Dischargeability of Debts Obtained by Oral Misrepresentation
On June 4, 2018, the Supreme Court of the United States decided Lamar, Archer & Cofrin, LLP v. Appling and held that single-asset statements qualify as statements respecting the debtor’s financial condition for purposes of Bankruptcy Code § 523(a)(2)’s exceptions to discharge.
In this matter, Appling, the debtor, had hired Lamar, an Atlanta law firm, to represent him in a business dealing. Appling was unable to pay for the services, but Lamar continued working for him because Appling allegedly promised that he was expecting a $100,000 tax refund that he could use as payment. Lamar, believing Appling’s assurances, continued to work despite not being paid. The firm did not stop its representation until it learned that Appling’s tax refund was smaller than Appling had claimed, and that Appling had already spent the money on other business expenses. In October 2012, more than six years after Appling’s original promise of payment, Lamar sued a won a judgment in Georgia state court. However, Appling quickly filed for Chapter 7 bankruptcy and sought to discharge the amount owed in the judgment.
Lamar then filed an adversary action against Appling in bankruptcy court seeking a determination that Appling’s bill was non-dischargeable under 11 U.S.C. § 523(a)(2)(A), which limited the discharge of debts that were “obtained by fraud.” However, as the Court stated, there is an issue with the exception to this limitation – it does not apply if the alleged fraud is “a statement respecting the debtor’s or an insider’s financial condition.” If the alleged fraud is a “statement respecting the debtor’s financial condition” then a different provision, § 523(B), applies – which only renders the false statements non-dischargable if they were in writing. In this matter, Appling never wrote down his promise to pay Lamar with the tax refund. Therefore, this entire case depended upon whether Appling’s statement about his tax refund constituted a statement “respecting” his “financial condition.”
Both parties agreed to the meaning of the word “statement” and “financial condition” so this matter turned on the breadth of the word “respecting.” Since the word “respecting” is not defined within the Bankruptcy Code, the Court looked to the word’s plain meaning within dictionaries. One of the definitions of “respecting” included “relating to” – a term the court had consistently read expansively. The Court saw no reason to interpreted “respecting” any differently.
Such an expansive reading was detrimental to Lamar because only a narrow reading of “respecting” could help Lamar prevail on the argument that a statement about a single asset could never be a statement respecting the debtor’s financial condition. Hence, the Court found that Appling’s statement regarding his tax refund was a “statement regarding his financial condition” and therefore Lamar’s claim was NOT barred from discharge under 11 U.S.C. § 523(a).
Authored by: Cristina Vanea, Associate