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Which Financial Representations Will Justify a Discharge Objection after Lamar, Archer?
Since the passage of the Bankruptcy Act of 1898, and particularly since 1926, United States bankruptcy laws have contained a provision that would penalize debtors who use false pretenses or false financial documents to obtain credit. The Supreme Court's decision in Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752, 201 L. Ed. 2d 102 (2018) (Lamar, Archer) has significantly constricted the range and nature of statements that will support a successful objection by a creditor to the discharge of a debt that was obtained by the statements in question. This constriction could have a very real impact on how entities that loan money or provide services on credit review and collect information regarding a borrower's creditworthiness.
The Underlying Statutory Basis for Objecting to the Discharge of a Debt
11 U.S.C. 523(a)(2) currently provides that a debtor cannot obtain a discharge from a debt for money, property, services or an extension or renewal of credit if that debt was incurred or obtained by:
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;
(B) use of a statement in writing:
(i) that is materially false;
(ii) respecting the debtor's or an insider's financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive.
The statute carves out two types of representations by a borrower that will justify the denial of the borrower's discharge. The first is false pretenses or actual fraud that induce an entity to advance money or provide services on credit other than fraudulent statements about a borrower's financial condition. This exception encompasses false or fraudulent representations from a borrower regarding certain aspects of a pending business transaction, or the substance of that transaction, that induce a lender or service provider to extend credit.
One example would be a borrower's materially false or fraudulent representations regarding the value or potential future use of a piece of real estate owned by a third-party that will be the subject of a proposed loan (and thus collateral for the lender).
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