SCOTUS Will Take Up Bankruptcy Discharge Appeal

By Diane Davis

The U.S. Supreme Court will try to settle a dispute over how much weight bankruptcy courts should give a statement made by debtors about a single aspect of their finances that’s not in writing, an issue that has divided appeals courts.

In accepting review Jan. 12, the justices will dive into the case of R. Scott Appling, who told his bankruptcy lawyers that he would pay his legal fees with an anticipated tax refund but wound up spending that money on his business, according to court papers.

The law firm sued and received a judgment for its fees. Appling then filed for bankruptcy, but that court refused to discharge or wipe out that debt. A district court upheld the bankruptcy court decision, but the U.S. Court of Appeals for the Eleventh circuit went the other way.

The case turns on two points in bankruptcy law.

First, what elements constitute a debtor’s financial condition for the purposes of discharging, or wiping out debt? Can it be a single line item, like promises of a tax refund, or must it be a fuller picture of net worth, hard assets and liabilities? And second, should debtors be held more accountable for falsely representing their finances even if they don’t do so in writing?

Federal appeals courts are split.

The Eleventh Circuit said that the single statement, not in writing, about the tax refund can reflect, or respect, the debtor’s financial condition and justify a debt discharge even if it’s false. But the Fifth, Eighth, and Tenth circuits have taken contrary views about such financial statements in other cases.

The case is Lamar, Archer & Cofrin, LLP v. R. Scott Appling , U.S., No. 16-1215, review granted, 1/12/18 .

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

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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