Even when the facts tug on the heartstrings, the law is the law. Representing that a business is profitable and lucrative is a representation about “financial condition” that must be in writing to supply the basis for nondischargeability under Section 523(a)(2), the Fifth Circuit held.
Dr. A owned a corporate medical practice. Dr. B agreed to join the practice and was promised he would be paid half of his gross billings received from patients and insurance companies.
Dr. B said he signed up because Dr. A represented orally that the corporate practice was “profitable and lucrative.”
Dr. B was not paid what he said he was promised. So, he sued the corporation in state court, asserting claims including fraud and breach of contract. Dr. A filed a personal chapter 7 petition.
Dr. B filed a complaint alleging that Dr. A was responsible for the corporate debt and that the debt was nondischargeable under Section 523(a)(2), (4) and (6). Bankruptcy Judge Craig A. Gargotta of San Antonio dismissed the complaint and was upheld in district court.
The Fifth Circuit affirmed in a nonprecedential, per curiam opinion on December 15.
Dr. B argued that the representation about a profitable medical practice was a “false representation” resulting in nondischargeability under Section 523(a)(2)(A).
The circuit court did not even reach the question of whether the representations were false, whether Dr. A had an intent to deceive or whether Dr. B reasonably relied. Instead, the appeals court upheld dismissal under Section 523(a)(2)(B).
To result in nondischargeability, Section 523(a)(2)(B) requires, among other things, a “statement in writing . . . that is materially false . . . respecting the debtor’s . . . financial condition.” The appeals court noted that the Bankruptcy Code does not define “statement,” “financial condition” or “respecting.”
Citing dictionary definitions, the appeals court said, “It follows that a declaration regarding one’s overall financial status is a ‘statement respecting the debtor’s financial condition.’” The statement about profitability “is a statement respecting [the corporation’s] financial condition” because “this statement relates to [the corporation’s] overall financial status,” the circuit court said.
It did not avail the creditor to argue that the statement about profitability only related to one aspect of the corporation’s overall financial condition. The appeals court said, “A statement about a single asset can be a statement respecting the debtor’s financial condition.”
Furthermore, a statement about the financial condition of the corporation was a statement about Dr. A’s financial condition because he owned the corporation, making “his statement about [the corporation’s] profitability . . . a statement about his own financial condition.”
The circuit court upheld dismissal of the fraudulent representation claim because it was a statement of financial condition that was not in writing. The court upheld dismissal of other claims because the complaint failed to allege that other statements were false, that Dr. A knew they were false or that they were made with intent to deceive.
Even when the facts tug on the heartstrings, the law is the law. Representing that a business is profitable and lucrative is a representation about “financial condition” that must be in writing to supply the basis for nondischargeability under Section 523(a)(2), the Fifth Circuit held.
Dr. A owned a corporate medical practice. Dr. B agreed to join the practice and was promised he would be paid half of his gross billings received from patients and insurance companies.
Dr. B said he signed up because Dr. A represented orally that the corporate practice was “profitable and lucrative.”
Dr. B was not paid what he said he was promised. So, he sued the corporation in state court, asserting claims including fraud and breach of contract. Dr. A filed a personal chapter 7 petition.
Dr. B filed a complaint alleging that Dr. A was responsible for the corporate debt and that the debt was nondischargeable under Section 523(a)(2), (4) and (6). Bankruptcy Judge Craig A. Gargotta of San Antonio dismissed the complaint and was upheld in district court.
The Fifth Circuit affirmed in a nonprecedential, per curiam opinion on December 15.