A Single Statement about a Debtor’s Financial Condition Must be in Writing in order for a Creditor to Avoid Discharge

by Virginia Shea

In the recent Supreme Court decision Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018), one can almost hear Justice Sotomayor belting out the lyrics to Aretha Franklin’s classic, “all I’m askin’ is for a little RESPECT . . . .”  Justice Sotomayor relies on the simple definition of “Respecting,” to settle a split in the circuits, resolutely determining that a debtor’s purported fraudulent statement about a single asset must be in writing to deny discharge under 11 U.S.C. § 523(a)(2).  At issue was whether a statement about a single asset could constitute a “statement … respecting the debtor’s … financial condition,” or, whether the statement, which must be in writing under 11 U.S.C. §523(a)(2)(B), had to be about the debtor’s overall financial status rather than about a single asset.  Justice Sotomayor, in no-nonsense fashion, looked to the clear language of the word “respecting” and ruled that a statement about a single asset could “relate” to a debtor’s financial condition, but that to avoid discharge, it must be in writing.

The underlying facts may resonate with everyone who has ever been promised payment from a client or customer.  Appling hired the Lamar law firm to represent him in litigation.  He eventually owed Lamar over $60,000, and after counsel threatened to withdraw from representation, he orally told his attorneys that he was expecting a tax refund of approximately $100,000.  When the tax refund arrived, it was under $60,000, and rather than paying Lamar, Appling spent it on his business.  A month later, Appling told his attorneys that he had not yet received the refund.  Lamar relied upon both misstatements in agreeing to complete the pending litigation.  Five years after Lamar sent its final invoice, the firm sued Appling for non-payment and obtained a judgment.  Appling filed for bankruptcy.  Lamar filed an adversary proceeding against Appling arguing, in part, that the debt was nondischargeable under § 523(a)(2)(A) as a debt arising from “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s … financial condition.”  Appling argued that the law firm could not block discharge of the debt because the representations were statements about his financial condition, which had to have been in writing in order to be nondischargeable.

Justice Sotomayor linguistically explained that “the key word in the statutory phrase is the preposition ‘respecting,’ which joins together ‘statement’ and ‘financial condition.’”  Id. at 1759:

A statement is ‘respecting’ a debtor’s financial condition if it has a direct relation to or impact on the debtor’s overall financial status.  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.

Id.at 1761.    Justice Sotomayor brushed aside concerns that this ruling could leave fraudsters free to swindle by lying about their finances orally, then discharging the resulting debt in bankruptcy.  The antidote, according to the Justice, is the good practice of memorializing promises in writing.  She explained that one reason that Congress  heightened the bar to discharge by imposing a writing requirement on statements respecting a debtor’s financial condition, was due to a historic practice of loan officers providing little space to list all debts on a loan application, followed by the preprinted phrase “I have no other debts.”  If the applicant later filed for bankruptcy, the creditor could contend that the debtor had made a misrepresentation in his loan application by failing to list all debts, and the creditor would threaten litigation over excepting the debt from discharge.  Justice Sotomayor explained that the new ruling does not leave creditors powerless – they need only “insist that representations respecting a debtor’s financial condition on which they rely in extending money, property, services, or credit are made in writing.”  Id. at 1764.   Thus, Justice Sotomayor’s ruling offers due “respect” to Congress’ effort to balance potential misuse of such statements vis-à-vis creditors and debtors, while providing creditors the ability to protect themselves from potential fraud by the good practice of memorializing representations of financial condition prior to extending credit.