SCOUNDRELLY INTENT: CAN DEBTOR’S MISREPRESENTATION ABOUT A SINGLE ASSET DEFEAT NON-DISCHARGABILITY UNDER SECTION 523(A)(2)(A)?

10/1/2018

First published in the Oregon State Bar Debtor-Creditor Newsletter Vol. XXXVII, No. 3

By Susan T. Alterman, Kell, Alterman & Runstein, LLP; Margot Seitz, Farleigh Wada Witt

This summer the United States Supreme Court clarified the scope of 11 USC § 523(a)(2)(A) in its largely unanimous opinion in Lamar, Archer & Cofrin, LLP v. Appling, 138 S.Ct. 1752 (2018). Section 523(a)(2)(A) bars the discharge of debts arising from “false pretenses, a false representation, or actual fraud” unless the discharge is based on a “statement respecting the debtor’s or an insider’s financial condition.” The question in Lamar was whether a debtor’s oral statements to a creditor regarding a single asset (in this case, the amount of his tax refund) fall under this exception and qualify as a statement “respecting” his or her “financial condition.”  The Court held that an oral misrepresentation about a “single asset” can, indeed, fall under this exception. As a result, an oral misrepresentation about a single asset—even if made with scoundrelly intent and reasonably relied on by a creditor—will likely not give rise to a nondischargeability claim under § 523(a)(2).

Lamar is a tale as old as the legal profession itself. R. Scott Appling (“Appling”) hired the law firm Lamar, Archer & Cofrin, LLP (“Lamar”) to represent him in a business litigation matter. Midstream, Appling fell behind on his bills. Lamar told Appling that it would withdraw from representation and place a lien on its work product if the bill was not brought current. The parties met in March 2005, and Appling represented that he was expecting a tax return of approximately $100,000 that he would use to pay his outstanding legal bill. Lamar resumed work based on this representation. The parties met again in November 2005 and Appling told Lamar that he had not yet received the refund. In fact, Appling’s tax refund was slightly less than $60,000, he had received the refund in October 2005, and he had already spent the funds. Lamar continued to represent Appling until it learned the truth. Lamar eventually sued Appling and obtained a state court judgment for roughly $104,000. Appling and his wife promptly filed for bankruptcy relief under Chapter 7. Lamar filed an adversary proceeding, seeking to have the debt deemed nondischargeable.

Lamar argued that Appling’s misrepresentations about the tax refund were fraudulent and excepted from discharge under Section 523(a)(2)(A). Appling moved to dismiss on the ground that his alleged misrepresentations were merely statements “respecting” his “financial condition,” and thus specifically excluded from Section 523(a)(2)(A). That section excepts from discharge those debts obtained by “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s ... financial condition” (emphasis added). To except a debt from discharge where the debtor has made a false statement about the debtor’s “financial condition,” a creditor must rely on Section 523(a)(2)(B). That section only applies to debts “obtained by” “use of a statement in writing” that is “materially false” “respecting” the debtor’s “financial condition” “on which the creditor … reasonably relied” and that the debtor “caused to be made or published with the intent to deceive.” Because Appling’s misstatements were oral, he argued that they did not fall under either Section 523(a)(2)(A) or Section 523(a)(2)(B).

The Bankruptcy Court disagreed and held that a statement regarding a single asset is not a “statement respecting the debtor’s financial condition.” The Bankruptcy Court also found that Appling knowingly made false representations to Lamar, that Lamar justifiably relied on those statements, and that Lamar incurred damages as a result.

Appling appealed and the Eleventh Circuit reversed, finding that Appling’s statements about the amount and timing of his tax return were statements “respecting the debtor’s financial condition.” Because Appling’s statements were regarding his “financial condition” and not in writing, neither Section (a)(2)(A) nor Section (a)(2)(B) prevented discharge.

The Supreme Court’s analysis focused primarily on the text of Section 523(a)(2)(A). Because Appling never promised Lamar in writing that he would use his tax refund to pay his bill, Lamar’s argument turned on its ability to convince the Court that Appling’s statements about his tax refund were not statements “respecting” his “financial condition.” To that end, Lamar argued that this phrase should be applied only to “statements” that capture a debtor’s overall financial status (i.e., a statement “about” the debtor’s overall financial well-being). The Court rejected that narrow interpretation and explained that the word “respecting” means “in view of; considering; with regard or relation to; regarding; concerning.” The Court stressed that the word “respecting” in the “legal context has a broadening effect, ensuring that the scope of a provision covers not only its subject but also matters relating to that subject.” Similarly, the phrase “related to” (which is encompassed in the word “respecting”) has historically been interpreted expansively, not narrowly.

The Court held that any oral statement which has a “direct relation or impact” on a debtor’s “overall financial status” will fall under this exception. Because a single asset can have a direct impact on a debtor’s aggregate financial condition and can help indicate whether a debtor is “solvent or insolvent, able to repay a debt or not,” statements concerning a single asset can indeed speak to a debtor’s “financial condition.” Lamar argued that an expansive reading of this exception undermined a fundamental purpose of the Bankruptcy Code—to give honest debtors a fresh start while protecting innocent victims from fraudsters. Based on the Bankruptcy Court’s factual findings, Appling was certainly dishonest and his statements were meant to induce his lawyers to continue to work for him. The Supreme Court disagreed, explaining that Congress purposefully included a heightened requirement in Sections 523(a)(2)(A)-(B) not to shield dishonest debtors but rather to “balance the potential misuse of such statements by both debtors and creditors.”

Even if the result in Lamar is not particularly surprising, and overlooking the fact that the debtor’s outright lies were rewarded, the Supreme Court’s opinion does resolve a split among the federal courts of appeal. Prior to Lamar, the Fifth and Tenth Circuit Court of Appeals held that a misrepresentation about a single asset is not a statement respecting a debtor’s financial condition, while the Fourth and Eleventh Circuits came to the opposite conclusion. See In re Bandi, 683 F. 3d 671, 676 (CA5 2012) (a statement about a single asset is not a statement respecting the debtor's financial condition); In re Joelson, 427 F. 3d 700, 714 (CA10 2005) (same); See also In re Appling, 848 F. 3d 958, 960 (CA11 2017) (a statement about a single asset can be a statement respecting the debtor's financial condition); Engler v. Van Steinburg, 744 F. 2d 1060, 1061 (CA4 1984) (same). With this new clarity, creditors would do well to confirm in writing any statement they rely on regarding a client’s financial condition as a condition of continued work. A man’s word may indeed be his bond but, particularly after Lamar, best to get it in writing.

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