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.