Samuel Goodstein writes:

The U.S. Supreme Court resolved a dispute about whether debts obtained by false promises to pay (or fraud) can be discharged in bankruptcy.

On June 4, 2018, the U.S. Supreme Court issued an opinion affirming the U.S. Court of Appeals for the Eleventh Circuit’s ruling that false statements related to a single asset (here, a tax refund) that could be used deny discharge of a particular debt may prevent denial of discharge because the statement relates to the Debtor’s financial condition. See Lamar, Archer, & Cofrin, LLP v. Appling, No. 16-1215 (U.S. June 4, 2018).

InvoicesThe case involved R. Scott Appling (“Debtor”) who failed to pay his attorneys, Lamar, Archer & Cofrin (“Creditor”) for legal services provided in a business litigation. Creditor/attorney threatened to withdraw from the case and place a retaining lien on the work product to compel payment.

Debtor made remarks to Creditor about certain expected tax refunds that could be used to pay for the legal services; and Creditor agreed not to withdraw from the representation. Debtor thereafter did not pay Creditor for the legal services.  Ultimately, Creditor brought suit against Debtor for the balance due and obtained a judgment, and Debtor then filed for chapter 7 bankruptcy.

In the chapter 7 case, Creditor brought an adversary proceeding claiming that the debt was not dischargeable under 11 U.S.C. § 523(a). Section 523(a)(2)(A) provides an exception to dischargeability of a debt if the debt is obtained by “false pretenses, a false representation, or actual fraud,” but 523(a)(A) itself has an exception and does not deny discharge if the statement is “respecting the debtor’s . . . financial condition.”

When the purported false statement is “respecting” the debtor’s financial condition, §523(B), applies to render the debt not dischargeable if the false statement was in writing.  Here, the Debtor’s promise to pay creditor with his tax refund proceeds were not in writing so Creditor argued that the Debtor’s statements about his tax refund was not a “statement respecting” his financial condition such that the exception to denial of discharge in 523(a)(2)(A) would not apply.

The Supreme Court affirmed the Eleventh Circuit’s ruling and found the debt was still dischargeable because the false promises to pay with the tax refund proceeds constituted a statement “respecting” the Debtor’s financial condition and were not in writing.  The Supreme Court agreed and broadly construed the word “respecting.”  The Supreme Court decided that statements about a single asset (the tax refund) can constitute a “statement respecting the debtor’s financial condition” such that denial of discharge is not appropriate.

The practical implications of this ruling are rather straightforward. Debtors can make, at the very least, a single false statement about their ability to complete payment to creditors as long as it relates to their financial condition and it isn’t memorialized in writing.  It will be interesting to see how this plays out throughout the country.

Samuel Goodstein is a summer associate in Fox Rothschild’s New York Office.