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A Lack of a Written Document Dooms a Creditor’s Non-Dischargeability Argument in Bankruptcy Dispute

There are certain principles that can apply across an array of areas of the law. In many settings, it is good advice to “get it in writing.” The ability (or lack thereof) to produce a written document that supports your assertions regarding the terms of a statement or agreement can be essential to a successful outcome. This is also true in some bankruptcy situations. According to a recent U.S. Supreme Court decision, a debtor was able to overcome a claim of non-dischargeability and discharge a debt because the creditor lacked a written document to support its claim that the debtor engaged in falsehoods regarding his financial condition. As with any bankruptcy issue, it is worthwhile to ensure that you have knowledgeable South Florida bankruptcy counsel working for you.

The origins of the bankruptcy case began with a client who hired a law firm in Atlanta to represent him in a business litigation matter. Eventually, the client fell behind on legal bills to the sum of nearly $60,000. The firm threatened to cease representing the client, but he told them he was expecting a tax refund of $100,000. The firm relented. The client’s refund was actually around $60,000, and he spent the whole amount of his business, paying none of it to the law firm. In a later meeting, he told the firm that he had not yet received the refund. Based on that statement, the firm went forward, litigating the case to completion.

The law firm eventually had to sue for the unpaid fees, and a Georgia court awarded it $104,000. Along the way, the client filed for bankruptcy. The law firm filed an action in the bankruptcy, arguing that the $104,000 debt the client owed was not dischargeable.

The case went all the way to the U.S. Supreme Court. Bankruptcy law is clear that when a debt in which the debtor engaged is fraud, false pretenses or false representation, it is not dischargeable in bankruptcy if it was made “respecting the debtor’s… financial condition.” The key to the outcome of the case was one central fact: that the client made his representations to the law firm about his financial condition orally. At no point did the client ever make the statements about his financial state or wherewithal to pay the fees bill in writing. That absence of a written document was the crux of the outcome. If the false statement had been in writing, it could have made the debt non-dischargeable. In the absence of a writing, however, the non-dischargeability exceptions didn’t apply, so the client was permitted to discharge the debt he owed to the firm.

While this client’s case was not a Chapter 11 matter, the outcome of the Supreme Court case is nevertheless important to debtors in some Chapter 11 cases. As the federal government pointed out in its amicus brief in this case, Congress has extended the application of the non-dischargeability provisions of Section 523(a) of the Bankruptcy Code “to corporate debtors under Chapter 11 with respect to debts owed,” “to a domestic governmental unit,” or “to a person as the result of an action filed under” the False Claims Act. So this “get it in writing” directive could be very important for some corporate entities filing (or considering) Chapter 11 bankruptcy.

Whether you are a debtor or a creditor in a Chapter 11 case, consult the skilled South Florida bankruptcy attorneys at Stok Folk + Kon. Our experienced attorneys have been helping clients navigate the bankruptcy system for many years and are ready to get to work for you.

Contact us online or by calling (305) 935-4440 to schedule your consultation and find out how our firm can help you.

More blog posts:

Penalties for a Bad Faith Chapter 11 Bankruptcy Filing in Florida, Florida Business Lawyers Blog, Aug. 9, 2017

South Florida Creditor Who Settled in Chapter 11 Case Forced to Pay Fees for Violating Agreement Terms, Florida Business Lawyers Blog, July 7, 2017