Lamar, Archer & Cofrin, LLP v. R. Scott Appling

Whether a statement concerning a specific asset constitutes a "statement respecting the debtor's financial condition” within 11 U.S.C. § 523(a)(2)(A) of the Bankruptcy Code.

Respondent purchased a business, later learning that the seller had misrepresented the business’s financial condition. Petitioner was retained by Respondent to sue the seller. However, Respondent fell behind on paying attorney’s fees and asked Petitioner to continue litigation on the basis that Respondent expected a substantial tax refund that would cover all of their legal fees. Relying on this statement, Petitioner continued to represent Respondent. However, Respondent’s tax return was significantly lower than expected, and so Respondent did not use it to pay Petitioner. Petitioner then sued Respondent obtaining a judgment. Subsequently, Respondent filed for Chapter 7 Bankruptcy. Petitioner then initiated an adversary proceeding and the bankruptcy court determined that Respondent’s outstanding legal fees qualified as nondischargeable debt because it was incurred by fraud. The district court affirmed, holding that, pursuant to § 523(a)(2)(A), the statement Respondent made regarding the amount and proposed use of the expected tax return was a fraudulent statement that did not relate to the Respondent’s overall financial condition. On appeal, the Eleventh Circuit reversed, holding that the debt was dischargeable because the statements made: 1) were not in writing and 2) did relate to Respondent’s financial condition. The court stated that § 523(a)(2)(B) applies only for statements relating to financial conditions that are materially false and in writing. Petitioner asks the court to resolve a circuit split over the financial condition exception in § 523(a)(2)(A) of the Bankruptcy Code and to construe it narrowly so that it would not apply in this case.