Alert: False Statement about One Asset does not Prevent Bankruptcy Discharge if Statement is not in Writing

Print PDFShare
June 5, 2018

Under section 523(a)(2)(B) of the Bankruptcy Code, a debtor can discharge a debt obtained by a false statement “respecting the debtor’s financial condition,” as long as that false statement was not made in writing. On June 4, 2018, in Lamar, Archer & Cofrin, LLP v. Appling, the U.S. Supreme Court held that an oral statement about a single asset may constitute such a statement, and therefore comes within section 523(a)(2)(B)’s exception. The provision does not, the Court held, require a statement about the debtor’s overall financial state.

R. Scott Appling hired law firm Lamar, Archer & Cofrin, LLP to represent him in a business litigation. Appling fell behind on his payments to the firm until he owed it more than $60,000. Appling told his attorneys in person that he would receive a tax refund of around $100,000, even though he had only requested $60,178 in his tax return. Appling spent the money from his tax return on his business, and then told his attorneys that he had not received it yet. Lamar completed the pending litigation, and then sued Appling in Georgia state court for nonpayment.

When Appling filed for Chapter 7 bankruptcy, Lamar argued that because Appling had made fraudulent statements about his tax refund, his debt was non-dischargeable. Appling argued that his statements were “respecting his financial condition” and were not in writing, so their resulting debts could be discharged. A Bankruptcy Court held that the statement was about just one asset—the tax refund—so it was not “respecting his financial condition,” and therefore Appling’s debt to Lamar was non-dischargeable. The District Court affirmed, but the Eleventh Circuit Court of Appeals reversed.

Resolving a circuit split, the Supreme Court held that a statement about a single asset does “respect[] the debtor’s financial condition.” In a 9–0 decision, Justice Sotomayor’s opinion focused on the meaning of the word “respecting,” which the Court defined as “in view of: considering; with regard or relation to: regarding; concerning.” Historically, the Court has given that word a broadening effect, “ensuring that the scope of a provision covers not only its subject but also matters relating to that subject.” The Court reasoned that if Congress had meant for section 523(a)(2)(B) to cover only statements expressing the debtor’s total financial state, it could have written something like “statement of the debtor’s financial condition.” But the word “respecting,” the Court held, means that a statement having a direct relation to or impact on the debtor’s financial condition is also covered by the statute. And a statement about one asset meets that standard.

The Court insisted that its holding would not leave creditors “defenseless … swindled by lying debtors careful to make their financial representations orally.” As the Court put it, in order to benefit from the Bankruptcy Code’s protections against fraud, creditors must simply insist that statements about the debtor’s financial condition are made in writing.