Categories & Search

Supreme Court Resolves Circuit Split on the Dischargeability of Debts Obtained by Oral Misrepresentations

On June 4, the Supreme Court decided Lamar, Archer & Cofrin, LLP v. Appling, No. 16-1215, in a unanimous opinion by Justice Sotomayor. The Court affirmed the Eleventh Circuit and resolved a circuit split about the meaning of “statement respecting the debtor’s . . . financial condition” in section 523(a)(2) of the Bankruptcy Code.

Section 523(a)(2) bars the discharge in bankruptcy of certain debts obtained through fraud. Section 523(a)(2)(A) bars the discharge of debts “obtained by . . . false pretenses, a false representation, or actual fraud,” except when such debts were obtained by “a statement respecting the debtor’s or an insider’s financial condition.” Section 523(a)(2)(B) addresses debts obtained by “a statement respecting the debtor’s or an insider’s financial condition,” barring their discharge only when the statement in question was “written,” “materially false,” reasonably relied upon by the creditor, and published by the debtor with intent to deceive.

Together, section 523(a)(2)(A) and section 523(a)(2)(B) establish a scheme where the debtor’s ability to discharge a debt obtained through a misrepresentation can depend on whether the misrepresentation was “a statement respecting the debtor’s or an insider’s financial condition.” In particular, if the debtor made an oral misrepresentation to obtain the debt, the debt can be discharged if it was a statement respecting the debtor’s financial condition, because section 523(a)(2)(B) requires a writing to block discharge. But if it was not such a statement, the debt cannot be discharged, because section 523(a)(2)(A) does not require that the misrepresentation be in writing.

This Supreme Court case involves such a situation. Respondent R. Scott Appling represented to petitioner Lamar, Archer & Cofrin LLP that he was expecting a tax refund of $100,000. In fact, he only received a refund of $59,851. He subsequently told Lamar that he had not yet received the refund. Relying on these representations, Lamar continued to represent him and delayed collection of outstanding fees. Appling later filed for bankruptcy, and Lamar initiated an adversary proceeding in bankruptcy court seeking to block discharge of the debt Appling owed it on the ground that it was nondischargeable under section 523(a)(2)(A). The bankruptcy court found that Appling had knowingly made misrepresentations about the tax refund. It further held that, because the statements were only about a single asset, they were not statements “respecting the debtor’s . . . financial condition,” and the debt could not be discharged. The district court affirmed, but the Eleventh Circuit reversed, reasoning that, because a single asset has an impact on a debtor’s overall financial condition, a statement about a single asset is a statement “respecting the debtor’s . . . financial condition.”

The Supreme Court agreed with the Eleventh Circuit. Focusing on the word “respecting,” it read the term to mean “related to,” rejecting Appling’s argument that it has a narrower meaning. It thus understood “respecting” to have an expansive effect, including in the statutory phrase any statement that “has a direct relation to or impact on the debtor’s overall financial status.” Lamar, slip op. at 9. Since a statement about a single asset clearly has an impact on the debtor’s overall financial status, it counts as a “statement respecting the debtor’s . . . financial condition.” Such a statement, then, cannot be a basis for barring discharge of a debt unless it is in writing.

The Court went on to conclude that Lamar’s interpretation was inconsistent with the history and structure of the provision. It noted that on Lamar’s interpretation, a misrepresentation about a single asset included on a balance sheet would trigger the additional requirements of section 523(a)(2)(B), while the same misrepresentation made by itself would not, which it characterized as a “seemingly arbitrary” distinction. Id. at 10. It also pointed to court interpretations of a similar phrase in a previous version of the Bankruptcy Code, a “statement in writing respecting . . . financial condition,” which courts consistently interpreted to include statements concerning just one or some of a debtor’s assets or liabilities. The Court invoked the presumption that Congress is aware of judicial interpretations of past legislative language when Congress adopts legislation using such language anew. Id. at 10-11.

The Court additionally rejected Lamar’s purposive arguments. Lamar argued that reading section 523(a)(2)(B) to encompass statements about single assets would leave little work to be done by section 523(a)(2)(A), but the Court noted that 523(a)(2)(A) still covers frauds that do not involve statements, such as fraudulent transfers, and frauds that involve misrepresentations about the value of goods and services. Id. at 12. Lamar further argued that a broad interpretation undermined the Bankruptcy Code’s purpose to only protect honest debtors. The Court, relying on legislative history, noted that Congress had intentionally sought to protect certain debtors who made misrepresentations in the course of obtaining a debt, because of worries about unscrupulous lenders who would manipulate borrowers into making misrepresentations so as to prevent the debt from being discharged in bankruptcy. It further observed that creditors worried about being defrauded could simply require that borrowers make representations in writing, which has other benefits as well. Id. at 13-15. (Justices Gorsuch, Thomas, and Alito did not join this part of the opinion, perhaps because it relied on legislative history.)