Court Broadly Construes Bankruptcy Discharge Exception for Fraud

One of the most litigated issues in bankruptcy court is whether a discharge of a particular claim should be granted to a debtor who has committed fraud relating to the claim, a statutory discharge exception found in section 523(a)(2)(A) and (B) of the Bankruptcy Code. The statute establishes a dichotomy between fraudulent statements regarding the debtor’s (or an “insider” of the debtor’s) “financial condition” and other fraudulent statements giving rise to a debt.  If the statement is characterized as “respecting the debtor’s . . . financial condition” then it must be in writing to be excepted from discharge.

In Appling v. Lamar, Archer & Cofrin, LLP (In re Appling), 848 F.3d 953 (11th Cir. 2017), the Eleventh Circuit considered an important issue on which there is a circuit split.  Specifically, the question was whether a debtor’s false statement concerning a single asset qualifies as a “statement respecting the debtor’s . . . financial condition” that could render a debt nondischargeable only if made in writing.  The asset in question was a substantial tax refund that could be used to pay a creditor’s claim.  The debtor admittedly made false oral statements to the creditor regarding the refund.  The court, in an opinion by Judge Bill Pryor, acknowledged a circuit split on the issue, and rejected the Fifth, Eighth and Tenth Circuits’ holdings that a statement concerning a single asset is not a statement concerning the debtor’s financial condition.  The court sided with the Fourth Circuit and many bankruptcy courts in holding that a statement concerning a single asset may qualify as a statement concerning the debtor’s financial condition. Engler v. Van Steinburg, 744 F.2d 1060, 1061 (4th Cir. 1984).  The result was that the debtor obtained a discharge of the debt, even though he made false oral statements that gave rise to it.

Judge Robin Rosenbaum concurred in a separate opinion, noting the incongruity of the result but finding it to be more consistent with statutory purpose and structure than the contrary result reached by the bankruptcy and district courts.

If review is sought, the circuit split may attract the interest of the Supreme Court, which previously construed section 523(a)(2) in Field v. Mans, 516 U.S. 59 (1995).

UPDATE:  A petition for certiorari was filed by Lamar, Archer & Cofrin, LLP on April 11, 2017 (No. 16-1215), and was granted by the Court on January 12, 2018.

Posted by Tom Byrne.

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