Supreme Court Sets a Trap for the Unwary Debtor

“One of the ‘main purpose[s]’ of the federal bankruptcy system is ‘to aid the unfortunate debtor by giving him a fresh start in life, free from debts, except of a certain character.’” Lamar, Archer & Cofrin, LLP v. Appling, 584 U.S. ___ (2018)(citing Stellwagen v. Clum, 245 U. S. 605, 617 (1918)). “To that end, the Bankruptcy Code contains broad provisions for the discharge of debts, subject to exceptions.” Id. One such exception is found in 11 U. S. C. §523(a)(2), which provides that a discharge under Chapter 7, 11, 12, or 13 of the Bankruptcy Code ‘does not discharge an individual debtor from any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by’ fraud.” Id. “This exception is in keeping with the ‘basic policy animating the Code of affording relief only to an ‘honest but unfortunate debtor.’” Id. (citing Cohen v. de la Cruz, 523 U. S. 213, 217 (1998)). “More specifically, §523(a)(2) excepts from discharge debts arising from various forms of fraud.” Id. Subparagraph (A) bars discharge of debts arising from ‘false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s . . . financial condition.’” Id.  “Subparagraph (B), in turn, bars discharge of debts arising from a materially false ‘statement…respecting the debtor’s . . . financial condition’ if that statement is ‘in writing.’” Id.

On June 4, 2018, the Supreme Court issued an opinion in the matter of Lamar, Archer & Cofrin, LLP v. Appling (“Lamar”) providing additional guidance as to whether a statement regarding a single asset is a “statement respecting the debtor’s financial condition” such that it must be written in order to be determined non-dischargeable. Although, in the end, the debtor prevails in this case, the take away message for all debtors is to be very careful about what you say (and put in writing) when communicating with those you owe.

The underlying facts of Lamar are not unusual.  Lamar, a law firm, represented Appling in connection with business litigation. Appling failed to pay Lamar’s invoices and ultimately owed Lamar over $60,000. When Lamar threatened to withdraw from the representation, “Appling told his attorneys that he was expecting a tax refund of approximately $100,000, enough to cover his owed and future legal fees.” Id.  Relying upon Appling’s statement, Lamar continued in the representation. Id. However, Appling’s tax refund ended up being substantially less than represented (approximately $60,000) and when received, Appling used the refund for business expenses rather than paying Lamar. Id. After receiving the refund, Appling falsely to Lamar the refund had not yet been received. Id.

Five years later, after concluding its representation of Appling, Lamar obtained a judgment against Appling in the amount of $104,179.60. Id. Shortly thereafter, Appling filed for relief under Chapter 7 of the Bankruptcy Code. Id. Lamar filed a complaint against Appling seeking a determination that the debt for unpaid legal fees that Appling owed to “Lamar was nondischargeable pursuant to 11 U. S. C. §523(a)(2)(A), which governs debts arising from ‘false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s . . . financial condition’” based on Appling’s false statements regarding the tax refund. Id. “Appling, in turn, moved to dismiss, contending that his alleged misrepresentations were “statement[s] . . . respecting [his] financial condition” and were therefore governed by §523(a)(2)(B), such that Lamar could not block discharge of the debt because the statements were not in writing as required for nondischargeability under that provision.” Id.

“The Bankruptcy Court held that a statement regarding a single asset is not a ‘statement respecting the debtor’s financial condition’ and denied Appling’s motion to dismiss.” Id. (citing Lamar, Archer & Cofrin, LLP v. Appling, 500 B. R. 246, 252 (M.D Ga. 2013)). “After a trial, the Bankruptcy Court found that Appling knowingly made two false representations on which Lamar justifiably relied and that Lamar incurred damages as a result…[and] concluded that Appling’s debt to Lamar was nondischargeable under §523(a)(2)(A).” Id. (citing Lamar, Archer & Cofrin, LLP v. Appling, 527 B. R. 545, 550–556 (M.D Ga. 2015)). “The District Court affirmed.” Id. (citing Appling v. Lamar, Archer & Cofrin, LLP, 2016 WL 1183128 (M.D Ga., Mar. 28, 2016)). “The Court of Appeals for the Eleventh Circuit reversed…[holding] that ‘statement[s] respecting the debtor’s . . . financial condition’ may include a statement about a single asset.” Id. (citing In re Appling, 848 F. 3d 953, 960 (2017)). “Because Appling’s statements about his expected tax refund were not in writing, the Court of Appeals held that §523(a)(2)(B) did not bar Appling from discharging his debt to Lamar.” Id.

Noting a conflict among Circuit Courts of Appeals on the issue of whether a statement about a single asset can be a statement respecting the debtor’s financial condition, the Supreme Court granted certiorari. Compare In re Bandi, 683 F. 3d 671, 676 (5th Cir. 2012) (a statement about a single asset is not a statement respecting the debtor’s financial condition); In re Joelson, 427 F. 3d 700, 714 (10th Cir. 2005) (same), with In re Appling, 848 F. 3d 958, 960 (11th Cir. 2017) (a statement about a single asset can be a statement respecting the debtor’s financial condition); Engler v. Van Steinburg, 744 F.2d 1060, 1061 (4th Cir. 1984) (same).

The Court’s determination that a statement about a single asset can be a “statement respecting the debtor’s financial condition” started with an in-depth analysis of the ordinary meaning of the words used in the statutory language, focusing on the key word “’respecting’, which joins together ‘statement’ and ‘financial condition’”.  The Court opted to read the terms expansively and rejected Lamar’s argument that the term should be read in a more limited fashion that would include only formal financial statements providing a detailed accounting of all assets and liabilities. Id. The Court reasoned that its conclusion is supported by the statutory history and that Lamar’s reading would lead to “inexplicably bizarre” results. The Court also rejected Lamar’s argument that reading “respecting” expansively would shield nefarious debtors and fail to reserve discharge exclusively for the honest but unfortunate debtor, observing that creditors are not defenseless, and can still benefit from the protection of §523(a)(2)(B) “so long as they insist that the representations respecting the debtor’s financial condition on which they rely in extending money, property, services, or credit are made in writing.”

Ostensibly this ruling is a win for Appling. However, this ruling makes it likely that more creditors, as savvy creditors have done all along, will require these statements to be made in writing. Without adequate representation, consumers in desperate financial conditions and/or unfamiliar with these pitfalls may find themselves jumping out of the frying pan and into the fire when pursuing bankruptcy relief.

For assistance in communicating with your creditors and/or seeking bankruptcy relief, contact FactorLaw at 312-878-6976 for a free, no obligation consultation.

 

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