July 13, 2018
Section 523(a)(2)(B) of the Bankruptcy Code provides that a discharge under the Bankruptcy Code does not discharge an individual debtor from any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by use of a statement in writing that is materially false, respecting the debtor’s financial condition, on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied, and that the debtor caused to be made or published with intent to deceive.
In Lamar, Archer & Cofrin, LLP v. Appling, the U.S. Supreme Court recently held that a statement about a single asset — here a tax return — can be a statement respecting the debtor’s financial condition under Section 523(a)(2)(B).
In that case, R. Scott Appling fell behind on paying legal bills that he owed to Lamar, Archer & Cofrin. In the course of the parties’ negotiations to repay the debt, Appling informed Lamar that he could pay the amounts he owed to Lamar from a refund he expected to receive for overpayment of his taxes. Based on that representation, Lamar continued to represent Appling. Appling did not pay Lamar but instead used the refund for other purposes. Thereafter, Lamar sued Appling and obtained a judgment, Appling filed bankruptcy, and Lamar commenced an adversary proceeding pursuant to Section 523(a)(2) arguing that the debt was nondischargeable.
The Supreme Court held that a statement regarding a specific asset can be a “statement respecting the debtor’s . . . financial condition” under Section 523(a)(2)(B) of the Bankruptcy Code. Interpreting the statutory provision, the Supreme Court explained that the use of the word “respecting” in the legal context generally has a broadening effect. The Supreme Court went on to state that because “[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.” Therefore, “a statement about a single asset can be a ‘statement respecting the debtor’s financial condition.’ ”
A lesson from this case is that creditors should obtain every representation about a debtor’s financial condition in writing. A writing is a necessary element for a debt to be excepted from discharge under Section 523(a)(2) for representations regarding a debtor’s financial condition.