On Jan. 5 the justices will hold a conference to decide whether the Supreme Court will follow the recommendation of the Solicitor General and grant certiorari to review Appling v. Lamar Archer Cofrin LLP (In re Appling), 848 F.3d 953 (11th Cir. Feb. 15, 2017).
With Appling, the Supreme Court can resolve a split of circuits and decide whether a false oral statement about one asset is a statement of “financial condition” that must be in writing to result in denial of discharge of a debt under Section 523(a)(2). A statement about “financial condition” underlay a Dec. 29 opinion by the Fifth Circuit, one of the courts of appeals that has already taken sides in the circuit split.
The Eleventh and Fourth Circuits hold that a false oral statement about one asset is a statement of “financial condition” that must be in writing to result in denial of discharge of a debt under Section 523(a)(2). The Fifth and Tenth Circuits ruled to the contrary and held that misrepresenting one asset can result in nondischargeability of the debt owing to the creditor to whom the misrepresentation was made.
Curiously, the new opinion we report today means that orally misrepresenting all assets will not make the debt nondischargeable in the Fifth Circuit, while orally misrepresenting one asset can make the debt nondischargeable in the same circuit.
In the new Fifth Circuit case, an executive of an aircraft repair service told a potential customer that his company was in “very fine legally [sic] financial shape” and had “plenty of cash to operate” while it would be working on the customer’s aircraft.
After paying about $400,000, the customer terminated the contract. Although agreeing to a refund for the work not completed, the repair shop never paid. So, the customer sued the company executive. In state court, a jury awarded the customer a $260,000 judgment against the executive, having found he committed fraud.
The executive filed a chapter 7 petition, but the bankruptcy court granted summary judgment in favor of the customer based on collateral estoppel, declaring that the debt was nondischargeable under Section 523(a)(2)(A) for obtaining money obtained by false representation.
The district court affirmed, but the Fifth Circuit reversed in a non-precedential, per curiam opinion on Dec. 29. The panel was composed of Circuit Judges Carolyn D. King, James L. Dennis, and Gregg J. Costa.
The appeals court explained that Section 523(a)(2)(A) renders a debt nondischargeable if obtained by false pretenses, false representations, or actual fraud. However, that subsection includes an exception making the debt dischargeable if the misrepresentation was an oral statement about “financial condition.” When it comes to statements about financial condition, the representation must be in writing before it can be considered nondischargeable under Section 523(a)(2)(B).
The Fifth Circuit avoided basing the opinion on its side of the circuit split. The appeals court said that the “meaning of ‘statement respecting . . . financial condition” in 11 U.S.C. § 523(a)(2) is a question of law, which we consider de novo.”
Following the court’s precedent in Bandi v. Becnel (In re Bandi), 683 F.3d 671 (5th Cir. 2012), the appeals court said the “representations pertained to the overall financial strength and stability” of the repair shop and therefore presented a picture of the shop’s “overall financial health.”
As such, the statements pertained to “financial condition,” were “therefore outside of the scope of Section 523(a)(2)(A),” and provided no basis to deny discharge of the debt, the circuit court said.
Explaining the reversal further, the appeals court said that the executive’s “representations were general and intimated that the overall value of [the repair shop’s] property and income was greater than its debts and liabilities.” As a statement about “overall financial health,” the statements did not form the basis for denial of discharge of the debt because they were not in writing.
In light of the new decision, law in the Fifth Circuit is curious. On one hand, a debt might not be discharged if the debtor made a false oral statement about the value of one asset. On the other hand, a debt can be discharged if the debtor made a false statement about all of his or her assets. Consequently, it’s more dangerous in the Fifth Circuit to misrepresent one asset orally than to misrepresent all assets.
Also on Jan. 5, the Supreme Court will consider the certiorari petition in First Southern National Bank v. Sunnyslope Housing LP, 17-455 (Sup. Ct.), a case that asks whether a secured creditor in chapter 11 is always entitled to recover at least the foreclosure value of its collateral. If the high court decides to consider either Appling or Sunnyslope, an announcement could come on the afternoon of Jan. 5 or at 9:30 a.m. on Jan. 8.
If there is no action announced at either time, it means that the justices will consider the petition again at a later conference. The lack of action raises the odds that the petition will be granted later. The likelihood of Supreme Court review in Appling already increased when the Solicitor General recommended granting certiorari in November.
The Appling case in the Supreme Court is Lamar Archer & Cofrin LLP v. Appling, 16-1215 (Sup. Ct.). To read ABI’s most recent coverage of Sunnyslope and Appling, click here and here.
The Fifth Circuit case is Haler v. Boyington Capital Group LLC (In re Haler), 17-40229 (5th Cir. Dec. 29, 2017).