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Supreme Court Holds Argument in Lamar, Archer & Cofrin on Dischargeability

Quick Take
The high court seemed primed to rule that a debt will be discharged despite an oral misrepresentation about one asset.
Analysis

The Supreme Court heard oral argument yesterday in Lamar, Archer & Cofrin, LLP v. Appling, 16-1215 (Sup. Ct.). The justices seem primed to rule that a false statement about one asset must be in writing to provide grounds for ruling that a debt is nondischargeable under Section 523(a)(2).

The high court granted certiorari on Jan. 12 to resolve a split of circuits. The courts of appeals are evenly split, with the Eleventh and Fourth Circuits holding that a false oral statement about one asset is a “statement respecting the debtor’s . . . 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.

Among the lower courts, a majority follow the Eleventh and Fourth Circuits.

In a telling indication of how the Court may come out, the justices spent perhaps one-third of oral argument discussing the best rule they could devise to reach the same result as the Eleventh Circuit and hold that an oral misrepresentation about one asset cannot lead to the nondischargeability of a debt.

The Case Below

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, 2017, 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). To read ABI’s discussion of the Eleventh Circuit opinion, click here.

The creditor filed a petition for certiorari. The U.S. Solicitor General recommended that the Court grant the petition, submitted an amicus brief, and participated in oral argument, contending that the Eleventh Circuit was correct and that an oral misstatement about one asset is a statement about “financial condition” that must be in writing before the debt can be declared nondischargeable.

The Issue and the Statute

The case centers around 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 circuits are split about the result when a debtor prevaricates about one asset, rather than lies about his or her net worth or overall financial condition. Curiously, the Fifth and Tenth Circuits would discharge a debt if a debtor makes a big lie orally about his or her net worth, but would declare the debt nondischargeable if the debtor makes a smaller, oral lie about only one asset.

Oral Argument

The justices were uncharacteristically quiet, interrupting counsel on both sides less often than they do in most arguments. Perhaps the justices have already decided how they will rule. Or perhaps they were simply exhausted after the morning’s prior argument in a very consequential case, South Dakota v. Wayfair, Inc., to decide whether the Court will overrule its prior precedent and allow states to impose sales taxes on goods purchased through the Internet.

As the petitioner in the bankruptcy case, counsel for the creditor argued first. He asked the justices to rule “that a statement about a single asset or a single liability is not a statement respecting financial condition.” He focused on the statutory word “respecting” to mean that a misrepresentation about “overall financial condition” is the only type of statement that must be in writing to result in nondischargeability. In “commercial practice,” he said, “financial condition” refers “to one’s overall financial status.”

The creditor’s counsel argued that the result might be different if the statute had used “about” rather than “respecting.” But Justice Elena Kagan countered, “I honestly couldn’t find one [example] where [the two words] meant something different.”

Justice Stephen G. Breyer took a different approach. He focused on the word “statement” rather than “respecting” to broaden the meaning of “financial condition” to encompass one asset.

In the same vein, Justice Ruth Bader Ginsburg asked why a statement about a forthcoming tax refund “isn’t . . . a statement respecting the financial condition.”

Similarly, Justice Neil M. Gorsuch asked why a misrepresentation about a major asset “can’t . . . be about your overall financial condition.”

Justice Breyer used the example of a debtor who claimed to own an original painting by Vermeer. He asked, “What’s that if it’s not about overall financial [condition]?”

Later, counsel for the creditor addressed these questions by saying that a misstatement about one asset “goes to the ability to pay, not overall financial condition.”

Counsel for the debtor and the Solicitor General drew even fewer questions.

Counsel for the debtor rested his case on the plain language of the statute, as did the creditor. Fleshing out his interpretation of the statute, he said “that any statement that has a direct impact on one’s overall financial condition . . . is a statement respecting financial condition.”

The debtor’s counsel proposed the following test: “Does the statement describe what would be a line item on one’s balance sheet or income statement?”

He described the government’s proposed test as saying that a statement pertains to financial condition if it is “an affirmative representation about a single asset if that representation is offered as evidence of the debtor’s ability to pay.”

In response to questions from the bench, he could not think of a circumstance where the result would differ depending on which test was employed.

When the time came for the Solicitor General to speak, he agreed that “there is no practical difference in how it turns out” if the debtor’s formulation were used rather than the government’s. He grounded the government’s position in history.

According to the Solicitor General, the phrase “financial condition” was not “plucked out of the ether in 1978” with the adoption of the Bankruptcy Code. He said it had existed in bankruptcy law “dating back to 1926 [and] had been interpreted by courts over the years to extend beyond statements about overall financial condition to include statements about particular assets.”

The justices asked no questions of the creditor’s counsel during rebuttal argument.

The creditor was represented in the Supreme Court by Gregory George Garre from Latham & Watkins LLP in Washington, D.C. The debtor’s counsel was Paul Whitfield Hughes from Mayer Brown LLP in Washington, D.C. Arguing for the government was Jeffrey E. Sandberg, Assistant to the Solicitor General.

To read the transcript of oral argument, click here.

Case Name
Lamar, Archer & Cofrin, LLP v. Appling
Case Citation
Lamar, Archer & Cofrin, LLP v. Appling, 16-1215 (Sup. Ct.)
Rank
1
Case Type
Consumer
Bankruptcy Codes
Judges