In Lamar, Archer & Cofrin, LLP v. Appling, Case No. 16-1215, issued June 4, 2018, the Supreme Court held that a statement about a single asset can be a “statement respecting the debtor’s financial condition” under § 523(a)(2) of the Bankruptcy Code. If that statement is not in writing, then indebtedness arising from the false statement may be discharged.
The Court’s Reasoning
The federal bankruptcy system aims to assist an honest, but unfortunate, debtor by offering a fresh start, free from debt. However, the Bankruptcy Code recognizes that certain kinds of debt should not be subject to discharge. 11 U.S.C. § 523(a)(2)(A) excludes the discharge of debt arising from “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.” Under § 523(a)(2)(B), a debt is nondischargeable if it arises from a materially false statement “respecting the debtor’s . . . financial condition” that is “in writing.”
The Court turned to the ordinary meaning of “respecting” to determine whether a statement regarding a single asset is considered a statement respecting the debtor’s financial condition. If it is, then the statement must be in writing. In ordinary usage, “respecting” means “concerning; about; regarding; and relating to.” A statement is therefore “respecting” a debtor’s financial condition if it has a direct relation to or impact on the debtor’s financial status. The Court held that a statement about a single asset has a direct relation to and impact on a debtor’s financial condition, and can indicate whether a debtor is solvent or insolvent.
The Court rejected the petitioners’ argument that § 523(a)(2)(B) only applies to statements “respecting” the debtor’s overall financial state or well-being. The Court concluded that this application of “respecting” was too limited in scope. The Court noted that the Supreme Court has typically interpreted the phrase “relating to”—one of “respecting’s” meanings—expansively.
Finally, the Court rejected the petitioners’ argument that this ruling undermines the purpose of § 523(a)(2) by providing a shield for dishonest debtors. The Court explained that the heightened writing requirements for nondischargeability in § 523(a)(2)(B) were originally intended to target creditor abuse and unfair practices in the consumer finance industry.
Impact and Implications for Creditors and Debtors
The Supreme Court’s decision clarifies that statements regarding a single asset are considered statements “respecting” the debtor’s financial decision for purposes of § 523(a)(2). Creditors can take advantage of § 523(a)(2)’s exception to discharge only if they obtain a debtor’s misrepresentations in writing. Going forward, if a creditor relies on debtor representations of financial conditions to extend money, property, services or credit, the creditor should secure those representations in writing.
While the Court’s decision appears to broaden the scope of what needs to be in writing to fall within an exception to discharge, § 523(a)(2)(A) still bars the discharge of debts arising from acts of fraud or misrepresentations about matters other than a debtor’s or insider’s financial condition.
If you have any questions about this recent Supreme Court decision or any other restructuring or insolvency matters, please contact a member of our Restructuring and Insolvency Practice Group or your Warner attorney.
