Recent Case on Discharge

Individuals in Chapter 7 can discharge old debts, with exceptions. One exception to the discharge is listed under section 523(a)(2)(A). Specifically, credit obtained by a false representation is nondischargeable in bankruptcy. However, an exception (to the exception) actually allows for the discharge of the debt if the misrepresentation is considered a “statement” respecting the debtor’s “financial condition.” The phrase “statement respecting the debtor’s…financial condition” also appears in section 523(a)(2)(B). The Supreme Court has characterized these two subsections as “two close statutory companions barring discharge.” In re Bandi, No. 11-30654 (5th Cir. filed Jun 12, 2012) (citing Field v. Mans, 516 U.S. 59, 66 (1995)).

So, the natural question is: What does the phrase “statement respecting the debtor’s…financial condition” under 11 U.S.C. § 523(a)(2)(A) and (a)(2)(B) mean? The Fifth Circuit Court of Appeals recently answered this question (June 12, 2012) and held that the phrase “a statement respecting the debtor’s…financial condition” is intended by Congress to be interpreted under its “commercial usage rather than a broadly descriptive phrase intended to capture any and all misrepresentations that pertain in some way to specific assets or liabilities of the debtor.” In re Bandi, at 8. The Court goes on to explain that “financial condition” means “the general overall financial condition of an entity or individual, that is, the overall value of property and income as compared to debt and liabilities.” Id. Therefore, a statement made that broadly describes a debtor’s financial condition such as, “I own many pieces of real property,” is probably not enough to render the debt dischargeable.

In Bandi, two brothers filed for individual chapter 7 bankruptcy and the bankruptcy court consolidated the adversary proceedings objecting to their discharge. Id. at 3. Stephan and Charles Bandi made false representations that they owned certain commercial properties. Id. at 3. The Court concluded that a representation that the Debtors own commercial properties did not provide any information regarding the Debtors’ ability to repay a loan because the property could be completely encumbered by liens. Id. at 7. Thus, the Debtors’ obligation to pay a $150,000 promissory note was not considered a “statement” regarding their “financial condition” and thus, was nondischargeable in bankruptcy. Interestingly, the Court noted that relatively few federal Circuit Courts have addressed this issue and the ones that have addressed this issue are split. Id. at 10. The Eight and Tenth Circuits have interpreted the language in section 523(a)(2) in a way that is consistent with the narrow view the Fifth Circuit adopts in this case, while the Fourth Circuit adopted the broader interpretation (holding that Debtor’s false representation that real property was unencumbered was a statement regarding Debtor’s financial condition and thus dischargeable). Id. at 11.
THIS IS NOT LEGAL ADVICE AND CANNOT BE RELIED UPON AS SUCH

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