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  • Supreme Court Interprets Single Word from Bankruptcy Code and Leads to Dramatic Results

Supreme Court Interprets Single Word from Bankruptcy Code and Leads to Dramatic Results

The key term in bankruptcy proceedings is “discharge,” which, in this context means to free a debtor from the liability of their debts. However, filing for bankruptcy does not always discharge all debts. The bankruptcy code actually exempts quite a few types obligation from discharge. For instance, non-income based taxes, child/spousal support payments, student loans, and government fines are just a few of the common types of debts that are non-dischargeable in bankruptcy. The full list of exceptions to discharge can be found here in 11 U.S. Code § 523. It’s these little types of nuances and complexities that can thwart the relief a debtor may be desperately seeking and having an experienced attorney can make all the difference.

The balance of a case can even come down to the court’s interpretation of a single word in the bankruptcy code. In a recent case, Lamar, Archer & Cofrin, LLP v. Appling, No. 16-1215, The Supreme Court ruled on the meaning of the word “respecting” as it applies in the exceptions of Section 523 of the bankruptcy code. The story of the case revolves around a client, Scott Appling, who told his lawyers that he would be paying money owed on his legal bills with a tax refund he was due to receive. His lawyers kept working on his case but he took his refund check and put it into his business, telling his lawyers he never received the money. Five years later the lawyers obtained a judgment against Appling for their services but were prevented from collecting by Appling’s bankruptcy filing.

His lawyers at Lamar, Archer & Cofrin were not about to let a $100,000 debt go and argued to the bankruptcy court that because Appling had made a fraudulent statement to them on which they relied, the debt would fall under one of the Section 523 exceptions, specifically Section 523(a)(2)(A) which says:

  • A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

The important phrase here is “other than a statement respecting the debtor’s or an insider’s financial condition.” Appling argued that his oral statement to Lamar “respect[ed]… his financial condition,” so Section 523(a)(2)(A) wouldn’t apply. Instead, Section 523(a)(2)(B) should apply and under that section statements made regarding financial condition are non-dischargeable only if that statement is made in writing. The case turned on that word “respecting.” Is a statement about a debtor’s overall financial condition the only type of statement “respecting” financial condition that can fall under Section 523(a)(2)(B) or is a statement about a single asset still “respecting” financial condition?

The case went back and forth up through the court system until it reached The Supreme Court. The Supreme Court, relying on several dictionaries for reference, ultimately ruled that a statement about a single asset is still “respecting” financial condition and since Appling’s statement was not in writing, his debt was discharged.

Dischargeability litigation is very fact specific. For six years this court battle was waged over one statement and over one word. While Appling had his debt discharged, it is vitally important that debtors make full and accurate disclosures. Failure to truthfully disclose financial information can result in the non-dischargeability of some debts or even the complete dismissal of a bankruptcy filing, leaving the debtor open to the inevitable assault of his creditors. The importance of having experienced seasoned bankruptcy attorneys representing you cannot be overstated. Nicholas C. Inman and Linda J. Littlefield have forty-eight years of bankruptcy law experience combined. They can guide you through the process and ensure you get safely where you need to be financially.

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