Section 523(a)(2)(B) provides that an individual debtor’s debt is not discharged to the extent the debt was obtained by use of a statement in writing that (1) is materially false, (2) is respecting the debtor’s financial condition, (3) is one on which the creditor reasonably relied and (4) was caused by the debtor to be made or published with intent to deceive. Recently, in Privitera v. Curran (In re Curran),[1] the First Circuit considered the limits of a materially false statement by omission. It affirmed the bankruptcy court’s dismissal of a § 523(a)(2)(B) count, where the plaintiff’s averment in support of a materially false statement was that the debtor had not disclosed information that the creditor had not requested in the first place.
In 2007, the Curran debtor needed funds. His romantic partner, the plaintiff, agreed to loan him $30,000. The plaintiff asked the debtor for a list of “property ‘belonging’ to him ‘either by title or by physical possession’ and used in his landscaping business.” The debtor provided such a list, which included 16 landscaping items along with their purchase prices. However, the debtor did not disclose that he was still making payments on one of the trucks on the list, and that the truck remained titled to the lender. The debtor later defaulted, and the plaintiff obtained a state court judgment against the debtor. The debtor then filed for chapter 7 relief, and the plaintiff filed a complaint seeking a determination that the judgment debt was excepted from discharge under § 523(a)(2)(B). The bankruptcy court granted the motion to dismiss and denied the plaintiff’s request to amend the complaint to add a § 523(a)(2)(A) count. The BAP affirmed, and the plaintiff further appealed.
The First Circuit chose not to affirm on the grounds upon which the lower courts had relied. It also rejected the contention that the appeal required it to decide whether the list constituted a “statement respecting the debtor’s financial condition.” Instead, it decided the case on the “materially false” element.
The court began its analysis by recognizing that a materially false statement can be made by affirmative misrepresentation or by omission, but that “[t]o sink to the level of a misstatement by omission, the party privy to the omitted information must have been obligated to furnish it” and that the “failure to speak becomes a misrepresentation by omission only if the context requires the debtor to speak (that is, to provide the missing information).” Accordingly, “[v]iewed against this backdrop, the plaintiff’s complaint needed plausibly to plead either that the debtor affirmatively misrepresented the status of the items enumerated in the List or that he omitted information he was obligated to furnish.” Since the plaintiff did not allege an affirmative misrepresentation, the court determined that, “[s]tripped to its essence, then, the plaintiff’s case rests on a claim that it is what the debtor did not say that created a materially false impression. She points specifically to his failure to disclose that at least one of the trucks was encumbered.”
The court affirmed the dismissal of the § 523(a)(2)(B) count for several reasons. First, the inclusion of the encumbered property on the list was “entirely consistent” with the request that the debtor prepare a list of property that he owned or possessed. As the court bluntly observed: “[T]he debtor gave [the plaintiff] exactly what she had requested: a list of items that he either owned or possessed.” Second, the loan agreement required that the debtor not further encumber the property; it did not refer to preexisting encumbrances. Third, the plaintiff did not aver that the debtor promised to provide a list of items sufficient to secure the loan fully. Fourth, there was no averment that “the parties reached a meeting of the minds regarding either the purpose of the List or the implications of its recharacterization. Nor does the complaint supply facts suggesting that the plaintiff believed the listed items to be unencumbered.”
The court also made short shrift of the argument that “it should have been clear to the debtor that he was expected to disclose any preexisting encumbrances.” The court stated that it was aware of no authority requiring the debtor to disclose a prior encumbrance “simply because he has been asked to provide a list of property that he owns and/or possesses.”
Similarly, the court affirmed the denial of the request to amend to add a § 523(a)(2)(A) claim, observing, “These facts did not bear the weight of her [§] 523(a)(2)(B) claim, and they are likewise too flimsy to bear the weight of her § 523(a)(2)(A) claim. The List was exactly what it purported to be: a description of items that the debtor used in the course of his business and their cost when he purchased them.”
Curran is a reminder that a lender’s request for information made in connection with due diligence should be specific and expansive, and crafted without the assumption that the responder is obliged to provide information outside the express request. A lender-creditor may be in a weak position if he later must argue the debtor made a false statement by omission by not providing information that had not been requested. Curran had little appetite for the notion that the debtor could be found to have made a false statement by omission where the omitted information had never been explicitly sought.
However, Curran might have left a door open. In footnote 4, the court observed: “In a last-ditch attempt to snatch victory from the jaws of defeat, the plaintiff invokes the tenet that a party to a transaction must disclose ‘matters known to him that he knows to be necessary to prevent his partial or ambiguous statement of the facts from being misleading.’” Although the First Circuit declined to consider that argument as made by the plaintiff (the issue had not been raised below and was waived), the court did not foreclose considering this argument when properly preserved.
It also should be noted that Curran did not wade into the circuit split on whether the phrase “statement ... respecting the debtor’s ... financial condition” should be interpreted to refer only to those documents that speak directly to the debtor’s overall financial condition, or to include those documents that merely reference a single asset or liability. (The Fifth and Tenth Circuits have adopted a narrower approach,[2] while the Fourth and Eleventh Circuit have adopted a broader approach.[3]) Curran declined to take up the issue, as the appeal could be decided on other grounds.
[1] 855 F.3d 19 (1st Cir. 2017). Factual recitations and quotations are from the First Circuit’s Curran opinion.
[2] Bandi v. Becnel (In re Bandi), 683 F.3d 671 (5th Cir. 2012), and Cadwell v. Joelson (In re Joelson), 427 F.3 700 (10th Cir. 2005).
[3] Appling v. Lamar, Archer & Cofrin LLP (In re Appling), 848 F.3d 953 (11th Cir. 2017), and Engler v. Van Steinburg (In re Van Steinburg), 744 F.2d 1060 (4th Cir. 1984).