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Are Legal Fees Dischargeable?

Are Legal Fees Dischargeable?

“Does an oral statement about a single asset qualify as a “statement respecting the debtor’s financial condition?” That was the subject of a recent Supreme Court case that was ruled upon last week which debated whether a debtor is able to discharge debt if he or she makes a false claim about a financial asset to a creditor. The justices heard oral arguments in the case of Lamar, Archer & Cofrin v. Appling, 584 U.S. ___ (2018) (per Sotomayor, J.) in which they needed to determine whether respondent Scott R. Appling made a “statement respecting the debtor’s financial condition” when he falsely claimed he could pay for his legal fees with an expected tax refund.

Mr. Appling fell behind in payments owed to his attorney, who threatened to withdraw as his counsel. Appling orally stated he could pay his bill and future legal expenses with an expected tax refund that was, in reality, already received and spent. The firm took him on his word and continued to represent him in litigation. Ultimately, Appling never paid the final invoice and Lamar sued and obtained a judgment in excess of $100,000.00. Shortly thereafter, Appling filed a Chapter 7 bankruptcy. Lamar filed an adversary action against Appling arguing that the debt was nondischargeable pursuant to 11 U.S.C. §523(a)(2)(A), which bars a discharge of specified debts arising from “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s … financial condition.” Appling moved to dismiss on the ground that his alleged misrepresentations were “statements respecting the debtor’s financial condition” which, according to the second part of the law, need to be “in writing” §523(a)(2)(B). He claimed that since the statement wasn’t “in writing” then this law did not apply.

The Bankruptcy Court disagreed and denied the debtor’s motion. The case was appealed to the District Court which affirmed, then to the 11th Circuit which reversed holding that a statement about a single asset can be a “statement respecting the debtor’s financial condition” so it falls under the scrutiny of this law and must be in writing. Finally, on appeal to the Supreme Court, the justices affirmed the 11th Circuit’s ruling.

The Court focused on the definition of the word “respecting.” In the legal context, the word generally has a broadening effect and is interpreted expansively. Moreover, a statement is respecting a debtor’s “financial condition” if it has a direct relation to or impact on the debtor’s overall financial status and a statement claiming a monetary amount of this size is substantial. The statutory history of the phrase “statement respecting the debtor’s financial condition” corroborates the Court’s reading.

The Court ruled that Appling’s fees to his attorney are dischargeable, noting that the heightened requirements are not a shield for dishonest debtors. Rather, they reflect Congress’s effort to balance the potential misuse of such statements by both debtors and creditors.

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