Appling v. Lamar, Archer & Cofrin, LLP (In re Appling)

• Decision Date: 15 February 2017
• Docket Number: No. 16-11911,16-11911
• Parties: IN RE: R. Scott APPLING, Debtor. R. Scott Appling, Plaintiff–Appellant, v. Lamar, Archer & Cofrin, LLP, Defendant–Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

848 F.3d 953

IN RE: R. Scott APPLING, Debtor.

R. Scott Appling, Plaintiff–Appellant,

v.Lamar, Archer & Cofrin, LLP, Defendant–Appellee.

No. 16-11911

United States Court of Appeals, Eleventh Circuit.

February 15, 2017

Paul Whitfield Hughes, Michael B. Kimberly, Jonathan Weinberg, Mayer Brown, LLP, Washington, DC, Daniel L. Wilder, Law Offices of Emmett L. Goodman, Jr. LLC, Macon, GA, for Plaintiff–Appellant.

David William Davenport, Robert C. Lamar, Lamar Archer & Cofrin, Atlanta, GA, for Defendant–Appellee.

Before WILLIAM PRYOR and ROSENBAUM, Circuit Judges, and MARTINEZ,^* District Judge.

WILLIAM PRYOR, Circuit Judge:

This appeal presents a question that has divided the federal courts: Can a statement about a single asset be a "statement respecting the debtor's ... financial condition"? 11 U.S.C. § 523(a)(2). Ordinarily, a debtor cannot discharge any debt incurred by fraud, id. § 523(a)(2)(A), but a debtor can discharge a debt incurred by a false statement respecting his financial condition unless that statement is in writing, id. § 523(a)(2)(B). R. Scott Appling made false oral statements to his lawyers, Lamar, Archer & Cofrin, LLP, that he expected a large tax refund that he would use to pay his debt to the firm. After Lamar obtained a judgment against Appling for the debt, Appling filed for bankruptcy and Lamar initiated an adversary proceeding to have the debt ruled nondischargeable. The bankruptcy court and the district court ruled that Appling's debt could not be discharged under section 523(a)(2)(A) because it was incurred by fraud. But we disagree. Because Appling's statements about his tax refund "respect[ ] [his] ... financial condition," id. § 523(a)(2)(B)(ii), and were not in writing, id. § 523(a)(2)(B), his debt to Lamar can be discharged in bankruptcy. We reverse and remand.

I. BACKGROUND

R. Scott Appling hired the law firm Lamar, Archer & Cofrin, LLP, to represent him in litigation against the former owners of his new business. Appling agreed to pay Lamar on an hourly basis with invoices for fees and costs due monthly. Appling became unable to keep current on the mounting legal bill and as of March 2005, owed Lamar $60,819.97. Lamar threatened to terminate the firm's representation and place an attorney's lien on all work product unless Appling paid the outstanding fees.

Appling and his attorneys held a meeting in March 2005. The bankruptcy court found that during this meeting Appling stated he was expecting a tax refund of "approximately $100,000," which would be enough to pay current and future fees. Lamar contends that in reliance on this statement, it continued its representation and did not begin collection of its overdue fees.

When Appling and his wife submitted their tax return, they requested a refund of only $60,718 and received a refund of $59,851 in October. The Applings spent this money on their business. They did not pay Lamar.

Appling and his attorneys met again in November 2005. The bankruptcy court found that Appling stated he had not yet received the refund. Lamar contends that in reliance on this statement, it agreed to complete the pending litigation and forego immediate collection of its fees but refused to undertake any additional representation. In March 2006, Lamar sent Appling his final invoice for a principal amount due of $55,303.66 and $6,185.32 in interest.

Five years later, Lamar filed suit against Appling in a superior court in Georgia. In October 2012, Lamar obtained a judgment for $104,179.60. Three months later, the Applings filed for bankruptcy.

Lamar initiated an adversary proceeding against Appling in bankruptcy court. The bankruptcy court ruled that because Appling made fraudulent statements on which Lamar justifiably relied, Appling's debt to Lamar was nondischargeable, 11 U.S.C. § 523(a)(2)(A). The district court affirmed. The district court rejected Appling's argument that his oral statements "respect[ed] ... [his] financial condition," 11 U.S.C. § 523(a)(2)(B), and should have been dischargeable. The district court ruled that "statements respecting the debtor's financial condition involve the debtor's net worth, overall financial health, or equation of assets and liabilities. A statement pertaining to a single asset is not a statement of financial condition." The district court agreed with the bankruptcy court that Appling made material false statements with the intent to deceive on which Lamar justifiably relied.

II. STANDARD OF REVIEW

When we sit as the second appellate court to review a bankruptcy case, In re Glados, Inc. , 83 F.3d 1360, 1362 (11th Cir. 1996), we "assess the bankruptcy court's judgment anew, employing the same standard of review the district court itself used," In re Globe Mfg. Corp. , 567 F.3d 1291, 1296 (11th Cir. 2009). "Thus, we review the bankruptcy court's factual findings for clear error, and its legal conclusions de novo ." Id.

III. DISCUSSION

The Bankruptcy Code gives a debtor a fresh start by permitting him to discharge his pre-existing debts. But there are many exceptions to discharge. And some of those exceptions protect victims of fraud.

Section 523(a)(2) creates two mutually exclusive exceptions to discharge:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—

...

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition ;

(B) use of a statement in writing —

(i) that is materially false;

(ii) respecting the debtor's or an insider's financial condition ;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive; ...

11 U.S.C. § 523(a)(2) (emphasis added).

The Code treats debts incurred by a statement "respecting the debtor's ... financial condition" differently from other debts. Id. All fraud "other than a statement respecting the debtor's ... financial condition" is covered by subsection (A). Id. § 523(a)(2)(A). Under subsection (A), a debtor cannot discharge a debt obtained by any type of fraudulent statement, oral or written. Id. A creditor also need prove only justifiable reliance. Field v. Mans , 516 U.S. 59, 61, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). But if a statement is made "respecting the debtor's ... financial condition," then subsection (B) governs. 11 U.S.C. § 523(a)(2)(B)(ii). To avoid discharge of a debt induced by a statement respecting the debtor's financial condition, a creditor must show reasonable reliance and that the statement was intentional, materially false, and in writing. Id. § 523(a)(2)(B). Thus, a debt incurred by an oral, fraudulent statement respecting the debtor's financial condition can be discharged in bankruptcy.

We must determine whether Appling's statements about a single asset are "statement[s] respecting [his] ... financial condition." Id. § 523(a)(2). The bankruptcy court found that Appling made false oral statements about his anticipated tax refund to receive an extension of credit from Lamar. If these statements do not respect his financial condition, Appling can discharge his debt to Lamar in bankruptcy only if he disproves an element of fraud. Id. § 523(a)(2)(A). But if the statements do respect his financial condition, Appling can discharge his debt to Lamar because the statements were not in writing. Id. § 523(a)(2)(B).

The circuits and other federal courts are split on this question. The Fourth Circuit has held that a "debtor's assertion that he owns certain property free and clear of other liens is a statement respecting his financial condition." Engler v. Van Steinburg , 744 F.2d 1060, 1061 (4th Cir. 1984). Several bankruptcy courts—including one in this Circuit, In re Aman , 492 B.R. 550, 565 & n.47 (Bankr. M.D. Fla. 2010) —have agreed. See, e.g., In re Carless , No. 10–42988, slip op. at *3–4, 2012 WL 32700 (Bankr. D.N.J. Jan. 6, 2012) ; In re Nicolai , No. 05–29876, slip op. at *1, 2007 WL 405851 (Bankr. D.N.J. Jan. 31, 2007) ; In re Hambley , 329 B.R. 382, 399 (Bankr. E.D.N.Y. 2005) ; In re Priestley , 201 B.R. 875, 882 (Bankr. D. Del. 1996) ; In re Kolbfleisch , 97 B.R. 351, 353 (Bankr. N.D. Ohio 1989) ; Matter of Richey , 103 B.R. 25, 29 (Bankr. D. Conn. 1989) ; In re Rhodes , 93 B.R. 622, 624 (Bankr. S.D. Ill. 1988) ; In re Howard , 73 B.R. 694, 702 (Bankr. N.D. Ind. 1987) ; In re Panaia , 61 B.R. 959, 960–61 (Bankr. D. Mass. 1986) ; In re Roeder , 61 B.R. 179, 181 n.1 (Bankr. W.D. Ky. 1986) ; In re Prestridge , 45 B.R. 681, 683 (Bankr. W.D. Tenn. 1985). But the Fifth, Eighth, and Tenth Circuits have held that a statement about a single asset does not respect a debtor's financial condition because it "says nothing about the overall financial condition of the person making the representation or the ability to repay debt." In re Bandi , 683 F.3d 671, 676 (5th Cir. 2012) ; see also In re Lauer , 371 F.3d 406, 413–14 (8th Cir. 2004) ; In re Joelson , 427 F.3d 700, 706 (10th Cir. 2005). And some bankruptcy courts in other circuits have agreed. See, e.g. , In re Feldman , 500 B.R. 431, 437 (Bankr. E.D. Penn. 2013) ; In re Banayan , 468 B.R. 542, 575–76 (Bankr. N.D.N.Y. 2012) ; In re Campbell , 448 B.R. 876, 886 (Bankr. W.D. Penn. 2011).

"[I]nterpretation of the Bankruptcy Code starts ‘where all such inquiries must begin: with the language of the statute itself.’ " Ransom v. FIA Card Servs. N.A. , 562 U.S. 61, 69, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011) (quoting United States v. Ron Pair Enters . , Inc. , 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) ). Because the Code does not define the relevant terms, we look to "their ordinary, everyday meanings—unless the context indicates that they bear a technical sense." Antonin Scalia & Bryan A. Garner, Reading Law: The...