Supreme Court to Lenders (Again): Get It in Writing

June 2018

On June 4, 2018, the U.S. Supreme Court reiterated to lenders everywhere, the long-time advice “Get it in writing.” The Court issued its decision in Lamar Archer & Cofrin LLP v. Appling, Case No. 16-1215 (Sup. Ct. June 4, 2018), holding that a false statement by a debtor about a single asset can be cause for holding the debt nondischargeable in bankruptcy only if the statement is in writing. Although the Bankruptcy Code makes clear that a nondischargeability finding arising from debts obtained using false statements “respecting the debtor’s … financial condition” can result only when the statements are in writing, courts were divided as to whether this included a false statement about a single asset. The Court has now made clear that a “single asset” false statement is a statement about a debtor’s overall “financial condition,” thus being grounds for nondischargeability only when any such alleged statement is in writing.

Not surprisingly, the Bankruptcy Code contains a general prohibition against consumers' discharging debts based on fraudulent or deceitful conduct. But Congress also gave consumers—even dishonest ones—a defense against nondischargeability claims, by mandating that for a creditor to pursue such a claim, any representation about “financial condition” cannot be oral, but must be in writing. The case before the Court involved just such a dishonest debtor, and the Court allowed him to escape liability because his falsehood was verbal.

The case involved a law firm client who told his lawyers that he would be receiving a large tax refund that would allow him to pay his legal bills. Based on this verbal representation, the lawyers continued working for the client. The client did receive a tax refund, but it was smaller than he represented, and the client spent the refund on his business. Nevertheless, he told his lawyers he was still waiting on his refund. The lawyers continued to work. After eventually not being able to collect their bill, the lawyers sued and obtained a judgment, but they were thwarted from collecting it because their former client filed a petition for relief under chapter 7. Because the debt was based on the client’s false claims about a single asset (the tax refund), the firm requested that the debt be declared nondischargeable as having been obtained by a false representation under Bankruptcy Code section 523(a)(2)(A), which does not require such a statement to be in writing. The client responded that the representation about the tax refund was a statement “respecting” his “financial condition,” such that under section 523(a)(2)(B), such a representation can form the basis for nondischargeability only if the statement is in writing. The Court agreed with the client-debtor.

The Court concluded that the “statutory language makes plain that a statement about a single asset can be a ‘statement respecting the debtor’s financial condition.’” Consequently, if the statement about the single asset was only verbal, “the associated debt may be discharged, even if the statement was false.”

The Court’s decision is certainly favorable to debtors, even dishonest ones. Nevertheless, lenders and creditors are not left without recourse against such a debtor. The Court’s opinion focuses only on discharging debts arising from oral statements, not written ones. Lenders can still obtain nondischargeability rulings against dishonest debtors, as long as the misrepresentation is in writing. The Court even notes that obtaining the information in writing “will likely redound to [the creditor’s] benefit, as such writings can foster accuracy at the outset of the transaction, reduce the incidence of fraud, and facilitate the more predictable, fair, and efficient resolution of any subsequent dispute.”

The Court's decision reinforces the notion that lenders should get in writing any representation from a borrower on which the lender ever hopes to rely. Prudent lenders will proceed accordingly. If you have questions about nondischargeable debt, contact a Lewis Rice attorney.

Firm Highlights
News

Kansas City Office of Lewis Rice Names New Member

More
News

Jeremy P. Brummond’s Article on Waivers of Consequential Damages is Published in Construction Executive

More
Client Alert

City of St. Louis 2021 Primary Municipal Election: Meet the Candidates

More
News

Lindsay S. C. Brinton and Meghan S. Largent Negotiate $1.4 Million Settlement for Landowners along Legacy Trail

More
Client Alert

COVID-19 Rescue Plan Act Expands Paid Leave Availability but Does Not Revive Employer Mandates

More
Diversity & Inclusion

Lewis Rice Member Ronald A. Norwood Serves on Missouri Bar’s Special Committee on Lawyers of Color to Establish Diversity, Inclusion Programs

More
News

Meghan S. Largent and Lindsay S. C. Brinton Negotiate $700,000 Award to Cobb County, Georgia Landowners in Rails-to-Trails Case

More
News

Jerina D. Phillips Offers COVID-19 Vaccination Advice for Employers in St. Louis Magazine Article

More
Client Alert

Supreme Court Decision Provides Good News for Creditors

More
Client Alert

Temporary COBRA Changes Under the American Rescue Plan Act

More
News

David W. Sweeney Interviewed in Realtime REALTOR® Podcast on Changes to Elections in the City of St. Louis

More
Client Alert

New York State Regulator Discourages Ransomware Payments and Publishes New Cyber Insurance Risk Framework

More
News

Brian P. Pezza Discusses Vaccination Considerations for Employees in Society for Human Resource Management (SHRM) Article

More
News

Paul R. Himmelstein Joins Lewis Rice Kansas City Office

More
News

Brian P. Pezza Gives Advice on Vaccination Acceptance in the Workforce in Society for Human Resource Management Article

More
Diversity & Inclusion

Fatima G. Khan Elected President of South Asian Bar Association of Metropolitan St. Louis

More
News

Lewis Rice Wins Significant Victory for Atlanta Landowners Impacted by the Belt Line Rail-Trail

More
Client Alert

Virginia Passes Sweeping Data Privacy Legislation Similar to CCPA and GDPR

More
Client Alert

Have You Done Your Annual CCPA Housekeeping?

More
Diversity & Inclusion

Two Lewis Rice Members Selected for Leadership Council on Legal Diversity Programs

More