In Chapter 7, Oral Lies Are Safer Than Written Lies

In my last article, I discussed how the Fourth Circuit Court of Appeals affirmed the denial of a Chapter 7 debtor’s discharge because the debtor intentionally lowballed the value of his interest in a real estate investment company. 

The Fourth Circuit affirmed the Bankruptcy Court's holding that the debtor’s signed filings violated the false oath provision of the Bankruptcy Code. 

A recent decision from the United States Supreme Court also considered discharge under Chapter 7 of the Code.  In Lamar, Archer & Cofrin, LLP v. Appling, the Supreme Court held that a false statement about a single asset can be enough to deny discharge.  But the Court held that the Code requires that false statement be in writing.  A Chapter 7 debtor can orally lie about his financial condition and obtain a discharge. 

Scott Appling hired Lamar, Archer & Cofrin, LLP to represent him in a business lawsuit.  He fell behind on his bills and the firm told him they would have to stop representing him.  He asked them to keep working on his case and told them he was getting a $100,000 tax refund, which he would use to cover past and future fees.  The firm relied on this statement and continued to represent him, but the firm did not get this in writing.  Appling later received a $59,851 tax refund, which he spent on his business.  Appling never paid his bill and the firm—five years after the lawsuit ended—sued him and obtained a judgment.  Appling and his wife then filed a Chapter 7 bankruptcy.

Chapter 7 of the Code is designed to provide honest but unfortunate debtors with a fresh start by discharging their debts.  But the bankruptcy court may deny discharge for several reasons, like when a debtor makes an intentional and material false statement under oath with intent to defraud creditors or the court.  The Code also has exceptions to discharge—specific debts for which a debtor will remain liable even if his other debts are discharged. 

In Appling, the Code provision at issue was Section 523.  It prohibits discharge of a debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”  Note the “other than” exception at the end of this provision.  If a debtor makes a false statement about his finances, even if a creditor relies on it, it is insufficient to except the debt from discharge.  It effectively allows debtors to lie orally about their finances and get away with it.  The Code has a separate section dealing with discharge exceptions based on false written statements, but because the law firm took Appling at his word and got nothing in writing, it did not apply. 

The Supreme Court also held that a statement about a single asset—like the tax refund—qualifies as a statement respecting the debtor’s financial condition.  The Court reasoned that 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. 

There are two takeaways from Appling.  First, the bar is low on what qualifies as a statement about financial condition.  A debtor’s single false representation can create a discharge claim for a creditor.  But only if, and this is the second takeaway, the creditor gets that representation in writing.  Creditors must remember the fundamentals.  Don’t rely on oral conversations, where memories can fade and recollections change.  If you intend to provide money, products, or services to an individual or company—particularly if they are under financial stress—get their representations about how they intend to re-pay you in writing.

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This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

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