Supreme Court: To Bar Bankruptcy Discharge, Statement of Financial Condition Must Be “In Writing”
Bankruptcy, Restructuring & Creditor's Rights Alert 06/28/18 Christopher Combest, E. King Poor
Bankruptcy debtors receive a “fresh start” with a discharge of debts, except for certain debts arising from fraud. But in the Supreme Court’s recent decision in Lamar, Archer & Cofrin, LLP v. Appling, 2018 WL 2465174 (June 4, 2018), it ruled that a misrepresentation about a debtor’s financial condition may block a discharge only if it is “in writing.” In the wake of the Appling decision, lenders, suppliers, professional service firms—indeed anyone extending credit to individuals—should be mindful of its lesson to get any statements about a borrower’s financial condition in writing.
In Appling, a law firm client (Appling) fell behind in paying the firm and assured his lawyers that he would use a forthcoming tax refund to pay his debt as well as to fund his future legal fees. Later, when the firm threatened to quit if it was not paid, the client persuaded it to continue its representation by falsely stating that he had not yet received the refund – when, in fact, he had already received it and spent it on his business, instead of his overdue legal bills.
The client never did pay his lawyers and instead filed a Chapter 7 bankruptcy case. The law firm then sought to block their former client’s discharge by alleging that the client had extracted value by inducing his lawyers to continue working for him by false representations—namely, his lies about the tax refund.
In response, the client argued that the language of the Bankruptcy Code blocked a discharge for any statement “respecting [his] financial condition,” only if that statement were “in writing.” The law firm countered that the writing requirement applies only to statements about a debtor's overall financial condition as a whole, and not to false statements about a single, specific asset such a tax refund.
The Supreme Court unanimously agreed with the client and did so by focusing on what it called the “key word” in the statute: “respecting.” Using a variety of dictionary definitions and noting the same term in the predecessor statute going back to 1926, the Court held that the word “respecting,” as used in the phrase “respecting the debtor's financial condition” should be read broadly, to include any statement that has “a direct relation to or impact on the debtor's overall financial status.” Therefore, a statement even about a single asset can have such a relationship and qualifies as a statement “respecting the debtor's financial condition.” The Court also explained that by requiring statements about a debtor’s financial condition be “in writing,” Congress had intended to make it harder for creditors to prevent discharge of their debts and to “balance the potential misuse of such statements by both debtors and creditors.”
Get It in Writing
As the Court noted in Appling, a creditor seeking to bar discharge of a debt must also prove that the false statement was material, that it reasonably relied on the statement, and that the debtor made the statement with an intent to deceive. But after Appling, the threshold issue is whether any alleged false statement about a debtor’s financial condition was “in writing.” As a result, when extending credit to individuals, best practice counsels requiring any statements about assets and liabilities to be in writing, including supplements, amendments, and revisions. Otherwise, even a deceitful debtor might walk away from a significant debt, because the creditor doesn’t have a statement “in writing.”