From the Top in Brief: U.S. Supreme Court Clarifies Whether Debts Based on False Statements Can Be Discharged in Bankruptcy

On June 4, 2018, the U.S. Supreme Court ruled in Lamar, Archer & Cofrin, LLP v. Appling, No. 16-1215, 138 S. Ct. 1752, 2018 WL 2465174 (U.S. June 4, 2018), that an individual debtor's false statement about a single asset, as distinguished from the debtor's overall financial status, can make a debt for money, property, services, or credit obtained on the basis of the statement nondischargeable in the debtor's bankruptcy case, but only if the statement is in writing.

Section 523(a)(2)(A) of the Bankruptcy Code excludes from an individual debtor's discharge debts for money, property, services, or credit obtained by "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's … financial condition." Section 523(a)(2)(B) makes such debts nondischargeable if they are based on a materially false written statement "respecting the debtor's ... financial condition." Thus, although the Bankruptcy Code generally excludes from discharge an individual debtor's debts stemming from dishonest or fraudulent conduct, an exception to the rule—requiring statements regarding the debtor's financial condition to be in writing—exists to protect individuals from abusive creditors.

R. Scott Appling owed law firm Lamar, Archer & Cofrin, LLP, more than $60,000 in legal fees for representing him in litigation. He verbally promised to pay the bill with a tax refund but failed to do so. Appling later tried to discharge a $104,000 state court judgment awarded to the law firm in his chapter 7 case, but the bankruptcy and district courts ruled that his oral statement about a single asset—the tax refund—did not respect his financial condition and that the debt was accordingly nondischargeable under section 523(a)(2)(A). The U.S. Court of Appeals for the Eleventh Circuit reversed on appeal.

The unanimous Supreme Court agreed with the Eleventh Circuit, resolving a circuit split on the issue. Writing for the court, Justice Sotomayor explained that "[t]he statutory language makes plain that a statement about a single asset can be a 'statement respecting the debtor's financial condition.' " She further noted that if Congress had intended section 523(a)(2)(B) to encompass only "statements expressing the balance of a debtor's assets and liabilities, there are several ways in which it could have so specified," yet it chose not to do so.

If that statement is not in writing, she wrote, the "associated debt may be discharged, even if the statement was false."

Justices Thomas, Alito, and Gorsuch joined the opinion, except for that portion addressing the law firm's argument that Appling's interpretation was inconsistent with the overall principle that the Bankruptcy Code exists to give relief only to the "honest but unfortunate debtor" because it leaves "fraudsters" free to "swindle innocent victims for money, property or services by lying about their finances, then discharge the resulting debt in bankruptcy, just so long as they do so orally." Justice Sotomayor rejected this argument, noting that the heightened requirements set forth in section 523(a)(2) "are not a shield for dishonest debtors … [but] [r]ather, they reflect Congress' effort to balance the potential misuse of such statements by both debtors and creditors."

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