Lamar v. Appling (In re Appling)

• Decision Date: 20 September 2013
• Docket Number: Adversary No. 13–3042.,Bankruptcy No. 13–30083–JPS.
• Citation: 500 B.R. 246
• Court: U.S. Bankruptcy Court — Middle District of Georgia
• Parties: In the Matter of R. Scott APPLING, Connie F. Appling, Debtors. Lamar, Archer & Cofrin, LLP, Plaintiff v. R. Scott Appling, Defendant.

500 B.R. 246

In the Matter of R. Scott APPLING, Connie F. Appling, Debtors.Lamar, Archer & Cofrin, LLP, Plaintiff

v.R. Scott Appling, Defendant.

Bankruptcy No. 13–30083–JPS.

Adversary No. 13–3042.

United States Bankruptcy Court,

M.D. Georgia,

Athens Division.

Sept. 20, 2013.

Bruce B. Weddell, Burbage & Weddell, L.L.C., Robert C. Lamar, Lamar Archer & Cofrin, Atlanta, GA, for Plaintiff.

Daniel L. Wilder, Emmett L. Goodman, Jr., LLC, Macon, GA, for Defendant.

MEMORANDUM OPINION

JAMES P. SMITH, Bankruptcy Judge.

Before the Court is Defendant's motion to dismiss Plaintiff's complaint on the ground that the complaint fails to state a claim upon which relief can be granted pursuant to Bankruptcy Rule 7012 and Fed.R.Civ.P. 12(b)(6). Plaintiff, in its complaint, objects to the dischargeability of its claim against Defendant pursuant to 11 U.S.C. § 523(a)(2)(A). The Court, having considered the motion, the response and the complaint, now publishes this memorandum opinion.

When challenged under Rule 12(b)(6):

“To survive ... a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007)). The plausibility standard “calls for enough fact to raise a reasonable expectation that discovery will reveal evidence” of the defendant's liability. Twombly, 550 U.S. at 556, 127 S.Ct. at 1965.

Miyahira v. Vitacost.com, Inc., 715 F.3d 1257, 1265 (11th Cir.2013). Accordingly, accepting as true the allegations in Plaintiff's amended complaint ¹, Plaintiff's claim is based on the following facts.

Plaintiff is a law firm that represented Defendant and his company, Hartwell Enterprises, Inc. (“Hartwell”), in litigation in the Superior Court of Franklin County, Georgia. In March 2005, Plaintiff's unpaid legal fees for representing Defendant and Hartwell had grown to $66,710.57. Robert Lamar (“Lamar”), a partner of Plaintiff, had a meeting with Defendant and advised that Plaintiff would have to withdraw from the representation unless the legal fees were brought current. Defendant advised Lamar that his accountant had just prepared his 2004 tax return and that he would be receiving a tax refund in excess of $100,000. Defendant represented to Lamar that the tax refund would be sufficient to pay all outstanding fees and agreed to pay those fees, as well as subsequent fees, as soon as the tax refund was received if Plaintiff would continue to represent him and Hartwell and forego immediate collection of the past due amounts. In reliance upon this promise, Plaintiff continued to represent Defendant and Hartwell and did not institute collection efforts.

In November 2005, Defendant again confirmed his promise to use his tax refund to pay all of Plaintiff's fees. Plaintiff continued to represent Defendant and his company and successfully settled the superior court litigation in March 2006. By this time, the unpaid fees had grown to $104,179.60. When Defendant did not pay these fees, Plaintiff obtained judgment against Defendant for this amount in the Superior Court of Hart County, Georgia.

Plaintiff alleges that when Defendant promised to use his tax refund to pay the fees, Defendant had no intent to do so or, in the alternative, had no reasonable basis to believe the refund would be sufficient to pay the fees. Plaintiff alleges that, through his knowledge of the distressed financial state of Hartwell, Defendant knew the refund would not be available for payment of the fees. Further, Plaintiff alleges that when it met with Defendant in November 2005, and Defendant renewed his promise regarding the tax refund, Defendant had already received the refund and spent the refund on the operations of Hartwell. Accordingly, Plaintiff alleges that its claim against Defendant arose as a result of Defendant's “false pretenses, a false representation, or actual fraud” and is therefore not dischargeable under 11 U.S.C. § 523(a)(2)(A).

DISCUSSION

11 U.S.C. § 523(a)(2) provides, in pertinent part:

(a) A discharge under section 727 ... 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 ...

Statement Respecting Defendant's Financial Condition

Defendant contends that his alleged oral representation regarding his intent to use his tax refund to pay the fees is not actionable under section 523(a)(2)(A) because the alleged representation is “a statement respecting the debtor's ... financial condition” which, pursuant to section 523(a)(2)(B), must be in writing. As explained by the Bankruptcy Appellant Panel for the Sixth Circuit:

Subsections (A) and (B) are mutually exclusive. All statements regarding a debtor's financial condition, whether written or oral, are expressly excluded from subsection (A). Rather, such a creditor must proceed under subsection (B) and satisfy the requirement that the statement of financial condition be in writing. A debt based upon an oral misrepresentation of financial condition is not actionable and will be dischargeable. Conversely, a debt obtained through fraudulent written statements about a debtor's financial condition will be nondischargeable. As a result of this construction, whether a debt under this section is dischargeable or nondischargeable depends on whether the fraudulent misrepresentation (i) is oral or in writing and (ii) whether the statement concerns the debtor's financial condition ...

Two views have emerged on the proper interpretation of the phrase “respecting the debtor's ... financial condition.” The “broad interpretation” includes any communication that has a bearing on the debtor's financial position. In other words, any communication addressing the status of a single asset or liability qualifies. The “strict interpretation,” on the other hand, limits statements “respecting the debtor's ... financial condition” to communications that purport to state the debtor's overall net worth, overall financial health, or equation of assets and liabilities.

Prim Capital Corp. v. May (In re May), 368 B.R. 85, 2007 WL 2052185, at *5–6 (6th Cir. BAP July 19, 2007) (unpublished decision) (internal citations omitted).

The Eleventh Circuit has not addressed this issue. The Fifth Circuit ² and the Tenth Circuit ³ have adopted the “strict interpretation”. The Fifth Circuit noted that the Fourth Circuit, in Engler v. Van Steinburg (In re Van Steinburg), 744 F.2d 1060 (4th Cir.1984), apparently followed the “broad interpretation”.⁴

The Fifth Circuit noted that the Eighth Circuit's ⁵ construction of section 523(a)(2)(A) was consistent with the construction applied by the Fifth and Tenth Circuits.⁶Id. Bankruptcy courts have reached conflicting conclusions.⁷ For the reasons set forth by the Fifth Circuit in Bandi v. Becnel, supra, this Court adopts the “strict interpretation” as to the meaning of “a statement respecting the debtor's ... financial condition”.

This case is similar to the case of Barns v. Belice (In re Belice), 461 B.R. 564 (9th Cir. BAP 2011). There, in connection with obtaining a loan, the debtor made a number of representations regarding specific assets and the probable sale of a business to provide a source of funds for repayment of the loan. The court, adopting the “strict interpretation”, held that the representations:

[R]elate to a handful of [debtor's] assets, but they do not reveal anything meaningful or comprehensive about his overall net worth. These statements do not purport to reflect all of [debtor's] assets, and they tell us nothing regarding his liabilities or any liens against any of his property.... Accordingly, under our interpretation of the financial condition phrase, [debtor's] alleged misrepresentations do not amount to a statement respecting his financial condition. At most, they are isolated representations regarding various items that might ultimately be included as assets in a balance sheet or in a statement of net worth.

Id. at 579. Similarly, in the case of In re May, supra, the court held that a promise by a debtor attorney that he would be able to repay a loan with fees he expected to receive from the settlement of a case was “not related to [his] overall financial health but ... related to a single debt and the potential of one source of income” and therefore was actionable under § 523(a)(2)(A). Id. at *7.

In the case at bar, the alleged misrepresentation is that a single asset, the tax refund, would be used to pay Plaintiff's legal fees. This is not a representation as to Defendant's overall financial condition or net worth.

In support of his position, Defendant relies on the case of Baker v. Sharpe (In re Sharpe), 351 B.R. 409 (Bankr.N.D.Tex.2006). In that case, the debtor made an oral representation that he had hidden funds from his wife during their divorce and that the funds would be available to repay a loan as soon as the divorce was final. The court held that this representation concerned the debtor's financial condition and therefore was not actionable under § 523(a)(2)(A). However, in light of the subsequent decision by the Fifth Circuit Court of Appeals in Bandi, it appears that the Sharpe case has been abrogated.

In addition, Defendant relies on the case of Bancorpsouth Bank v. Callaway (In re Callaway), 2006 WL 6589022 (B...