Supreme Court Might Grant ‘Cert’ to Resolve a Split on Dischargeability

November 21, 2017

The Supreme Court will decide whether a false oral statement about one asset is grounds for denial of discharge of a debt, if the justices take the advice of the U.S. Solicitor General and grant certiorari to the Eleventh Circuit in Lamar Archer & Cofrin LLP v. Appling, 16-1215 (Sup. Ct.).

The courts of appeals are evenly split, with the Eleventh and Fourth Circuits holding that a false oral statement about one asset is a statement of “financial condition” that must be in writing to result in denial of discharge of a debt under Section 523(a)(2). The Fifth and Tenth Circuits ruled to the contrary and held that misrepresenting one asset can result in nondischargeability of the debt owing to the creditor to whom the misrepresentation was made.

Among the lower courts, a majority follows the Eleventh and Fourth Circuits.

In the case in the Eleventh Circuit, a client told his lawyers that he expected a large tax refund that would enable him to pay his legal bills. Based on that representation, the lawyers continued working.

Although the refund was smaller than represented, the client spent it on his business, falsely telling his lawyers that he had not received the refund. The lawyers continued working. Later, they obtained a judgment they could not collect when the client filed bankruptcy.

The bankruptcy judge held that the claim for legal fees was not discharged. The ruling in bankruptcy court was upheld in district court, but the Eleventh Circuit reversed in a Feb. 15 opinion authored by Circuit Judge William Pryor. Appling v. Lamar, Archer Cofrin LLP (In re Appling), 848 F.3d 953 (11th Cir. Feb. 15, 2017).

The dispute centers around Sections 523(a)(2)(A) and 523(a)(2)(B). Under (a)(2)(B), a debt will not be discharged if it resulted from a materially false written statement “respecting the debtor’s . . . financial condition.”

Under (a)(2)(A), a debt will not be discharged if it resulted from “a false representation or actual fraud, other than a statement respecting the debtor’s . . . financial condition.”

The creditor who lost in the Eleventh Circuit filed a petition for certiorari in April. In June, the justices invited the Solicitor General “to file a brief in this case expressing the views of the United States.”

In a brief on Nov. 9, the Solicitor General recommended that the high court hear the case because there is a deepening circuit split over an “important and recurring” question. The government also took the position that the Eleventh Circuit was correct in holding that a false oral statement about one asset should not result in nondischargeability of a debt.

Although the government, as a creditor, would benefit if a false statement about one asset could result in nondischargeability, the Solicitor General nonetheless said that the Eleventh Circuit had the “better reading” of the statute.

By granting certiorari, the Supreme Court will have another opportunity to decide a bankruptcy case based more on the perceived purpose as opposed to the language of the statute. Did Congress intend to confine nondischargeability to limited circumstances regarding a debtor’s written statement about financial condition? Did Congress recognize that people are prone to puffery and that creditors should take oral statements about financial condition with a grain of salt?

At oral argument on Nov. 6 in Merit Management Group LP v. FTI Consulting Inc., 16-784 (Sup. Ct.), the justices seemed to focus more on the purpose of the safe harbor in Section 546(e) than upon the language of the statute. If the Court takes on Lamar Archer, the justices can either tease a result out of the word “respecting” or focus on the purpose of the statute. To read ABI’s report on theMerit Management argument, click here.

At this writing, the justices are yet to schedule a conference to consider theLamar Archer petition. Assuming the conference takes place on Dec. 1 or 8, there is still a chance the Court could hold oral argument and issue an opinion before the end of the term in June.

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