U.S. Supreme Court Holds That Debtor's False Oral Statement About Single Asset Does Not Bar Bankruptcy Discharge
In a unanimous decision in Archer & Cofrin, LLP v. Appling, the U.S. Supreme Court held that an individual debtor was not barred from discharging debt he incurred by making a false oral statement about one of his assets in order to obtain an extension of credit. The Court’s decision was based on its statutory interpretation of Section 523 (a)(2)(A) and (B) of the Bankruptcy Code. Section 523 (a)(2)(A) provides that an individual debtor will not be discharged from any debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s financial condition ....” Further, Section 523 (a)(2)(B) requires that a false “statement respecting the debtor’s financial condition” be in writing in order to be nondischargeable.
Under the alleged facts, the debtor hired a law firm but did not pay his legal fees. The firm threatened to file a lien and withdraw representation. The debtor convinced the firm not to withdraw by making the oral statement that he would be receiving a $100,000 tax refund, which he would use to pay the fees. The debtor still failed to pay and used the tax refund (which was only $60,000) for other purposes. Ultimately, the firm obtained a judgment for $104,000. The debtor then filed for Chapter 7 bankruptcy protection in order to discharge the firm’s judgment. The firm used Section 523 (a)(2)(A) to oppose the discharge by stating that the debtor made a false representation in order to receive services and therefore the debt should be nondischargeable.
In defense, the debtor argued that his statement about the tax refund qualified as one “respecting a debtor’s financial condition” and therefore had to have been in writing in order for his debt to the firm to be nondischargeable. The firm argued that the phrase “statement respecting a debtor’s financial condition” means a financial statement of assets and liabilities as opposed to a statement regarding a single asset (the tax refund). The firm further argued that since the debtor’s statement was about a single asset and not his overall financial condition, it did not have to be in writing to be nondischargeable. On appeal, the Supreme Court, in an opinion by Justice Sotomayor, ruled that a “statement respecting a financial condition” can indeed be a statement about a single asset, which means it would need to be in writing in order to be nondischargeable. The Court’s decision was based on its broad construction of the word “respecting”. As a result, the debtor was discharged from the law firm’s claim despite the false statement about the tax refund since the statement was not in writing.
As a result of the Supreme Court’s decision, a creditor deciding whether to extend credit by relying on a debtor’s statement as to a particular asset would be well advised to obtain the statement in writing. This should prevent the debt from being dischargeable if the debtor files for bankruptcy.