discharge

Lamar, Archer & Cofrin, LLP v. Appling

Issues

Is a verbal statement regarding a single asset a false statement “respecting the debtors . . . financial condition” that precludes discharge of the debt in bankruptcy under 11 U.S.C. § 523(a)(2)?

In this case, the Supreme Court will determine whether R. Scott Appling’s debt to Lamar, Archer & Cofrin, LLP is dischargeable in Appling’s bankruptcy proceedings. Between 2004 and 2005, Appling accumulated a debt of $60,000 to the law firm for legal services, evading collection attempts by saying that he soon expected a tax return of over $100,000. But Appling’s tax return was only $60,000, and he did not use it to pay down any of his debt to the law firm. Appling later filed for bankruptcy. Appling now asks the court to discharge his debt to the law firm, but discharge is not allowed if Appling’s verbal statements about his tax return were “respecting the debtor’s . . . financial condition.” The case will turn on interpretation of the relevant bankruptcy statutes. The outcome could affect the ways that lenders, especially small businesses, administer loans.

Questions as Framed for the Court by the Parties

Whether a statement concerning a specific asset can be a “statement respecting the debtor's . . . financial condition” within Section 523(a)(2) of the Bankruptcy Code.

In July 2004, R. Scott Appling retained Lamar, Archer & Cofrin, LLP to help him rescind the purchase of a manufacturing business. Matter of Appling, at 547–48. After a year of litigation, Appling owed Lamar over $60,000 in fees and costs for their legal services. Id. at 548. Appling and Lamar met on March 18, 2005 to discuss the outstanding amount.

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United Student Aid Funds v. Espinosa

Issues

1. Is a bankruptcy court’s confirmation of a debtor’s Chapter 13 plan void when the plan improperly discharges the debtor’s statutorily non-dischargeable student loans?

2. Does a debtor violate the due process rights of a student loan creditor when, instead of commencing a statutory adversary proceeding by filing a complaint and serving it, the debtor merely states in his Chapter 13 plan that the debt owed to the creditor will be discharged?

 

Francisco J. Espinosa filed for Chapter 13 bankruptcy and proposed in his Chapter 13 reorganization plan that he would repay $13,250 in student loans to United Student Aid Funds (“Funds”). Although Funds claimed they were owed an additional $4,582.15, the U.S. Bankruptcy Court for the District of Arizona confirmed Espinosa's plan as proposed, and Funds did not object to the confirmed plan. Espinosa repaid all debts according to the Chapter 13 plan. Funds subsequently began to intercept Espinosa's income tax refunds, claiming that Espinosa had improperly discharged his student loans, because Espinosa had not initiated a statutorily required adversary proceeding to determine whether repayment of the student loans would constitute an "undue hardship." While the U.S. District Court of Arizona held that Espinosa had violated Funds' due process interests by failing to initiate an adversary proceeding and serve a complaint and summons upon Funds according to the statutory procedure, the United States Court of Appeals for the Ninth Circuit reversed, and Funds now appeals. The Supreme Court’s decision in this case will determine how student loans and other debts are collected in bankruptcy and will affect the overall relationship between debtors and creditors in America.

Questions as Framed for the Court by the Parties

1. Student loans are statutorily non-dischargeable in bankruptcy unless repayment would cause the debtor an "undue hardship." Debtor failed to prove undue hardship in an adversary proceeding as required by the Bankruptcy Rules, and instead, merely declared a discharge in his Chapter 13 plan. Are the orders confirming the plan and discharging debtor void? 

2. Bankruptcy Rules permit discharge of a student loan only through an adversary proceeding, commenced by filing a complaint and serving it and a summons on an appropriate agent of the creditor. Instead, debtor merely included a declaration of discharge in his Chapter 13 plan and mailed it to creditor's post office box. Does such procedure meet the rigorous demands of due process and entitle the resulting orders to respect under principles of res judicata?

In 1988, Respondent Francisco J. Espinosa borrowed $13,250 in student loans through the Federal Family Education Loan Program, which grants federally guaranteed loans. See Brief for Petitioner, United Student Aid Funds, Inc.

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