SCOTUS’ Appling Continues to Make it Harder to Exempt a Debt From Discharge Debts incurred by making intentional false representations are generally

SCOTUS’ Appling Continues to Make it Harder to Exempt a Debt From Discharge Debts incurred by making intentional false representations are generally

exempt from a debtor’s discharge in bankruptcy. However, if the false representations were “respecting” a debtor’s financial condition, the Bankruptcy Code makes it harder to obtain a declaration of

nondischargeability. The Code does this by requiring: (1) that false representations respecting a debtor’s financial condition be made in writing (debts obtained by oral misrepresentations respecting the debtor’s financial condition are dischargeable), and (2) that the creditor prove the heightened standard of “reasonable” reliance in such representations, instead of the more lenient “justifiable” reliance applicable to other types of misrepresentations.

As a result, creditors long advocated for a narrow interpretation of the phrase “statement respecting the debtor’s financial condition”, while debtors argued in favor of a broad interpretation of the phrase. This led to a sharp division among bankruptcy courts and a deep circuit split.

While the First Circuit did not address the issue, U.S. Bankruptcy Judge Bailey for the District of Massachusetts adopted the narrow approach. According to this approach, only statements which relate to a debtor or insider's overall financial health qualified.

Judge Feeney, of the same district, adopted a broader approach than Judge Bailey, but one that fell closer to the narrow approach than the broad approach adopted by other courts, as it still insisted on the need to “describe the financial condition of the debtor.” The First Circuit BAP cited with approval Judge Feeney’s approach (although, ironically, it did so in an opinion in which the BAP reversed in part and remanded a case presided over by Judge Feeney).

Eventually the U.S. Supreme Court resolved the issue and adopted a broad construction of the phrase, holding that a statement about a single asset can fit the bill. Lamar, Archer & Cofrin, LLP v. Appling, 138 S.

Ct. 1752, 1761 (2018). The Court explained that a statement is “respecting” a debtor’s financial condition if “it has a direct relation to or impact on the debtor’s overall financial status.” Id.

After Appling, courts have held that the following are statements respecting the financial condition of a debtor (or an insider of the debtor): (a) sales or revenues generated; (b) amount of capital or equity; (c) value of an entity owned in part by the debtor; (d) profits or net income generated; (e) hours worked and earnings; (f) pending work and incoming receivables, and (g) cash flow generated.

Recently, the Fifth Circuit joined the fray, and held that a debtor’s statement to the effect that no liens encumbered her property was a statement respecting her financial condition, and thus not actionable under §523(a)(2)(A).