By Elizabeth Freeman

On June 4, 2018, the Supreme Court of the United States issued its opinion authored by Justice Sotomayor in Lamar, Archer & Cofrin, LLP v. Appling impacting the discharge of debts under Bankruptcy Code § 523(a)(2)(A).

R. Scott Appling (“Appling”) hired Lamar, Archer & Cofrin, LLP (“Lamar”) to represent him in litigation related to his business. Appling later fell behind in payments to Lamar. Appling orally represented to Lamar that he anticipated a tax refund that he would use to catch up on outstanding bills. Thus, Lamar agreed to continue the representation. The tax refund was less than Appling represented. Appling used the refund to pay business debts rather than Lamar, while representing that the refund had not been received so as to induce Lamar to continue working.

After the bill went unpaid for a number of years, Lamar sued Appling and won a judgment. Thereafter, Appling filed a case under Chapter 7 of the Bankruptcy Code. Lamar initiated an adversary proceeding seeking to have its debt declared nondischargable under § 523(a)(2)(A) of the Bankruptcy Code, which excepts from discharge debts “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition”.

The Bankruptcy Court concluded the debt was nondischargable. After the District Court affirmed, the Court of Appeals for the Eleventh Circuit reversed, holding § 523(a)(2)(A) was inapplicable because the alleged fraud was a “statement respecting the debtor’s . . . financial condition”. The Court further found that because Appling’s statements about the anticipated tax return were not in writing, § 523(a)(2)(B) did not bar discharge of the debt to Lamar.

This ruling split from the Fifth Circuit Court of Appeals, which held in In re Bandi, 683 F.3d. 671, 676 (5th Cir. 2012) a statement about a single asset is not a statement respecting the debtor’s financial condition. The Supreme Court granted certiorari to resolve a conflict among the Courts of Appeals. The import of the question is whether a statement about a single asset could support the finding of nondischargeability under § 523(a)(2)(A).

The Supreme Court affirmed the Eleventh Circuit Court of Appeals when it concluded that a “statement about a single asset can be a ‘statement respecting the debtor’s financial condition’”. In such a case, § 523(a)(2)(A) is inapplicable because it applies only to representations “other than a statement respecting the debtor’s or an insider’s financial condition”. The Court held if an alleged fraud is “a statement respecting the debtor’s financial condition”, which can be a representation regarding a single asset, then § 523(a)(2)(B) applies instead. Section 523(a)(2)(B) requires a false statement be made in writing to be the basis of a nondischargable claim.

The Court did not find that a statement about a single asset is always a statement about a debtor’s financial condition, which would render § 523(a)(2)(A) inapplicable. Exceptions are possible. However, a vigilant creditor should obtain in writing any representation regarding a debtor’s financial condition—whether it be a financial statement or information regarding a particular asset—if the financial condition is being relied upon in determining whether to provide money or extend credit or services.

For more information, read the Supreme Court’s opinion.

Meet Liz

Bankruptcy partner Elizabeth Carol Freeman has over 20 years of experience with out-of-court workouts and complex bankruptcy and reorganization matters. Liz assists clients with workouts of distressed loans, including the negotiation of amend and extend agreements. Prior to joining Jackson Walker, she served for six years as law clerk to the Chief Bankruptcy Judge for the United States Bankruptcy Court for the Southern District of Texas. Liz is Board Certified in Business Bankruptcy Law by the Texas Board of Legal Specialization. She holds memberships with the State Bar of Texas, Houston Bar Association, American Bankruptcy Institute, and American Inns of Court.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice.