Jul 30, 2018Bankruptcy & Business Reorganization
One of the most important protections afforded to a debtor by bankruptcy is the ability to discharge certain debts to gain a fresh financial start. Generally, the subset of debts excepted from discharge are construed narrowly. For example, Bankruptcy Code section 523(a)(2) provides an exception preventing the discharge of debts that are obtained by “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s . . . financial condition” or by a materially false statement “respecting the debtor’s . . . financial condition” if such statement is made in writing. 11 U.S.C. § 523(a)(2)(A)-(B). Debtors and creditors have looked to the courts to determine what constituted a statement “respecting the debtor’s . . . financial condition,” including whether a statement about a single asset qualifies as such a statement. After contradictory holdings from various courts, a recent decision from the United States Supreme Court held that a statement from a debtor about a single asset can be a “statement respecting the debtor’s . . . financial condition” under Bankruptcy Code section 523 and thus, it must be in writing to serve as the basis for a creditor to object successfully to the discharge of that particular debt. Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752, 1757 (2018). In Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018), a debtor retained a law firm to represent him in a business dispute. Id. at 1757. The firm agreed to continue representing the debtor, notwithstanding the debtor’s non-payment of legal fees, based on the debtor’s representation that he would pay the outstanding fees from an anticipated tax refund. Id. After receiving his tax refund, the debtor misrepresented to the firm that he did not receive it and used his tax refund to pay business expenses. Id. The firm then obtained a state court judgment against the debtor for the fees. Id. When the debtor and his wife filed a chapter 7 bankruptcy case, the firm objected to the dischargeability of the debt based on Bankruptcy Code section 523(a)(2)(A) claiming that the debt was incurred based on the debtor’s fraudulent oral misrepresentation that he would pay the legal fees from the tax refund. Id. at 1757-58. The firm argued, and the district court agreed and ruled, that “statements respecting the debtor’s financial condition involve the debtor’s net worth, overall financial health, or equation of assets and liabilities” and that “[a] statement pertaining to a single asset is not a statement of financial condition,” thus, the debt was not dischargeable. In re Appling, 848 F.3d 953, 956 (11th Cir. 2017), cert. granted and aff’d sub nom. Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018). At issue was the use of the phrase “respecting a debtor’s . . . financial condition” in 11 U.S.C. § 523(a)(2)(A). Courts have interpreted this phrase in two ways. Under a narrow interpretation, “financial condition” was defined in the context of solvency as the overall net worth of the debtor and, therefore, a statement regarding a single asset should not be deemed a statement “respecting a debtor’s . . . financial condition.” In re Bandi, 683 F.3d 671, 676-79 (5th Cir. 2012), abrogated by Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018). See also In re Lauer, 371 F.3d 406, 413-14 (8th Cir. 2004); In re Joelson, 427 F.3d 700, 706 (10th Cir. 2005), abrogated by Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018). Under this interpretation, a creditor could succeed in objecting to the dischargeability of its debt if the debtor made an oral misrepresentation about a single asset, assuming such creditor satisfied the other elements of Bankruptcy Code section 523(a)(2)(A). Courts adopting a broad interpretation generally viewed a statement “respecting a debtor’s . . . financial condition” to include any statement affecting the debtor’s overall financial health. These courts reasoned that the word “respecting” is defined broadly as “regarding, or concerning” and therefore a statement about a single asset can “respect” a debtor’s financial condition without describing the overall financial situation of the debtor. In re Appling, 848 F.3d at 960-61. See also Engler v. Van Steinburg, 744 F.2d 1060, 1061 (4th Cir. 1984). Therefore, an objection to discharge based on a misrepresentation concerning a single asset would only be successful if such misrepresentation was in writing. The Supreme Court held in favor of the debtor and allowed the debt to be discharged. It reasoned that the use of the word “respecting” in a legal context generally has a broadening effect, ensuring that the scope of a provision not only covers its subject, but also matters relating to that subject. Lamar, 138 S. Ct. at 1760-61. Further, the Court noted that if Congress intended “respecting” to be read in a limited way, it would not have included the word “respecting” in Bankruptcy Code section 523(a)(2)(A) at all. Id. at 1761. The Supreme Court also explored the history of the phrase “statement respecting the debtor’s financial condition,” tracing it back almost one-hundred years to an early amendment to the Bankruptcy Act where it had been used to address one or some of a debtor’s assets. Id. at 1762. Based on the extensive statutory history, the Court found that Congress intended for the phrase to retain its established meaning when using the same language in Bankruptcy Code section 523(a)(2)(A). Id. The Supreme Court also found that a single asset has a direct relation to a debtor’s overall financial condition, and can help indicate a debtor’s solvency and ability to repay a given debt. Id. at 1761. Further, the Court recognized that the law firm’s interpretation would lead to “incoherent results.” Id. at 1761. For example, a misrepresentation about a single asset made in the context of a formal financial statement or balance sheet would constitute a “statement respecting the debtor’s financial condition” and trigger §523(a)(2)(B)’s heightened non-dischargeability requirements, but the same exact misrepresentation made on its own, or in the context of a list of some but not all of the debtor’s assets and liabilities, would not. Id.
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