Falsely Misrepresenting One Asset Isn’t Grounds for Nondischargeability, Circuit Holds
Facing a split among the circuits, the Eleventh Circuit came down on the side of the majority by holding that a false oral statement about one asset is a statement of “financial condition” that must be in writing to be grounds for denial of discharge of a debt under Section 523(a)(2).
The case involved a client who told his lawyers that he expected a large tax refund that would enable him to pay his legal bills. Based on that representation, the lawyers continued working.
Although the refund was smaller than represented, the client spent it on his business, falsely telling his lawyers that he had not received the refund. The lawyers continued working. Later, they obtained a judgment they could not collect when the client filed bankruptcy.
The bankruptcy judge held that the claim for legal fees was not discharged. The ruling in bankruptcy court was upheld in district court, but the Eleventh Circuit reversed in a Feb. 15 opinion authored by Circuit Judge William Pryor.
Section 523(a)(2)(A) makes a debt nondischargeable if obtained by “a false representation . . . other than a statement respecting the debtor’s or an insider’s financial condition.”
In Section 523(a)(2)(B), there are additional requirements for the denial of discharge of a debt resulting from reliance on a materially false written statement about the debtor’s financial condition.
Taking sides with the Fourth Circuit, the district court reasoned that a false statement about one asset was “not a statement of financial condition” and could therefore form the basis for nondischargeability, even though it was not made in writing.
Judge Pryor disagreed and followed the Fifth, Eighth and Tenth Circuits in making the debt dischargeable because a false oral statement about one asset “‘says nothing about the overall financial condition of the person . . . or the ability to repay the debt.’”
The phrase “financial condition,” Judge Pryor said, “likely means one’s overall financial status.” He went on to say that “knowledge of one asset or liability is a partial step toward knowing whether the debtor is solvent or insolvent.”
“If the statute applied only to statements that expressed a debtor’s overall financial condition, Congress would have said so,” the opinion says.
Making the debt nondischargeable given a false oral statement about one asset “is based on policy, not statutory structure.” Judge Pryor concluded that the statute was not ambiguous.