Lawyers Lose $100,000 Award Despite Bankrupt Client’s Lie

Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.

By Diane Davis

A debtor who falsely claimed he would pay legal fees with an anticipated $100,000 tax refund, but spent the money on his own business instead, can still discharge the legal fees in bankruptcy, the U.S. Court of Appeals for the Eleventh Circuit held Feb. 15 ( Appling v. Lamar, Archer & Cofrin, LLP (In re Appling) , 2017 BL 45134, 11th Cir., No. 16-11911, 2/15/17 ).

The decision deepens a circuit split, with the Eleventh Circuit joining the Fifth, Eighth and Tenth circuits in a split with the Fourth Circuit.

Typically, a debtor can’t discharge any debt incurred by fraud. But as long as the false statement isn’t in writing, a debtor can discharge a debt incurred by a false statement respecting his financial condition, the court said, citing Bankruptcy Code Section 523(a)(2)(B).

Requiring a statement respecting a debtor’s financial condition to be in writing provides an incentive for creditors to receive statements in writing to reduce the incidence of fraud, the court said.

Allowing debtor R. Scott Appling to discharge more than $100,000 in legal fees to Lamar, Archer & Cofrin LLP, “strikes a reasonable balance between the ‘confilicting interests’ of discouraging fraud and providing the honest but unfortunate debtor a fresh start,” Judge William H. Pryor, Jr., wrote.

“The Eleventh Circuit’s decision makes sense in the overall context of the fraud exception to discharge, and is faithful to what Congress intended in differentiating between statements respecting a debtor’s financial condition and all other forms of fraud,” Professor Charles J. Tabb, of counsel, Foley & Lardner LLP and Mildred Van Voorhis Jones Chair in Law, University of Illinois, Champaign, Ill., told Bloomberg BNA Feb. 16.

“It’s hard to fathom how the debtor’s statement that he expected to get 100 grand as a tax refund did not have to do with his ‘financial condition,’” Tabb said. “I think most people would view a tax refund of a hundred thousand dollars as relevant to their financial condition,” he said. “That the debtor’s attorneys just took the debtor’s word for it is shocking.” Tabb is an editor of Bloomberg Law: Bankruptcy Treatise.

“Congress felt it was a fair balance in such cases to ask the creditor to ‘get it in writing’ in such a situation,” Tabb said.

Circuit Split

The circuits are split, however, on whether statements about a single asset are statements about a debtor’s financial condition, the court said.

The Eleventh Circuit sided with the Fifth, Eighth, and Tenth circuits, rather than the Fourth Circuit, which have held that a statement about a single asset doesn’t respect a debtor’s financial condition because “it says nothing about the overall condition of the person making the representation or the ability to repay debt.”

Promotes Congressional Intent

Judge Robin S. Rosenbaum concurred with the court’s broad reading of Bankruptcy Code Section 523(a)(2). A broad reading of the statute “better promotes congressional intent to give a fresh start to only the ‘honest debtor’ than does a narrow construction of the same phrase,” Rosenbaum wrote.

The term “financial condition” most likely means “one’s overall financial status,” Pryor said. Knowledge of one asset or liability is a “partial step” toward knowing whether the debtor is solvent or insolvent,” the court said.

The text of the statute isn’t ambiguous, Pryor said, A statement respecting the debtor’s financial condition may include a statement about a single asset, the court said.

Judge Jose E. Martinez of the U.S. District Court for the Southern District of Florida, sitting by designation, joined the opinion.

Daniel Lewis Wilder represented Appling; David W. Davenport represented Lamar, Archer & Cofrin, LLP.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Try Bankruptcy on Bloomberg Law