On Jan. 12 the Supreme Court granted certiorari and will review Lamar, Archer & Cofrin LLP v. Appling, 16-1215 (Sup. Ct.), to 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).
The case will be argued, with a decision handed down before the Court’s term ends in late June. With Appling, the high court will decide three bankruptcy cases this term.
On Nov. 6, the justices heard oral argument in Merit Management Group LP v. FTI Consulting Inc., 16-784 (Sup. Ct.), dealing with the safe harbor in Section 546(e). In U.S. Bank NA v. The Village at Lakeridge LLC, 15-1509 (Sup. Ct.), argued on Oct. 31, the Supreme Court will prescribe the standard of appellate review for non-statutory insider status. Decisions in those cases could come down in the next few weeks.
On the issue in Appling, the courts of appeals are evenly 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, holding that misrepresenting one asset can result in nondischargeability of the debt owing to the creditor to whom the misrepresentation was made.
Among the lower courts, a majority follow the Eleventh and Fourth Circuits.
In the Eleventh Circuit case that the justices will review, a client told his lawyers that he expected a large tax refund that would enable him to pay his legal bills. Based on that representation, the lawyers continued working.
Although the refund was smaller than represented, the client spent it on his business, falsely telling his lawyers that he had not received the refund. The lawyers continued working. Later, they obtained a judgment they could not collect when the client filed bankruptcy.
The bankruptcy judge held that the claim for legal fees was not discharged. The ruling in bankruptcy court was upheld in district court, but the Eleventh Circuit reversed in a Feb. 15 opinion authored by Circuit Judge William Pryor. Appling v. Lamar, Archer Cofrin LLP (In re Appling), 848 F.3d 953 (11th Cir. Feb. 15, 2017).
The high court will be interpreting Sections 523(a)(2)(A) and 523(a)(2)(B). Under (a)(2)(B), a debt will not be discharged if it resulted from a materially false written statement “respecting the debtor’s . . . financial condition.”
Under (a)(2)(A), a debt will not be discharged if it resulted from “a false representation or actual fraud, other than a statement respecting the debtor’s . . . financial condition.”
The creditor who lost in the Eleventh Circuit filed a petition for certiorari in April. In June, the justices invited the Solicitor General “to file a brief in this case expressing the views of the United States.”
In a brief on Nov. 9, the Solicitor General recommended that the high court hear the case because there is a deepening circuit split over an “important and recurring” question. The government also took the position that the Eleventh Circuit was correct in holding that a false oral statement about one asset should not result in nondischargeability of a debt.
If the justices reverse the Eleventh Circuit, bankruptcy law will mean that someone who utters a big lie can win a discharge of debt when making a small lie can mean a nondischargeable debt.
Here are the examples. If the debtor says orally, “I have a $10 million net worth,” that statement will not make a debt nondischargeable because all circuits would agree it’s a statement about “financial condition” that must be in writing before resulting in nondischargeability.
By way of contrast, assume the debtor owns many properties and says orally, “One property I own is worth $10 million.” In the Fifth and Tenth Circuits, the statement could make the debt nondischargeable if it were false because those courts of appeals believe that the representation would not concern “financial condition” because it says nothing about the debtor’s overall net worth.
In the Fifth and Tenth Circuits, a debtor could safely misrepresent his or her net worth without the risk of dischargeability, but the same debtor in those circuits would end up with a nondischargeable debt for misrepresenting only one asset. In other words, the Supreme Court will decide whether a smaller lie is more dangerous to dischargeability than a big lie.
Like Merit Management, Appling gives the Supreme Court another opportunity to decide a bankruptcy case by focusing more on the perceived purpose as opposed to the language of the statute. Like the Eleventh Circuit, perhaps the justices will recognize that human beings are prone to puffery and that creditors should take oral statements about financial condition with a grain of salt, regardless of whether the statement concerns one asset or overall financial condition.
To read ABI’s discussions of the Merit Management and Lakeridge oral arguments, click here and here, respectively.