On June 4, 2018, the U.S. Supreme Court issued its opinion in
Lamar Archer & Cofrin LLP v. Appling,1
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,2 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.
The Supreme Court's opinion has implications for both
creditors and borrowers in future transactions.
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[.]"3
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[.]"4
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 law firm of Lamar Archer & Cofrin LLP, 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. The law firm
alleges that, relying on the debtor's oral representations at
that meeting 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 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 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).5
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 affirmed the bankruptcy court's
ruling.6
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 Sonia 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 to creditors and
should encourage creditors to rely on written, rather than oral,
statements they obtain from borrowers as to both their assets and
their overall financial health or status.
As the Supreme Court noted in its opinion, "[d]oing so will
likely redound to their benefit, as such writings can foster
accuracy at the outset of a transaction, reduce the incidence of
fraud, and facilitate the more predictable, fair and efficient
resolution of any subsequent dispute."
By insisting on written statements from borrowers as to any
representation that may fall within the scope so broadened by the
Supreme Court's decision, creditors can arm themselves with the
best evidence to successfully prosecute any potential future
nondischargeability action.
Footnotes
- Lamar Archer & Cofrin LLP v. Appling, 584 U.S. ___ (2018).
- 848 F.3d 953 (11th Cir. 2017).
- 11 U.S.C. § 523(a)(2)(A).
- 11 U.S.C. § 523(a)(2)(B).
- 500 B.R. 246 (Bankr. M.D. Ga. 2013).
- 2016 WL 1183128 (M.D. Ga. Mar. 28, 2016).
Reprinted with permission of Law360.
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