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.

CAN SPOUSES NOW SAVE MARITAL PROPERTY BY FILING SEPARATE BANKRUPTCIES?

by Virginia Shea

The New Jersey Appellate Division has crafted a potential new avenue for debtor spouses to protect marital property.  The Appellate Division recently clarified that a creditor of one spouse cannot execute on marital real or personal property held by the spouses as tenants by the entirety, absent consent of both spouses.  Bankruptcy law holds that property held as tenants by the entirety is exempt property, unless state law holds to the contrary, which New Jersey law, now, clearly does not.  Accordingly, spouses may be able to protect marital property by filing separate bankruptcies, whereby consent may be denied by the respective non-debtor spouse.

The New Jersey Appellate Division recently ruled that a New Jersey Statute enacted in 1988 supersedes prior case law, such that there is no question that an unsecured creditor of one spouse cannot seek partition of property held by spouses as tenants by the entirety.  In Jimenez v. Jimenez, __A.3d __, 2018 WL 2106639 (App. Div. 2018), Raul and his wife Gwyn[1] owned undeveloped land in Mansfield, NJ (the “Mansfield Property”), as tenants by the entirety.  Plaintiffs, relatives of Raul, sought to enforce a consent judgment entered against Raul only, which judgment had been recorded as a lien.  Plaintiffs tried to enforce the judgment by way of other collection efforts but were unsuccessful.  Plaintiffs then moved under R. 4:59-1(d) to compel the partition and sale of the Mansfield Property.  Raul opposed the motion arguing that a forced sale and partition is prohibited by N.J.S.A. 46:3-17.4.  The motion judge agreed with Raul and denied the partition application.  The Appellate Division affirmed stating that N.J.S.A. 46:3-17.4 precluded one spouse’s unsecured creditor from obtaining a forced partition of property owned by both spouses as tenants by the entirety.

In 1988, new statutes were enacted in New Jersey, N.J.S.A. 46:3-17.2 to -17.4, pertaining to tenancies created on or after the 1988 enactment date.  Section 17.2 provides that a tenancy by the entirety is created when a husband and wife take title to “real or personal property under a written instrument designating both of their names as husband and wife.”  A tenancy by the entirety is a form of joint ownership of property only available to spouses, whereby each co-tenant is the owner of the entire property and each co-tenant has the right of survivorship after the death of the other.  Jimenez, 2018 WL 2106639 at *2.  A spouse can alienate his or her right of survivorship,[2]  but a spouse cannot force the partition of the property during the marriage.  Id.

Section 17.4 of N.J.S.A. 4:3 statute states, “[n]either spouse may sever, alienate, or otherwise affect their interest in the tenancy by entirety during the marriage or upon separation without the written consent of both spouses.”  Prior to the adoption of the 1988 statute, case law authorized courts to compel the partition and sale of a spouse’s interest in property held in a tenancy by the entirety, in the court’s discretion, where it would be equitable to do so.  Id. at *3.  In Jimenez, equity otherwise would have warranted partition as the Mansfield Property, because it was not used as the marital residence, some of the funds loaned to Raul by the plaintiffs related to development of the Mansfield Property, and plaintiffs had expended significant effort trying to execute from other sources, to no avail.  Id.  Nevertheless, the Appellate Division was constrained by the language of the 1988 statute to preclude partition since Raul and Gwyn owned the Mansfield Property as tenants by the entirety.  “Otherwise, a free-wheeling spouse, by amassing such individual debt, could detrimentally ‘affect’ the other spouse’s interest in their co-owned property.” Id. Moreover, “[t]here would have been little point for the Legislature to have enacted Section 17.4 if it only intended to continue established principles of case law regarding tenancies by the entirety ….”  Id.  The Appellate Division reached this conclusion in part, after reviewing In re Wanish, 555 B.R. 596 (Bankr. E.D. Pa. 2016).

In In re Wanish, a chapter 7 trustee in a Pennsylvania bankruptcy case, objected to a debtor’s claimed exemption in a mobile home owned with his non-debtor wife, which was located in New Jersey.  The Trustee conceded that New Jersey law applied in order to determine the exemption issue.  The bankruptcy court determined that based upon New Jersey’s 1988 statute, it was clear that creditors of one spouse could not levy or sell personal property held by a debtor as a tenant by the entirety, without the non-debtor spouse’s consent.  Id. 555 B.R. at 498.  Since it was clear under New Jersey law that creditors of the debtor were prohibited from levying on the mobile home without the consent of the non-debtor spouse, the debtor’s interest in the mobile home was exempt under 11 U.S.C. § 522(b)(3)(B).   Section 522(b)(3)(B) provides that a debtor may exempt as property “any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety … to the extent that such interest as a tenant by the entirety … is exempt from process under applicable non-bankruptcy law.”  Here, New Jersey law no longer provides such “exempt[ion] from process,” such that property held as tenants by the entirety, is now clearly exempt under 11 U.S.C. § 522(b)(3)(B).

Along these lines, in 2012, the Bankruptcy Court for the Middle District of Florida, applied New Jersey law and determined that a trustee could not reach the sales proceeds generated by the sale of a debtor’s marital property.   In In re Montemoino, 491 B.R. 580 (2012), a married debtor, together with her non-debtor husband, sold real property held as tenants by the entirety, and deposited the net proceeds into a bank account titled solely in the non-debtor spouse’s name.   The trustee alleged that half the proceeds from the sale were property of the debtor and could be avoided as fraudulent, because the debtor transferred the proceeds to the non-debtor spouse for no consideration causing her to become insolvent as a result.  Id. at 583.  The debtor argued that the proceeds had originated from property held as tenants by the entirety,  and, as such, the proceeds maintained their tenant by entirety status, such that the proceeds were exempt.  The Florida bankruptcy agreed that New Jersey recognizes that personal property could be held as tenants by the entirety, and since the proceeds from the sale went to both spouses, the proceeds were presumed to be, under New Jersey law, held by the spouses as tenants by the entirety.  Id. at 586.  The bankruptcy court then held that although New Jersey common law prior to 1988 permitted creditors of a single spouse to execute on tenancy by the entireties property, “with the enactment of the tenancy by the entireties statutes, this Court concludes that creditors of just one spouse can no longer execute on entireties property.”  Id. at 588.  The court noted that the statute prevented a spouse from granting a mortgage on real property without the consent of the other spouse.  Id. at 589.  The court also pointed to a Third Circuit ruling that held “filing a bankruptcy petition does not sever a tenancy by the entirety and thus an individual spouse may be able to exempt the whole of entireties property from the bankruptcy estate in some circumstances.”  Id. (quoting In re O’Lexa, 476 F.3d 177 (3d Cir. 2007)).

Accordingly, Jimenez clarifies that with respect to creditors of a debtor who owns New Jersey property with a non-debtor spouse as tenants by the entirety, the entireties property is exempt under 11 U.S.C. § 522(b)(3)(B) because it is exempt from process under applicable non-bankruptcy law (absent a fraudulent conveyance).   A debtor may thus be able to protect marital property by filing for bankruptcy without his or her spouse, or by each spouse filing an indivi

[1] As plaintiffs and defendants surnames are “Jimenez,” all references will be to their first names.

[2] Presumably, by stepping into the debtor’s survivorship shoes, an unsecured creditor could acquire survivorship rights only such that the unsecured creditor could become owner of the entire property to the extent the debtor survives his or her non-debtor spouse after the marriage ends, whether by way of divorce or death.