(CN) – A man’s false promises about a coming financial windfall, made to keep their lawyers working, were statements respecting his financial condition that – because they weren’t made in writing – can’t be used against him in bankruptcy proceedings, the Supreme Court ruled Monday.
The case involves the Atlanta law firm of Lamar, Archer & Cofrin and a former client, R. Scott Appling.
Appling hired the firm to represent him in a lawsuit against the former owners of a business he’d recently purchased. According to Lamar Archer’s petition for certiorari, Appling agreed to pay the firm on an hourly basis with fees due monthly. However, as the litigation proceeded, Appling fell behind in his payments.
The parties met a number of times to discuss the matter and each time came to an agreement in which Lamar Archer reduced their client’s payments and continued to represent him. In June 2006, as these conversations continued, Appling received a tax refund, which he’d told Lamar Archer was coming and was the reason the law firm continued its work.
However, Appling invested the tax refund – which was much smaller than he’d told Lamar Archer it would be – in his business rather than paying his outstanding legal fees.
Lamar Archer demanded payment of all outstanding fees and eventually sued Appling in Georgia state court for the money, obtaining a judgment of more than $104,000. Appling and his wife then filed for bankruptcy under Chapter 7, seeking to discharge all of their personal debts, including Lamar Archer’s judgment.
The law firm then initiated an adversary proceeding in the bankruptcy court for the Middle District of Georgia, seeking a determination that Appling’s debt to was not dischargeable under 11 U.S.C. § 523(a)(2)(A) because it was obtained by fraud.
Appling moved to dismiss the complaint, arguing among other things that the prohibition on discharging such debts did not apply because the promises about his tax refund were “statement[s] respecting [his] … financial condition.”
The bankruptcy court found Appling “knowingly made a false representation with intent to deceive when he represented” that his tax refund would be “approximately $100,000” and, later, that “he had not yet received the refund.” It further found the law firm was harmed by this and that Appling’s debt to the firm was not dischargeable.
Appling appealed to the 11th Circuit, which agreed with Appling’s interpretation of bankruptcy code and reversed. The Supreme Court agreed to take up the case to resolve conflict among the circuits a statement about a single asset – in this case, Appling’s expected tax refund – can be “a statement respecting the debtor’s financial condition” under bankruptcy code.
On Monday, the high court sided with Appling’s interpretation. Writing for the unanimous court, Justice Sonia Sotomayor said if Congress wanted the bankruptcy provision to include only statements expressing the balance of a debtor’s assets and liabilities, it would have done so. Instead, it used broad language.
“We also agree that a statement is ‘respecting’ a debtor’s financial condition if it has a direct relation to or impact on the debtor’s overall financial status. A single asset has a direct relation to and impact on aggregate financial condition, so a statement about a single asset bears on a debtor’s overall financial condition and can help indicate whether a debtor is solvent or insolvent, able to repay a given debt or not,” Sotomayor wrote. “Naturally, then, a statement about a single asset can be a ‘statement respecting the debtor’s financial condition.’”
While all nine justices joined Sotomayor’s 18-page opinion generally, Justices Clarence Thomas, Samuel Alito and Neil Gorsuch did not agree with her assessment that Congress crafted the provision to “balance the potential misuse of such statements by both debtors and creditors” and not, as Lamar Archer had argued, to leave dishonest debtors free to “swindle innocent victims for money, property or services by lying about their finances, the discharge the debt in bankruptcy, just so long as they do it orally.”