Nondischargeable Debt and the Fraud Exception

U.S. Supreme Court Hears Bankruptcy Case Concerning Fraud Exception

The U.S. Supreme Court recently heard arguments in bankruptcy-related case that has been ongoing for quite some time. Back in January 2018, the U.S. Supreme Court agreed to hear the case, Lamar, Archer & Cofrin, LLP v. Appling. In brief, the case deals with an individual debtor who made false promises about repaying a portion of his debt. The debtor ultimately filed for Chapter 7 bankruptcy and attempted to discharge the debt. The creditor argued that the debt fell under the U.S. Bankruptcy Code’s fraud exception, and as such the debt was a nondischargeable debt in the Chapter 7 bankruptcy proceeding. The debtor disagreed, and the issue is now up to the U.S. Supreme Court.

The U.S. Supreme Court’s decision could impact certain debtors in Oak Park who file for consumer bankruptcy. We will tell you more about the recent case and its possible implications.

Getting the Facts of the Case: Lamar, Archer & Cofrin, LLP v. Appling

In order to consider whether the fraud exception may apply to this case, it is important to understand the facts. Back in 2004, the debtor (Appling) retained a law firm (Lamar), and he ended up owing more than $60,000 in attorneys’ fees and court costs after a lengthy period of litigation. The debtor met with the law firm and insisted that he would be able to pay off his debt because he was expecting to receive a $100,000 tax refund that he planned to use to pay the law firm. While the debtor did apply for a tax refund, it was only for $60,000—instead of $100,000 as he had indicated—and he used none of the refund to pay the law firm.

The law firm again met with the debtor after he had received his tax refund, and the debtor lied and told the law firm that he had not yet received his tax refund. As such, he wanted the law firm to continue representing him, and it agreed on the assumption that the debtor would make payment once he received his tax refund. Eventually, the law firm stopped representing the debtor and sent a final invoice for approximately $61,000. About a year later—during which time the debtor still had not made payment—the law firm learned that the debtor had in fact received a tax refund much earlier and had paid none of the attorneys’ fees or court costs as he had promised. The law firm filed a lawsuit against the debtor for the unpaid attorneys’ fees and court costs.

A lower court ordered the debtor to pay $104,000 to the law firm. The debtor then filed for Chapter 7 bankruptcy and listed the debt to the law firm among the debts he planned to discharge. In bankruptcy court, the law firm argued that the debt was nondischargeable because it fell into the category of one of the exceptions to discharge - the fraud exception.

What is the fraud exception? The statute says that a debt cannot be discharged “to the extent [it was] obtained by false pretenses, a false representation, or actual fraud.” The only exception to the exception is a situation in which the debtor’s seemingly fraudulent statement was “respecting the debtor’s . . . financial condition.”

The law firm argues that the debtor’s false statements concerning the tax refund and promised payment constituted fraud, placing the debt in the nondischargeable category. The debtor argues that his statements fall into the exception to the exception because his statements about the tax refund and paying the debt were “respecting the debtor’s financial condition.” A lower court that heard the case said that a statement “pertaining to a single asset,” meaning the tax refund, does not constitute “a statement of financial condition.” As such, it said the debt was nondischargeable due to the fraud exception. The debtor appealed, and the Eleventh Circuit found in favor of the debtor.

Now, the U.S. Supreme Court will have to decide whether a statement—or series of statements—concerning a tax refund and promise to pay a debt constitute “a statement of financial condition,” or whether the debt does in fact fall into the fraud exception making it nondischargeable.

Contact an Oak Park Bankruptcy Lawyer

To learn more about Chapter 7 bankruptcy, you should speak with an Oak Park bankruptcy attorney. Contact the Emerson Law Firm for more information.

See Related Blog Posts:

What is Priority Debt in Bankruptcy, and Why Does it Matter?

Most Consumer Debt is Dischargeable Through Bankruptcy