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In re Appling

United States Court of Appeals, Eleventh Circuit

February 15, 2017

In re: R. SCOTT APPLING, Debtor.
LAMAR, ARCHER & COFRIN, LLP, Defendant-Appellee. R. SCOTT APPLING, Plaintiff-Appellant,

         Appeal from the United States District Court Nos. 3:15-cv-00031-CAR; 3:13-bkc-03042-JPS for the Middle District of Georgia

          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.


         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.


         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 ...

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