Can a Debtor’s misrepresentation to a Creditor, made specifically to get the Creditor to extend credit, be the basis of claiming the obligation is nondischargeable in the Debtor’s bankruptcy? If the misrepresentation is not in writing and relates to a single asset, then probably not, even if the representation was made fraudulently.
Under 11 U.S.C. Sec. 503(2), an extension of credit is nondischargeable in either of two circumstances. The debt is nondischargeable under subsection (A) if it was obtained by a false statement, whether written or oral, “other than a statement respecting the debtor’s . . . financial condition.” Alternately, the debt is dischargeable under subsection (B) it was obtained through a written false statement on which the creditor reasonably relied – whether or not it related to the debtor’s financial condition.
Last summer, the United States Supreme Court ruled on nondischargeability under subsection (A). It held that a debtor’s fraudulent oral misrepresentation regarding a single asset (in this case, a tax return), was not enough to support an argument that the debt was nondischargeable under 11 USC § 523(a)(2)(A). Lamar, Archer & Cofrin, LLP v. Appling, 138 S Ct 1752 (2018). The Court essentially held that a statement about the amount and timing of a tax return was a statement “respecting debtor’s financial condition.” Since the representation was oral and not in writing, it was subject to the exception for statements relating to the debtor’s financial condition, and was dischargeable.
Given the Court’s expansive view of what constitutes a statement about the debtor’s financial condition, creditors should avoid relying on subsection (A) for non-dischargeability. Instead, they should rely on subsection (B), regarding written misrepresentations (whether or not they relate to the debtor’s financial condition). To ensure the application of subsection (B), lenders should confirm in writing any statement they rely upon regarding a customer’s financial condition as a condition to extending credit.