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U.S. Supreme Court Holds that Debtor’s False Oral Statement Concerning Single Asset Does not Provide Basis for Non-dischargeability Action

On June 4, 2018, the U.S. Supreme Court decided the case of Lamar, Archer & Cofrin, LLP v. Appling, No. 16-1215, which dealt with the dischargeability of debt in bankruptcy proceedings. The Court held that a statement about a single asset can be a “statement respecting the debtor’s financial condition” under section 523(a)(2) of the Bankruptcy Code.

Background Facts

The underlying case involved a dispute between R. Scott Appling and his law firm Lamar, Archer & Cofrin, LLP ("Lamar"). Appling retained Lamar to provide representation in a business dispute but fell behind on his legal fees in the amount of approximately $60,000. At that point, Lamar threatened to withdraw as counsel and place a lien on its work product if Appling did not pay his debt. Appling could not (or would not) pay, but told Lamar that he would settle the debt with an expected tax refund of $100,000. Lamar continued its representation. After receiving the refund, which was for an amount less than he suggested it would be, Appling used it for business expenses. When Lamar asked if it had been received yet, Appling said he was still waiting for the refund. Lamar continued to represent Appling and ultimately, Appling racked up legal fees with Lamar of more than $100,000.

Lamar sued Appling, obtained a judgment, and Appling and his wife then filed for Chapter 7 bankruptcy. Lamar initiated an adversary proceeding in the bankruptcy case seeking a determination that the debt owed to Lamar was non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), which prevents discharge of debts arising from “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s . . . financial condition.”

Appling sought dismissal of the adversary proceeding on the basis that his alleged misrepresentations were “statement[s] respecting the debtor’s . . . financial condition,” which 11 U.S.C. § 523(a)(2)(B) requires to be “in writing.” Because the statements at issue were made orally, Appling argued, they did not fall within the § 523(a)(2)(B) exception to discharge. The bankruptcy court denied Appling’s motion, and the district court affirmed the bankruptcy court’s decision on appeal. The case was further appealed to the U.S. Court of Appeals for the Eleventh Circuit which reversed the bankruptcy court decision. The Eleventh Circuit held that a “statement respecting the debtor’s financial condition,” in this case the statement regarding Appling’s alleged tax return, may include a statement about a single asset, rather than a comprehensive statement about all assets. Since Appling’s statements “respecting . . . the debtor’s financial condition” were made orally rather than in writing, Appling was not prevented from discharging the debt due Lamar pursuant to 11 U.S.C. § 523(a)(2)(B).

The Supreme Court Decision

The Supreme Court affirmed the Eleventh Circuit, resolving a split among the federal courts of appeal regarding this issue. The Court’s opinion came down to an analysis of the word “respecting,” and how it should be interpreted in the context of 11 U.S.C. § 523(a)(2)(B). The Court determined that the use of the word “respecting,” in a legal context, “generally has a broadening effect….” It concluded that “a statement is ‘respecting’ a debtor’s financial condition if it has a direct relation to or impact on the debtor’s overall financial status.” Given this broad interpretation of the word “respecting,” the Court rejected Lamar’s argument that a statement “respecting . . . the debtor’s financial condition” means only a statement that captures the debtor’s overall financial status. Rather, the Court held that a statement about a single asset can be a “statement . . . respecting the debtor’s financial condition.”

Finally, the Court noted that its decision is consistent with the statutory history regarding the phase “statement respecting the debtor’s financial condition.” This language has remained consistent through close to 100 years’ worth of amendments to the Bankruptcy Code (and the preceding Bankruptcy Act). During this period of time, the Court noted, courts have interpreted this statement to encompass statements addressing just one or some of the debtor’s assets or liabilities. Therefore, Congress could have changed the language if it did not intend for it to have a more expansive interpretation, and since it has not the Court saw no reason to intervene.

If you have questions regarding this decision on non-dischargeable actions, contact Patricia Scott at 517.371.8132 or at pscott@fosterswift.com. Patricia helps creditors and trustees enforce their rights and protect their interests in all aspects of individual and commercial bankruptcy proceedings, as well as out-of-court workouts and restructurings, including commercial litigation.

To view the full case, click here.

Categories: Chapter 7, U.S. Supreme Court

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