In our uncommonly vicious and partisan political culture, it’s refreshing to hear oral arguments at the U.S. Supreme Court on a non-partisan and apolitical issue. Here’s one:
–Oral arguments held on April 17, 2018, in the bankruptcy case of Lamar, Archer & Cofrin, LLP v. Appling, Case No. 16-1215 [here’s the transcript] .
The Appling question is about a statute’s requirement of a writing to deny discharge for false statements about financial condition.
The Statute in Question
Under § 523(a)(2) [Fn. 1], a debtor can be denied a discharge for using false statements to obtain a loan from a creditor. However, when the false statement is “respecting the debtor’s or an insider’s financial condition,” § 523(a)(2)(B) requires the false statement be “in writing” to deny discharge.
The Appling Issue
So, the Appling case is all about the meaning of this phrase in § 523(a)(2)(A)&(B):
“a statement respecting . . . financial condition.”
Prior rulings by bankruptcy and appellate courts on the meaning of this phrase have been indistinct and indeterminate.
–The Fact Context
Appling hired Lamar, Archer & Cofrin law firm to defend him in a lawsuit. When unpaid fees piled up, Appling said he expected a $100,000 tax refund and would use it to pay their fees. So the firm kept working.
Instead, Appling used the refund for operating expenses.
When Appling filed bankruptcy, the law firm sued to deny a discharge of their unpaid legal fees. They based their no-discharge claim on § 523(a)(2)(A) because:
–he made a false statement that induced them to keep working for him.
Appling claimed that his tax payment assurance could not provide grounds for denying his discharge because of § 523(a)(2)(B), which requires a “statement respecting” his “financial condition” be in writing to deny a discharge. Appling argued:
the tax refund assurance, (i) was a “statement respecting” his “financial condition,” (ii) was made orally and not in writing, and (iii) therefore, could not be grounds for denying a discharge of the law firms legal fees.
–The Eleventh Circuit Ruling
The Eleventh Circuit Court of Appeals accepted Appling’s argument and granted his discharge. The law firm appealed. The U.S. Supreme Court granted certiorari, and oral arguments occurred last week.
Appling oral arguments centered on three different suggestions on what the § 523(a)(2) phrase, “a statement respecting . . . financial condition,” should mean.
The following is a review of oral arguments on each of these three suggestions.
–Law Firm’s Suggestion
The law firm argues:
(i) Appling incorrectly reads the word “respecting” to mean “related to”—instead, “respecting” should be read to mean “about”; and
(ii) The term “financial condition” refers to statements about “one’s overall financial status,” not to statements about a single asset.
Comments of Justices Kagan, Sotomayor, Breyer, Alito, Ginsburg and Gorsuch appear, in varying degrees, skeptical of this argument.
The “clearest test is to ask: Does the statement describe what would be a line item on one’s balance sheet or income statement?”
Comments of the Justices do not show support for this approach either.
–U.S. Government’s Suggestion
The U.S. Government proposes that a statement is “respecting . . . financial condition” when it is given as “evidence of debtor’s ability to pay.”
Here are supporting explanations, from oral arguments, by an Assistant to the Solicitor General.
The “statement respecting financial condition” phrase:
is “about the topic of the statement — not about the significance of the statement”; and
“wasn’t plucked out of the ether in 1978”—it “existed in prior bankruptcy law dating back to 1926” and “had been interpreted by courts over the years” to “include statements about particular assets” when a creditor relied on that statement and was defrauded by it.
The test should be objective:
i.e., whether a “reasonable creditor” would perceive the debtor’s statement to shed light on the creditor getting money back; and
the subjective intent of the debtor should be irrelevant.
The 1970s legislative process toward adopting the Bankruptcy Code focused on a “Commission’s report,” and hearings thereon “were all about what had happened before the Commission and what the Commission was proposing.”
Here are some points the Government refers to as “striking”:
The Commission “had proposed to eliminate the fraud exception to discharge entirely for [all] consumer debts, not just for false financial statements”; and
“Congress thought that that went too far” but “ultimately preserved” the rule that statements dealing with financial condition “would need to be in writing” to “render that claim non-dischargeable.”
Making predictions is always hazardous, and predictions are usually wrong.
Nevertheless, I’ll hazard this guess:
–it seems likely that the Supreme Court’s Appling ruling will more closely resemble the U.S. Government’s suggestion than the suggestions of the parties.
Footnote 1: 11 U.S.C. § 523(a)(2)(A)&(B) reads:
(a) A [bankruptcy discharge] does not discharge an individual debtor from any debt— . . . (2)for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition; (B) use of a statement in writing—(i) that is materially false; (ii) respecting the debtor’s or an insider’s financial condition; (iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and (iv) that the debtor caused to be made or published with intent to deceive.
Endnote: For a prior article on the Supreme Court granting certiorari in this case, see U.S. Supreme Court and Statute of Frauds for Nondischargeability (§ 523(a)(2)): In re Appling
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