At what point does the policy of bankruptcy, a discharge that strongly favors the honest-but-unfortunate individual debtor, yield to creditor protections from fraudulent debtor behavior? This is a question the Supreme Court recently considered in its decision in Lamar, Archer & Cofrin LLP v. Appling.[1]
Case Background
R. Scott Appling retained Lamar, Archer & Cofrin, LLP to represent Appling in a business litigation. By March 2005, Lamar threatened to withdraw from the case if Appling did not pay Lamar’s outstanding bills. Appling told Lamar that he was expecting a significant tax refund in excess of the amount owed to Lamar and that he would use that refund to pay Lamar. Lamar agreed to continue working on the case. In October 2005, Appling received the tax refund, but the amount of the refund was lower than Appling had expected. Rather than paying Lamar, Appling spent the tax refund on his business. In November 2005, Appling told Lamar he had not yet received the tax refund. In March 2006, Lamar sent Appling a final invoice for legal services, which remained unpaid. Five years later, Lamar filed suit in Georgia State Court and obtained a judgment against Appling. Appling then filed for chapter 7.
Lamar brought an adversary proceeding against Appling in bankruptcy court asserting that Lamar’s debt was nondischargeable under 11 U.S.C. § 523(a)(2)(A). That section prevents the discharge of debts arising from “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s … financial condition.” Lamar argued that Appling’s misrepresentations were regarding a specific asset, not the debtor’s financial condition. Appling responded in a motion to dismiss that Lamar’s claims were dischargeable because Appling’s alleged misrepresentations were “statement[s] respecting the debtor’s … financial condition,” which § 523(a)(2)(B) requires to be “in writing” to be nondischargeable.
The bankruptcy court denied Appling’s motion to dismiss on the grounds that Appling knowingly made two false representations about a single asset, Lamar had relied upon these misrepresentations, and Lamar was damaged as a result. The district court affirmed the bankruptcy court’s decision.
The Eleventh Circuit reversed the decision, stating that a “statement respecting the debtor’s … financial condition” may include a statement regarding a single asset. Given that Appling’s statements were not in writing, the Eleventh Circuit held that § 523(a)(2)(A) does not prohibit Appling from discharging the debt to Lamar.
Lamar appealed the case to the Supreme Court, which heard oral arguments in April 2018.
Supreme Court Ruling
The Supreme Court faced one central question in this case: Does an oral statement regarding a particular asset constitute a “statement[s] respecting the debtor’s … financial condition”?
In its opinion, rendered on June 4, 2018, the Supreme Court affirmed the circuit court’s holding that an oral statement regarding a particular asset does in fact constitute a “statement respecting the debtor’s … financial condition.” In the opinion of the Supreme Court, Justice Sotomayor referenced the definition of the word “respecting,” which in ordinary use means “about;” “concerning;” “regarding;” “in regard to;” or “relating to” — all terms with a broadening rather than limiting effect.[2]
Justice Sotomayor also noted that while the Bankruptcy Code intends to provide relief to the “honest but unfortunate debtor,”[3] Congress has also made a significant attempt to “balance the potential misuse of such statements by both debtors and creditors”[4] when requiring false statements respecting financial condition to be made in writing to be nondischargeable claims.
[1] Lamar, Archer & Cofrin LLP v. Appling, __ U.S. __, 201 L. Ed. 2d 102, 138 S. Ct. 1752 (2018).
[2] Lamar, Archer & Cofrin LLP v. Appling, 201 L. Ed. 2d at 112-113.
[3] Cohen v de al Cruz, 523 U.S. 213, 217 (1998).
[4] Lamar, Archer & Cofrin; id. at 111.