PBCBA BAR BULLETINS pbcba_bulletin_march 2018 | Page 9

BANKRUPTCY C o r n e r
Eleventh Circuit Discharges Debt Incurred By Fraud
Under Section 523(a)(2)
JOSHUA LANPHEAR
The Supreme Court of the United States
will decide this term whether a false
oral statement about a single asset is a
statement “respecting the debtor’s . . .
financial condition” that may result in
denial of discharge of a debt under section
523(a)(2) of the Bankruptcy Code. The
Eleventh Circuit recently ruled in the
affirmative and discharged a debt incurred
by an undisputed false oral statement. Until
SCOTUS clarifies, a creditor in this circuit
concerned about protecting its rights in
bankruptcy by enforcing a debt incurred by
fraud should ensure that all statements—
whether respecting a debtor’s financial
condition or not—are in writing and should
not rely on oral statements.
In Appling v. Lamar, Archer & Cofrin, LLP
(In re Appling), 848 F.3d 953 (11th Cir. 2017),
the debtor made false oral statements to
his (non-bankruptcy) lawyers about an
expected tax refund that he would use
to pay overdue legal fees owed to the
firm. The firm relied on the debtor’s false
statements, continued representation, and
did not take any action to collect on its debt.
Eventually, the firm obtained a judgment
against the debtor for the debt. The debtor
then filed bankruptcy. The firm filed an
adversary proceeding to have the debt ruled
nondischargeable under section 523(a)(2).
In bankruptcy, the honest but unfortunate
debtor receives a discharge of his or
her pre-existing debts, subject to many
exceptions. Section 523(a)(2) creates two
mutually exclusive exceptions to discharge.
Section 523(a)(2)(A) excepts from discharge
a 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.”
A creditor also need prove justifiable
reliance. Field v. Mans, 516 U.S. 59, 61 (1995).
Under subsection (A), a debtor cannot
discharge a debt incurred by any type of
fraudulent statement, oral or written, as
long as such statement does not “respect[]
the debtor’s . . . financial condition” and the
creditor justifiably relied. Section 523(a)
(2)(B) excepts the same type of debt from
discharge “to the extent obtained by . . .
use of a statement in writing—(i) that is
materially false; (ii) respecting the debtor’s
. . . financial condition; (iii) on which the
creditor . . . reasonably relied; and (iv) that
the debtor caused to be made or published
with intent to deceive[.]” Under subsection
(B), even if a debtor concedes fraudulent
intent, a debt incurred by an oral, fraudulent
statement respecting the debtor’s financial
condition can be discharged in bankruptcy.
The bankruptcy court ruled, and the
district court affirmed, that the debt was
nondischargeable under subsection (A)
because it was incurred by fraud and
the firm justifiably relied. The district
court rejected the debtor’s argument
that subsection (B) applied because his
oral statements respected his financial
condition (and therefore should have
been discharged because they were not in
writing), ruling that “statements respecting
the debtor’s financial condition involve the
debtor’s net worth, overall financial health,
or equation of assets and liabilities. A
statement pertaining to a single asset is not
a statement of financial condition.” Appling
v. Lamar, Archer & Cofrin, LLP, 2016 U.S. Dist.
LEXIS 39958, *8 (M.D. Ga. 2016).
Compare id. at 955, and Engler v. Van
Steinburg, 744 F.2d 1060, 1061 (4th Cir. 1984),
with Land Inv. Club, Inc. v. Lauer (In re
Lauer), 371 F.3d 406, 413-14 (8th Cir. 2004),
Cadwell v. Joelson (In re Joelson), 427 F.3d
700, 706 (10th Cir. 2005), and Bandi v. Becnel
(In re Bandi), 683 F.3 d 671, 676 (5th Cir. 2012).
The Eleventh Circuit interpreted the
phrase “respecting the debtor’s . . . financial
condition” in section 523(a)(2) broadly.
Under this interpretation, essentially
any statement made by a debtor about
his or her finances respects his or her
financial condition. This arguably render’s
subsection (A)’s incorporation of common
law fraud elements superfluous.
Consequently, creditors will commonly
find themselves under subsection (B) when
seeking to enforce a debt incurred by fraud.
Creditors, especially those who are typically
not in the business of lending, seeking
to protect their rights in bankruptcy
need to ensure that any statements are
memorialized in writing.
Indeed, the Eleventh Circuit noted that
the law firm could have required the
debtor to put his promise to spend his tax
return on overdue legal fees in writing
before continuing to represent him.
In re Appling, 848 F.3d at 960. Such a
writing could be dispositive in a creditor’s
nondischargeability action.
The Eleventh Circuit was not convinced.
According to the Eleventh Circuit, “financial
condition” refers to the sum of all assets and
liabilities. In re Appling, 848 F.3d at 958.
However, in giving meaning to the word
“respecting,” the Eleventh Circuit explained
that a statement can “respect” a debtor’s
“financial condition” without describing
the overall financial situation of the debtor.
Id. at 598-60. Because a statement about a
single asset can be a statement “respecting
the debtor’s . . . financial condition” and the
debtor’s statements, though fraudulent, were
not in writing, the debt was dischargeable.
Because the Eleventh Circuit’s decision
deepens an existing circuit split on whether
a debtor’s statement about a single asset is
a statement respecting his or her financial
condition, SCOTUS deemed the issue ripe This article was submitted by Joshua Lanphear,
Esq., Law Clerk to the Honorable Erik P. Kimball, U.S.
for review.
Bankruptcy Court for the Southern District of Florida,
West Palm Beach Division, Joshua_Lanphear@flsb.
uscourts.gov. None of the statements in this article
are from or on behalf of Judge Kimball, or otherwise
indicate his view on the matter.
PBCBA BAR BULLETIN
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