financial statementIn In re Appling (Appling v. Lamar, Archer & Cofrin, LLP), No. 16-11911, 2017 WL 603833 (11th Cir. February 15, 2017) (click here for .pdf), the Court addressed a question that has divided several other courts – Can a statement about a single asset be a “statement respecting the debtor’s … financial condition” for purposes of 11 U.S.C. §523(a)(2)?  In other words, if a debtor makes an oral material misrepresentation about a single asset (or liability?) that affects his overall financial condition, does it fall within the fraud exception of §523(a)(2)(A) or does it fall within the scope of §523(a)(2)(B), which requires that such statements be in writing in order to be excepted from discharge?  If the latter, arguably, it would allow dishonest debtors a “safe harbor” even after making significant material misrepresentations.

The debtor falsely stated to the creditor law firm that he expected a large tax refund of around $100,000 that he would use to pay the debt to the firm of approximately $61,000.  In reliance on this representation, the creditor continued its representation of the debtor and incurred more fees and expenses.  In fact, the tax refund was only about $60,000 and the debtor spent that money on his business rather than paying the creditor as he had promised.  After the creditor obtained a judgment against the debtor for ~$104,000, the debtor filed a Bankruptcy case.  The creditor filed an adversary proceeding to have the debt declared nondischargeable based upon the debtor’s fraud pursuant to §523(a)(2).  The Bankruptcy and District Courts held that the debt was excepted from discharge pursuant to §523(a)(2)(A).

The bankruptcy court ruled that because Appling made fraudulent statements on which Lamar justifiably relied, Appling’s debt to Lamar was nondischargeable, 11 U.S.C. § 523(a)(2)(A). The district court affirmed. The district court rejected Appling’s argument that his oral statements “respect[ed] … [his] financial condition,” 11 U.S.C. § 523(a)(2)(B), and should have been dischargeable. The district court ruled 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.” The district court agreed with the bankruptcy court that Appling made material false statements with the intent to deceive on which Lamar justifiably relied.

Section 523(a)(2) “creates two mutually exclusive exceptions to discharge:”

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt —

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

(B) use of a statement in writing

(i) that is materially false;

(ii) respecting the debtor’s or an insider’s financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit
reasonably relied; and

(iv) that the debtor caused to be made or published
with intent to deceive; …

11 U.S.C. § 523(a)(2) (emphasis added).  Thus, fraudulent statements respecting the debtor’s financial condition are covered under subsection (B), rather than subsection (A).  Subsection (A) does not limit the statements (or fraud) to just written statements and the creditor only has to prove justifiable reliance. Conversely, statements regarding a debtor’s financial condition must be in writing, and the creditor has to prove reasonable reliance.  Thus, the debtor has a “safe harbor” if he makes oral representations regarding his financial condition.

The initial question addressed by the Court was whether the debtor’s representation about the expected tax refund was a “statement respecting his financial condition” under the statute.  If the answer is no, the issue would have been whether the debtor’s actions fall within the definition of “fraud” under §523(a)(2)(A).  If the answer is yes, the debtor escapes liability because the statement was not in writing, as required by § 523(a)(2)(B).  Other Circuit and federal courts were split on this issue.

The Fourth Circuit has held that a “debtor’s assertion that he owns certain property free and clear of other liens is a statement respecting his financial condition.” Engler v. Van Steinburg, 744 F.2d 1060, 1061 (4th Cir. 1984)… But the Fifth, Eighth, and Tenth Circuits have held that a statement about a single asset does not respect a debtor’s financial condition because it “says nothing about the overall financial condition of the person making the representation or the ability to repay debt.” In re Bandi, 683 F.3d 671, 676 (5th Cir. 2012); see also In re Lauer, 371 F.3d 406, 413–14 (8th Cir. 2004); In re Joelson, 427 F.3d 700, 706 (10th Cir. 2005).

The Eleventh Circuit held that the plain language of the statute and the context establish that a statement about a single asset can be a statement respecting a debtor’s financial condition.

“Financial condition” likely means one’s overall financial status. Elsewhere in the statute, the Bankruptcy Code defines “insolvent” as the “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property.” [11 U.C.C.] §101(32)(A). In this context, the statute uses “financial condition” to describe the overall state of being insolvent, not any particular asset on its own. Because “[a] word or phrase is presumed to bear the same meaning throughout a text,” [Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 69 (2012) at 170], we should interpret “financial condition” in section 523(a)(2) in the same way. Whether by its ordinary meaning or as a term of art, “financial condition” likely refers to the sum of all assets and liabilities.

But even if “financial condition” means the sum of all assets and liabilities, it does not follow that the phrase “statement respecting the debtor’s … financial condition,” Id. § 523(a)(2) (emphasis added), covers only statements that encompass the entirety of a debtor’s financial condition at once. Read in context, the phrase “statement respecting the debtor’s … financial condition,” id., includes a statement about a single asset. We must not read the word “respecting” out of the statute. See Scalia & Garner, supra, at 174 (“If possible, every word … is to be given effect.”)…

The Supreme Court has interpreted “with respect to” in a statute to mean “direct relation to, or impact on.” Presley v. Etowah Cty. Comm’n, 502 U.S. 491, 506 (1992). And the Court has interpreted “respecting” in the First Amendment to include any partial step toward the establishment of religion. Lemon v. Kurtzman, 403 U.S. 602, 612 (1971). A statement about a single asset “relates to” or “impacts” a debtor’s overall financial condition. And knowledge of one asset or liability is a partial step toward knowing whether the debtor is solvent or insolvent… A statement about a single asset is still a statement respecting a debtor’s financial condition.

The Court dismissed the creditor’s argument that a “statement respecting the debtor’s financial condition” should be interpreted to mean a more formal or thorough “financial statement.”

Mere proximity of “statement” to “financial condition” is not enough to limit the meaning of the text. “Statement” is defined as “[t]hat which is stated; an embodiment in words of facts or opinions; a narrative; recital; report; account.” Statement, Webster’s New International Dictionary 2461 (2d ed. 1961). The definition of financial statement is technical and would exclude a statement about a single asset: “A balance sheet, income statement, or annual report that summarizes an individual’s or organization’s financial condition on a specified date or for a specified period by reporting assets and liabilities.” Financial Statement, Black’s Law Dictionary (10th ed. 2014). Setting aside the problems with legislative history, Lamar’s argument works against it. Precisely because “[t]he term ‘financial statement’ has a strict, established meaning,” [In re Joelson, 427 F.3d 700, 709 (10th Cir. 2005)], we should expect the statute to say “financial statement” if it conveys that meaning. But the statute instead says “statement.” To limit the definition to only “financial statements,” Congress need only say so… And in the context of a statute about fraud, the ordinary meaning of the word “statement” makes sense. Section 523(a)(2) creates two similar exceptions to discharge for debts incurred by fraud.

Finally, the Court noted that this interpretation creates a gap that favors a debtor but, again, it is based upon the plain language of the statute and basic definitions of the terms.  “A distaste for dishonest debtors does not empower judges to disregard the text of the statute. Because the text is not ambiguous, we hold that “statement[s] respecting the debtor’s … financial condition” may include a statement about a single asset. This result is also perfectly sensible. The requirement that some statements be made in writing promotes accuracy and predictability in bankruptcy disputes that often take place years after the facts arose.

The creditor in this case is obviously correct in pointing out that this interpretation creates a potentially large gap that favors the debtor, but I believe it is the correct interpretation.  Presumably, the lower courts found that the creditor reasonably or justifiably relied on the oral statement of the debtor, but the creditor also could have requested documents and a written statement from the debtor concerning the tax refund.  Perhaps even a cover letter or email along with a copy of the filed tax return would have been sufficient to bring the matter within the scope of §523(a)(2)(B).

For more reading about a recent case in the Northern District of Georgia related to the “reasonable reliance” requirement of §523(a)(2)(B), see “A Debtor’s Allegedly False Financial Statement Doesn’t, At All, Excuse a Lack of Lender’s Due Diligence” by Mark Duedall at Bryan Cave.


Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.