United States: Supreme Court Resolves Circuit Split On Issue Of Whether Statement About A Single Asset Is One Respecting Debtor's Financial Condition

On June 4, 2018, the U.S. Supreme Court issued its opinion in Lamar, Archer & Cofrin, LLP v. Appling, 584 U.S. ___ (2018), resolving a circuit split on the issue of whether a debtor's statement about a single asset constitutes "a statement respecting the debtor's financial condition" for the purposes of 11 U.S.C. § 523(a)(2). Affirming the Eleventh Circuit's decision, 848 F.3d 953 (11th Cir. 2017), the Supreme Court held that a debtor's statement about a single or specific asset does fall within the scope of the statutory phrase "a statement respecting the debtor's financial condition," and therefore, such a statement must be made in writing in order to constitute grounds for nondischargeability.

Debt Nondischargeability Under Section 523(a)(2)

Section 523(a)(2) was enacted to place limits on the Bankruptcy Code's "fresh start" policy by protecting victims of fraud.

Subsection (A) prohibits debtors from discharging debts for money, property, services or credit obtained through "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's ... financial condition[.]" 11 U.S.C. § 523(a)(2)(A).

Subsection (B) prohibits debtors from discharging debts for money, property, services or credit obtained through "use of a statement in writing ... that is materially false ... respecting the debtor's ... financial condition[.]" 11 U.S.C. § 523(a)(2)(B).

Thus, under the plain reading of the statutory text, a "statement respecting the debtor's financial condition" must be in writing in order for it to constitute grounds for nondischargeability under Section 523(a)(2).

Background: Lamar, Archer & Cohen, LLP v. Appling

In March 2005, R. Scott Appling (the "Debtor") owed his lawyers, the firm of Lamar, Archer & Cofrin, LLP (the "Law Firm"), approximately $80,000 for unpaid legal fees and costs in connection with litigation against the former owners of his business. After sending his lawyers an email that contained a complaint about the amount of their legal fees and a derogatory lawyer joke, lawyer and client met in person to discuss a potential resolution. At that meeting, the Law Firm alleges that, relying on the Debtor's oral representations that he expected to receive a tax refund in an amount sufficient to cover both his outstanding legal bill and future fees, the Law Firm continued to represent the Debtor in the pending litigation and held off on the collection of its fees.

In June 2005, the Debtor and his wife signed and filed their amended 2002 tax return, which sought a refund in the amount of $60,718. They ultimately received a tax refund in the amount of $59,851 from the Internal Revenue Service (IRS) in November 2005.

In a subsequent meeting between the Debtor and the Law Firm in November 2005 to discuss the outstanding fees and the potential filing of a new lawsuit on behalf of the Debtor, the Law Firm alleges that, again, relying on the Debtor's representations regarding his anticipated receipt of a large tax refund, it agreed to continue representing the Debtor and forbear from immediate collection of its fees.

All pending litigation was settled or otherwise resolved by March 2006. In June 2006, the Law Firm learned that the Debtor had received, and spent, the tax return. The Law Firm sought and obtained a judgment in the Georgia state court against the Debtor in the amount of $104,179.60 in 2012. The Debtor and his wife filed a petition for protection under chapter 7 of the Bankruptcy Code in 2013.

The Law Firm initiated an adversary proceeding against the Debtor in the bankruptcy case, seeking an order of nondischargeability pursuant to Section 523(a)(2)(A), on the grounds that it justifiably relied on the Debtor's representations as to the anticipated tax refund in agreeing to continue representing the Debtor.

After conducting a trial on the Law Firm's nondischargeability claim, the Bankruptcy Court determined that the Debtor knowingly made false representations on which the Law Firm justifiably relied in agreeing to continue to represent the Debtor and held that the Law Firm's judgment against the Debtor was nondischargeable pursuant to Section 523(a)(2)(A). 500 B.R. 246 (Bankr. M.D. Ga. 2013).

The Debtor appealed the Bankruptcy Court's determination that the Law Firm's judgment was nondischargeable under Section 523(a)(2)(A), asserting that, among other things, the Bankruptcy Court had erred in determining that his alleged oral misrepresentations were not statements respecting his financial condition because they concerned a single asset rather than his overall financial health. 

The District Court (2016 WL 1183128 (M.D. Ga. Mar. 28, 2016)) affirmed the Bankruptcy Court's ruling.

The Circuit Split

In reversing the District Court, the Eleventh Circuit declined to apply the narrow interpretation favored by the Fifth, Eighth and Tenth Circuits, which construed the phrase "a statement respecting the debtor's or an insider's financial condition" to mean a statement relating to a debtor's overall financial health or their ability to pay.

The Eleventh Circuit instead adopted the broader approach employed by the Fourth Circuit, which recognized not only that Congress did not use the term "financial statement" in the statute but that a debtor's statements about his assets may be the most significant statements he could make about his financial condition.

The Eleventh Circuit concluded that the Debtor's oral misrepresentation about his tax refund was "a statement respecting his financial condition," and was, therefore, dischargeable because it was not in writing.

The Supreme Court granted the Law Firm's petition for certiorari, on the recommendation of the U.S. Solicitor General (who also filed an amicus brief in support of the Debtor and participated at oral argument), to resolve the conflict among the Courts of Appeals.

The Supreme Court's Opinion

Justice Sotomayor delivered the opinion for the Supreme Court, which affirmed the Eleventh Circuit's decision and held that a statement about a single asset can be "a statement respecting the debtor's financial condition" under Section 523(a)(2).

The Supreme Court's analysis looked to the language of the statute and focused on the preposition "respecting," rejecting the Law Firm's argument that the terms "about," "concerning," "with respect to" and "as regards" each suggest different levels of relation. The Court noted that, when used in a legal context, the word "respecting" was intended to have a broadening effect so as to encompass both the subject and matters relating to the subject. The Court further noted that its past interpretations of the related phrase "relating to" have been broad rather than narrow.

The Supreme Court determined that a statement is "respecting the debtor's financial condition" if it relates to or impacts the debtor's overall financial status, and because a single asset can impact a debtor's overall financial status, such a statement is one respecting the debtor's financial condition. The Court's determination was buttressed by its review of the statutory history, which indicated that Congress intended to balance the potential abuse of such statements by both debtors and creditors alike.

The Supreme Court's opinion is significant because it will encourage creditors to rely on written, rather than oral, statements of debtors as to both their assets and overall financial status, which are better evidence in a nondischargeability case.

For More Information

If you have any questions about this Alert, please contact Rudolph J. Di Massa, Jr., Keri L. Wintle, any of the attorneys in our Business Reorganization and Financial Restructuring Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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