Beware of an Oral Agreement before Bankruptcy
How many times have we placed our trust in someone just to later be disappointed when what the other person told us was either misleading or a downright lie? So many business transactions or deals are done based upon what the parties have said without memorializing anything in writing. When it comes to incurring debt, a debtor can now orally make a misrepresentation through a statement respecting his or her financial condition to a creditor and not be denied a discharge of debt, even if that statement was only about a single asset. Recently, the US Supreme Court decided the case of Lamar, Archer, & Cofrin, LLP v. Appling, which dealt with this very issue.
In that case, the debtor, R. Scott Appling, had hired the law firm of Lamar, Archer, and Cofrin, LLP to represent him in a legal dispute. The debtor had incurred significant attorney’s fees totaling $60,000 when Lamar approached the debtor about placing a lien on the work product, the documents the law firm had prepared on Mr. Appling’s behalf. The law firm would have been able to withhold the release of these documents until Mr. Appling paid the $60,000.
Instead, Mr. Appling informed the law firm that he was to receive a $100,000 tax refund, which may come as no surprise was not the amount he actually received. The law firm continued to work on Mr. Appling’s behalf because of his statements regarding his tax refund. Once Mr. Appling owed $100,000, the law firm inquired about the tax refund. Mr. Appling, even after receiving and spending the tax refund on business expenses, told the law firm that he had not yet received the tax refund. Subsequently, the law firm sued Mr. Appling and obtained a judgment. In response, Mr. Appling and his wife filed for bankruptcy.
During the bankruptcy, the law firm filed a lawsuit, called an adversary proceeding, in the bankruptcy court stating that Mr. Appling should not be able to discharge the $100,000 debt for unpaid attorney’s fees. In these actions the creditor sets forth a reason why the debtor should be prohibited from eliminating his or her legal obligation on the debt. Ultimately, the US Supreme Court sided with Mr. Appling that in order for a debt to be found non-dischargeable the false or misrepresenting “statement respecting the debtor’s financial condition” must be in writing. Because he made the false statement orally, Mr. Appling was able to discharge the debt to the law firm.
In practice, this means you should get everything in writing. Also, be honest, transparent, and forthright. Even though Mr. Appling evaded the consequences of his bad behavior in the bankruptcy court, he has shown the kind of person he is. Sometimes it is not about the legal outcomes, but the practical impacts of bad behavior.