Garfield & Hecht, P.C
United States Supreme Court Makes Ruling Concerning Discharge of Debt Owed to Bank
On June 4, 2018, the United States Supreme Court decided Lamar, Archer & Cofrin, LLP v. Appling, a case about how the Bankruptcy Code treats dishonest debtors. Justice Sotomayor delivered the Court’s opinion. The Court confirmed that the phrase “respecting” means “relating to” in the Bankruptcy Code, and that the statute makes plain that a statement about a single asset can be a “statement respecting the debtor’s financial condition.” The Supreme Court’s decision affirmed the 11th Circuit’s ruling in favor of the debtor and resolved a split among the United States Courts of Appeals.
The case arose from a dispute between Lamar, Archer & Cofrin, LLP (“Lamar”), an Atlanta law firm, and one its former clients, R. Scott Appling. Lamar represented Appling in a business dispute, and, when Appling fell behind on his legal bills, Lamar threatened to withdraw its representation and place a lien on its work product if Appling did not pay. Appling told Lamar that he could cover current and future legal expenses with a tax refund; however, when he received the tax refund it was much smaller than what he had represented to Lamar and he spent the whole refund on business expenses. When Appling met with Lamar again, he told them he was still waiting for the tax refund, and Lamar agreed to complete the pending litigation. Appling never paid the final invoice from Lamar and Lamar won a judgment against him for $104,179 in Georgia state court.
A few months after Lamar won its judgment, Appling and his wife filed for Chapter 7 bankruptcy. Lamar then filed an adversary proceeding against Appling in Bankruptcy Court, arguing that Appling’s debt to Lamar was non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). Specifically, 11 U.S.C. § 523(a)(2), states, “A discharge . . . 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—(A) false pretense, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”
Appling filed a motion to dismiss and argued that because his statements to Lamar had been about his financial condition, they would have had to be in writing to be non-dischargeable under 11 U.S.C. § 523(a)(2)(B). That section provides, “use of a statement in writing—(i) that is materially false; (ii) respecting the debtor’s or an insider’s financial condition; (iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and (iv) that the debtor caused to be made or published with intent to deceive.”
The bankruptcy court denied Appling’s motion to dismiss, finding that the phrase “statement respecting the debtor’s . . . financial condition” covers only statements about the debtor’s “overall financial condition or net worth.” After trial, the bankruptcy court found that Appling’s debts to Lamar where non-dischargeable because he had made two knowingly false representations to Lamar, upon which Lamar had relied. The federal district court affirmed.
The U.S. Court of Appeals for the 11th Circuit, however, reversed the lower courts. It held that a single statement about a single asset could be a statement respecting the debtor’s financial condition. Because Appling’s statements about his tax refund were not in writing, § 523(a)(2)(B) did not bar Appling from discharging his debts to Lamar.
The Supreme Court affirmed the 11th Circuit and explained that, because the Bankruptcy Code does not define “respecting,” the term’s plain meaning governs. After consulting several popular dictionaries, the Court determined that “respecting” has a broadening effect, similar to “concerning,” “regarding,” “about,” or “relating to” and that a statement is “respecting” a debtor’s financial condition if has a direct relation to or impact on the debtor’s overall financial condition. Because a single asset could bear on the debtor’s overall financial condition, a single statement about a single asset qualifies as “statement respecting the debtor’s financial condition.” As such, because Lamar did not have Appling’s statements in writing, Appling could discharge his debts to them and Lamar was without recourse.
As a result, an important takeaway for creditors and financial institutions from the Supreme Court’s decision is that only written fraudulent statements about the debtor’s financial condition are non-dischargeable under federal law. Although the courts have noted that that interpretation of the Bankruptcy Code may lead to a harsh result, especially in instances of fraud, it gives creditors an incentive to memorialize in writing a debtor’s representation as to his or her financial condition before a dispute arises.
Garfield & Hecht, P.C. attorney Chris Bryan (moc.t1542810317hcehd1542810317leifr1542810317ag@na1542810317yrbc1542810317; (970) 925-1936) represents banks, financial institutions, and other creditors in bankruptcy matters.