In 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.