On June 4th, the Supreme Court clarified when discharge of debts may occur if the debt arises out of fraudulent statements about assets. As a result, banks cannot assume that all fraudulent charges are nondischargeable.
In this case, R. Scott Appling fell behind in his payments to the law firm representing him in pending litigation, Lamar, Archer & Cofrin, LLP. Lamar threatened to withdraw its services if Appling’s bill was not paid, and in response, Appling told Lamar that he was expecting to receive a sizable tax return from which he could pay his debts and future expenses with. In reliance, Lamar continued work and agreed to delay debt collection until Appling received his return. Unknown to Lamar, however, Appling significantly misstated the amount he expected to receive. Appling thereafter received his tax return and instead spent the money on business expenses and not in repayment to Lamar. Then, after having already spent the money, Appling again told Lamar that he was still waiting on the refund. And so Lamar, in reliance, agreed to continue to represent Appling and complete work on his pending litigation. After five years of nonpayment, Lamar sued Appling and obtained a judgement order. Shortly after which Appling and his wife filed for Chapter 7 Bankruptcy.
Lamar initiated an adversary proceeding against Appling in Bankruptcy Court arguing that Appling’s debt to him was non-dischargeable under 11 U.S.C. §523(a)(2)(A), which bars the discharge of debts arising from “false pretenses, a false representation, or actual fraud” unless that statement is one “respecting the debtor’s…financial condition.” Appling moved to dismiss Lamar’s motion because his statements were ones respecting his “financial condition,” and the statute required such statements to be “in writing.” Lamar argued that a fraudulent statement about a single asset, in this case his tax return, was not a statement of financial condition, and therefore did not need to be in writing.
The Bankruptcy Court denied Appling’s motion to dismiss, agreeing with Lamar that a statement about a single asset is not “a statement respecting the debtor’s financial condition.” It held that Appling’s debt was nondischargeable after finding that Appling knowingly made two false representations on which Lamar justifiably and detrimentally relied. The 11th Circuit Court reversed on the grounds that a single asset can, in fact, be a “statement respecting a debtor’s financial condition.” It determined that Appling’s statement fell within the exception of the statute, and that to be nondischargeable, it needed to have been in writing. Because it was not, the 11th Circuit denied Lamar’s motion to block Appling’s discharge.
Finally, the Supreme Court held and agreed with the 11th Circuit, that a statement about a single asset can be one “respecting a debtor’s…financial condition.” The Supreme Court’s decision turned on the meaning of the term “respecting” in the statute. Lamar argued for a narrower interpretation so that a statement about a single asset would not fall within the meaning of a person’s “financial condition.” The Supreme Court rejected this argument, stating that the Legislature intended the word “respecting” to hold a broad meaning which could capture statements made in relation to, impacting, considering, or in view of a person’s financial condition. In this context, the Supreme Court held that a statement about a single asset could fall within this definition because it could have a “direct relation to and impact on aggregate financial condition.” The Court cited legislative history, looking back to the Bankruptcy Act of 1898 forward. It also looked to the plain meaning of the phrase “respecting” and at how the term is consistently interpreted in court. In each evaluation, the court determined that the Legislature intended to retain it’s ordinary, broadening effect.
Lamar also argued that Appling’s interpretation was inconsistent with the principles of the Bankruptcy code in that it would be used a shield for dishonest debtors. The Supreme Court also rejected this argument. Here, the Court cited the House Report on the Bankruptcy Reform Act of 1978 and determined, as it had previously, that Congress intended this statute to address creditor abuse involving such statements. The Court stated that a narrow interpretation would frustrate the “very end Congress sought to avoid when it set forth heightened requirements for rendering nondischargeable ‘statements respecting the debtor’s financial condition.’” Therefore, the Supreme Court held that Appling’s debt to Lamar was dischargeable, even though arising from fraudulent statements, because the Legislature required statements relating to a person’s financial condition, including those about single assets, to be in writing.
The moral of the story here is that a showing of fraud is not enough to block discharge in bankruptcy proceedings. If a statement is made in relation to, impacting, considering, or in view of a person’s financial condition on which you rely, be sure to get it in writing.
Erich Paetsch is a partner in the Litigation and Creditors’ Rights & Bankruptcy practice groups. The information in this article is not intended to provide legal advice. For a professional consultation, please contact Erich Paetsch at Saalfeld Griggs PC. 503.399.1070. firstname.lastname@example.org © 2018 Saalfeld Griggs PC