Scotus Resolves Circuit Disagreement over Non-Dischargeability Based on Fraud

Posted by NCBRC - June 20, 2018

A falsehood concerning a single asset may be a “statement respecting the debtor’s financial condition,” and therefore, the misrepresentation must be in writing to render non-dischargeable a debt arising out of the creditor’s reliance on it. Lamar, Archer & Cofrin, LLP, v. Appling, 584 U.S. ___, No. 16-1215 (S. Ct. June 4, 2018).

Scott Appling put off paying his attorneys fees in a business litigation case by assuring his attorneys at Lamar, Archer & Cofrin, LLP, (Lamar) that he expected a tax refund that would more than cover the bill. When the actual refund was smaller than he represented, he used the money to pay business expenses and told Lamar he had not yet received the refund. In reliance on Mr. Appling’s false statements, Lamar continued to represent him. When the final litigation bill remained unpaid for five years, however, Lamar sued in state court and obtained a judgment against Mr. Appling and his wife. The Applings then filed for chapter 7 bankruptcy relief.

Lamar filed an adversary complaint seeking a finding that the debt was non-dischargeable under section 523(a)(2)(A) because it was incurred by fraud. The Applings countered that the fraud involved a statement concerning their financial condition and therefore, under section 523(a)(2)(B), it had to be in writing in order to fall under that exception to discharge provision. The bankruptcy court found in favor of Lamar, 500 B. R. 246, 252 (M.D. Ga. 2013), and the district court affirmed, 2016 WL 1183128 (M.D. Ga. Mar. 28, 2016). The Eleventh Circuit reversed. In re Appling, 848 F. 3d 953, 960 (11th Cir. 2017).

The Supreme Court began with the text of section 523(a)(2)(B) which provides that a debtor is not entitled to discharge of a debt obtained by a fraudulent representation where the statement was “respecting the debtor’s . . . financial condition” and was made in writing. In the absence of statutory definitions, the Court turned to the common meaning of the words. Specifically, the case turned on whether a statement concerning a single asset was a representation “respecting” the debtor’s financial condition. Lamar argued that such statement must actually concern the debtor’s overall financial condition, such as a statement to the effect that the debtor is “above water.”

The Court disagreed. Various dictionaries define “respecting” as “concerning,” “relating to,” or “with reference to,” all of which are interrelated, broad terms, generally meaning the same thing and, when used in a statutory provision, are intended to expand the scope of the word to which they refer. The Court found no reason to interpret “respecting” more narrowly.

The Court found Lamar’s proposed interpretation to be illogical as it would require that a vague statement as to overall financial condition be in writing while a specific statement about an asset, such as amount of equity in real property, would not fall under section 523(a)(2)(B)’s writing requirement. It would also create a distinction without a difference between a written misrepresentation as to a single asset in a financial account, and the exact same misrepresentation in an unwritten statement outside a broad financial account.

The Court concluded that “A single asset has a direct relation to and impact on aggregate financial condition, so a statement about a single asset bears on a debtor’s overall financial condition and can help indicate whether a debtor is solvent or insolvent, able to repay a given debt or not. Naturally, then, a statement about a single asset can be a ‘statement respecting the debtor’s financial condition.’”

The Court also rejected Lamar’s contention that a broad interpretation of the text of section 523(a)(2)(B) essentially eviscerates paragraph (2)(A). The Court found that the latter paragraph covers such instances as misrepresentations concerning the value of goods or services, or cases of  fraudulent transfer or conveyance.

In Part III-B, in which Justices Thomas, Alito and Gorsuch did not join, the Court balanced equities. As to bankruptcy’s policy of affording the honest but unfortunate debtor with a fresh start, the Court, citing Field v. Mans, 516 U. S. 59, 76–77 (1995), recognized the reality that a debtor’s financial statement may include a misrepresentation because the creditor itself instructed the debtor to provide false information. In such cases, the creditor later uses the false representation it has demanded, to insulate its claim from discharge under section 523(a)(2)(A). (In a footnote, the Court explained that it is the heightened level of reliance between paragraph (2)(B)—reasonable—versus paragraph (2)(A)—justifiable—that accounts for the balance of equities, as the writing requirement would afford a debtor no protection in the circumstances set forth in Field.)

To the extent that the Court’s ruling incentivizes dishonest debtors to orally lie about their assets, the Court noted that a creditor can protect itself by requiring that financial representations upon which it relies be in writing.

The Court affirmed the holding of the Eleventh Circuit.

Justice Sotomayor wrote the opinion in which Chief Justice Roberts, and Justices Kennedy, Ginsburg, Breyer and Kagan, joined. Justices Thomas, Alito and Gorsuch joined as to all but Part III–B.

Appling USSCt June 2018


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