Put it in Writing: Lamar, Archer, Cofrin, LLP v. Appling and the Limits of the Fraud Exception to Discharge

By: Ian Shippey

Articles and Symposium Editor, American Journal of Trial Advocacy

Pursuant to § 523 of the Bankruptcy Code, a debtor is not entitled to discharge to the extent that the debtor obtained the “money property, services or . . . extension renewal or refinancing of credit,” in question, “by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”[1] In order for a statement regarding a debtor’s financial condition to be subject to this discharge exception, the statement must be in writing and satisfy four elements: (1) the statement must be materially false; (2) the statement must relate to the debtor’s financial condition; (3) the creditor must have relied on the statement; (4) the debtor must have intended to deceive the creditor at the time the statement was made.[2] The Code’s distinction between fraudulent statements generally, and fraudulent statements regarding a debtor’s financial condition leaves one obvious question: What is a statement “respecting the debtor’s . . . financial condition?” This is a question that had not been answered definitively until quite recently.[3]

For many years, courts have been split on whether to apply a strict or broad interpretation to the requirement. Under the strict interpretation, a statement “respecting the debtor’s . . . financial condition” is defined as any communication that presents an “overall view of the debtor’s financial position.”[4] Conversely, under a broad reading of the statute, a statement is considered to relate to the debtor’s financial position, as long as the statement has any bearing on the debtor’s financial position, even if the statement only relates to the debtor’s ownership of one specific piece of property.[5]

The Fifth Circuit exemplified the narrow definition of a statement, regarding a debtor’s financial decision, in In re Bandi.[6] In Bandi, the creditor, Christopher Bencel, loaned $150,000 to RSB Companies, Inc.[7] The loan was personally guaranteed by two brothers, Charles and Stephen Bandi, who asserted that they owned a commercial building and a condominium building.[8] The brothers further provided Bencel, the creditor, with a statement of RSB’s accounts receivable, which was later found to be fraudulent.[9] RSB subsequently defaulted on its obligation to Bencel, and Bencel obtained state-court judgments against both of the brothers.[10]

Subsequently, Charles and Stephen Bandi filed for Chapter 7 Bankruptcy and sought to have the debt to Bencel discharged pursuant to § 523.[11] Bencel opposed the discharge, asserting that the original loan to RSB was fraudulently obtained, and was nondischargeable under § 523(a)(2)(A).[12] The bankruptcy court found that the brother had obtained the loan through false pretenses by intentionally misrepresenting their ownership of commercial property and that the debt to Bencel could not be discharged.[13] The court held that their representations of ownership of commercial property was not sufficient to trigger the stringent requirements of § 523(a)(2)(B) because the statement regarding ownership of specific items of property did not relate to the Bandi’s overall financial status.[14]

The Fifth Circuit Court of Appeals agreed with the bankruptcy court’s reading of the phrase “statements respecting the debtor’s . . . financial condition” in § 523(a)(2)(a).[15] In coming to its conclusion, the Fifth Circuit carefully analyzed both the statutory text of § 523(a)(2)(A) and (a)(2)(B), along with the Congressional record pertaining to the two sections.[16] The Circuit Court first noted the different standards of reliance required to satisfy the elements of the two provisions.[17] While § 523(a)(2)(A) requires justifiable reliance, Congress expressly required only “reasonable reliance” on a written statement made pursuant to § 523(a)(2)(B).[18] The Fifth Circuit found that, in making this distinction, Congress had contemplated that a statement respecting a debtor’s financial standing would take the form a balance sheet and, as such, would impart a high degree of credibility.[19] The court further noted that creditors commonly encourage debtors to file false written statements regarding their overall financial position, which take the form of formal balance sheets or bank statements, in order to insulate the relevant date from discharge.[20] Based on Congress’ concern with this practice when drafting the provision, as demonstrated in the Congressional record, the Fifth Circuit concluded that a statement relating to a debtor’s financial position should be defined based on common commercial practice, namely that these statements convey the debtor’s overall financial position through formal balance sheets.[21] With these justifications in mind, the Fifth Circuit held that the oral statements made by the Bandi brothers, respecting their ownership of specific commercial property did not fall within the ambit of § 523(a)(2)(B)’s strict requirements for statements respecting a debtor’s financial position.[22] Thus, the oral statements fell within § 523(a)(2)(A)’s fraud exception and were not subject to discharge.[23] Under this narrow reading of § 523 (a)(2) creditors receive significant protection when they make a loan based on a debtor’s oral representations regarding ownership of specific items of property.

Alternatively, creditor’s are not afforded this same protection under the broad reading of § 523(a)(2), as enunciated by the Fourth Circuit in Engler v. Van Steinburg.[24] In Engler, the creditor, Engler, obtained a $5,500 security interest in certain farming implements owned by Van Steinburg.[25] In obtaining the loan, Van Steinburg made a false oral representation to Engler that there was not a superior interest in the collateral, by any creditor.[26] At the time Van Steinburg made these representations to Engler, Van Steinburg was aware that several creditors held interests in the equipment that were superior to Engler’s.[27] Subsequently, Van Steinburg filed for bankruptcy and sought to have the debt to Engler discharged.[28] Engler objected, claiming that the debt was not dischargeable under § 523(a)(2)(A)’s fraud exception to discharge.[29] The bankruptcy court and the district court found that the debt fell within the ambit of the fraud exception based on similar reasoning to that used in Bandi.[30] However, the Fourth Circuit reversed, finding that a debtor’s statements regarding his ownership interest in specific items of property constituted statements respecting a debtor’s financial status, and must therefore be made in writing and meet the strictures of § 523(a)(2)(B) in order to be exempted from discharge.[31] In coming to this conclusion the Fourth Circuit focused on the general language used in § 523(a)(2), stating that “Congress did not speak in terms of financial statements. Instead, it referred to a broader class of statements respecting the debtor’s . . . financial condition.”[32] The court interpreted the word “respecting” so as broaden the application of § 523(a)(2)(B) to any statement that relates in some way to the debtor’s financial standing. Because the debtor’s ownership interest property does relate to the debtor’s financial standing, such a statement would only be exempted from discharge under the Fourth Circuit’s broad reading of the phrase “respecting the debtor’s . . . financial condition” if it were in writing and complied with all of the requirements of § 523(a)(2)(B). Thus, Van Steinburg’s oral representations regarding his ownership interest in his farm equipment could not be exempted under § 523(a)(2)(A).[33] This narrow reading provides significantly less protection to creditors who rely on oral statement made by debtors respecting their ownership of certain items of property.

The conflict between the narrow reading of § 523(a)(2), as exemplified by the Fifth Circuit in Bandi, and the broad reading of the section, as exemplified by the Fourth Circuit in Engler, remained unresolved until the Supreme Court heard Lamar, Archer, & Cofrin, LLP v. Appling in June of 2018.[34] In Appling, the debtor, Appling, had hired the law firm Lamar, Archer, & Cofrin to represent him in certain commercial legal matters.[35] Appling was unable to pay a substantial portion of his legal bills, and became $60,000 in debt to the firm.[36] Appling was able to convince the law firm to continue representing him without bringing an action against him for the recovery of the debt by orally representing that he expected a tax refund of $100,000 and that he would use the refund to pay off his outstanding legal bills.[37] However, Appling had requested a substantially smaller refund and did not intend to use the refund to pay the firm.[38] After failing to pay the debt, the firm obtained a state court judgment against Appling, and Appling subsequently filed for bankruptcy.[39] Additionally, Appling sought to have his debt to the firm discharged, and the firm objected, arguing that Appling obtained the debt through his fraudulent representations regarding his tax return.[40] The Eleventh Circuit held that the debt was not exempted from discharge based on the broad reading of § 523(a)(2) enunciated by the Fourth Circuit in Engel.[41]

In affirming the Eleventh Circuit’s ruling, the Court focused on the ordinary definition of the term “respecting”, and its impact on the phrase “respecting a debtor’s . . . financial condition.”[42] The Court noted that the word “respecting” is ordinarily defined as “in view of: considering; with regard or in relation to: regarding; concerning.”[43] Given this definition, courts typically interpret the term “respecting” as having a broadening effect on the phrase it modifies.[44] The Court applied this same general principal in its reading of § 523(a)(2), and held that a statement “respecting a debtor’s . . . financial condition” if the statement “has a direct relation to or impact on the debtor’s overall financial status.”[45] This is essential an adoption of the broad reading of § 523(a)(2). A statement need not give a detailed history of the debtor’s financial history to meet this definition. Indeed, ownership of even a single asset could have “a direct relation to or impact on the debtor’s overall financial status.”[46] Therefore, any statement regarding the debtor’s ownership of certain property will not fall within § 523(a)(2)(A)’s exceptions from discharge under this holding, and must be reduced to writing in accordance with § 523(a)(2)(B).

In light of the Supreme Court’s adoption, in Appling, of a broad construction of the phrase “respecting a debtor’s . . . financial condition”, creditor’s must now be extremely careful in documenting representations by debtor’s which influence the creditor’s decision making when determining whether to lend money, or to refrain from collecting on a debt. If any statement a debtor makes regarding the debtor’s ownership in property, or potential acquisition of future property makes a creditor more likely to advance funds to the debtor, the creditor should make sure to have the debtor reduce that representation to writing in order to avoid possible discharge of fraudulently obtained debt in bankruptcy. By reducing such representations in writing financial institutions and other lenders can feel secure that debtors will not be able to evade collection of loans obtained through fraud, even under the Supreme Court’s broad reading of § 523(a)(2).


1 11 U.S.C. § 523(a)(2)(A).

2 11 U.S.C. § 523(a)(2)(B).

[3] See, Lamar, Archer & Cofrin, LLP v. Appling, 138 S.Ct. 1752, 1758 (2018) (stating that “the Court granted cert . . . to resolve a conflict among the Court of Appeals as to whether statement about a single asset can be a statement respecting the debtor’s financial condition”).

[4] In re Joelson, 427 F.3d 700 (10th Cir. 2005).

[5] Id.

[6] In re Bandi, 683 F.3d 671, 673 (5th Cir. 2012).

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] In re Bandi, 683 F.3d 671, 673 (5th Cir. 2012).

[12] Id.

[13] Id.

[14] Id. at 674.

[15] Id. at 679.

[16] In re Bandi, 683 F.3d 671, 675 (5th Cir. 2012).

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] In re Bandi, 683 F.3d 671, 675-76 (5th Cir. 2012).

[22] Id. at 679.

[23] Id.

[24] 744 So.2d 1060, 1060-61 (4th Cir. 1984).

[25] Id. at 1060.

[26] Id.

[27] Id.

[28] Id.

[29] Id.

[30] Engler v. Van Steinburg, 744 So.2d 1060, 1060 (4th Cir. 1984).

[31] Id.

[32] Id. at 1060-61.

[33] Id. at 1061.

[34] 138 S.Ct. 1752, 1758 (2018).

[35] Id. at 1757.

[36] Id.

[37] Id.

[38] Id.

[39] Lamar, Archer, & Cofrin, LLP v. Appling, 138 S.Ct. 1752, 1757 (2018).

[40] Id. at 1757-58.

[41] Id. at 1758.

[42] Id. at 1759.

[43] Id.

[44] Lamar, Archer, & Cofrin, LLP v. Appling, 138 S.Ct. 1752, 1760 (2018).

[45] Id. at 1761.

[46] Id.

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