Supreme Court Determines That Debtor’s Oral Statement About a Single Asset Constitutes a “Statement Respecting the Debtor’s Financial Condition” Such that the Debt is Not Non-dischargeable Under Bankruptcy Code Section 523(a)(2)(A)

Bankruptcy Law

By:  Brian L. Bloom & Gerrick Warrington

Discharged debts detrimentally drain the national economy.  A bankruptcy discharge allows the debtor to be relieved from paying off his or her debts.  Discharges are granted to the vast majority of debtors who file bankruptcy.  The purpose of Chapter 7 bankruptcy is to give a “fresh start” to debtors who have fallen on hard times.  Bankruptcy doctrine provides that an “honest but unfortunate debtor” may obtain a discharge by filing bankruptcy.  But, not surprisingly, some debtors are less-than-honest.  What happens when a debtor is less-than-honest with his creditors in obtaining money, services, or other extensions of credit?  In these cases, the Bankruptcy Code provides certain exceptions to the discharge.  Those exceptions are contained in section 523 of the Bankruptcy Code.

One type of debt which a creditor may seek to except from discharge is a debt for “money, property, services or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”  11 U.S.C. § 523(a)(2)(A) (emphasis added).  Note that a debtor may not discharge a debt arising from a written statement respecting the debtor’s financial condition (the typical example being a false financial statement). 11 U.S.C. § 523(a)(2)(B).  These two Code sections are mutually exclusive. In other words, if the claim of false pretenses, false representations or actual fraud arises from a “statement respecting the debtor’s financial condition,” then the debt is discharged, unless the statement is in writing.

But, what does the phrase “a statement respecting the debtor’s financial condition” mean?

On June 4, 2018, the United States Supreme Court unanimously held, in the case of Lamar, Archer & Cofrin, LLP v. Appling, that a statement about a single asset can be a “statement respecting the debtor’s financial condition” within the ambit of Section 523(a)(2)(A) and (a)(2)(B), and that if that statement is not in writing, then the debt associated with that statement is not rendered non-dischargeable, even if the statement was a misrepresentation.

The case involves a debtor (Appling) who allegedly promised to pay his lawyers’ (the Atlanta-based firm of Lamar, Archer & Corfin, LLP) legal bill with an anticipated tax refund of approximately $100,000.

But, when Appling received his tax refund, it was only about $60,000, and he promptly spent it on his own business expenses and did not pay the Lamar firm anything. In fact, the debtor later met with the firm and told them that he had not yet received the refund.  The firm contends that, based on this statement, they agreed to continue to represent the debtor and complete pending litigation involving the debtor. The final invoice to the debtor was about $55,000.  After not receiving payment, the firm sued Appling for this debt and obtained an approximate $100,000 judgment. Shortly thereafter, Appling filed Chapter 7 bankruptcy in the Middle District of Georgia.

The firm continued to pursue the debtor in bankruptcy, filing an adversary complaint against the debtor in the bankruptcy case, alleging that their debt should be excepted from the debtor’s discharge.  The firm alleged that the debtor made fraudulent statements to them, which were non-dischargeable under section 523(a)(2)(A).

One of the debtor’s defenses was that the debt should be discharged because the debtor’s statement to the firm (that he would remit his tax refund to them, which the debtor never did) was an oral “statement concerning the debtor’s financial condition” under section 523(a)(2)(A).  If the debtor’s argument were correct, then the debt could not be rendered non-dischargeable under section 523(a)(2)(A).

But, the bankruptcy court disagreed with the debtor’s argument and found in favor of the law firm. The debtor appealed to the district court, but the district court agreed with the bankruptcy court, finding that “statements respecting the debtor’s financial condition involve the debtor’s net worth, overall financial health, or equation of assets and liabilities. A statement pertaining to a single asset is not a statement of financial condition.”

Undeterred, the debtor further appealed to the Eleventh Circuit who reversed and remanded the matter, finding that he phrase “statement respecting the debtor’s financial condition” was broad enough to encompass the debtor’s statement concerning his tax refund.  The Eleventh Circuit pointed out that this very same cryptic phrase occurs in both sections 523(a)(2)(A) and (a)(2)(B), and that as a matter of statutory construction, the same phrase must have the same meaning in both sections.  This observation is important because although a narrow reading of the phrase would mean that the debtor’s statements were excepted from discharge under section 523(a)(2)(A), that same narrow interpretation would also narrow the scope of section 523(a)(2)(B), which prevents a debtor from discharging false written statements “respecting the debtor’s or an insider’s financial condition.”  In other words, the circuit court observed that:

[I]f the phrase has a broad meaning, more false oral statements will have the effect of exempting a debt incurred as the result of a misrepresentation, from the exception to discharge (meaning that such debts will be discharged), than if we construe the phrase narrowly. But fewer false written statements will result in excusing a debt for a fraudulently obtained asset, service, or loan. And since it seems likely that, at least in arm’s length transactions, most significant debts are obtained as the result of written representations about finances, as opposed to oral ones, a broader interpretation of the phrase is less likely to benefit dishonest debtors than a narrow construction of it.

The Supreme Court granted cert to resolve the circuit split concerning whether a statement about a single asset constitutes a “statement respecting the debtor’s financial condition.”

The Supreme Court affirmed the Eleventh Circuit, rejecting the law firm’s argument that a “statement respecting the debtor’s financial condition” should be limited to statements concerning the debtor’s overall financial status. The Court reasoned that Congress could have written this Code section more narrowly, but did not.  The Court further found that the term “respecting” entails a direct relationship to, or impact on, the debtor’s financial condition, and that a statement respecting a single asset may have such a relationship with the debtor’s overall financial condition.  Finally, the Court found the law firm’s interpretation to lead to absurd results: for example, under the law firm’s interpretation, a misrepresentation about a single asset made on a balance sheet would be non-dischargeable, but the same statement made outside of a financial statement (e.g., in a list of some, but not all, of the debtor’s assets and liabilities) would not be non-dischargeable.  The Court rejected this interpretation because it created distinctions that were “incoherent.”

The opinion and its central holding was unanimous, but three justices declined to join the final portion of the opinion which discussed practices related to providers of consumer finance.