Opinion analysis: Justices confirm that “respecting” means “relating to” in the Bankruptcy Code

Monday’s opinion in Lamar, Archer & Cofrin, LLP v. Appling brought a predictable end to this dispute about when debts obtained by fraud can be discharged in bankruptcy.  At the oral argument, it became clear that the justices thought that the debtor, R. Scott Appling, had the better reading of the statute.  At 15 pages, the largely unanimous opinion by Justice Sonia Sotomayor made clear that the justices did not find the case particularly difficult.

Like most bankruptcy cases, this one began with someone not paying his bills.  Appling had hired Lamar, an Atlanta law firm, to represent him in a business dispute.  He was unable to pay for the firm’s services, but Lamar continued working for him because he allegedly promised that he was expecting a tax refund of approximately $100,000.  Lamar claims that it believed this assurance and so kept working despite not being paid.  The firm did not stop representing Appling until it learned that Appling’s tax refund was far smaller than Appling had claimed and that Appling had already spent it.  In October 2012, more than six years after Appling’s original promise, Lamar sued and won a judgment for $104,179 in Georgia state court.  Appling promptly filed for bankruptcy and sought to discharge Lamar’s claim.

This case began as an an adversary proceeding in the Middle District of Georgia, in which Lamar sought a determination that Appling’s $104,000 outstanding bill was non-dischargeable under 11 U.S.C. § 523(a)(2)(A), which limits the discharge of debts that were “obtained by fraud.”  The problem with this argument, though, is that §523(a)(2)(A)’s exception to dischargeability itself has an exception—it does not apply if the alleged fraud is “a statement respecting the debtor’s or an insider’s financial condition.”  If the alleged fraud is a statement respecting the debtor’s financial condition, then a different provision limiting discharge, §523(B), applies, but that provision renders false statements nondischargeable only if they are in writing.  Appling never promised Lamar the tax refund in writing, so Lamar’s argument turned on its ability to convince the court that Appling’s statement about his tax refund was not a statement “respecting” his “financial condition.”

Because the parties agreed on the meaning of the words “statement” and “financial condition,” this case turned on the breadth of the word “respecting.”  Sotomayor’s majority opinion explained that since the Bankruptcy Code does not define “respecting,” the term’s plain meaning governs.  The court consulted four popular dictionaries, all of which suggested that “respecting” means something like “concerning,” “regarding,” “about,” or “relating to.”  The court noted that it had consistently read the phrase “relating to” in other statutes expansively and saw no reason to interpret “respecting” differently.

This conclusion spelled doom for Lamar, which had argued that “respecting” was narrower than “about” and “relating to.”  The firm needed a narrow reading of “respecting” to win:  Only under a narrow definition of “respecting” could Lamar prevail on the argument that a statement about a single asset could never be a statement respecting the debtor’s financial condition.  The firm maintained that only statements about balance sheets or about the debtor’s overall financial health could be statements “respecting” a debtor’s “financial condition.”  But the court took the opposite approach, focusing on nonbankruptcy precedent that interpreted “respecting,” and its synonym “relating to,” broadly.  It concluded that “Lamar’s preferred statutory construction—that a ‘statement respecting the debtor’s financial condition’ means only a statement that captures the debtor’s overall financial status—must be rejected, for it reads ‘respecting’ out of the statute.”

The court then spent a couple of paragraphs highlighting the “incoherent results” that Lamar’s reading would produce.  These arguments are essentially the same ones to which Lamar’s counsel struggled to provide good responses at oral argument.  Noting that Lamar’s reading would make dischargeability turn on “the superficial packaging of a statement rather than its substantive content,” the court observed that Lamar had failed to “explain why Congress would draw such seemingly arbitrary distinctions.” Piling on, the court explained that under Lamar’s reading a “a highly general statement like, ‘I am above water,’ would need to be in writing to foreclose discharge, whereas a highly specific statement like, ‘I have $200,000 of equity in my house,’ would not.”   Such a reading would be “inexplicably bizarre,” Sotomayor argued.

The opinion was unanimous in all but the final section, which covered the statutory history of the phrase “respecting the debtor’s financial condition.” Justices Clarence Thomas, Samuel Alito and Neil Gorsuch declined to join that part of the opinion (though none of them bothered to write separately).  For Thomas, this was not surprising; that section included a discussion of legislative history, and he, like the late Justice Antonin Scalia, usually refuses to join opinions dealing with legislative history. It is too soon to say for certain whether Gorsuch will take the same approach, but that would not be surprising given his affinity for Scalia’s jurisprudence.  Alito is usually less dogmatic about the use of legislative history, but he may have simply found the discussion unnecessary given that the plain text of the Bankruptcy Code itself provided a straightforward answer in this case—as the whole court seemed to agree.

Indeed, the most surprising thing about Lamar is that the court even had to resolve the dispute. In retrospect, the text of the Bankruptcy Code, and its underlying logic and purposes, seem to strongly support Appling’s reading. One might wonder why a circuit split on this question even arose. Nonetheless, perhaps because of a lack of familiarity with specialized and technical bankruptcy concepts or an abundance of unsavory litigants, it is not unusual for circuit courts to interpret the Bankruptcy Code in ways that seem to make little sense. For that reason, Lamar is not the first, and likely will not be the last, case in which the court needs to resolve a circuit split on the meaning of a seemingly straightforward provision in the Bankruptcy Code.