The Supreme Court held that a statement about a single asset can be a “statement respecting the debtor’s financial condition” for purposes of determining the application of the exception to discharge set forth in Section 523(a)(2) of the Bankruptcy Code. Lamar, Archer & Cofrin LLP v. Appling, 2018 WL 2465174 (June 4, 2018).
Appling involved a client who failed to pay his attorney. Mr. Scott Appling hired a law firm – Lamar, Archer & Cofrin LLP (Lamar) – to represent him in business litigation. After Appling fell behind on his legal bills (more than $60,000), Lamar threatened to withdraw as counsel. Appling told Lamar that he was expecting a $100,000 tax refund and would use such refund to pay Lamar. In reliance upon this representation, Lamar continued to provide legal services to Appling.
Appling received a $59,851 tax refund, which was approximately $40,000 less than he had represented to Lamar. Thereafter, Appling met with his attorneys and told them that he had yet to receive the refund. Appling then spent the tax refund on the business and did not pay Lamar. Lamar sued Appling to recover the unpaid legal fees, and Appling filed for bankruptcy. Lamar instituted an adversary proceeding against Appling and asserted that the debt owed by Appling for legal services rendered by Lamar was not dischargeable under Section 523(a)(2) of the Bankruptcy Code.
Section 523(a)(2) of the Bankruptcy Code sets forth two exceptions to discharge. The first, Section 523(a)(2)(A), covers all fraud “other than a statement respecting the debtor’s … financial condition.” 11 U.S.C. § 523(a)(2)(A) (emphasis added). If the fraudulent statement is made “respecting the debtor’s … financial condition,” the second exception, Section 523(a)(2)(B) applies. Under this section, the fraudulent statement must be “in writing.” 11 U.S.C. § 523(a)(2)(A) (emphasis added). Thus, a debt for services obtained by a false oral statement respecting the debtor’s financial condition can be discharged in bankruptcy since it does not fall within the scope of Section 523(a)(2)(A) or Section 523(a)(2)(B). In order to prevail, Lamar had to stay within the scope of Section 523(a)(2)(A) and prove that the legal services were obtained by fraud, but not fraudulent statements respecting Appling’s financial condition.
The Bankruptcy Court ruled in favor of Lamar. In re Appling, 527 B.R. 545 (Bankr. M.D. Ga. 2015). The Bankruptcy Court found that Appling knowingly made false representations – he overstated the amount of the tax refund and failed to admit that he had received it – and ruled that the debt owed to Lamar was not dischargeable under Section 523(a)(2)(A). The District Court affirmed and found that the false statements regarding the refund concerned only a “single asset,” rather than Appling’s financial condition, making Section 523(a)(2)(A) applicable. Appling v. Lamar, Archer & Cofrin, LLP, No. 3:15-CV-031, 2016 WL 1183128, at *3-4 (M.D. Ga. Mar. 28, 2016).
On appeal, the Eleventh Circuit reversed. The Eleventh Circuit held that “‘statement[s] respecting the debtor’s … financial condition’ may include a statement about a single asset.” In re Appling, 848 F.3d 953, 960 (11th Cir. 2017). The Supreme Court agreed. The Supreme Court reasoned that “[a] single asset has a direct relation to and impact on aggregate financial condition, so a statement about a single asset bears on a debtor’s overall financial condition and can help indicate whether a debtor is solvent or insolvent, able to repay a given debt or not.”
The necessary consequence of this finding was that the debt owed by Appling for legal services could not fall within the scope of Section 523(a)(2)(A), as the false representations concerned Appling’s financial condition, or Section 523(a)(2)(B), as the false representations were oral and not in writing. The Supreme Court concluded its opinion by noting that creditors are not “powerless” – “[t]hey can still benefit from the protection of § 523(a)(2)(B) so long as they insist that the representations respecting the debtor’s financial condition on which they rely in extending money, property, services, or credit are made in writing.” Hence, the obvious takeaway for financial institutions and other potential creditors – get it in writing.