Supreme Court to Weigh into Clash Over Bankruptcy Code

(CN) – The Supreme Court agreed Friday to decide to wade into the intent of Congress when it crafted a provision of bankruptcy code related to the discharge of debts involving dishonest or fraudulent conduct.

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.

The law firm says that in June 2006, as these conversations continued, Appling received a tax refund payment and invested it in his business, rather than paying his outstanding legal fees.

Lamar, Archer demanded payment of all outstanding fees, and then, when it wasn’t paid, sued Appling in Georgia state court, obtaining a judgment of more than $104,000.

Three months later, Appling and his wife filed for bankruptcy under Chapter 7, seeking to discharge all of their personal debts, including Lamar’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 it 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 alleged false statements about his tax

refund were “statement[s] respecting [his] … financial condition.”

The bankruptcy court 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 action and that Appling’s debt to the firm was not dischargeable.

The ruling was later affirmed, but when the case reached the 11th Circuit, the previous findings were reversed.

The question before the appeals court was “can a statement about a single asset be a ‘statement respecting the debtor’s … financial condition”  and it adopted an interpretation  used by the Fourth Circuit which had previously held a statement about a single asset can be a ‘statement respecting the debtor’s … financial condition.

Other Circuits have had widely varying interpretations.

As is their custom, the justices of the Supreme Court did not explain their rationale for taking the case.

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