Supreme Court to Hear Consumer Bankruptcy Issue on Dischargeability 523(a)(2) – What is a “Statement of Financial Condition”?

On Jan. 12 the Supreme Court granted certiorari and will review Lamar, Archer & Cofrin LLP v. Appling, 16-1215 (Sup. Ct.), to resolve a split of circuits and decide whether a false oral statement about one asset is a statement of “financial condition” that must be in writing to result in denial of discharge of a debt under Section 523(a)(2).  The briefs are here.    It has not been set for oral argument.

The 11th Circuit has a nice summary of the issue in the first paragraph.

This appeal presents a question that has divided the federal courts: Can a statement about a single asset be a “statement respecting the debtor’s . . . financial condition”? 11 U.S.C. § 523(a)(2).  Ordinarily, a debtor cannot discharge any debt incurred by fraud, id. § 523(a)(2)(A), but a debtor can discharge a debt incurred by a false statement respecting his financial condition unless that statement is in writing, id. § 523(a)(2)(B).

Below is my brief on the issue resolved by the 9th Cir BAP. 

Barnes v. Belice (In re Belice), 461 B.R. 564 (9th Cir. B.A.P. 2011)

Issue:   Were oral statements made by the debtor sufficient to support a finding that the debtor committed fraud or were the statements about his “financial condition” which to be actionable had to be in writing?

Holding:   The oral statements made supported a finding of fraud and therefore non-dischargeability.

Judge Peter Bowie, San Diego

Markell, Hollowell, Kirscher

Opinion by Markell

Creditor filed a non-dischargeability complaint against the debtor under section 523(a)(2)(A) saying that the debtor made a number of false statements which the creditor relied on when making a loan of approximately $25,000.  The debtor filed a motion to dismiss asserting that the purported misstatements where ones that “respected [his] financial condition” and therefore could not be included in 523(a)(2)(A) but had to be in writing and alleged under 523(a)(2)(B).  The purported misstatements covered his salary, a ring he owned, season seats to the San Diego Chargers, and two businesses he owned.  Judge Bowie ruled that those are misstatements respecting his financial condition and cannot be used to prove up fraud under 523(a)(2)(A).

The BAP reversed.  “Section 523(a)(2)(A) excepts debts from discharge when those debts were incurred by way of ‘false pretenses, false representation, or actual fraud . . . .’But not all fraud leads to nondischargeability.  Congress expressly excluded oral ‘statement[s] respecting the debtor’s or an insider’s financial condition’ from § 523(a)(2)(A)’s coverage. In short, oral misrepresentations regarding financial condition are dischargeable.”  “[A]broad interpretation of the phrase . . . includes ‘any statement that has a bearing on the financial position of the debtor or an insider.’This includes any statement regarding ‘the status of a single asset or liability,’ as is the case here.”  “[A] narrow or strict interpretation . . . includes ‘only statements providing information as to a debtor’s net worth, overall financial health,or an equation of assets and liabilities.’”The opinion discusses the history of the discharge exception for fraud and cases arguing both the narrow and the broad view.  “[W]e hold that the phrase ‘statement respecting the debtor’s . . . financial condition’ should be narrowly interpreted. We agree . . . that such statements ‘are those that purport to present a picture of the debtor’s overall financial health.’”

There was also an issue regarding a purported omission, the failure of the debtor to advise the creditor that he was being sued for $500,000 over a business transaction.  The BAP said that there must be a duty to disclose.  It cites the Restatement of Torts, section 551(2) for the proposition that a party to a business transaction must disclose facts which make statements made not misleading.  In other words, if the person makes a statement, he must also disclose additional facts which make the statement made not misleading.  The BAP said there was no duty to disclose here.

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