of [defendant] nor a dependent of [defendant] in the amount of . . . .”22
Only by referring to the account statement attached to the complaint to match the date and amount
of the credit card transaction alleged can one ascertain the identity of the merchant in each
transaction. And the identity of the merchant is the only fact that sheds any faint light on the nature
of the goods or service purchased in the transaction. But the reasonable inference to be drawn from
the identity of the merchants here is that nearly none of the charges was incurred for luxury goods
or services.

Looking at the 36 charges that are alleged (Complaint ¶s 7-42), all of the charges but two can
be quickly eliminated without resorting to a determination of whether luxury goods were purchased,
because the amount of the charge for the named merchant, whether a single charge or in the
aggregate, is less than the $600 threshold.23 Indeed, most of the charges are less than $100, even in
the aggregate. Nearly all of these merchants are in any event, discount or low-end retailers and

22 See Adv. Dkt. 1, ¶s 7-42.

23 Credit card charges for the following merchants as cross-referenced to paragraphs of
the complaint cannot be subjected to the statutory presumption of nondischargeability: ¶ 7
(Avon); ¶s 8, 40 (Michael’s); ¶ 10 (Dillon’s Grocery); ¶s 11, 39 (Noori Convenience Store); ¶s
12, 15 (Petsmart); ¶ 13 (Ryan’s Restaurant); ¶s 14, 32, 34 (Furr’s Restaurant); ¶s 16, 24, 31
(Dollar General); ¶s 18, 20 (Quik Trip); ¶s 19, 37, 41 (Walmart); ¶ 21 (Jimmie’s Diner); ¶s 22,
23 (Big Lots); ¶ 25 (One Day Jewelry); ¶ 26 (Chili’s Restaurant); ¶ 27 (Sam’s Club); ¶ 28
(Jimmy’s Egg); ¶s 29, 30 (Kmart); ¶s 33, 38 (Golden Corral); ¶ 35 (Up N Smoke); ¶ 36 Cox
Communications; and ¶ 42 (T-Mobile). The Court notes in paragraph 22 of the Complaint
plaintiff alleges a credit transaction of February 23, 2012 in the amount of $20.77. The account
statement attached to the complaint shows that the correct amount of this transaction is $40.77,
but the corrected amount does not change the result as the aggregate amount charged for goods
from Big Lots is still far below the $600 threshold.


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restaurants.24 With respect to these charges, the presumption of nondischargeability does not arise.

That leaves only two credit charges alleged by Discover to be presumptively fraudulent, both
were charges incurred for purchases of goods or services at Alef’s Harley-Davidson – $1,000 on
March 13, 2012 (Complaint ¶ 17) and $44.51 on March 20, 2012 (Complaint ¶ 9). Other than the
Court’s local knowledge that Alef’s is a motorcycle dealership, no other facts are alleged by
Discover indicating what specific goods or services were purchased from Alef’s. Discover
undoubtedly is suggesting, without alleging, that Hankins unnecessarily purchased a motorcycle
that qualifies as a luxury item. That is certainly one possibility, but that is not the only reasonable
inference that can be drawn from Discover’s nearly fact-free complaint. Perhaps Hankins had no
means of transportation and purchased a motorcycle for that purpose, or maybe she incurred the
charge for service or repair to her only means of transportation. Perhaps Hankins purchased a
motorcycle for a dependent as the dependent’s sole means of transportation. There are several
possible inferences that can be drawn from this bare allegation. Twombly requires a plaintiff to
plead “factual content that allows the court to draw the reasonable inference that the defendant is
liable for the misconduct alleged.”25 Plausibility requires more than a “sheer possibility” that the
defendant is liable under the claim alleged.26 This, Discover has failed to do. As the Supreme Court

24 In re Zeman, 347 B.R. 28 (Bankr. W.D. Tex. 2006) (summary judgment granted for
defendant on § 523(a)(2)(C) luxury goods count where only “evidence” of luxury goods was the
identity of merchants alleged in pleadings – Target, Walgreens, Whataburger, Regal Cinemas,
restaurants, groceries, Petsmart – see fn. 1 therein; court characterizes plaintiff’s lawsuit as a
“shakedown” ); In re Meyer, 296 B.R. at 866 (In absence of details of the charges debtor made at
Walmart, Sears, J.C. Penney, and a carpet store, the Court cannot assume that the charges were
made for luxury goods).

25 550 U.S. at 556.

26 Id.


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stated in Iqbal:

Rule 8 . . . does not unlock the doors of discovery for a plaintiff armed with nothing

more than conclusions. . . . But where the well-pleaded facts do not permit the court

to infer more than the mere possibility of misconduct, the complaint has alleged – but

it has not ‘show[n]’ – ‘that the pleader is entitled to relief.’ Fed. Rule Civ. Proc. 8


. . . pleadings that, because they are no more than conclusions, are not entitled to the

assumption of truth. While legal conclusions can provide the framework of a

complaint, they must be supported by factual allegations.27
With respect to the Alef’s Harley-Davidson charges, Discover has not met the facial plausibility
standard in pleading the luxury goods statutory presumption in § 523(a)(2)(C).

Discover’s wholesale failure to plead anything about the charges other than its boilerplate
refrain that they are “not reasonably believed to be reasonably necessary for maintenance and
support” is inadequate.28 A close reading of the allegation reveals a critical pleading deficiency.
Discover does not specifically allege these 36 charges were for luxury goods, necessary to invoke
§ 523(a)(2)(C). Instead, Discover alleges the charges were for goods or services that were not
necessary for support or maintenance. In other words, Discover alleges the charges were not for
necessities. Even if the goods purchased on credit do not qualify as necessities, that does not
automatically make them luxuries. Goods can fall in between necessities and luxuries as numerous
cases so hold.29 At the pleading stage, it was incumbent upon Discover to allege the credit card
charges were for luxury goods, coupled with factual allegations from which the “luxury”

27 556 U.S. at 678-79.

28 See note 24, supra, and note 29, infra; In re Hampsohn, 429 B.R. 360 (Bankr. N.D. Ga.
2009) (creditor would not be granted default judgment on 523(a)(2)(A) and (C) claims where it
did not plead sufficient facts to establish (a)(2)(C) was applicable or to establish facts from
which a finding of actual, subjective fraudulent intent could be inferred).

29 See Alexo, supra at 49; In re Shaw, supra at 655; In re Blackburn, 68 B.R. 870, 874
(Bankr. N.D. Ind. 1987); In re Stewart, 91 B.R. 489, 497 (Bankr. S.D. Iowa 1988).


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characterization could be inferred. Here, it has done neither and this is fatal to maintaining its
presumptive nondischargeability claim. Discover’s § 523(a)(2)(C) claim with respect to the 36
transactions alleged in the Complaint (¶s 7-42) must therefore be dismissed for failure to state a
claim upon which relief may be granted.

The dismissal of the presumptive nondischargeability claim does not, however, eliminate
Discovery’s allegation that these 36 credit card charges were fraudulent. Even without the benefit
of the presumption, Discover may still have a claim under § 523(a)(2)(A) provided it is sufficiently
pled. Without the presumption of fraud at trial, Discover will be tasked to prove the elements of its
(a)(2)(A) claim charge by charge, including defendant’s intent not to pay for the goods or services
at the time the credit card charge was made.

Has Discover sufficiently pled its § 523(a)(2)(A) claim with respect to all of the transactions
comprising the credit card debt? Are there sufficient factual allegations, and not mere conclusory
allegations, from which to infer that Hankins had no intent to pay the debt at the time the credit card
charges were made? Answering these questions requires the Court to examine the complaint and
determine the presence of the Kukuk factors. The bare allegations of the complaint coupled with the
attached account statement, suggest several: (1) many charges were made within a few months of
filing;30 (2) there were lots of charges; (3) some of the charges were for large amounts;31 and (4)

30 Approximately 60 charges were made during the seven-month period September 2011March
2012, with two-thirds of those charges being incurred in the 3 months before filing.

31 The larger charges were to Alef’s Harley Davidson ($1,000) on March 13, 2012; Big
Lots ($482) on December 10, 2011; Walmart ($430) on November 25, 2011; and Best Buy
($295) on October 29, 2011.


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there were multiple charges on several days.32 The complaint alleges that, according to her
schedules, the debtor makes and spends only $200 a month but accumulated a credit card account
that, by the time the case was filed, exceeded $11,000. That is nearly five times her annualized
income of $2,400. It is plausible that Discover can show that the debtor made these charges without
intending to pay them. I therefore conclude that Discover’s complaint, boilerplate though it may
be, meets the plausibility standard and its § 523(a)(2)(A) claim survives the motion to dismiss.

Unlike the debtor, I do not presume that Discover filed this bare-bones complaint in hopes
of a quick default judgment or settlement. But even a cursory examination of the account statement
would reveal that the amounts and type of merchants involved in the charges are not suggestive of
luxury items or services. After all, a debtor’s routine charges for groceries or for medical care aren’t
luxuries. And a debtor who has made numerous monthly payments during the six months preceding
her petition may well have intended to repay her debts. But here, Discovery claims that each and
every charge the debtor made in the 90 days preceding the bankruptcy filing was a luxury charge.
That suggests that little or no thought or analysis went into the drafting of this complaint and, in this
judge’s experience, that usually means that even less pre-filing investigation has been done. But,
perhaps Discover will bring more to the table as it pursues this matter to a conclusion.33

32 The Court counts ten days on the account statement in which multiple charges were
made, ranging from two to four charges on the same day.

33 And if it doesn’t, Discover may have given the defendant ample fodder for recovery
under § 523(d) and Rule 9011. See In re Ritter, 404 B.R. 811, 832 (Bankr. E.D. Pa. 2009)
(consideration of factors in determining whether creditor’s § 523(a)(2)(A) complaint was
“substantially justified”); See also In re Pusateri, 432 B.R. 181, 203-04 (Bankr. W.D. N.C.
2010) (criticizing creditor’s “shoot first, then aim” approach to filing nondischargeability
complaints, filing of boilerplate complaint, lack of factual allegations, and lack of pre-filing


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Hankins’ motion to dismiss is GRANTED as to the presumptive nondischargeability claim
under § 523(a)(2)(C) and DENIED as to the fraud nondischargeability claim under § 523(a)(2)(A).
Her answer is due 14 days after this Order’s entry date and the Court will thereafter set this matter
down for a pretrial scheduling conference. Discover is reminded of the provisions of § 523(d).

# # #


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