One might assume that an individual debtor who makes false statements to a creditor respecting his future ability and willingness to pay a debt could not file for bankruptcy and then discharge any associated debts—especially where the creditor relied on the debtor’s statements to its detriment. As the United States Supreme Court recently decided, however, a debtor may do just that if his false statements respecting his financial condition are not made in writing.
In Lamar, Archer & Cofrin, LLP v. Appling, a creditor law firm continued to represent its individual client in litigation based on the client’s promises to use his anticipated tax refund to pay his legal fees. After the creditor sued for non-payment, the debtor filed for bankruptcy. The bankruptcy court ruled that because the creditor continued to provide its services based on the debtor’s false statements, the debtor could not discharge creditor’s debt in bankruptcy. The debtor appealed.
After appeal to the district court and Eleventh Circuit Court of Appeals, the Supreme Court ruled entirely in debtor’s favor. The Court first observed that the debtor’s oral statements about his tax refund were offered as evidence of his ability to pay creditor’s debt. If the debtor’s representations about his tax refund in any way influenced the creditor’s decision to continue providing services, the Court reasoned, then those representations also constituted “statement[s] respecting [the] debtor’s financial condition” as contemplated by Bankruptcy Code section 523(a)(2). Under the plain language of the Code, the Court concluded, absent the debtor making any written statements respecting his financial condition, a creditor could not discharge the debt associated with those statements — even if the debtor’s statements were fraudulent.
How will this decision impact creditors? Many creditors are willing to extend money, property, services or credit to an individual debtor based on the debtor’s statements about his or her financial condition. While corporations and other business entities do not receive discharges in bankruptcy, this recent Supreme Court decision should serve as a reminder to consumer and commercial creditors alike to require that any statement respecting a debtor’s financial condition be made in writing.