Amicus Curiae Brief — Lamar, Archer & Cofrin, LLP v. Appling, 137 S. Ct. 2285 (2017) (No. 16-1215)

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No. 16-1215

IN THE

Supreme Court of the Anited States

LAMAR, ARCHER & COFRIN, LLP,

Petitioner,

Vv.

R. Scott APPLING,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Eleventh Circuit

BRIEF OF AMICI CURIAE

THE HONORABLE EUGENE WEDOFF (RET.)

AND A GROUP OF LAW PROFESSORS

IN SUPPORT OF RESPONDENT

DAVID R. KUNEY

Counsel of Record

WHITEFORD, TAYLOR &

PRESTON, LLP

1800 M. Street. N.W.

Suite 450 North

Washington, D.C. 20036

(202) 659-6807

dkuney@wtplaw.com

Counsel for Amici Curiae

April 2, 2018

WILSON-EPES PRINTING Co., INC. — (202) 789-0096 — WASHINGTON, D.C. 20002

TABLE OF CONTENTS

TABLE OF AUTHORITIEG..............::cccseeseseseeees

INTEREST OF THE AMICI CURIAE................

SUMMARY OF THE ARGUMENT....................

TE cerniinnetnsereeniesenssinemmmnniprivensbvereriaie

The availability of a discharge is of

critical importance to individual debtors,

to the larger economy, and to the proper

functioning of the bankruptcy system .....

Il.

The correct interpretation of 11 U.S.C.

§ 523(a)(2A) should begin with the

economic and contextual importance

of the bankruptcy discharge for the

ED GO cactrnccnssccsocceseccesccevcecs

. The correct interpretation of 11 U.S.C.

§ 523(a)(2)(A) should reflect the fiscal

and contextual importance of the

bankruptcy discharge on the larger

. Chapter 7 debtors frequently lack

legal counsel for discharge litigation,

which leaves them vulnerable to

unwarranted settlement pressure ......

Section 523(a)(2)(A) should be _ inter-

preted broadly to mean that the excep-

tion to nondischargeability may include

an oral statement about a single asset...

(i)

Page

TABLE OF CONTENTS—Continued

A. Section 523(a)(2)(A) expressly adopts

a broad notion of what is discharge-

able by use of the word “respecting” to

modify financial condition...................

B. Prior to the adoption of the Code in

1978, most circuit courts generally

interpreted “respecting financial con-

dition” as applying to more than a

formal financial statement..................

C. The meaning of “financial condition”

cannot be determined by reliance on

the definition of “insolvency” in Code

§ 101. The definition of equitable

insolvency provides a better tool for

interpreting “financial condition.” ......

III. The legislative history demonstrates that

Congress has been expanding protection

against loss of the discharge and that

§ 523(a)(2)A) was intended to have a

DCIS TI secccsetsetiicsivvinsisnnaunieiiinaseniines

A. “Financial condition” has been broadly

defined since the passage of the

Bankruptcy Act in 1898 ................608

B. In 1960 and 1978, Congress added

greater debtor protection from loss of

the discharge in view of creditor abuse

of the discharge provisions..................

OTC ARIUUIIN cesccesenscccrsssevsceveveesenbeanepunenannsidinnten

Page

TABLE OF CONTENTS—Continued

APPENDIX Page

Bankruptcy Act of 1898, § 14, 30 Stat. 544... la

Act of February 5, 1903, ch. 487, § 4, 32 Stat.

ORE ER EE aS i oO 2a

Amendment of the Bankruptcy Act, S. Rep.

ratte rctceriantnnsnnincnnenenees 4a

Establish a Uniform System of Bankruptcy,

H. Rep. No. 69-1257 (1926) ............ccccccceeeeeeees 7a

Act of May 27, 1926, § 6, Pub. L. No. 69-301

TI ci catciapendnnghentnconunsemneonses 10a

Act of June 22, 1938, Pub. L. No. 75-696,

cee aeretmeisanesntivnnsonousennees 12a

Limiting the Use of False Financial State-

ments as a Bar to Discharge in Bankruptcy,

H. Rep. No. 86-1111 (1959) ...........ccccceeeeneees 15a

Limiting the Use of False Financial State-

ments as a Bar to Discharge in Bankruptcy,

S. Rep. No. 86-1688 (1960)...............:cccceeeeees 22a

Act of July 12, 1960, Pub. L. No. 86-621, 74

SUN a 33a

Bankruptcy Law Revision, H. Rep. No. 95-

iia scan en cenarcenseenssenenee 35a

Act of November 6, 1978, Pub. L. 96-598,

$§ 523-524, 92 Stat. 2590...................ccccccceeeees 55a

TABLE OF AUTHORITIES

CASES Page(s)

Albinak v. Kuhn,

149 F.2d 108 (6th Cir. 1945)..................... 20, 21

District of Columbia v. Greater

Washington Bd. of Trade,

I Mi cccciccciccacpsanssscnnnsesccntees 18

Field v. Mans,

Se oc actcrcnsnsenscitibanten 3, 31, 32

Heald v. District of Columbia,

Ee ne 22

In re C.F. Foods, L.P..,

280 B.R. 103 (Bankr. E.D. Penn. 2002) ... 25

In re Cook,

46 B.R. 545 (Bankr. E.D. Va. 1985) ......... 22

In re Dolata,

306 B.R. 97 (Bankr. W.D. Pa. 2004)......... 24

In re Hyman,

502 F.3d 61 (2d Cir. 2007) ...............ccccc00 7

In re Joelson,

427 F.3d 700 (10th Cir. 2005)................... 3, 24

In re Kanour,

No. 09—-07030JAD, 2010 WL 8354696

(Bankr. W.D. Pa. July 1, 2010)................. 24

In re Powell,

423 B.R. 201 (Bankr. N.D. Tex 2010)... 4, 14, 22

In re Prestridge,

45 B.R. 681 (Bankr. W.D. Tenn. 1985)..... 22

TABLE OF AUTHORITIES—Continued

In re Roberts,

54 B.R. 765 (Bankr. D.N.D. 1985)

J.W. Ould Co. v. Davis,

een

Jerman v. Carlisle, McNellie, Rini,

Kramer & Ulrich LPA,

559 U.S. 573 (2010).............c0cseeseeees

Key v. Doyle,

434 U.S. 59 (1977)..............cccccseeseeees

Lemon v. Kurtzman,

403 U.S. G02 (1971).............0000ssce00e0

Local Loan Co. v. Hunt,

292 U.S. 234 (19B4)............ccccssereeeees

Lockhart v. Edel,

23 F.2d 912 (4th Cir. 1928).............

Mau v.

185 F.2d 400 (9th Cir. 1950)............

Moody v. Sec. Pac. Bus. Credit, Inc.,

971 F.2d 1056 (3d Cir. 1992)...........

Rake v. Wade,

508 U.S. 471 (19938)..........cccccceeeeeeees

Shainman v. Shear’s of Affton, Inc.,

387 F.2d 33 (8th Cir. 1967)..............

Shaw v. Delta Airlines, Inc.,

463 U.S. 85 (1983).............ccccccceeeees

Smith v. United States,

508 U.S. 223 (19938)..............00sscsee0

Page(s)

— 18

a 18

—

TABLE OF AUTHORITIES—Continued

Page(s)

Taltech Ltd. v. Esquel Enterprises Ltd.,

410 F. Supp. 2d 977

Ce NN SIE chien cerpsecsnstcncnsincsscencscnntocs 23

Tenn v. First Hawaiian Bank,

549 F.2d 1356 (9th Cir. 1977)................... 21

Wright v. Union Cent. Life Ins. Co.,

8 ee 9

STATUTES

Ee ee 20

Act of 1898, § 14b(2), 30 Stat. 544-550........ 27

Act of Feb. 5, 1903, ch. 487, 32 Stat. 797

Gore bectchstcdetundantinsidesenintiiniiinistbiuabieeoaanenen 27

Act of May 27, 1926, Pub. L. 69-301, ch.

a Gs I cctttcecncniinitnciteenectissneniones 19, 29

Act of July 12, 1960, Pub. L. No. 86-621, 74

, Sctlrenncsinecensdinmnenstqietenteneiadis 19, 31, 32

U.S. Bankruptcy Code, 11 U.S.C. § 101

OD, BAI cceanctctsnnnisnnnmamescatassasinnsnsesstnamninein passim

I II lic aentabiteiteidiammaiiinancanidtiaiasints 23

RSS ete Seat ore aes aa eee Rr 18, 33

EE SAE eae passim

NEES SE EU UePE PS eda are Oe 22

acct ccnciiatieiceceninansteliicialaainien 24

fo th | ee 24

vii

TABLE OF AUTHORITIES—Continued

LEGISLATIVE MATERIALS Page(s)

H. Rep. No. 69-1257 (1926) .................ceseee0es 19, 29

H. Rep. No. 86-1111 (1959) ....................cc00e 30, 31

H. Rep. No. 95-6596 (1977) ..................000000e passim

S. Rpt. No. 61-691 (1910) ........................c000 29

S. Rep. No. 86-1688 (1960) ...................ee 14, 31

OTHER AUTHORITIES

Amber J. Moren, Note, Debtor’s Dilemma:

The Economic Case for Ride-Through in

the Bankruptcy Code, 122 Yale L.J. 1594

SI icncencathstebihdpenssdiiistlemaanasmaniannitegitepuaiinnse 13

Andrew F. Emerson, So You Want to Buy a

Discharge? Revisiting the Sticky Wicket of

Settling Denial of Discharge Proceedings

in the Chapter 7 Bankruptcy, 92 Am.

eB eer 15

Angela Littwin, The Affordability Paradox:

How Consumer Bankruptcy’s Greatest

Weakness May Account for Its Surprising

Success, 52 Wm. & Mary L. Rev. 1933

Sei bcthininsteipsonesnenctdicinneseduiiontuinbteniedinedeationn 15

Charles Jordan Tabb, The Historical

Evolution of the Bankruptcy Discharge,

65 Am. Bankr. L.J. 325 (1991) ................. 13

Jay L. Zagorski & Lois R. Lupica, A Study

of Consumers’ Post-Discharge Finances:

Struggle, Stasis, or FreshStart? 16 Am.

Bankr. Inst. L. Rev. 283 (2008)................ 11, 12

Vili

TABLE OF AUTHORITIES—Continued

Page(s)

John C. McCoid, Il, Discharge: The Most

Important Development in Bankruptcy

History, 70 Am. Bankr. L.J. 163 (1996)...

Katherine Porter & Deborah Thorne, The

Failure of Bankruptcy’s Fresh Start, 92

Cornell L. Rev. 67 (2006).....................0644.

March 2017 Bankruptcy Filings Down 4.7

Percent, United States Courts (Apr. 19,

2017), http://www.uscourts.gov/news/20

17/04/19/march-2017-bankruptcy-filings-

down-47-percent [https://perma.cc/LB7B-

Gare isaddicnesttsdinsehsntusamdnanneunantdintenenaniadictmantin

Maurie Backman, This Is the No. 1 Reason

Americans File for Bankruptcy, The

Motley Fool (May 1, 2017), https://www.

fool.com/retirement/2017/05/0 1/this-is-th

e-no-1-reason-americans-file-for-bankrup.

aspx [https://perma.cc/M8WA-2W@Q8) .......

Michael D. Sousa, The Principle of Con-

sumer Utility: A Contemporary Theory

of Bankruptcy Discharge, 58 U. Kan. L.

Bers, UIT ctetsicnctinctiiinisieneenianenabennehsesdnss

NFIB National Small Business Poll Getting

Paid (William J. Dennis, Jr. eds., 2001),

http://www.411sbfacts.com/files/gettingp

aid|1).pdf [https://perma.ce/CDZ7-PX6T].... 13, 14

Rafael I. Pardo, An Empirical Examination

of Access to Chapter 7 Relief by Pro Se

Debtors, 26 Emory Bankr. Dev. J. 5

TABLE OF AUTHORITIES—Continued

Page(s)

Respecting, Funk & Wagnalls, Standard

Encyclopedic Dictionary (1968), www.

Funkand Wagnallnalls.com......................

Respecting, Oxford English Dictionary

as CE ciiicdastninsaitinsteeatdancienisnatenene

Robert M. Lawless, et. al., Did Bankruptcy

Reform Fail? An Empirical Study of

Consumer Debtors, 82 Am. Bankr. L. J.

ee eh ricnsintniinceccsictcneieteneditveinviimnnonspeene

Ronald J. Mann, Bankruptcy and the U.S.

Supreme Court (2017) ..........ccccccceeeeeeeeeeeees

Teresa A. Sullivan, Elizabeth Warren &

Jay Lawrence Westbrook, As We Forgive

Our Debtors: Bankruptcy anc’ «* 1sumer

Credit in America (1989) ......... 0 ...ccecceees.

Teresa A. Sullivan, Elizabeth Warren, &

Jay Lawrence Westbrook, Consumer

Debtors Ten Years Later: A Financial

Comparison of Consumer Bankrupis

1981-1991, 68 Am. Bankr. L.J. 121

Teresa A. Sullivan, Elizabeth Warren

& Jay Lawrence Westbrook, Limiting

Access to Bankruptcy Discharge: An

Analysis of the Creditors’ Data, 1983

Wis. L. Rev. 1091 (1983)...................00.08

Teresa A. Sullivan, Elizabeth Warren & Jay

Lawrence Westbrook, The Fragile Middle

Class: Americans in Debt (2000) ..............

5, 6

TABLE OF AUTHORITIES—Continued

Page(s)

2 William Blackstone, Commentaries on the

Laws of England (1765-1769)...........0.06 13

William F. Stone, ur. & Bryan A. Stark, The

Treatment of Attorneys’ Fee Retainers in

Chapter 7 Bankruptcy and the Problem of

Denying Compensation to Debtors’ Attor-

neys for Post-Petition Legal Services They

Are Obligated to Render, 82 Am. Bankr.

Reis CE ED sivtiicadcencechenbenadaschdecstdsindainninn 15-16

INTEREST OF THE AMICI CURIAE'

The amici curiae, whose names are set forth below,

include a former bankruptcy judge and law professors

at various universities where they teach courses on

bankruptcy law, conduct research, and are frequent

speakers and lecturers at seminars and conferences on

bankruptcy law.

The Honorable Eugene Wedoff (ret.) served as a U.S.

Bankruptcy Judge in the Northern District of Illinois in

Chicago from 1987-2015 and as Chief Judge from

2002-07. Before his judicial service, Judge Wedoff was

a partner and member of the executive committee of

the Chicago law firm of Jenner & Block. He served as

a member and as the chair of the Advisory Committee

on Bankruptcy Rules from 2004 to 2014, and as a

governor, secretary, and president of the National

Conference of Bankruptcy Judges through 2015. He

is currently president of the American Bankruptcy

Institute. He is a Fellow of the American College of

Bankruptcy and a member of the National Bankruptcy

Conference.’

Margaret Howard is the Law Alumni Association

Professor of Law, Emerita, at Washington and Lee

University School of Law, Lexington, Virginia. She

‘ Pursuant to this Court’s Rule 37.3(a), both parties sent a

letter or email granting consent to this amici curiae brief.

Pursuant to Rule 37.6, amici affirm that no counsel for a party

authored this brief in whole or in part, and that no person other

than amici or their counsel contributed any money to fund its

preparation or submission.

? The views set forth herein are the personal views of Judge

Wedoff and the named aynici and are not necessarily the views of

the American Bankruptcy Institute, which has not participated

in any way in this appeal.

has taught and conducted research on topics in bank-

ruptcy law for more than three decades, with an

emphasis on discharge issues in consumer bank-

ruptcy. She holds a B.A. from Duke University, a J.D.

and M.S.W. from Washington University in St. Louis,

and an LL.M from Yale University. She has served as

the Scholar in Residence at the American Bankruptcy

Institute, and as the ABI’s Vice President in charge of

the Research Grants Committee. Professor Howard is

a fellow of the American College of Bankruptcy and

the American Law Institute.

Professor Jack F. Williams is a professor of law at

Georgia State University and the Center for Middle

East Studies, where he teaches and/or conducts research

on bankruptcy and business organizations; mergers

and acquisitions; and taxation and statistics. He is the

Association of Insolvency and Restructuring Scholar in

Residence. He is a fellow in the American College of

Bankruptcy. He holds a B.A. in economics from the

University of Oklahoma, a J.D. with High Honors from

George Washington University National Law Center,

and a Ph.D in archaeology from the University of

Leicester in Leicester, United Kingdom.

David R. Kuney is an Adjunct Professor at the

Georgetown University Law Center where he teaches

bankruptcy law. He has taught at American University’s

Washington College of Law and at New York Law

School. He was formerly a partner at the law firm of

Sidley & Austin. He currently serves on the Board of

Directors of the American Bankruptcy Institute. He is

a fellow in the American College of Bankruptcy.

Your amici are submitting this brief out of a concern

that the discharge provisions of the Bankruptcy Code

not be interpreted in such a fashion as to cause

unwarranted economic injury to individual debtors

nor to the larger economy. We write because

Petitioner has offered an interpretation of the Code

and a view of debtors that we believe is decidedly

incorrect and will cause economic harm to many.

The central issue in this case concerns the correct

interpretation and application of ome of the key

discharge provisions in the U.S. Bankruptcy Code,’

namely, 11 U.S.C. § 523(a(2)(A). This provision states

that the Code prohibits the discharge of “any debt .. .

for money, property, lor] services . . . to the extent

obtained by . . . false pretenses [or] false reprewenta-

tion .. . other than a statement respecting the debtor's

... financial condition” (emphasis added).

Petitioner argues that the phrase “other than” only

excludes from the rule of non-dischargeability a

debt obtained \y an oral misrepresentation that is

tantamount to a “standard” financial statement, e.g.,

statements that reflect a debtor’s overall assets and

liabilities.t Oral statements about a debtor's individ-

ual assets or debts, large or small, material or not,

would potentially bar a discharge, in Petitioner’s view.

Debtors would be subject to a discharge challenge

based on oral statements, often made many years

earlier, for which there is no written evidence and

without any showing of reasonable reliance.°

*11 U.S.C. § 101 et. seq. (the “Code”).

* See, e.g., In re Joelson, 427 F.3d 700, 707 (10t) Cir. 2005)

(describing the limited view that the phrase “statement respect-

ing the debtor’s .. . financial condition” as used in § 523(a)(2)A)

means “a debtor's net worth or overall financial condition.”).

® See Field v. Mans, 516 U.S. 59 (1995) (requiring the lesser

showing of “justifiable reliance”).

The Eleventh Circuit held the opposite, finding that

an alleged oral misrepresentation concerning even a

single asset may still be a statement “respecting” or

“related to” one’s financial condition, and hence may

not serve as the basis to bar a debtor’s discharge. This

view was, until recently, the majority view.® The

Solicitor General, representing the United States as

the largest creditor in bankruptcy matters, agrees.

S.G. Opp. Br. 21. So do we.

Petitioner’s opening sentence describes Mr. Appling

as one who lied to his attorneys and references to lying

appear four times in the first paragraph. Pet. Br. 2.

Petitioner also argues that the Eleventh Circuit's

ruling would permit a “truck” to be driven through the

Code’s discharge provisions. Cert. Pet. 2. Implicit in

this opening argument is a view of debtors, collectively,

as “can-pay” individuals who will opportunistically

seek to game the system when given the chance.

Petitioner’s brief is premised on this unflattering view

of the population of individual debtors and a notion

that Congress has sought to rein in misconduct by ever

stricter views of who deserves a discharge.

Petitioner’s view of both debtors collectively and of

Congressional response to the discharge issue are

decidedly inaccurate. We urge a different view and

one widely supported by the existing empirical data,

which is missing from Petitioner's brief. The large

body of economic data on the true nature and purpose

of the discharge for individual debtors in the

bankruptcy system discloses not only a bona fide need

® See Jn re Powell, 423 B.R. 201, 210 (Bankr. N.D. Tex 2010)

(“Other courts (and the emerging majority of cases) adopt a more

liberal view. Those courts have defined the phrase to encompass

a much broader class of statements, even those which relate to a

single asset or liability.”).

for discharge protection, but the macroeconomic value

that relieving debt has on the general economy.

Congress is aware of this plight and Congressional

statements, as well as the legislative movement, over

the past 60 years, have sought to broaden protection

of the discharge. The Eleventh Circuit correctly

perceived this.

The bankruptcy discharge goes to the very heart of

bankruptcy law and deeply affects its administration,

outcome, and social value. “(T]he introduction of

the discharge [into modern bankruptcy law] could

well be considered the single most important event

in bankruptcy history.” Teresa A. Sullivan, Elizabeth

Warren & Jay Lawrence Westbrook, As We Forgive

Our Debtors: Bankruptcy and Consumer Credit in

America 20 (1989). Indeed, commentators have ob-

served that the bankruptcy discharge “ranks ahead in

importance of all others in Anglo-American bank-

ruptcy history.” John C. McCoid, II, Discharge: The

Most Important Development in Bankruptcy History,

70 Am. Bankr. L.J. 163, 164 (1996).

This case has widespread importance to potentially

millions of individual Chapter 7 debtors because of its

potential to deny a discharge for debtors and to change

the law in many jurisdictions.’ Individual debtors who

seek bankruptcy relief have been well-studied and

their economic plight analyzed with statistical care:

“when bankrupt debtors as a group are compared to

the general population, their situations are grim.”

’ The number of non-business bankruptcy filings in 2017, 2016,

and 2015 was as follows: 770,901, 808,781, and 911,086,

respectively. March 2017 Bankruptcy Filings Down 4.7 Percent,

United States Courts (Apr. 19, 2017), http//www.uscourts.

gov/news/2017/04/19/march-2017-bankruptcy-filings-down-47-pe

recent (https://perma.cc/LB7B-CAEA]).

Sullivan et al., As We Forgive Our Debtors, supra at

77. The data shows “a segment of America in financial

collapse.” Jd.

Petitioners harsh rule strays far from the

underlying principles expressed by this Court over

eighty years ago, in which this Court held that

bankruptcy discharge is an essential aspect of one’s

financial and personal “liberty.” Local Loan Co. v.

Hunt, 292 U.S. 234, 245 (1934).

of the Code.

The power of the individual to earn a living

for himself and those dependent upon him is

in the nature of a personal liberty quite as

much as, if not more than, it is a property

right. To preserve the free exercise is of the

utmost importance, not only because it is a

fundamental private necessity, but because it

is a matter of great public concern .... The

new opportunity in life and the clear field for

future effort, which it is the purpose of the

bankruptcy act to afford the emancipated

debtor, would be of little value to the wage

earner if he were obliged to face the necessity

of devoting the whole or a considerable por-

tion of his earnings for an indefinite period

of time in the future to the payment of indebt-

edness incurred prior to his bankruptcy.

The underlying principles of Local Loan pertain

here, as does long-standing practice and the words

For these reasons set forth below, the

Eleventh Circuit’s decision should be affirmed.

SUMMARY OF THE ARGUMENT

The Bankruptcy Code, at 11 U.S.C. § 523(a)(2)(A),

prohibits a discharge of “any debt . . . for money,

property, lor] services ... to the extent obtained

by ... a false representation . . . other than a statement

respecting the debtor’s . . . financial condition.” The

question presented in this case is whether the phrase

beginning with “other than” should be broadly inter-

preted to mean a statement concerning even a single

asset or whether it should be narrowly construed to

mean only a statement regarding the debtor’s overall

financial condition. The better-reasoned rule, and the

rule consistent with congressional intent and sound

bankruptcy policy, is that § 523(a)(2A) may include

a statement concerning even one asset where that

statement bears on the debtor’s ability to perform

or pay the relevant transaction. Accordingly, the

decision of the Eleventh Circuit should be affirmed for

the following reasons:

First, the proper judicial interpretation of § 523(a)(2)(A)

requires consideration of the underlying economic

rationale of the bankruptcy discharge, as well as the

statutory language used by Congress. One informs the

other. The ability of an individual consumer debtor to

obtain a discharge in bankruptcy has been said to be a

matter of economic life and death. “The consequences

to a debtor whose obligations are not discharged are

considerable; in many instances, failure to achieve

discharge can amount to a financial death sentence.”

In re Hyman, 502 F.3d 61, 66 (2d Cir. 2007).

Petitioner’s overly narrow view of § 523(a)(2)(A) injures

not only individual debtors, but also has a demon-

strated harm to the macro economy by discouraging

family formation, educational expenditures, and over-

all participation in the economy.

Second, the statutory language of § 523(a)(2)(A)

fully demonstrates a broader reading of the protection

for the discharge. The phrase “respecting financial

condition” was first introduced into American bank-

ruptcy law in 1926. Virtually every circuit court that

interpreted this section prior to adoption of the Code

in 1978 held that the phrase was not limited to only a

formal financial statement. Petitioner’s reliance on

the Code definition of “insolvency” as somehow supply-

ing the definition of “financial condition” is unsound

and contradicted by other Code-based definitions of

insolvency that suggest a different outcome.

Third, the legislative history likewise shows that

Congress has been moving steadily toward broader

protection of the discharge for individual debtors. The

key terminology, such as “financial condition” and

“false statement” were untethered to any notion of a

formal financial statement. Indeed, when Congress

enacted the 1978 Code, the Bankruptcy Commission

created to recommend changes to the bankruptcy law

was so concerned over creditor abuse of the “financial

condition” provision that it “recommended that this

exception to discharge be eliminated for consumer

debts.” H. Rep. No. 95-595 (1977). App. 47a. While

Congress did not eliminate it, Congress did strictly

limit the ability to challenge the discharge in new

§ 523(a)(2)(A). It is inconceivable that the Code should

now be read as making the discharge /ess available

when Congress was seeking exactly the opposite

outcome.

Accordingly, we urge this Court to affirm the deci-

sion of the Eleventh Circuit.

ARGUMENT

I. The availability of a discharge is of critical

importance to individual debtors, to the

larger economy, and to the proper func-

tioning of the bankruptcy system.

A. The correct interpretation of 11 U.S.C.

§ 523(a)(2)(A) should begin with the

economic and contextual importance of

the bankruptcy discharge for the indi-

vidual debtor.

The discharge provisions of the Code were not

drafted in a vacuum; they were instead manifestly

responsive to perceived economic distress. Thus, a

proper interpretation of § 523(a)(2)(A) must reflect the

bankruptcy discharge’s impact on the individual

debtor, the larger social and economic benefits of the

discharge, and Congressional recognition of these

values. “[Tjhe [Bankruptcy] Act must be liberally

construed to give the debtor the full measure of the

relief afforded by Congress, lest its benefits be

frittered away by narrow formalistic interpretations

which disregard the spirit and the letter of the Act.”

Wright v. Union Cent. Life Ins. Co., 311 U.S. 273, 279

(1940) (internal citations omitted).

Petitioner argues that the rule announced by the

Eleventh Circuit undermines the primary operation of

§ 523(a)(2)(A) “by creating a loophole through which

dishonest debtors might relieve themselves, at honest

creditors’ expense, of liabilities incurred through

fraud.” Cert. Pet. 21. Petitioner argues that the broad

rule would permit debtors to “drive a truck” through

the intended policy of Congress. Id.

All of these contentions are lacking in any empirical

data to support the notion of meaningful debtor abuse.

Indeed, Petitioner offers no support for the view that

Chapter 7 debtors are in any position to “drive a truck”

through Code-based policies nor that such debtors

even exist.

Instead, empirical data demonstrates that the

typical Chapter 7 debtor seeks bankruptcy protection

due to a grim and serious economic plight, rather than

misconduct, over-spending, or other non-productive

economic conduct. Economic relief in the form of a

discharge is of critical importance, and often protects

the debtor from health and life-risking choices, such

as between medical treatment and food.* This is

important because one in ten Americans has filed for

either a Chapter 7 or a Chapter 13 bankruptcy. Teresa

A. Sullivan, Elizabeth Warren & Jay Lawrence

Westbrook, The Fragile Middle Class: Americans in

Debt 22 (2000).

When asked why they filed for bankruptcy 67.5

percent of debtors reported job loss, 19.3 percent cited

a medical event, and 22.1 percent listed family concerns

(i.e. divorce) as contributing factors that led to their

bankruptcy. /d. at 16 fig. 1.2. These Americans file for

bankruptcy not because it is “an easy way out,” but

because they have run out of options. Teresa A.

Sullivan, Elizabeth Warren & Jay Lawrence Westbrook,

Limiting Access to Bankruptcy Discharge: An Analysis

of the Creditors’ Data, 1983 Wis. L. Rev. 1091, 1138

(1983).

* One of the largest single causes for the filing of Chapter 7

bankruptcy by individuals is catastrophic medical issues, such as

cancer, automobile and industrial accidents, and age-related

issues. Maurie Backman, This Is the No. 1 Reason Americans

File for Bankruptcy, The Motley Fool (May 1, 2017), https://www.

fool.com/retirement/20 17/05/0 /this-is-the-no- 1 -reason-americans-

file-for-bankrup.aspx [https://perma.cc/M8WA-2W@Q8}.

Debtors who seek bankruptcy protection earn much

less money and owe much more than the average

American. Robert M. Lawless, et. al., Did Bankruptcy

Reform Fail? An Empirical Study of Consumer

Debtors, 82 Am. Bankr. L. J. 349, 371-72 (2008).

[The] median household income for bankrupt

debtors in 2007 was about $27,100—-statisti-

cally indistinguishable from the $27,800

in 2001 and $27,100 back in 1991. Median

household income across the United States in

2006 was $48,200. These figures put the

income of the median bankrupt household in

2007 a full 45% below the income of the

median household in the general U-S.

population.

Id. at 363.

Only a small fraction of debtors had any hope of

repaying their debt outside of bankruptcy. Even those

debtors who voluntarily attempted repayment in

Chapter 13 were in terrible shape: at most, only about

a third were able to complete their repayment plans,

and a significant portion of those debtors were making

only minimal repayments. See Teresa A. Sullivan,

Elizabeth Warren, & Jay Lawrence Westbrook,

Consumer Debtors Ten Years Later: A Financial

Comparison of Consumer Bankrupts 1981-1991, 68

Am. Bankr. L.J. 121, 123 (1994).

The discharge provisions have proven to be effective.

Debtors who obtain a discharge are generally restored

to a productive role in the larger economy. Empirical

studies support the concept of fresh start. Indeed, “the

average person who files for bankruptcy to relieve

financial stress catches up with their peers.” Jay L.

Zagorski & Lois R. Lupica, A Study of Consumers’

Post-Discharge Finances: Struggle, Stasis, or Fresh-

Start? 16 Am. Bankr. Inst. L. Rev. 283, 289 (2008).’

“One study compared bankruptcy filers with non-filers

regarding key economic factors such as car ownership

and debt, home ownership and debt, savings, credit

card ownership, income, and work.” See id. at 296.

“None of the data indicate that over time the size of

the financial gap between bankruptcy filers and non-

filers either gets wider or stays the same; for the most

part, the size of the financial gap between these

two groups narrows over time.” Jd. at 307. Thus,

empirical research establishes that the discharge

provisions achieve the key goal of restoring individu-

als to economic capacity.

B. The correct interpretation of 11 U.S.C.

§ 523(a)(2)(A) should reflect the fiscal

and contextual importance of the

bankruptcy discharge on the larger

economy.

The bankruptcy discharge benefits the larger econ-

omy while aiding the individual. Petitioner incorrectly

posits the bankruptcy discharge as a benefit only to

the individual debtor, and then, only on a strict

condition of “honesty.” This misses much of the point

about the importance of the discharge. The discharge

also has macro consequences which benefit the larger

economy. “The theory is that society as a whole bene-

fits when an overburdened debtor is freed from the

oppressive weight of accumulated debt. The debtor

then is able to resume his or her place as a productive

* See also Katherine Porter & Deborah Thorne, The Failure of

Bankruptcy’s Fresh Start, 92 Cornell L. Rev. 67, 87 (2006) (“The

majority, 65% of families, reported that their financial situations

had improved since they filed bankruptcy.”).

member of society.” Charles Jordan Tabb, The

Historical Evolution of the Bankruptcy Discharge, 65

Am. Bankr. L.J. 325, 364—65 (1991). Essentially, “the

bankrupt becomes a clear man again; and, by the

assistance of his allowance and his own industry,

may become a useful member of the commonwealth.”

2 William Blackstone, Commentaries *484.

Additionally, “it has been noted that the Chapter 7

debt discharge prevents the development of an insol-

vent underclass and incentivizes entrepreneurship

by offering a mandatory insurance policy for failed

business endeavors.” Amber J. Moren, Note, Debtor’s

Dilemma: The Economic Case for Ride-Through in the

Bankruptcy Code, 122 Yale L.J. 1594, 1618 (2013).

This in turn encourages investment and economic

stability.

While the discharge has a beneficial effect on the

macro economy, the availability of a discharge for

individual debtors has no significant impact on small

business owners. The notion that the bankruptcy

discharge has a significant adverse effect on small

businesses is untrue, despite assertions of one amici

in this case suggesting that the Eleventh Circuit rule

is “fraudster friendly” and will injure small business.

See NFIB Br. 17. The lack of bankruptcy harm to

small business can be seen in the very polling data

that the NFIB cites in its amicus brief, showing

that only four percent of small businesses consider

bankruptcy a cause of customer non-payment. NFIB

National Small Business Poll Getting Paid 3 (William

J. Dennis, Jr. eds., 2001), http://www.411sbfacts.com/

files/gettingpaid|1].pdf [https://perma.cc/CDZ7-PX6T].

This was only slightly greater than the “cost of using

credit cards” at 2.9%. Id. Ninety-seven percent of all

small business owners do not expect to encounter more

than one bankruptcy case per year. /d. at 6 (“That

means about three percent of the entire small-

business population failed to receive payment in five

or more bankruptcy cases over the last five years, or

one or less [sic] than case per year.”). Indeed, small

business owners “benefit more from liberal bank-

ruptcy laws than perhaps any other group.” /d.

It is also untrue that the rule in the Eleventh Circuit

would create for the first time a rule requiring

“mountains of paperwork” or a novel federal statute of

frauds. NFIB Br. 3. Until 2010, the majority of courts

did in fact follow the very rule urged by the Eleventh

Circuit. See In re Powell, 423 B.R. at 210-11. Reversal

of the Eleventh Circuit is far more likely to cause

disruption in the operation of the bankruptcy system.

C. Chapter 7 debtors frequently lack legal

counsel for discharge litigation, which

leaves them vulnerable to unwarranted

settlement pressure.

The economic distress of the individual debtor, as

mentioned above, also means that Chapter 7 debtors

frequently lack financial resources to retain legal

counsel to defend themselves from discharge chal-

lenges, whether well-grounded or not. Beginning in at

least 1960, Congress became aware that the discharge

provisions were being manipulated by institutional

creditors who were able to intimidate honest debtors

into surrendering their discharge in order to avoid

litigation. It was precisely this threat of intimidation,

noted by Congress in 1960 that led to one of the major

reforms in discharge legislation. S. Rep. No. 86-1688

(1960). See App. 23a-24a. There is a well-documented

history showing that the mere threat of a discharge

challenge is often sufficient to provoke an unwar-

ranted settlement in which the debtor surrenders his

or her discharge. Andrew F. Emerson, So You Want to

Buy a Discharge? Revisiting the Sticky Wicket of

Settling Denial of Discharge Proceedings in the

Chapter 7 Bankruptcy, 92 Am. Bank. L.J. 111, 118-23

(2018).

This intimidation factor is exacerbated by the

equally well-documented difficulty in providing legal

representation to Chapter 7 debtors who confront

discharge litigation. Legal counsel for Chapter 7

debtors frequently “unbundle” their legal services and

decline to undertake representation of the debtor in an

adversary proceeding challenging the discharge.

“Unbundling” allows attorneys to limit the scope of

their representation by excluding expensive tasks like

adversary proceedings from their general services.

If a creditor challenges the discharge, an adversary

proceeding may result. With these services “unbundled,”

a Chapter 7 debtor may have to decide whether to pay

additional and indeterminate legal fees or simply

allow the creditor to collect its known debt in full, thus

by-passing the collective process of bankruptcy.

Debtors who appear pro se have less favorable

outcomes in judicial proceedings.'°

The frequent inability to retain legal counsel

for discharge litigation makes Petitioner’s view of

§ 523(a)(2)A) even more abusive. See William F.

Stone, Jr. & Bryan A. Stark, The Treatment of

Access to Chapter 7 Relief by Pro Se Debtors, 26 Emory Bankr.

Dev. J. 5 (2009); Angela Littwin, The Affordability Paradox: How

Consumer Bankruptcy's Greatest Weakness May Account for Its

Surprising Success, 52 Wm. & Mary L. Rev. 1933, 1957 (2011)

(“The percentage of pro se cases rose statistically significantly,

especially among lower-income debtors, while the percentage of

these cases ending with a discharge of debt declined.”).

Attorneys’ Fee Retainers in Chapter 7 Bankruptcy and

the Problem of Denying Compensation to Debtors’

Attorneys for Post-Petition Legal Services They Are

Obligated to Render, 82 Am. Bankr. L.J. 551, 555 n.25

(2008).

The mere threat of discharge litigation is likely to

provoke a settlement and waiver of the discharge,

regardless of the merits of the discharge objection.

Prior to enacting the 1978 Code, the House Judiciary

Committee noted that, “[t]he threat of litigation over

this [discharge] exception and its attendant costs are

often enough to induce the debtor to settle for a

reduced sum, in order to avoid the costs of litigation”

even with respect to “marginal cases.” H. Rep. No. 95-

595 (1977). App. 47a-48a.

The foundation of Petitioner’s argument is essen-

tially empirical. Yet, Petitioner has not remotely

shown that there is statistically significant fraud in

the discharge area that justifies a narrower view of

what is dischargeable. Nothing in the record before

this Court, reported case law, or in Petitioner’s brief

justifies a harsher interpretation of § 523(a)(2)(A)

based on a uniform notion of debtor misconduct and

risk of fraud. Mr. Appling is an isolated case."* His con-

duct is hardly the occasion to interpret § 523(a)(2)(A)

in a way that produces negative macroeconomic effects

by potentially injuring the nearly one million individu-

als who seek bankruptcy relief each year.

‘. “(T]he consumer bankruptcy system is generally utilized by

American families in grave financial circumstances.” Michael D.

Sousa, The Principle of Consumer Utility: A Contemporary Theory

of Bankruptcy Discharge, 58 U. Kan. L. Rev. 553, 614 (2010).

Il. Section 523(a)(2)(A) should be interpreted

broadly to mean that the exception to

nondischargeability may include an oral

statement about a single asset.

A. Section 523(a)(2)(A) expressly adopts a

broad notion of what is dischargeable

by use of the word “respecting” to

modify financial condition.

The phrase “financial condition” is not defined in

the Code. Instead, the Code includes a key modifier,

namely, the word “respecting,” which plainly connotes

a broad and non-exclusive meaning. Petitioner, how-

ever, urges a “narrow” definition which essentially

disregards the full import of “respecting.” Pet. Br.

20-21.

Petitioner's argument that this Court disregard the

term “respecting” violates a core rule of statutory

construction that requires that each word be given

its full meaning.”* The term “respecting” is pivotal.

“Respecting” is defined as “with respect to; with

reference to; as regards.” Respecting, Oxford English

Dictionary (3d ed. 2010). “Respecting” is also defined

to mean “liJn relation to; regarding.” Funk &

Wagnalls, Standard Encyclopedic Dictionary, 567

(1968). This means that the term “respecting”

expands upon subsequent terms in the phrase or

sentence.

“Respecting” embraces notions of being “related to.”

This Court has interpreted the phrase “relate[d] to”

@ See, e.g., Rake v. Wade, 508 U.S. 471 (1993) (“To avoid

deny|ing] effect to a part of a statute we accord significance and

effect to every word.”) (citations omitted).

'S See also, FunkandWagnalls.com (same).

as being “deliberately expansive.” District of Columbia

v. Greater Washington Bd. of Trade, 506 U.S. 125,

129 (1992) (“We have repeatedly stated that a law

‘relate|s] to’ a covered employee benefit plan for pur-

poses of [ERISA] ‘if it has a connection with or

reference to such a plan’. . . and thus gives effect

to the ‘deliberately expansive’ language chosen by

Congress.”); Shaw v. Delta Airlines, Inc., 463 U.S.

85, 96-97 (1983) (same)."* The same is true within

this Court’s constitutional jurisprudence. See Lemon

v. Kurtzman, 403 U.S. 602, 612 (1971).

Significantly, in 1987, a House Report described

the discharge provision as dealing with a “false state-

ment in writing concerning the debtor’s financial

condition .. . ” H. Rep. No. 95-595 (1977). App. 44a

(emphasis added). This use of “concerning,” much like

“respecting,” shows that Congress was looking broadly

and well beyond merely formal financial statements.

Petitioner argues that “respecting” is too broad

when read to mean “related to,” complaining that

“everything is related to everything else.” Pet. Br. 31.

But the statute is intended to be broad. The language

in § 523(a)(2) was originally an exception to the

discharge and was broad; this key point is expressly

conceded by Petitioner who notes that the precursor to

this section was intended to be “as broad as its authors

could do it...” Pet. Br. 9. Further, Petitioner's

argument overlooks the important judicial ability to

draw sensible lines within broad language that con-

form to congressional purpose. See Lemon, 403 U.S. at

612.

“ This Court also found that the phrase “in relation to” in a

criminal statute clarified that a firearm “must have some purpose

or effect” with respect to a drug trafficking crime. See Smith v.

United States, 508 U.S. 223, 237 (1993) (citation omitted).

B. Prior to the adoption of the Code in

1978, most circuit courts generally

interpreted “respecting financial con-

dition” as applying to more than a

formal financial statement.

The “broad” meaning of the phrase “respecting

financial condition” has longstanding roots in settled

case law that dates back to 1928. The phrase

“respecting financial condition” first appears in H.

Rep. No. 69-1257 (1926) (App. 8a) when Congress was

in the process of amending what was then § 14b of the

Act, which precluded a discharge of all debts for a false

statement. See Act of May 27, 1926, § 6, 44 Stat. 663.

App. 10a. S.G. Opp. Br. 16. (See Section III below).’°

Following the introduction of the phrase “respecting

financial condition” in 1926, the circuit courts gener-

ally interpreted this phrase broadly as meaning more

than a formal financial statement. The Fourth Circuit

appears to be the first circuit court to apply it.

In Lockhart v. Edel, the Fourth Circuit held that

statements made by a brokerage firm that it would

purchase stock for the account of its customers upon

receipt of a partial payment was false because the

brokerage company was insolvent and unable to

perform. Lockhart v. Edel, 23 F.2d 912 (4th Cir.

1928). “The representation was that the firm was in a

position financially to fulfill the promise held out to its

customers ... when in fact they could not have possibly

done so...” and hence was a statement with respect

to financial condition. Jd. at 913.

‘*’ The Act was amended in 1960 so that a false statement

respecting financial condition would only bar a disch: fa

nonbusiness debtor of the particular debt in question. Act of Ju...

12, 1960, Pub. L. No. 86-621, § 2(a), 74 Stat. 409. App. 33a-34a.

In 1945, the issue was given more extensive discus-

sion by the Sixth Circuit. See Albinak v. Kuhn, 149

F.2d 108, 110 (6th Cir. 1945). In Albinak, the

argument was first made that the term “financial

statement” was a “term of art” that only applied to a

“complete statement of assets and liabilities by which

the precise financial worth of the person making the

statement can be determined.” Jd. at 110.’ The Sixth

Circuit rejected this narrow view, stating, “No [case]

has been found by careful examination, which confines

a statement respecting one’s financial condition as

limited to a detailed statement of assets and

liabilities.” Id.

In 1950, the Ninth Circuit agreed. Mau v. Sampsell,

185 F.2d 400, 400 (9th Cir. 1950) (finding that debtor’s

letter “stating that an existing escrow would soon net

him cash in excess of the debt” constituted a report of

financia! status under 11 U.S.C. § 32(c)). In 1967, the

Eighth Circuit joined with the Fourth, Sixth, and

Ninth Circuits on the meaning of the phrase “respect-

ing financial condition.” See Shainman v. Shear’s of

Affton, Inc., 387 F.2d 33, 38 (8th Cir. 1967), stating, “A

written statement purporting to set forth the true

value of a major asset, its inventory, is a statement

respecting the financial condition of that corporation.”

The court rejected the very argument made in this

case by Petitioner: “There is nothing in the language

or legislative history of this section of the Act to

indicate that it was intended to app!v only to complete

financial statements in the accounting sense.” Jd.

Finally, shortly before the adoption of the Code in

1978, the Ninth Circuit again addressed the issue.

‘© The court was then construing Section 14 of Chapter 3 of the

Bankruptcy Act, 11 U.S.C.A § 32.

Tenn v. First Hawaiian Bank, 549 F.2d 1356, 1357-58

(9th Cir. 1977) (per curiam). Here, the debtors

informed the bank they owned certain real property

based on a deed in their favor from their mother.

Shortly after the loan was made, they reconveyed the

property back to their mother. The Ninth Circuit

affirmed the denial of a discharge, finding that

“appellants’ recordation of deed . . . for the purpose of

obtaining an extension of credit on the basis of |that}

asset ... was a false statement of financial condition.”

Id. at 1358.

Petitioner tries to swat away Albinak and First

Hawaiian Bank but offers no analysis. Pet. Br. 44. It

points to a “mine” of cases contained in a footnote

which “involved” a false financial statement. That

“involvement” however was not the same as a

doctrinal statement within these cases that only a

formal financial statement constituted a “statement

respecting financial condition” under § 14 of the Act.

Pet. Br. 43, n.5. Indeed, none of the cases cited in this

“mine” stands for the view that the phrase “respecting

financial condition” is to be narrowly interpreted as

only a formal financial statement as a matter of law.

Petitioner next argues that because the purpose of

the pre-1978 parallel language was to deny discharge,

the 1978 reversal to making “statements respecting .. .

financial condition” an exception to denying discharge

should change the meaning of the phrase. Pet. Br. 45.

However, when the 1978 Code was adopted, the

view of the circuit courts was that “statements

respecting .. . financial condition” did not mean merely

a formal financial statement. Congress expressly stated

that it did not intend to change the law in this

provision. H. Rep. No. 95-595 (1977) App. 50a-51la.

Thus, “there is no reason to suppose that Congress

disagreed with |pre-1978] interpretation|| when it

enacted [the 1978 Code]”. Jerman v. Carlisle, McNellie,

Rini, Kramer & Ulrich LPA, 559 U.S. 573, 590 (2010).

Prior construction of identical language should

continue “in the absence of plain implication to the

contrary.” Key v. Doyle, 434 U.S. 59, 76 n.5 (1977)

(quoting Heald v. District of Columbia, 254 U.S. 20

(1920)).

Following the adoption of the 1978 Code, courts

continued to construe similar language in new

§ 523(a)(2)(B) to include written statements regarding

even a single asset.'’ Until recently, the majority rule

was consistent with the result reached below by the

Eleventh Circuit. See, e.g., In re Powell, 423 B.R. at

210 (construing § 523(a)(2)(B) and holding +’ at the

majority view is the broad view).’* Others cases were

in accord. See, e.g., In re Cook, 46 B.R. 545, 548-49

(Bankr. E.D. Va. 1985) (list of property owned by

debtor to secure a loan is a statement of a debtor’s

financial condition); Jn re Prestridge, 45 B.R. 681, 682

(Bankr. W.D. Tenn. 1985) (in construing § 523(a)(2)(B),

the bankruptcy court acknowledged that a statement

that one’s assets were not encumbered qualifies as a

statement respecting financial condition; “Congress

did not speak in terms of financial statements.

Instead it referred to a much broader class of

statements.”) (citations omitted); Jn re Roberts, 54 B.R.

’ Cases did not always distinguish between § 523(a)(2)(A) and

§ 523(aX(2\B).

‘* “(Tjhe emerging majority of cases{| adopt a more liberal

view. Those courts have defined the phrase to encompass a much

broader class of statements, even those which relate to a single

asset or liability.” Jn re Powell, 423 B.R. 201, 210-11 (Bankr.

N.D. Tex. 2010).

765, 769-71 (Bankr. D.N.D. 1985) (statement describ-

ing collateral pledged to bank is one concerning the

debtor’s financial condition).

Thus, while some more recent decisions have dis-

agreed with the result reached by the Eleventh

Circuit, the meaning of the phrase “respecting finan-

cial condition” was well settled by the circuit courts at

the time of the adoption of the 1978 Code. Congress

has given no indication that it intended to vary from

this large body of case law.

C. The meaning of “financial condition”

cannot be determined by reliance on

the definition of “insolvency” in Code

§ 101. The definition of equitable insol-

vency provides a better tool for

interpreting “financial condition.”

Petitioner contends that the meaning of “financial

condition” can be found by looking to the Code’s defini-

tion of “insolvent,” found in § 101(32). Cert. Pet. 19.

Pet. Br. 23. Pet. Add. 12. Section 101(32) defines

insolvency as a “financial condition such that” one’s

debts are greater than one’s assets. From this they

draw the untenable conclusion that since insolvency is

one aspect of one’s financial condition, Congress some-

how meant to define “financial condition” exclusively

as a statement containing all assets and liabilities.

The phrase “such that” by itself indicates that hav-

ing liabilities greater than assets is but one example

of a financial condition. See Taltech Ltd. v. Esquel

Enterprises Ltd., 410 F. Supp. 2d 977, 1003 (W.D.

Wash. 2006) (defining “such that” as inclusive, not

restrictive; the prior term “creates or results in” the

subsequent term). There is nothing to suggest balance

sheet insolvency is the Code’s exclusive notion of a

“financial condition.” Indeed, not until 2005 did any

court ever suggest such an odd linkage, despite the

phrase having been part of bankruptcy law since at

least 1898; even then the Tenth Circuit said the

relationship between the two Code sections was only

“tangential.” Jn re Joelson, 427 F.3d at 705.

However, if this Court determines that the defini-

tion of “insolvency” bears on this issue at all, then a

far better tool is to employ the other widely-used

definition in the Code, namely, equitable insolvency.

Equitable insolvency has a long settled meaning of

referring to a debtor’s inability to pay debts as they

mature. See Moody v. Sec. Pac. Bus. Credit, Inc.,

971 F.2d 1056, 1064 (3d Cir. 1992). This concept is

incorporated into Code § 548(a)(1)(B)(ii)(IID as part of

the trustee’s avoidance powers. For example, a trustee

may “avoid” a transfer under Chapter 5 of the Code

(e.g., for a fraudulent conveyance) if at the time of the

transfer the debtor intended to incur debts that were

beyond its ability to pay. This has traditionally been

labelled as “equitable insolvency.”

“Insolvency” is a multivalent term as used in bank-

ruptcy court. See In re Dolata, 306 B.R. 97, 133 (Bankr.

W.D. Pa. 2004) (finding that § 548(a)(1)(B)Gi)IID was

satisfied because “the debtors either intended to incur

or believed that they would incur debts that . . . would

be beyond their ability to satisfy as such debts

matured”); In re Kanour, No. 09—O07030JAD, 2010 WL

8354696, at *4 n.6 (Bankr. W.D. Pa. July 1, 2010)

(“Section 548(a)(1)(B)(ii) also includes relief. . . if the

debtor was rendered “insolvent” in an “equitable”

sense. Section 548(a)(1)(B)(iiX IID) states that a debtor

may be insolvent .. . if a debtor ‘intended to incur, or

believed that the debtor would incur, debts that would

be beyond the debtor’s ability to pay as such debts

matured’... .”). Cf. In re C.F. Foods, L.P., 280 B.R. 103,

117 n.30 (Bankr. E.D. Penn. 2002) (showing how the

Bankruptcy Code provides “independent bases for

avoiding constructively fraudulent transfers without

proving balance sheet insolvency”).

The notion of “insolvency” is not limited to a balance

sheet test but may reflect any aspect of financial

condition that would give rise to an inability to pay

one’s debts. If “insolvency” is to be used as a guide for

understanding the phrase “financial condition,” then

it is better understood to include any statement that

bears on the debtor’s ability to pay or perform the

underlying obligation. This could include a statement

about a single asset or a combination of assets. This

is precisely the argument offered by the Solicitor

General, stating that an affirmative representation by

a debtor qualifies as a “statement respecting the

debtor’s . . . financial condition” where it “relates to a

debtor’s financial circumstances and is offered by the

debtor as evidence of his ability to pay.” S.G. Opp. Br.

14. We agree.

III. The legislative history demonstrates that

Congress has been expanding protection

against loss of the discharge and that

§ 523(a)(2)(A) was intended to have a broad

meaning.

The plain meaning of “respecting” and the settled

case law that preceded the enactment of the 1978 Code

provide this Court with a sufficient basis to affirm the

Eleventh Circuit’s ruling. Petitioner, however, urges

a different result based on its reading of the legislative

history. Pet. Br. 36 et seq. Petitioner focuses on the

1960 amendments to the Bankruptcy Act. It argues

that Congress added the “financial condition” excep-

tion in 1960, and that it did so only in response to the

problem of consumer credit companies attempting to

shield their claims from discharge by encouraging

debtors to make false financial statements. Cert. Pet.

2. From this, it argues that Congress intended to

“tweak” the “general policy” by excepting from non-

discharge only a misrepresentation made in a formal

financial statement. Jd. Hence, the “narrow” rule

Petitioner urges here.

Neither argument is correct. The key language that

matters in this case (“respecting” and “financial condi-

tion”) emerged well before 1960 and was not limited to

financial statements that listed all assets and

liabilities. The introduction of the phrase “financial

condition” in 1898 was, from the outset, given a broad

meaning, and not tethered only to formal financial

statements. See also, Section II, above.

Nor was Congress merely “tweaking” the Act or

the Code when it adopted the various amendments.

Congress was responding to specific findings of credi-

tor abuse in attempting to block discharges, as well as

overly harsh interpretations of the discharge provi-

sion. Statements in the legislative history spanning

from 1910 to 1978 reflect specific Congressional con-

cern that the discharge provisions not be too “harsh,”

that they not make “careless” and “general state-

ments” the basis for blocking a discharge. Congress

saw the need to protect debtors from documented

creditor abuse of the discharge provisions by intimi-

dating debtors into unwarranted settlements. By 1977

the Bankruptcy Commission would recommend that

Congress delete the provision entirely. See App. 47a.

A. “Financial condition” has been broadly

defined since the passage of the

Bankruptcy Act in 1898.

The Bankruptcy Act of 1898'* barred a discharge

completely when the debtor acted with fraudulent

intent to conceal his or her “true financial condition

and in contemplation of bankruptcy, destroyed,

concealed or failed to keep books of account or records

from which his true condition might be ascertained.”

Act of 1898, § 14b(2), 30 Stat. 544, 550. App. la. This

appears to be the first use of the phrase “financial

condition” in American bankruptcy law.

The reference to “true financial condition” and then

to “true condition” suggests here, as elsewhere, that

the real concern was with the substance of the non-

disclosure, and not whether it was embodied in any

particular kind of document or whether it pertained

to all assets and liabilities. The term “condition” is

broadly generic. Non-disclosure of a single asset could

well obscure a debtor’s “condition.” The phrase was not

limited to a formal financial statement when first

used, let alone later. Nor was the phrase tied to

“so'vency” as Petitioner later argues. Solvency may be

a component, or aspect, of a “condition,” but it is hardly

the only such component.

The Act was amended in 1903 when Congress added

language to § 14b that barred a discharge when

the debtor “obtained property on credit .. . upon a

materially false statement in writing made .. . for the

purpose of obtaining such property .. .” Act of Feb. 5,

1903, ch. 487, 32 Stat. 797 (1903). App. 2a. Thus, as of

1903, the bar to discharge was not provoked by only

false “financial statements” but instead, by any false

App. la.

statement in writing that was “material.” There is no

indication that this section only referred to a formal

financial statement; then and now, the concern was

with the materiality of the non-disclosure.

As early as 1910, however, Congress became aware

of overly harsh interpretations of § 14b and deter-

mined that debtors needed greater protection from

loss of discharge. This legislative history is described

by the Fourth Circuit in J.W. Ould Co. v. Davis, 246 F.

228, 231 (1917). That case involved a creditor who

sought to block a discharge of a merchant who had

provided a false inventory to an independent credit

company, which later gave the report to a creditor

of the merchant. The court refused to deny the

discharge. The Fourth Circuit noted the comments by

the Senate Judiciary Committee, in responding to a

bill passed by the House in 1910, stating as follows:

Any tendency to make the bankrupt act

unduly harsh is to be avoided. It is a

sufficient ground of opposition to discharge

that the bankrupt has «tained property from

a creditor by a materially false statement in

writing where that statement was specifically

asked for by the creditor or by the creditor's

representative. General statements to mer-

cantile agencies, not specifically asked for by

prospective creditors, ought not to be ground

of opposition to discharge; it makes the

provision too harsh, in the estimation of

your committee. Merchants are likely to

make careless general statements where they

would be very careful were they making

statements to creditors from whom they were

at the time asking credit.

Id.*°

Ould was not concerned with the form of the

statement, but with issues of materiality and reliance.

The larger question was whether a discharge could be

lost through more typical, “careless” comments made

by merchants. What the case recognized was that

Congress and the courts did not want to make a

debtor’s “careless general statements” be grounds to

bar a discharge. It seems unlikely that “careless

general statements” were meant to denote something

said only in a formal financial statement. Instead, the

loss of the discharge should occur only upon a finding

of actual reliance and materiality of the statement.

This same logic pertains today.

In 1926, the word “respecting” first appears in

connection with the discharge exception in a House

Conference Report concerning amending § 14b of the

Act. H. Rep. No. 69-1257, at 3 (1926) (Conf. Rep.). App.

8a. Section 14b of the Act was then amended to reflect

these comments.” The 1926 amendment changed

§ 14b to read that a debtor may not receive a discharge

of any debt if the debtor has “obtained money or

property on credit, or obtained an extension or renewal

of credit, by making or publishing, or causing to be

made or published, in any manner whatsoever, a

materially false statement in writing respecting his

financial condition”. App. 10a .emphasis added.)

* The Court was evidently referring to S. Rpt. No. 61-691

(1910) App. 4a. See similar discussion in H. Rpt. No. 69-1257

(1926). App. 7a.

*! Act of May 27, 1926, Pub. L. 69-301, 44 Stat. 662. App.10a.

Petitioner argues the 1926 amendment was added

to close the so-called “loophole” in Ould, and thus was

intended only to protect creditors against the dis-

charge of a debt where the creditor relied on a false

financial statement prepared by a debtor and given to

a credit agency. Pet. Br. 8-9. Petitioner thus ignores

that while Congress observed the specific problem

with credit reporting agencies, its broader concern was

with the general problem of creditor abuse by assert-

ing fraud based on careless or general statements, as

Ould makes clear. One need only look to later House

Reports to see that this concern lingered over the next

few decades. See H. Rep. No. 86-1111 (1959). App. 15a.

Nothing in the text of the 1926 amendment supports

a reading that Congress was now only concerned with

formal financial statements. What Congress actually

wrote reflects a concern for materially false written

statements of any kind and in any manner. The

concern was broad and was not limited to formal

financial statements. Indeed, Petitioner concedes that

this amendment was drafted to be “as broad as [its

authors] could do it.” Pet. Br. 9. A materially false

statement could be in any kind of document, including

but not limited to a full financial statement. This

same language remained equally broad once it became

the exception to the exception.

B. In 1960 and 1978, Congress added

greater debtor protection from loss of

the discharge in view of creditor abuse

of the discharge provisions.

In 1960 and again in 1978, Congress continued its

movement toward protecting the debtor against loss of

the discharge. This was largely the result of findings

regarding institutional creditor abuse of the discharge

provisions. Most broadly, Congress effectively rebalanced

its concerns about the “honest debtor” against the

well-documented intimidation tactics of the consumer

creditor institutions and its concern that “careless”

comments become the basis to block a discharge.

By 1959 and 1960, both houses of Congress noted

that the discharge provisions were being abused by

institutional creditors who sought to intimidate debtors

by threatening loss of discharge due to allegedly false

statements. See, e.g.,S. Rep. No. 86-1688 (1960) App.

22a and H. Rep. No. 86-1111 (1959) App. 15a.

Specifically, Congress observed that the consumer

credit industry was abusing the discharge provisions

by inducing debtors to sign incomplete and hence

“fraudulent” financial statements in order to insulate

themselves from having their debt discharged. See

Field, 516 U.S. at 74-77. “Unscrupulous” lenders

“armed with false financial statement|s]” could thus

threaten an unwary debtor’s entire discharge unless

the debtor agreed to fully pay the lenders’ claims after

discharge. S. Rep. No. 86-1688 (1960). App. 23a.

In view of this risk of intimidation by threats of

discharge litigation, Congress proposed that the

Bankruptcy Act be amended so that only business

debtors were subject to the complete bar to discharge

due to false statements. S. Rep. No. 86-1688 (1960).

App. 22a. “(T]he Committee believes that it is

desirable to eliminate the false financial statement as

a ground for the complete denial of a discharge insofar

as the individual noncommercial bankrupt is con-

cerned.” Id. App. 24a. “It is also a penalty which

experience has shown is subject to abuse.” Jd. App.

23a. Accordingly, the 1960 amendments transferred

the language concerning false statements by

individuals from § 14 (where it barred any discharge)

to § 17a(2) where it now barred only the debt incurred

as a result of the false statement. Act of July 12, 1960,

Pub. L. 86-621, 74 Stat. 408-409. App. 33a-34a. (See

also, Field, 516 U.S. at 65-66, stating that § 17a(2)

was the precursor to § 523(a)(2)(A)).

The second key turning point occurred in 1978 when

the Bankruptcy Code replaced the Bankruptcy Act.

Congress expressly noted its goal of modernizing

bankruptcy law and addressing the “second major

problem .. . lof] the inadequacy of relief that the

Bankruptcy Act provides for consumer debtors.” /d.

App 41a. As Professor Ronald Mann noted, one ot the

central goals of the Bankruptcy Reform Act of 1978

was to provide a “broader discharge for debtors in

Chapter 7.” Ronald J. Mann, Bankruptcy and the U.S.

Supreme Court 28 (2017).

Congress remained concerned over the abuse of the

discharge provision concerning false statements and

that an exception to discharge could be sought even

where the debtor had no intent to deceive or where the

“merits of the case are weak.” Jd. App. 47a-48a.

Significantly, the House Report described its concern

with a “false statement in writing concerning the

debtor’s financial condition ....” H. Rep. 95-595. App.

44a. This comment and the use of “concerning,” much

like “respecting,” shows that Congress was looking

more broadly and well beyond merely formal financial

statements.

During the drafting process, Congress created the

Commission on the Bankruptcy Laws of the United

States to study and recommend changes to the bank-

ruptcy laws (the “Bankruptcy Commission”). H. Rep.

95-595 (1977). App. 36a. The Bankruptcy Commission

was sufficiently concerned about creditor abuse of the

exception to the discharge that it “recommended that

the false financial statement exception to discharge be

eliminated for consumer debts.” H. Rep. 95-595. App.

47a. Rather than delete the provision, Congress

adopted a compromise, but it is inconceivable that in

view of the consideration to delete this provision, the

upshot was a bill which made the loss of discharge by

creditor aggressive conduct more likely rather than

less likely.

The legislative history of § 523(a)(2) and its prede-

cessors fully reflect that Congress has consistently

moved toward greater protection of the discharge.

Petitioner’s brief suggests a narrative of Congress

moving in the opposite direction and making discharge

less available. Yet, Petitioner does not dispute that

the legislative history contains a detailed discussion of

Congress’ concern over creditor abuse of the discharge

provisions. Congress’ response to this abuse was to

provide broader protection against loss of the dis-

charge, not to re-define the established meaning

of “financial condition.” This concern over creditor

abuse hardly squares with Petitioner’s conclusion that

Congress therefore must have meant to give the

very same institutional creditors greater leverage

and intimidation opportunities by now making oral

statements on “financial condition” the easy prey for a

discharge challenge.

CONCLUSION

For the foregoing reasons, the decision of the

Eleventh Circuit should be affirmed.

Respectfully submitted,

DAVID R. KUNEY

Counsel of Record

WHITEFORD, TAYLOR &

PRESTON, LLP

1800 M. Street. N.W.

Suite 450 North

Washington, D.C. 20036

(202) 659-6807

dkuney@wtplaw.com

Counsel for Amici Curiae

April 2, 2018

APPENDIX

Bankruptcy Act of 1898, 30 Stat. 544

* * *

Sec. 14. DISCHARGES, WHEN GRANTED.—a Any

person may, after the expiration of one month and

within the next twelve months a: subsequent to being

adjudged a bankrupt, file an application for a disc

barge in the court of bankruptcy in which the proceed-

ings are pending ; if it shall be made to appear to the

judge that the bankrupt was unavoidably prevented

from filing it within such time, it may be filed within

but not after the expiration of the next six months.

b The judge shall hear the application for a

discharge, and such proofs and pleas as may be made

in opposition thereto by parties in interest, at such

time as will give parties in interest a reasonable

opportunity to be fully heard, and investigate the

merits of the application and discharge the applicant

unless he has (1) committed an offense punishable by

imprisonment as herein provided; or (2) with fraudu-

lent intent to conceal his true financial condition and

in contemplation of bankruptcy, destroyed, concealed,

or failed to keep books of account or records from

which his true condition might be ascertained.

c The confirmation of a composition shall discharge

the bankrupt from his debts, other than those agreed

to be paid by the terms of the composition and those

not affected by a discharge.

*x* * *

Act of February 5, 1903, 32 Stat. 797

Approved, February 5, 1903.

CHAP. 487.—An Act To amend an Act entitled “An

Act to establish a uniform system of bankruptcy

throughout the United States,” approved July first,

eighteen — hundred and ninety-eight.

* * *

SEC. 4. That subdivision b of section fourteen of said

Act be, and the same is hereby, amended so as to read

as follows:

“b The judge shall hear the application for a

discharge, and such proofs and pleas as may be made

in opposition thereto by parties in interest, at such

time as will give parties in interest a reasonable

opportunity to he fully heard, and investigate the

merits of the application and discharge the applicant

unless he has (1) committed an offense punishable by

imprisonment as herein provided; or (2) with intent to

conceal his financial condition, destroyed, concealed,

or failed to keep books of account or records from

which such condition might be ascertained; or (3)

obtained property on credit from any person upon a

materially false statement in writing made to such

person for the purpose of obtaining such property on

credit; or (4) at any time sub sequent to the first day

of the four months immediately preceding the filing of

the petition transferred, removed, destroyed, or

concealed, or permitted to be removed, destroyed, or

concealed any of his property with intent to hinder,

delay, or defraud his creditors; or (5) in voluntary

proceedings been granted a discharge in bankruptcy

within six years; or (8) in the course of the proceedings

in bankruptcy ref used to obey any lawful order of or

to answer any material question approved by the

court.”

Sec. 5. That section seventeen of said Act be, and

the same is hereby, amended so as to read as follows:

Sec. 17. DEBTS NOT AFFECTED BY A DISCHARGE.—a A

discharge in bankruptcy shall release a bankrupt from

all of his provable debts, except such as (1) are due as

a tax levied by the United States, the State, county,

district, or municipality in which he resides; (2) are

liabilities for obtaining property by false pretenses or

false representations, or for willful and malicious

injuries to the person or property of another, or for

alimony due or to become due, or for maintenance or

support of wife or child, or for seduction of an unmar-

ried female, or for criminal conversation; (3) have not

been duly scheduled in time for proof and allowance,

with the name of the creditor if known to the bank-

rupt, unless such creditor had notice or actual

knowledge of the proceedings in bankruptcy; or

(4) were created by his fraud, embezzlement, misap-

propriation, or defalcation while acting as an officer or

in any fiduciary capacity.”

* * *

SENATE

61ST CONGRESS REPORT

2d Session No. 691

AMENDMENT OF THE BANKRUPTCY ACT

MAY 16, 1910.—Ordered to be printed.

Mr. BACON, from the Committee on the Judiciary,

submitted the following

REPORT

(To accompany H.R. 20575.|

The Committee on the Judiciary, to whom was

referred the bill (H.R. 20575) entitled “An act to amend

an act entitled ‘An act to establish a uniform system of

bankruptcy throughout the United States,’ approved

July 1, 1898, as amended,” etc., have had the

same under consideration, and report it back with

amendments.

The report of the Judiciary Committee of the House

of Representatives on said bill is hereby concurred in

with the additions and reservations hereinafter indi-

cated and explained in connection with the different

sections treated. That report states:

The experience of the seven years elapsing since the

amendment of February 5, 1903, in the administration

of the bankruptcy law has developed certain defects

which seem to the committee to require additional

legislation to reconcile conflicting decisions of the

courts, to make the law more just to debtor and credi-

tor, and also to correct certain faults in its administra-

tive features, which, despite the obvious intention of

the framers of the present law as well as of those who

framed the amendment of 1903, have crept in through

loopholes that have developed. Hence the introduction

and approval of the bill which this report accompanies.

In explanation of this bill the following statement 1s

submitted:

Section 6. The House bill seeks to make three

changes in subdivision—b of section 14 of the present

law, relative to opposition to discharge. First, it pro-

vides that trustees shall be competent “parties in

interest” to object to a discharge; second, that they

can so object only when authorized at a meeting of

creditors; and, third, that a materially false mercantile

statement, if made to the trade and relied on by the

creditor, shall be an available objection to the debtor’s

discharge.

Your committee concur in the first two of these

changes, but do not concur in the last.

The first of these changes, making the trustee a

competent party to oppose a bankrupt’s discharge,

is a desirable change, as thereby the expense of the

proceedings in opposition to discharge will ho spread

over all of the creditors, and not be borne by a single

creditor who may file objections. Moreover, it lessens

the danger of improper oppositions to discharge by

single creditors for the purpose of forcing settlements.

The second change, namely, that, the trustee can

only oppose discharge when authorized to do so at

a meeting of creditors, is also desirable, affording a

proper check upon improvident and improper opposi-

tion to discharge. In view of the fact that “entry of

appearance” in opposition to discharge must be made

at the return tune of the ten days’ notice provided

by section 58, but that the meeting of creditors

for authorizing such opposition also must be upon

ten days’ notice—thus preventing creditors meetings

being held before the expiration of the time for

entering appearance in opposition—it has been found

necessary to amend section 58 by providing for thirty

days’ notice of the filing of discharge applications in

the place of the ten days’ notice at present prescribed,

in this way sufficient time being given for the creditors

to hold their meeting.

The third change made by the House bill, that which

in effect would make the obtaining of property on false

written statements to mercantile agencies ground of

opposition to discharge, without the creditor whose

property has thus been obtained first asking such

mercantile agencies to procure him the written state-

ment, is not concurred in by your committee. Any

tendency to make the bankrupt act unduly harsh is

to be avoided. It is a sufficient ground of opposition

to discharge that the bankrupt has obtained property

from a creditor by a materially false statement in

writing where that statement was specifically asked

for by the creditor or by the creditor’s representative.

General statements to mercantile agencies, not spe-

cifically asked for by prospective creditors ought not

to be ground of opposition to discharge; it makes the

provision too harsh, in the estimation of your our

committee. Merchants are likely to make careless

general statements where they would be very careful

were they making statements to creditors from whom

they were at the time asking credit.

Your committee propose a substitute for the House

amendment of this ground of opposition to discharge,

which is thought to go as far as is proper.

*-*. *

HOUSE OF REPRESENTATIVES

69TH CONGRESS REPORT

Ist Session No, 1257

ESTABLISH 4. UNIFORM SYSTEM

OF BANKRUPTCY

MAY 19, 1926.—Ordered to be printed

Mr. CHRISTOPHERSON, from the committee of

conference, submitted the following

CONFERENCE REPORT

(To accompany S. 1039]

The committee of conference on the disagreeing

votes of the two Houses on the amendment of the

House to the bill (S. 1039) entitled, “To amend an act

entitled, ‘An act to establish a uniform system of bank-

ruptcy throughout the United States’, approved July

1, 1898, and acts amendatory thereof and supplemen-

tary thereto, “having met, after full and free confer-

ence, have agreed to recommend and do recommend to

their respective Houses as follows:

That the Senate recede from its disagreement to the

amendment of the House and agree to the same with

the following amendments:

In lieu of the matter proposed to be inserted by said

amendment insert the following:

Sec. 6. That section 14 (a) and (6) of said act, as 80

amended, be, and the same hereby is, amended to read

as follows:

“(a) Any person may, after the expiration of one

month and within twelve months, subsequent to being

adjudged a. bankrupt, file an application for a dis-

charge in the court of bankruptcy in which the proceed-

ings are pending, if it shall be made to appear to the

judge that the bankrupt aas unavoidably prevented

from filing it within such time, it may be wled within

but not after the expiration of the next six months.

“(b). The judge shall hear the application for a

discharge and such proofs and pleas as may be made

in opposition thereto by the trustee or other parties in

interest, at such time as will give the trustee or parties

in interest a reasonable opportunity to be fully heard;

and investigate the merits of the application and dis-

charge the applicant, unless he has (1) committed an

offense punishable by imprisonment as herein pro-

vided; or (2) destroyed, mutilated, falsified, concealed,

or failed to keep books of account, or records, from

which his financial condition and business transac-

tions might be ascertained; unless the court deem such

failure or acts to have been justified, under all the

circumstances of the case; or (3) obtained money or

property on credit, or obtained an extension or renewal

of credit, by making or publishing, or causing to be

made or published, in any manner whatsoever, a mate-

rially false statement in writing respecting his finan-

cial condition; or (4) at any time subsequent to the first

day of the twelve months immediately preceding the

filing of the petition, transferred, removed, destroyed,

or concealed or permitted to be removed, destroyed, or

concealed any of his property, with intent to hinder,

delay, or defraud his creditors; or (5) has been granted

a discharge in bankruptcy within six years; or (6) in the

course of proceedings in bankruptcy, refused to obey

any lawful order of or to answer any material question

approved by the court; or (7) has failed to explain

satisfactorily any losses of assets or deficiency of assets

to meet his liabilities: Provided, That if, upon the

hearing of: an objection to a discharge the objector

shall show to the satisfaction of the court, that there are

reasonable grounds for believing that the bankrupt has

committed any of the acts which, under this paragraph

(b), would prevent his discharge in bankruptcy, then

the burden of proving that he has not committed any of

such acts shall be upon the bankrupt: And provided

further, That the trustee shall not interpose objections

to a bankrupt’s discharge until he shall be authorized

so to do by the creditors at a meeting of creditors called

for that purpose on the application of any creditor.”

10a

Act of May 27, 1926, 44 Stat. 662

*x* * *

Sec. 6. That section 14 (a) and (b) of said Act, as so

amended, be and the same hereby is, amended to read

as follows:

“(a) Any person may, after the expiration of one

month an within twelve months, subsequent to being

adjudged a bankrupt, file an application for a dis-

charge in the court of bankruptcy in which the pro-

ceedings are pending, if it shall be made to appear to

the judge that the bankrupt was unavoidably pre-

vented from filing it within such time, it may be filed

within but not after the expiration of the next six

months.

“(b) The judge shall hear the application for a

discharge and such proofs and pleas as may be made

in opposition thereto by the trustee or other parties in

interest, at such time as will give the trustee or parties

in interest a, reasonable opportunity to be fully heard;

and investigate the merits of the application and dis-

charge the applicant, unless he has (1) committed an

offense punishable by imprisonment as herein pro-

vided; or (2) destroyed, mutilated, falsified, concealed,

or failed to keep books of account, or records, from

which his financial condition and business transac-

tions might be ascertained; unless the court aeon such

failure or acts to have been justified, under all the

circumstances of the case; or (3) obtained money or

property on credit, or obtained an extension or renewal

of credit, by making or publishing, or causing to be

made or published, in any manner whatsoever, a,

materially false statement in writing respecting his

financial condition; or (4) at any time subsequent to

lla

the first day of the twelve months immediately preced-

ing the filing of the petition, transferred, removed,

destroyed, or concealed or permitted to be removed,

destroyed, or concealed any of his property, with intent

to hinder, delay, or defraud his creditors; or (5) has

been granted a discharge in bankruptcy within six

years; or (6) in the course of proceedings in bank-

ruptcy, refused to obey any lawful order of or to answer

any material question approved by the court; or (7) has

failed to explain satisfactorily any losses of assets or

deficiency of assets to meet his liabilities: Provided,

That if, upon the hearing of an objection to a discharge,

the objector shall show to the satisfaction of the court

that there are reasonable grounds for believing that

the bankrupt has committed any of the acts which,

under this paragraph (b), would prevent his discharge

in bankruptcy, then the burden of proving that he

has not committed any of such acts shall be upon the

bankrupt: And provided further, That the trustee shall

not interpose objections to a »bankrupt’s discharge

until he shall be authorized so to do by the creditors at

a meeting of creditors called for that purpose on the

application of any creditor.”

* * *

12a

Act of June 22, 1938, Pub. L. No. 75-696,

52 Stat. 850

* * *

“SEC. 14. DISCHARGES, WHEN GRANTED.—a. The

adjudication of any person, except a corporation, shall

operate as an application for a discharge: Provided,

That the bankrupt may, before the hearing on such

application, waive by writing, filed with the court, his

right to a discharge. A corporation may, within six

months after its adjudication, file an application for a

discharge in the court in which the proceedings are

pending.

“b. After the bankrupt shall have been examined,

either at the first meeting of creditors or at a meeting

specially fixed for that purpose, concerning his acts,

conduct, and property, the court shall make an order

fixing a time for the filing of objections to the bank-

rupt’s discharge, notice of which order shall be given

to all parties in interest as provided in section 58 of

this Act. Upon the expiration of the time fixed in such

order or of any extension of such time granted by the

court, the court shall discharge the bankrupt if no

objection has been filed ; otherwise, the court shall

hear such proofs and pleas as may be made in

opposition to the discharge, by the trustee, creditors,

the United States attorney, or such other attorney as

the Attorney General may designate, at such time as

will give the bankrupt and the objecting parties a

reasonable opportunity to be fully heard.

“c. The court shall grant the discharge unless satis-

fied that the bankrupt has (1) committed an offense

punishable by imprisonment as provided under this

Act; or (2) destroyed, mutilated, falsified, concealed, or

failed to keep or preserve books of account or records,

13a

from which his financial condition and business

transactions might be ascertained, unless the court

deems such acts or failure to have been justified under

all the circumstances of the case; or (3) obtained money

or property on credit, or obtained an extension or

renewal of credit, by making or publishing or causing

to be made or published in any manner whatsoever, a

materially false statement in writing respecting his

financial condition; or (4) at any time subsequent to

the first day of the twelve months immediately preced-

ing the filing of the petition in bankruptcy, transferred,

removed, destroyed, or concealed, or permitted to be

removed, destroyed, or concealed, any of his property,

with intent to hinder, delay, or defraud his creditors;

or (5) has within six years prior to bankruptcy been

granted a discharge, or had a composition or an

arrangement by way of composition or a wage earner’s

plan by way of composition confirmed under this Act;

or (6) in the course of a proceeding under this Act

refused to obey any lawful order of, or to answer any

material question approved by, the court; or (7) has

failed to explain satisfactorily any losses of assets or

deficiency of assets to meet his liabilities: Provided,

That if, upon the hearing of an objection to a discharge,

the objector shall show to the satisfaction of the court

that there are reasonable grounds for believing that

the bankrupt has committed any of the acts which,

under this subdivision c, would prevent his discharge

in bankruptcy, then the burden of proving that he has

not committed any of such acts shall be upon the

bankrupt.

“d. When requested by the court, the United States

attorney, located in the judicial district in which the

bankruptcy proceeding is pending, or such other

attorney as the Attorney General may designate, shall

examine into the acts and conduct of the bankrupt

l4a

and, if satisfied that probable grounds exist for the

denial of the discharge and that the public interest so

warrants, he shall oppose the discharge of such

bankrupt in like manner as provided in the case of a

trustee.

* * *

l5a

HOUSE OF REPRESENTATIVES

86TH CONGRESS REPORT

Ist Session No. 1111

LIMITING THE USE OF FALSE

FINANCIAL STATEMENTS AS A BAR

TO DISCHARGE IN BANKRUPTCY

SEPTEMBER 1, 1959.—Committed to the Committee

of the Whole House on the State of the Union and

ordered to be printed

Mr. FORRESTER, from the Committee on the

Judiciary, submitted the following

REPORT

(To accompany H.R. 4346)

The Committee on the Judiciary, to whom was

referred the bill (H.R. 4340) to amend the Bankruptcy

Act to limit the use of false financial statements as a

bar to discharge, having considered the same, report

favorably thereon with amendments and recommend

that the bill as amended do pass.

The amendments are as follows:

On page 2, line 16, strike out “defraud” and

substitute “deceive”.

On page 2, line 25, strike out “or”.

On page 3, line 2, strike out “or” where it appears

before (5).

EXPLANATION OF AMENDMENTS

During the subcommittee hearings, objection was

expressed to the use of the word “defraud” rather than

“deceive”. The committee is of the view that in the

context of this bill the words “defraud” and “deceive”

may be defined in terms of each other. The committee,

l6a

therefore, has no objection to substituting “deceive” for

“defraud”.

The second and third amendments are technical

amendments.

PURPOSE

The purpose of this bill is to eliminate as a ground

for the complete denial of a discharge the obtaining of

money or credit through false financial statements

issued by a nonbusiness bankrupt.

GENERAL STATEMENT

Section 14c(3) of the Bankruptcy Act now provides

that—

The court shall grant the discharge unless

satisfied that the bankrupt has * * * obtained

money or property on credit, or obtained an

extension or renewal of credit, by making

or publishing, or causing to be made or

published in any manner whatsoever, a

materially false statement in writing

respecting his financial condition; * * *.”

Section 17a(2) provides that—

A discharge in bankruptcy shall release a

bankrupt from all of his provable debts * * *

except such as * * * are liabilities for

obtaining money or property by false

pretenses or false representations * * *.”

Thus, an obligation incurred on the basis of a false

financial statement may result either in the nondis-

chargeability of the particular debt or in the complete

denial of a discharge.

The committee believes that complete denial of a

discharge is too severe a penalty in the case of the

l7a

individual noncommercial bankrupt. It is also a

penalty which experience has shown to be subject to

abuse. An unscrupulous lender armed with a false

financial statement has a powerful weapon with which

to intimidate a debtor into entering into an agreement

in which the creditor agrees not to oppose the dis-

charge in return for the debtor’s agreement to pay the

debt in full after discharge. The creditor may also

accomplish his purpose of preserving his debt by not

opposing the discharge and then suing in a State court

on the ground that the debt is not dischargeable.

Testimony before the Subcommittee on Bankruptcy

and Reorganization by experts in bankruptcy law

indicates that unscrupulous lenders have frequently

condoned, or even encouraged, the issuance of state-

ments omitting debts with the deliberate intention of

obtaining a false agreement for use in the event that

the borrower subsequently goes into bankruptcy.

Even where the creditor has had no part in the

issuance of a false financial statement, the exercise of

his right to bar the discharge completely results in a

windfall for other creditors who were not even aware

of such a statement, Debts which are dischargeable

are not discharged solely because one of many debts

was induced by a false financial statement. This

result is not required to protect a creditor who has

relied on a false financial statement since under sec-

tion 17a(2) that particular debt is not dischargeable.

In view of the protection which section 17a(2) gives

to the creditor, and in view of the abuses which have

grown out of section 14c(3), the committee believes

that it is desirable to eliminate the false financial

statement as a ground for the complete denial of a

discharge insofar as the individual noncommercial

bankrupt is concerned.

18a

The situation is somewhat different in the case of a

business bankrupt. The businessman is more likely to

be aware of the severe consequences to him of issuing

a false financial statement. His ordinary business

records enable him to produce a more accurate state-

ment than a householder who may have a multitude of

small debts and no records. Furthermore, the finan-

cial statement issued by a businessman is frequently

for the purpose of establishing credit standing in the

community. His creditors may never see the financial

statement itself. On the other hand, the nonbusiness

debtor normally issues his financial statement to a

particular creditor as part of his application for credit

or for a loan. That creditor already has the protection

of nondischargeability under section 17.

The bill, therefore, amends section 14c(3) to author-

ize the denial of a discharge only where the bankrupt

has incurred an obligation—

while engaged in business as a sole pro-

prietor, partnership, or as an executive of a

corporation * * *.

The bill also amends section 17a(2) by adding the

language:

or for obtaining money or property on credit

or obtaining an extension or renewal of credit

in reliance upon a materially false statement

in writing respecting his financial condition

made or published or caused to be made or

published in any manner whatsoever with

intent to defraud.

The purpose of this amendment is to assure that

although the obtaining of money or property on credit

through the issuance of a false financial statement is

no longer to be a ground for denial of a discharge to a

19a

nonbusiness bankrupt, any obligation incurred as a

result of such a statement is to be nondischargeable

under section 17. The addition of the elements of

reliance by the creditor and intent to deceive by the

debtor are merely enactments of existing case law.

This bill has the support of the Judicial Conference

of the United States and the National Bankruptcy

Conference. During the 85th. Congress, H.R. 106, a

bill dealing with this problem in a somewhat broader

fashion, passed the House but was riot acted on in the

Senate.

CHANGES IN EXISTING LAW

In compliance with clause 3 of rule XIII of the Rules

of the House of Representatives, there is printed below

in roman type without brackets existing law in which

no change is proposed by enactment of the bill here

reported; present provisions proposed to he stricken

are enclosed in black brackets; and new provisions

proposed to be inserted are shown in italic:

SECTION 14c(3) OF THE BANKRUPTCY ACT

SEC. 14. DISCHARGES WHEN GRANTED.—a.

** *

b. ** *

c. The court shall grant, the discharge unless

satisfied that the bankrupt lies (1) committed an offense

punishable by imprisonment as provided under title 18,

United States Code, section 152; or (2) destroyed,

mutilated, falsified, concealed, or failed to keep or

preserve books of accounts of records, from which his

financial condition and business transactions might be

ascertained, unless the court deems such acts or fail-

ure to have been justified under all the circumstances

of the ease; or (3) (obtained money or property on

20a

credit, or obtained an extension or renewal of credit,

by making or publishing or causing to be made or

published in any manner whatsoever, a materially

false statement in writing respecting his financial

condition;] while engaged in business as a sole proprie-

tor, partnership, or as an executive of a corporation,

obtained for such business money or property on credit

or as an extension or renewal of credit by making

or publishing or causing to be made or published

in any manner whatsoever a materially false statement

in writing respecting his financial condition or the

financial condition of such partnership or corporation;

* kk &

SECTION 17a OF THE BANKRUPTCY ACT

SEC. 17. DEBTS NOT AFFECTED BY A

DISCHARGE.—a. A discharge in bankruptcy shall

release a bankrupt from all of his provable debts,

whether allowable in full or in part, except such as

(1) are due as a tax levied by the United States, or any

State, county, district, or municipality; (2) are liabili-

ties for obtaining money or property by false pretenses

or false representations, or for obtaining money or

property on credit or obtaining an extension. or renewal

of credit in. reliance upon a materially ,false statement

in writing respecting his financial condition made or

published or caused to be made or published in. any

manner whatsoever with intent to deceive, or for willful

and malicious injuries to the person or property of

another, or for alimony due or to become due, or for

maintenance or support of wife or child, or for seduc-

tion of an unmarried female, or for breach of promise

of marriage accompanied by seduction, or for criminal

conversation; (3) have not been duly scheduled in time

for proof and allowance, with the name of the creditor,

if known to the bankrupt, unless such creditor had

2la

notice or actual knowledge of the proceedings in bank-

ruptcy; lor] (4) were created by his fraud, embezzle-

ment, misappropriation or defalcation while acting as

an officer or in any fiduciary capacity; lor] (5) are for

wages which have been earned within three months

before the date of commencement of the proceedings

in bankruptcy due to workmen, servants, clerics, or

traveling or city salesmen, on salary or commission

basis, whole or part time, whether or not selling exclu-

sively for the bankrupt; or (6) are due for moneys of

an employee received or retained by his employer to

secure the faithful performance by such employee of

the terms of a contract of employment.

22a

SENATE

86TH CONGRESS REPORT

2nd Session No. 1688

LIMITING THE USE OF FALSE

FINANCIAL STATEMENTS AS A BAR

TO DISCHARGE IN BANKRUPTCY

JUNE 24, 1960—Ordered to be printed

Mr. HRUSKA, from the Committee on the Judiciary,

submitted the following

REPORT

[To accompany H.R. 4346]

The Committee on the Judiciary, to which was

referred the bill (H.R. 4346) to amend the Bankruptcy

Act to limit the use of false financial statements as a

bar to discharge, having considered the same, reports

favorably thereon, without amendment, and recom-

mends that the bill do pass.

PURPOSE

The purpose of the bill is to limit the use of false

financial statements as a bar to discharge in

bankruptcy.

STATEMENT

The Administrative Office of the U.S. Courts

recommends the bill favorably.

Section 14 of the Bankruptcy Act, entitled “Dis-

charges, When Granted,” now provides in c(3) that the

court shall grant the discharge unless satisfied that

the bankrupt has—

23a

obtained money or property on credit, or

obtained an extension or renewal of credit, by

making or publishing, or causing to be made

or published in any manner whatsoever,

a materially false statement in writing

respecting his financial condition;

The bill would substitute in lieu of this the following

language—

while engaged in business as a sole pro-

prietor, partnership, or as an executive of

a corporation, obtained for such business

money or property on credit or as an

extension or renewal of credit by making or

publishing or causing to be made or published

in any manner whatsoever a materially false

statement in writing respecting his financial

condition or the financial condition of such

partnership or corporation;

The Committee on the Judiciary of the House of

Representatives in favorably reporting the bill has

commented as follows in regard to this change:

The committee believes that complete

denial of a discharge is too severe a penalty in

the case of the individual noncommercial

bankrupt. It is also a penalty which

experience has shown to be subject to abuse.

An unscrupulous lender armed with a false

financial statement has a powerful weapon

with which to intimidate a debtor into

entering into an agreement in which the

creditor agrees not to oppose the discharge in

return for the debtor’s agreement to pay the

debt in full after discharge. The creditor may

also accomplish his purpose of preserving his

24a

debt by not opposing the discharge and then

suing in a State court on the ground that the

debt is not dischargeable. Testimony before

the Subcommittee on Bankruptcy and

Reorganization by experts in bankruptcy law

indicates that unscrupulous lenders have

frequently condoned, or even encouraged, the

issuance of statements omitting debts with

the deliberate intention of obtaining a false

agreement for use in the event that the

borrower subsequently goes into bankruptcy.

Even where the creditor has had no part in

the issuance of a false financial statement,

the exercise of his right to bar the discharge

completely results in a windfall for other

creditors who were not even aware of such a

statement. Debts which are dischargeable

are not discharged solely because one of many

debts was induced by a false financial

statement. This result is not required to

protect a creditor who has relied on a false

financial statement since under section 17a

(2) that particular debt is not dischargeable.

In view of the protection which section

17a(2) gives to the creditor, and in view of the

abuses which have grown out of section

14c(3), the committee believes that it is

desirable to eliminate the false financial

statement as a ground for the complete denial

of a discharge insofar as the individual

noncommercial bankrupt is concerned.

The situation is somewhat different in the

case of a business bankrupt. The business-

man is more likely to be aware of the severe

consequences to him of issuing a false

25a

financial statement. His ordinary business

records enable him to produce a more

accurate statement than a householder who

may have a multitude of small d-bts and

no records. Furthermore, the financial state-

ment issued by a businessman is frequently

for the purpose of establishing credit standing

in the community. His creditors may never

see the financial statement itself. On the

other hand, the nonbusiness debtor normally

issues his financial statement to a particular

creditor as part of his application for credit or

for a loan. That creditor already has

the protection of nondischargeability under

section 17.

The bill also amends section 17 of the Bankruptcy

Act, entitled, “Debts Not Affected by a Discharge,” by

adding in a(2) the following new language—

or for obtaining money or property on credit

or obtaining an extension or renewal of credit

in reliance upon a materially false statement

in writing respecting his financial condition

made or published or caused to be made or

published in any manner whatsoever with

intent to deceive,

The Committee on the Judiciary of the House of

Representatives in its report on the bill has com-

mented in regard to this addition—

The purpose of this amendment is to assure

that although the obtaining of money or

property on credit through the issuance of a

false financial statement is no longer to be

ground for denial of a discharge to a

nonbusiness bankrupt, any obligation

26a

incurred as a result of such a statement to be

nondischargeable under section 17. The

addition of the elements of reliance by the

creditor and intent to deceive by the debtor

are merely enactments of existing case law.

The committee believes that the bill as recom-

mended by the Administrative Office of the U.S.

Courts and as passed by the House of Representatives

is meritorious and recommends it favorably.

Attached and made a part of this report are (1) a

letter, dated January 15, 1960, from the Administra-

tive Office of the U.S. Courts; (2) a letter, dated March

21, 1960, from the Secretary of the Treasury; (3) a let-

ter, dated June 1, 1960, from the Department of Jus-

tice; and (4) a letter, dated June 13, 1960, from the

American Bankers Association.

ADMINISTRATIVE OFFICE OF THE U.S. COURTS,

Washington, D.C., January 15, 1960

Hon. JAMES O. EASTLAND,

Chairman, Committee on the Judiciary.

U.S. Senate, Washington, D.C.

DEAR SENATOR EASTLAND: The bill (H.R. 4316)

to amend the Bankruptcy Act to limit the use of false

financial statements as a bar to discharge was on

September 1, 1959, reported favorable by the House

Judiciary Committee to the House with minor amend-

ments (H. Rept. 1111). It passed the House as

reported on September 7, 1959, and it is now pending

before the Senate Judiciary Committee. The amend-

ments arc stated in the House report as follows:

On page 2, line 16, strike out “defraud” and

substitute “deceive”.

27a

On page 2, line 25, strike out “or”.

On page 3, line 2, strike out “or” where it appears

before (5).

During the subcommittee hearings, objection was

expressed to the use of the word “defraud” rather than

“deceive.” The committee was of the view that in the

context of the bill the words “defraud” and “deceive”

may be defined in terms of each other and it, therefore,

had no objection to substituting “deceive” for

“defraud.”

The second and third amendments are merely

technical amendments.

The Judicial Conference at its March 1959 meeting

reaffirmed its approval of the language contained in

the original bill, H.R. 4346. In view of this and since

the amendments made by the House are of a clarifying

or technical nature we hope the bill will be enacted

into 1aw as so amended.

Sincerely yours,

AUBREY GASQUE,

Assistant Director.

28a

OFFICE OF THE SECRETARY OF THE TREASURY,

Washington, March 21, 1960.

Hon. JAMES O. EASTLAND,

Chairman, Committee on the Judiciary,

U.S. Senate, Washington, D.C.

MY DEAR MR, CHAIRMAN: This is in response to

your request for the Department's views on H.R. 4346,

to amend the Bankruptcy Act to limit the use of false

financial statements as a bar to discharge.

The proposed legislation amends section 14c(3) of

the Bankruptcy Act. (11 U.S.C. 32(c) (3) to eliminate

as a ground for the denial of a discharge, insofar as the

nonbusiness bankrupt is concerned, the obtaining of

money or credit through false financial statements. It

further amends section 17a(2) of the act (11 U.S.C.

35(a)(2) to make clear that, although the obtaining of

money or property on credit through the issuance of a

false financial statement is no longer to be a ground

for denial of a discharge to a nonbusiness bankrupt,

the particular obligation incurred as a result of such a

statement is to remain nondischargeable.

The subject matter of this bill does not appear to

have any adverse effect upon the treatment of Federal!

tax claims in Bankruptcy Act proceedings. Accord-

ingly, the Treasury Department expresses no views on

the merits of H.R. 4346.

The Bureau of the Budget has advised the Treasury

Department that there is no objection to the presenta-

tion of this report.

Sincerely yours,

JAY W. GLASMANN,

Assistant to the Secretary.

29a

U.S. DEPARTMENT OF JUSTICE,

Washington, D.C., June 1, 1960.

Hon. JAMES O. EASTLAND,

Chairman, Committee on the Judiciary,

U.S. Senate, Washington, D.C.

DEAR SENATOR: This is in response to your

request for the views of the Department of Justice

concerning (H.R. 4346) to amend the Bankruptcy Act

to limit the use of false financial statements as a bar

to discharge.

Section 14c(3) of the Bankruptcy Act (30 Stat. 550,

as amended; 11 U.S.C. 32(c)(3)) provides that a dis-

charge in bankruptcy shall be refused if the court is

satisfied that the bankrupt obtained money or prop-

erty on credit, or obtained an extension or renewal of

credit, by making or publishing or causing to be made

or published a materially false financial statement in

The bill would amend the section to limit this

ground for denying a discharge to bankrupts who fur-

nished such false statements while engaged in busi-

ness as a sole proprietor, partnership, or an executive

of a corporation.

The bill would also amend section 17 of the Bank-

ruptcy Act (30 Stat. 550, as amended; 11 U.S.C. 55(a)),

which now provides in part that a discharge does not

release a bankrupt from debts which are liabilities for

obtaining money or property by false pretenses or false

representations. Under the proposed amendment,

liabilities for obtaining money or property on credit,

or obtaining an extension or a renewal of credit, by

furnishing false financial statements would similarly

be unaffected by the discharge.

30a

The subject of this legislation is not a matter for

which the Department of Justice has primary respon-

sibility, and accordingly we make no recommendation

as to the enactment of the bill.

The Bureau of the Budget has advised that there is

no objection to the submission of this report.

Sincerely yours,

JOHN D. CALHOUN,

Acting Deputy Attorney General.

THE AMERICAN BANKERS ASSOCIATION,

WASHINGTON OFFICE,

Washington, D.C., June 13, 1960.

Re H.R. 4846.

Hon. JAMES O. EASTLAND,

Chairman, Senate Judiciary Committee,

New Senate Office Building, Washington. D.C.

DEAR SENATOR EASTLAND: In a letter dated

January 13, I indicated that the American Bankers

Association objected to enactment of H.R. 43-16, which

amends the Bankruptcy Act. The association has

reconsidered this legislation, and I am authorized to

advise you that the association is removing its objec-

tion to enactment of H.R. 4346.

Sincerely yours,

J. OLNEY BROTT.

3la

CHANGES IN EXISTING LAW

In compliance with subsection (4) of rule XXIX of the

Standing Rifles of the Senate, changes in existing law

made by the bill: as reported, are shown as follows

(existing law proposed to be omitted is enclosed in

black brackets, new matter is printed in italics,

existing law in which no change is proposed is shown

in roman) :

SECTION 14c(3) or THE BANKRUPTCY ACT

SEC. 14. DISCHARGES, WHEN GRANTED.—a.

***

b. ***

c. The court shall grant the discharge unless satis-

fied that the bankrupt has (1) committed an offense

punishable by imprisonment as provided under title

18, United States Code, section 152; or (2) destroyed,

mutilated, falsified, concealed, or failed to keep or

preserve books of accounts of records, from which his

financial condition and business transactions might be

ascertained, unless the court deems such nets or fail-

ure to have been justified under all the circumstances

of the case; or (3) [obtained money or property on

credit, or obtained an extension or renewal of credit,

by making or publishing or causing to be made or pub-

lished in any manner whatsoever, a materially false

statement in writing respecting his financial condi-

tion;] while engaged in business as a sole proprietor,

partnership, or as an executive of a corporation,

obtained for such business money or property on credit

or as an extension or renewal of credit by making or

publishing or causing to be made or published in any

manner whatsoever a materially false statement in

writing respecting his financial condition or the finan-

cial condition of such partnership or corporation; * * *.

32a

SECTION 17a OF THE BANKRUPTCY ACT

SEC. 17. DEBTS NOT AFFECTED BY A

DISCHARGE.—a. A discharge in bankruptcy shall

release a bankrupt from all of his provable debts,

whether allowable in full or in part, except such as

(1) are due as a tax levied by the United States, or

any State, county, district, or municipality; (2) are

liabilities for obtaining money or property by false

pretenses or false representations, or for obtaining

money or property on credit or obtaining an extension

or renewal of credit in reliance upon a materially false

statement in writing respecting his financial condition

made or published or caused to be made or published

in any manner whatsoever with intent to deceive, or for

willful and malicious injuries to the person or property

of another, or for alimony due or to become due, or for

maintenance or support of wife or child, or for seduc-

tion of an unmarried female, or for breach of promise

of marriage accompanied by seduction, or for criminal

conversation; (3) have not been duly scheduled in time

for proof and allowance, with the name of the creditor,

if known to the bankrupt, unless such creditor had

notice or actual knowledge of the proceedings in bank-

ruptcy; lor] (4) were created by his fraud, embezzle-

ment, misappropriation or defalcation while acting as

an officer or in any fiduciary capacity; |or| (5) are for

wages which have been earned within three months

before the date of commencement of the proceedings

in bankruptcy due to workmen, servants, clerks, or

traveling or city salesmen, on salary or commission

basis, whole or part time, whether or not selling

exclusively for the bankrupt; or (8) are due for moneys

of an employee received or retained by his employer to

secure the faithful performance by such employee of

the terms of a contract of employment.

33a

Act of July 12, 1960, Pub. L. No. 86-621

74 Stat. 408

*x* * *

AN ACT

To amend the Bankruptcy Act to limit the use of false

financial statements as a bar to discharge.

Be it enacted by the Senate and House of Represent-

atives of the United States of America in Congress

assembled, That section 14c ( 3) of the Bankruptcy Act,

as amended (11 U.S.C. 32 (c) (3) ), is amended to read

as follows :

“(3) while engaged in business as a sole

proprietor, partnership, or as an executive of

a corporation, obtained for such business

money or property on credit or as an extension

or renewal of credit by making or publishing

or causing to be made or published in any

manner whatsoever a materially false state-

ment in writing respecting his financial

condition or the financial condition of such

partnership or corporation: or”

Sec. 2. Subdivision a. of section 17 of the Bankruptcy

Act, as amended (11 U.S.C. 35a), is amended to read

as follows:

“a. A discharge in bankruptcy shall release

a bankrupt from all of his provable debts,

whether allowable in full or in part, except

such as (1) are due as a tax levied by the

United States, or any State, county, district,

or municipality; (2) are liabilities for obtain-

ing money or property by false pretenses or

false representations, or for obtaining money

or property on credit or obtaining an exten-

34a

sion or renewal of credit in reliance upon a

materially false statement in writing respect-

ing his financial condition made or published

or caused to be made or published in any

manner whatsoever with intent to deceive,

or for willful and malicious injuries to the

person or property of another, or for alimony

due or to become due, or for maintenance or

support of wife or child, or for ,seduction of an

unmarried female, or for breach of promise of

marriage accompanied by seduction, or for

criminal conversation; (3) have not been duly

scheduled in time for proof and allowance,

with the name of the creditor if known to

the bankrupt, unless such creditor had notice

or actual knowledge of the proceedings in

bankruptcy; (4) were created by his fraud,

embezzlement, misappropriation or defalca-

tion while acting as an officer or in any

fiduciary capacity ; (5) are for wages which

have been earned within three months before

the date of commencement of the proceedings

in bankruptcy due to workmen, servants,

clerks, or traveling or city salesmen, on salary

or commission basis, whole or part time,

whether or not selling exclusively for the

bankrupt or (6) are due for moneys of an

employee received or retained by his employer

to secure the faithful performance by such

employee of the terms of a contract of

employment.”

Approved July 12, 1960.

Public Law 86-622

35a

HOUSE OF REPRESENTATIVES

95th Congress Report

Ist Session No. 95-595

BANKRUPTCY LAW REVISION

September 8, 1977.—Committed to the Committee

of the Whole House on the State of the Union

and ordered to be printed.

Mr. Edwards of California, from the Committee

on the Judiciary, submitted the following

REPORT OF THE COMMITTEE ON THE

JUDICIARY together with SEPARATE

SUPPLEMENTAL, AND SEPARATE

ADDITIONAL VIEWS

[Including Cost Estimate of the

Congressional Budget Office!

[To accompany H.R. 8200]

The Committee on the Judiciary, to whom was

referred the bill (H.R. 8200) to establish a uniform law

on the subject of Bankruptcies, having considered the

same, report favorably thereon with an amendment

and recommend that the bill as amended do pass.

The committee amendment strikes out all after the

enacting clause and inserts a new text, which appears

in italic type in the reported bill.

The amendment is an amendment in the nature of a

substitute for the bill, incorporating six substantive

amendments adopted by the committee, and numer-

ous technical, drafting, and style changes to the bill.

A detailed description of the six amendments adopted

36a

during committee deliberations is incorporated into

the description of the bill contained in this Report,

which addresses itself to the amendments in the

nature of a substitute. Briefly summarized, they are

as follows:

*_ s+ *

Introduction

I. History

In 1970, congress created the commission on the

bankruptcy laws of the United States to study and

recommend changes in the bankruptcy laws.' The

commission became operational in June, 1971, and

filed its final report with the Congress on July 30,

1973.’ Its report was in two parts. Part I contained

the Commission’s findings and recommendations.

Part II contained a draft of a bill to implement those

recommendations. Don Edwards, Chairman of the

Subcommittee on Civil and Constitutior al Rights and

a Member of the Commission, and Charles Wiggins,

then ranking minority Member of the Subcommittee

' Established by Pub. L. 91-354, Act of July 24, 1970, 84 Stat.

468, the Commission consisted of nine members. Three, includ-

ing the chairman, were appointed by the President: Chairman

Harold Marsh, Jr., Los Angeles, Calif.; Charles Seligson, New

York, N.Y.; and Wilson Newman, Short Hills, N.J. Two each were

appointed by the Speaker of the House and the President of the

Senate: Hon. Don Edwards (D., Calif.), Hon. Charles E. Wiggins

(R. Calif.), Hon. Quentin N. Burdick (D., N. Dak.), and Hon.

Marlow W. Cook (R., Ky.). Two were appointed by the Chief

Justice: Hon Edward Weinfeld (S.D.N.Y.), and Hon. Hubert L.

Will (N.D. Il.). The study leading to the creation of the Commis-

sion actually began in 1968, when the Subcommittee on bank-

ruptcy of the Senate Committee on the Judiciary began hvarings.

Hearings on S.J. Res. 100 before the Subcomm. on bankruptcy of

the Senate Comm. on the Judiciary, 90th cong., 2d sess. (1968).

? H.R. Doc. No. 93-137 (1973).

37a

and also a Member of the Commission, introduced that

bill in the 93d Congress as H.R. 10792.°

The National Conference of Bankruptcy Judges dis-

agreed with major aspects of the Commission’s bill,

and drafted and proposed an alternative. The Judges

bill was also introduced in the 93d congress by Messrs.

Edwards and Wiggins as H.R. 16643.‘ In the 94th

Congress, both of these bills were again introduced, as

H.R. 31 and H.R. 32, respectively.°

Hearings began on both bills in the 94th Congress

in May, 1975, and continued until May, 1976. The

hearings were extensively publicized in the Congres-

sional Record, and all interested parties were encour-

aged to present views to the Subcommittee. There

were 35 days of hearings, over 100 witnesses, and over

2,700 pages of testimony.® The hearings covered every

aspect of bankruptcy law, from the structure of the

bankruptcy system to the jurisdiction of bankruptcy

courts, from consumer bankruptcy to business reor-

ganizations, from the interaction of the securities laws

with bankruptcy to the tax aspects of bankruptcy,

from railroad reorganization to commodity broker

liquidation.

° 93d Cong., 1st Sess. (1973).

* 93d Cong., 2d Sess. (1974).

° 94th Cong., Ist Sess. (1975).

® Hearings on H.R. 31 and H.R. 32 Before the Subcomm. on

Civil and Constitutional Rights of the House Comm. on the Judi-

ciary, 94th Cong., lst and 2d Sess., ser. 27 (1975-76). The Senate

also conducted extensive hearings. Hearings on S. 235 and S. 236

before the Subcomm. on Improvements in Judicial Machinery of

the Senate Comm. on the Judiciary, 94th Cong.,1st Sess. (1975).

38a

After the hearings were completed, the process of

bill drafting began. The result was H.R. 6,’ cospon-

sored by Chairman Edwards, and by Mr. Butler, cur-

rent ranking minority Member of the Subcommittee.

Since the introduction of H.R. 6, the Subcommittee has

received numerous comments from the bench, the bar,

and academia.

The Subcommittee on Civil and Constitutional

Rights began mark-up of the bill on March 21, 1977.

Mark-up continued for 22 days, spread over eight

weeks. The Members of the Subcommittee examined

and discussed every one of the over 300 sections of the

bill during its forty-two hours of mark-up, in addition

to its debate on the bill as a whole. Over 120 amend-

ments were proposed and debated. Over 100 were

adopted. The Subcommittee completed its work on the

bill on May 16, 1977, when it reported the bill favor-

ably by a roll call vote of 7-0. The bill as amended,

with numerous additional technical, drafting, and

style corrections, was ordered introduced as a clean

bill. Chairman Edwards, joined by the other Members

of the Subcommittee, introduced H.R. 8200* on July

11, 1977.

The Committee on the Judiciary began deliberations

on the bill on July 14, 1977, and continued work on

July 15, and July 19. On July 19, the bill was ordered

reported by a roll call vote of 26-3, with one Member

voting present.

On July 19, the Committee was informed of a

potential jurisdictional conflict with the Ways and

Means Committee over certain tax provisions in the

' 95th Cong., 1st Sess. (1977).

® 95th Cong., 1st Sess. (1977) [hereinafter cited as H.R. 8200].

39a

bill. The Chairman of the two Committees met to

reach an agreement on the proper disposition of the

potential claim of jurisdiction asserted by the Ways

and Means Committee. Under the agreement, the

Ways and Means Committee would not request a

sequential referral of the bill if the Judiciary Commit-

tee made the four special tax provisions contained in

the bankruptcy code proposed by the bill inapplicable

to Federal Taxes.’°

On September 8, the Committee on the Judiciary

met to consider the proposal. The Committee voted to

reconsider the vote to report H.R. 8200, adopted the

amendment in the nature of a substitute, and once

again ordered the bill reported favorably, by a roll call

vote of 23-8.

Il. Major Provisions

The major purpose of this bill is the modernization

of the bankruptcy laws. The substantive law of

bankruptcy and the current bankruptcy system was

designed in 1898," in the horse and buggy era of con-

sumer and commercial credit, and was last overhauled

in 1938,'* nearly 40 years ago. It has only been since

1938 that the consumer credit industry has grown;

and it has only been since the widespread adoption of

the Uniform Commercial Code in the early 1960’s that

commercial credit has grown to its present magnitude.

As the issue of bankruptcy has fallen from the national

consciousness since the Great Depression in the 1930’s

® Letter from Chairman Al Ullman to Chairman Peter W.

Rodino, Jr., July 19, 1977.

H.R. 8200 § 101 (proposed 11 U.S.C. 346, 728, 1146, 1331).

" Act of July 1, 1898, C. 541, 30 Stat. 544.

” Act of June 22, 1938, C. 575, 52 Stat. 840.

40a

the bankruptcy system has fallen into disrepair.

Those once primarily responsible for its operation and

maintenance, the district judges, have turned to other

matters and neglected their bankruptcy responsibili-

ties. The bankruptcy judges instead have taken over

prime responsibility for the operation of the system,

even though their offices are not designed statutorily

to perform those duties. Both substantively and

administratively, the bankruptcy system is straining

on all sides to handle situations that the framers of the

current law never dreamed would arise.

The Bankruptcy Commission found, and hearings

before the Subcommittee on Civil and Constitutional

Rights confirmed, that the most severe problem in the

bankruptcy administration was the court system. The

problem consists of two facets. First, the bankruptcy

court today is not truly and completely a court. It is

not independent. It must operate under the supervi-

sion of an unconcerned district court. This supervision

has hampered bankruptcy court operations both

administratively and substantively. This bill gives the

bankruptcy court the independence it needs to operate

in today’s complex bankruptcy world.”

Second, the bankruptcy judge, because of the duties

imposed upon him under the Bankruptcy Act, must

take an active role in supervising and administering a

bankruptcy case. No matter how fair a bankruptcy

judge is, his statutory duties give him a certain bias in

a case, and the bankruptcy court as a result has been

viewed by many as an unfair forum. The bill removes

many of the supervisory functions from the judge in

the first instance, transfers most of them to the trustee

and to the United States trustee, and involves the

‘8 See chapter 1, infra.

4la

judge only when a dispute arises. Because the judge

no longer will have to take an active role in managing

bankruptcy cases, the bankruptcy court should become

a forum that is fair in fact and in appearance as well.

Some of the supervisory functions removed from the

judge will be transferred to a new system of United

States trustees who will act as bankruptcy watchdogs,

overseeing the qualifications and appointments of

private trustees in bankruptcy cases, supervising their

performance, monitoring their fees, and serving as

trustees in cases where a private trustee cannot be

found to serve.'*

The second major problem under current bank-

ruptcy law is the inadequacy of relief that the Bank-

ruptcy Act provides for consumer debtors. The last

major revision of the Bankruptcy Act was in 1938,

before any significant amount of consumer credit

had been extended. In the post-War years, consumer

credit has become a major industry, and buying on

time has become a way of life for a large segment of

the population. The bankruptcy rate among consum-

ers has risen accordingly, but without the required

provisions in the Bankruptcy Act to protect those who

need bankruptcy relief. This bill makes bankruptcy a

more effective remedy *» the unfortunate consumer

debtor."®

This is not primarily a debtor’s bill, however. The

bill codifies creditors’ rights more clearly than the case

law, which is in many ways just developing. It defines

the protections to which a secured creditor is entitled,

and the means through which the court may grant

“ See chapter 2, infra.

42a

that protection.'* In the consumer area, proposed

chapter 13 encourages more debtors to repay their

debts over an extended period rather than to opt for

straight bankruptcy liquidation and discharge."’

The Bankruptcy Act now contains four chapters

for commercial reorganizations.'* These chapters,

and the divisions between them, were written in the

1930’s, at a time when the law of commercial reor-

ganization was little developed. The experience and

development of the past forty years has made the

current four chapters difficult to use, and the divisions

between them have been shown to be arbitrary and of

limited utility. The bill consolidates all four chapters

into one business reorganization chapter (with some

special provisions for railroad reorganizations) and

rationalizes the various forms of relief available to

a failing business, making a business reorganization

a quicker, more efficient procedure, and providing

greater protection for debtors, creditors, and the public

interest.”

Commercial financing has undergone significant

changes since the nearly universal adoption of the

Uniform Commercial Code in the 1960’s. The Bank-

ruptcy Act has not yet been revised to account for the

changes in the industry. The bill modernizes bank-

ruptcy law in its interaction with commercial financ-

ing, in the areas of preferences and protection of both

!’ See chapter 3, infra.

Bankruptcy Act, cc. VII, X, XI, XII.

9 See chapter 5, infra.

43a

the debtor and secured creditors during a bankruptcy

case.*°

House Report No. 95-595

Report of the Committee on the Judiciary

pp. 129-132 (continuation of previous report)

(September 8, 1977)

* * *

The bill makes changes in other areas of the dis-

charge. In liquidation cases, only individuals will be

entitled to a discharge.” In reorganization and indi-

vidual repayment plan cases, the existence of circum-

stances that would bar discharge, such as misconduct

or the six-year bar, will not be a bar to confirmation of

a plan.” As the bankruptcy commission notes:”

Neither the interests of creditors nor the

principles of sound bankruptcy administra-

tion requires a denial of confirmation due to

conduct on the part of the debtor which would

bar a discharge. If the debtor wants to pay

his debts pursuant to a plan, and if the

creditors are willing to go along, he should be

allowed to do so. The fact that a discharge

would not be available in a liquidation case

should furnish a greater incentive for the

debtor to perform under the plan.

» See chapter 4, infra.

” Id. (proposed 11 U.S.C. 727(a\(1)).

" Id (proposed 11 U.S.C. 1129, 1141, 1325, 1328).

™ COMMISSION REPORT, pt. I, at 175.

44a

2. Exceptions to discharge

H.R. 8200 carries over from current law the concept

that certain debts should be excepted from discharge.”

That is, certain debts should continue to be obligations

of the debtor after bankruptcy notwithstanding

the bankruptcy discharge. However, the bill makes

several changes in the debts excepted. Tax debts

continue to be nondischargeable to a limited degree,

but the time period for accumulation of taxes that are

excepted from discharges is reduced in the case of all

but income taxes, and the measurement of the time

period is better defined.”* Debts for alimony, mainte-

nance, and support continue to be nondischargeable,

with some changes.” Debts not listed by the debtor

also continue to be nondischargeable, but the category

of nonlisted debts is better articulated and defined.”

The bill continues the exception to discharge based

on a false statement in writing concerning the debtor’s

financial condition, but with some modifications,” and

rejects the notion that educational loans should be

excepted from discharge.”

™ Bankruptcy Act § 17a, 11 U.S.C. 35(a) (1970).

™ Compare H.R. 8200 § 101 (proposed 11 U.S.C. 507(6),

523(a)(11) with Bankruptcy Act § 17a(1), 11 U.S.C. 35(a)(1).

™® Compare H.R. 8200 § 101 (proposed 11 U.S.C. 523(a)(5)) with

Bankruptcy Act § 17a(7), 11 U.S.C. 35(a\(7). See Schiffman

V. Wasserman, 3 Bankr. Ct. Dec. 467 (D.R.I. 1977) (Votolato,

bankruptcy judge).

*® Compare H.R. 8200 § 101 (proposed 11 U.S.C. 523(a)(3)) with

Bankruptcy Act § 17a(3), 11 U.S.C. 35(a)(3).

™ Compare H.R. 8200 § 101 (proposed 11 U.S.C. 523(a)(2)) with

Bankruptcy Act § 17a(2), 11 U.S.C. 35(a)(2).

See H.R. 8200 § 316.

45a

a. False financial statements

A debt for obtaining money, property, or services, or

an extension or renewal of credit by use of a statement

in writing respecting the debtor’s financial condition,

that is materially false, that the debtor made or

published with intent to deceive, and on which the

creditor reasonably relied, is excepted from discharge

under the bill.” The amount of the debt made non-

dischargeable on account of a false financial statement

is not limited to “new value” extended when a loan is

rolled over. If an initial loan is made subject to a false

financial statement and new money is advanced under

a subsequent loan that is not made under conditions

of fraud or false pretenses, then only the initial

amount of the loan made on the original financial

statement is invalidated and excepted from discharge.

On the other hand, where the original financial state-

ment is made under nonfraudulent conditions and the

entire loan in addition to new money is advanced

under a subsequent false financial statement, the

entire loan is made under fraudulent conditions. This

rule is sound as a matter of policy because the creuitor

relies to his detriment with respect to the entire

amount advanced under the false financial statement.

Legal rights with respect to the amount previously

advanced may be altered; interest rates may be

changed, maturity dates may be extended, and legal

remedies may be forgone in reliance on the new false

financial statement. However, if the terms of the new

agreement are identical to the old agreement with

respect to the old money, then no new money was

obtained by a false statement on which the creditor

relied since the creditor’s rights were unchanged;

therefore, only that portion of the false financial

” H.R. 8200 § 101 (propos

46a

statement that applied to new money would be

nondischargeable. In addition, the bill contains a

provision that a creditor that requests a determination

of the dischargeability of a consumer debt under this

exception to discharge and that loses the ensuing

litigation must pay the debtor’s costs and attorney’s

fees, and may be required to pay any actual pecuniary

damages resulting from the litigation.“ Current law

provides a nearly identical exception to discharge.”

The differences are that current law does not cover a

debt for services, and requires only reliance, not rea-

sonable reliance, by the creditor on the statement. The

courts have recently begun to require that the reliance

be reasonable, however.*? Current law does not, how-

ever, contain a provision granting costs, attorney's

fees, and damages to a consumer debtor.

The premise of the exception to discharge is that a

creditor that extended credit based on misinformation

or fraudulent information transmitted by the debtor

should be protected. The provision, however, has led

to abuse in consumer cases, and has frustrated the

fresh start goal of the bankruptcy discharge.

It is a frequent practice for consumer finance compa-

nies to take a list from each loan applicant of other

loans or debts that the applicant has outstanding.”

While the consumer finance companies use these

statements in evaluating the credit risk, very often the

statements are used as a basis for a false financial

statement exception to discharge. The forms that the

applicant fills out often have too little space for a

* Id. (proposed 11 U.S.C. 523(d)).

*' Bankruptcy Act § 17a(2), 11 U.S.C. 35(a)(2).

™ Hearings, pt. 2, at 981-1006.

Hearings, pt. 2, at 759-60, 942, 990-92.

47a

complete list of debts. Frequently, a loan applicant is

instructed by a loan officer to list only a few or only the

most important of his debts. Then, at the bottom of

the form, the phrase “I have no other debts” is either

printed on the form, or the applicant is instructed to

write the phrase in his own handwriting. In addition,

the form states that the creditor has relied on the

statement in granting the loan.

However, the creditor often has other sources of

information, such as credit bureau reports, to verify

the accuracy of the list of debts. Nevertheless, if the

debtor files bankruptcy, creditors with these financial

statements are in a position to threaten the debtor

with litigation to determine the dischargeability of the

debt, based on the false financial statement exception

to discharge. Most often there has been no intent to

deceive on the part of the debtor, and, as in so many

aspects of the creditor-debtor relationship, the debtor

has simply followed the creditor’s instructions with

little understanding of the consequences of his action.

Creditor practices in this area have been so strong

that the Bankruptcy Commission recommended that

the false financial statement exception to discharge be

eliminated for consumer debts.“ This bill recognizes,

however, that there are actual instances of consumer

fraud, and that creditors should be protected from

fraudulent debtors. It retains the exception, with

small modifications. But it also recognizes that the

leverage creditors have over their debtors comes not so

much at the stage when the loan application is made,

but rather when bankruptcy ensues.

The threat of litigation over this exception to

discharge and its attendant costs are often enough to

™ Commission Report, pt. I, at 176; pt. Il, at 136.

48a

induce the debtor to settle for a reduced sum, in order

to avoid the costs of litigation. Thus, creditors with

marginal cases are usually able to have at least part

of their claim excepted from discharge (or reaffirmed),

even though the merits of the case are weak. Statistics

from a recent year, for example, show that approxi-

mately 8,000 cases were filed under this exception to

discharge. Of those, over 5,000 were settled without

trial. Of the remaining 3,000 creditors won just half.*

If those 3,000 are representative, then it is likely that

in 2,500 cases, debtors settled by agreeing to repay

part of the debt, even though they would have won the

case had it gone to trial.

In order to balae the scales more fairly in this

area, H.R. 8200 adupts a compromise. The false finan-

cial statement exception is retained, and the creditor,

as under current law, is required to initiate the pro-

ceeding to determine if the debt is nondischargeable.

If the debtor prevails, however, the creditor is taxed

costs and attorney’s fees, and may be taxed any actual

pecuniary damages, such as loss of a day’s work, that

the debtor might have suffered as a result of the

litigation. The present pressure on the honest debtor

to settle in order to avoid attorney’s fees in litigation

over a creditor—induced false statement is eliminated.

The creditor is protected from dishonest debtors by the

continuance of the exception to discharge.

The bill does not award the creditor attorney’s fees

if the creditor prevails. Though such a balance might

seem fair at first blush, such a provision would restore

the balance back in favor of the creditor by inducing

debtors to settle no matter what the merits of their

cases. In addition, the creditor is generally better able

* Hearings, pt. 2, at 926.

49a

to bear the costs of the litigation than a bankrupt

debtor, and it is likely that a creditor’s attorneys fees

would be substantially higher than a debtor’s, putting

an additional disincentive on the debtor to litigate.

The costs-attorney’s fees provision is mandatory. If

the provision were made permissive instead of man-

datory, with discretion in the court to award such

amounts as were proper in each particular case, the

debtor would once again be subject to the risk of

paying attorney’s fees and losing a day’s work without

pay. The balance would again shift back toward the

crediter, and would put pressure on the debtor to

settle. Making the provision discretionary would

seriously weaken the protection it provides.

House Report No. 95-595

Report of the Committee on the Judiciary

pp. 363-365 (continuation of previous report)

(September 8, 1977)

* * *

§ 523. Exceptions to discharge

This section specifies which of the debtor’s debts are

not discharged in a bankruptcy case, and certain

procedures for effectuating the section. The provision

in Bankruptcy Act § 17c granting the bankruptcy

courts jurisdiction to determine dischargeability is

deleted as unnecessary, in view of the comprehensive

grant of jurisdiction prescribed in proposed 28 U.S.C.

1471(b), which is adequate to cover the full jurisdiction

that the bankruptcy courts have today over discharge-

ability and related issues under Bankruptcy Act 17c.

The Rules of Bankruptcy Procedure will specify, as

50a

they do today, who may request determinations of dis-

chargeability, subject, of course, to proposed 11 U.S.C.

523(c), and when such a request may be made. Pro-

posed 1i U.S.C. 350, providing for reopening of cases,

provides one possible procedure for a determination of

dischargeability and related issues after a case is

closed.

Subsection (a) lists eight kinds of debts excepted

from discharge. Taxes that are entitled to priority

are excepted from discharge under paragraph (1). In

addition, taxes with respect to which the debtor made

a fraudulent return or willfully attempted to evade or

defeat, or with respect to which a return (if required)

was not filed or was not filed after the due date and

after one year before the bankruptcy case are excepted

from ¢'scharge. If the taxing authority’s claim has

been disallowed, then it would be barred by the more

modern rules of collateral estoppel from reasserting

that claim against the debtor after the case was closed.

See Plumb, The Tax Recommendations of the Commis-

sion on the Bankruptcy Laws: Tax Procedures, 88

Harv. L. Rev. 1360, 1388 (1975).

As under Bankruptcy Act § 17a(2), a debt for obtain-

ing money, property, services, or an extension or

renewal of credit by false pretenses, a false representa-

tion, or actual fraud, or by use of a statement in

writing respecting the debtor’s financial condition that

is materially false, on which the creditor reasonably

relied, and that the debtor made or published with

intent to deceive, is excepted from discharge. This

provision is modified only slightly from current section

17a(2). First, “actual fraud” is added as a grounds for

exception from discharge. Second, the creditor must

not only have relied on a false statement in writing,

the reliance must have been reasonable. This codifies

5la

case law construing this provision. Third, the phrase

“in any manner whatsoever” that appears in current

law after “made or published” is deleted as unneces-

sary. The word ‘published’ is used in the same sense

that it is used in slander actions.

Unscheduled debts are excepted from discharge

under paragraph (3). The provision, derived from

section 17a(3), follows current law, but clarifies some

uncertainties generated by the case law construing

17a(3). The debt is excepted from discharge if it was

not scheduled in time to permit timely action by the

creditor to protect his rights, unless the creditor had

notice or actual knowledge of the case.

Paragraph (4) excepts debts for embezzlement or

larceny. The deletion of willful and malicious conver-

sion from § 17a(2) of the Bankruptcy Act is not

intended to effect a substantive change. The intent is

to include in the category of non-dischargeable debts a

conversion under which the debtor willfully and

maliciously intends to borrow property for a short

period of time with no intent to inflict injury but on

which injury is in fact inflicted.

Paragraph (5) excepts from discharge debts to a

spouse, former spouse, or child of the debtor for ali-

mony to, maintenance for, or support of, the spouse or

child. This language, in combination with the repeal

of section 456(b) of the Social Security Act (43 U.S.C.

656 (b)) by section 327 of the bill, will apply to make

nondischargeable only alimony, maintenance, or sup-

port owed directly to a spouse or dependent. See

Hearings, pt. 2. at 942. What constitutes alimony,

maintenance, or support, will be determined under the

bankruptcy laws, not State law. Thus, cases such as

In Re Waller, 494 F.2d 447 (6th Cir. 1974); Hearings,

pt. 3, at 1308-10, are overruled, and the result in cases

52a

such as Fife v. Fife, 1 Utah 2d 281, 265 P. 2d 642 (1952)

is followed. This provision will, however, make non-

dischargeable any debts resulting from an agreement

by the debtor to hold the debtor’s spouse harmless on

joint debts, to the exvent that the »greement is in

payment of alimony, maintenance, or support of the

spouse, as determined under bankruptcy law consid-

erations that are similar to considerations of whether

a particular agreement to pay money to a spouse

is actually alimony or a property settlement. See

Hearings. pt. 3, at 1287-1290.

Paragraph (6) excepts debts for willful and mali-

cious injury by the debtor to another person or to the

property of another person. Under this paragraph,

“willful” means deliberate or intentional. To the

extent that Tinker v. Colwell, 193 U.S. 473 (1902),

1092 held that a looser standard is intended, and to

the extent that other cases have relied on Tinker

to apply a “reckless disregard” standard, they are

overruled.

Paragraph (7) excepts from discharge a debt for a

fine, penalty, or forfeiture payable to and for the bene-

fit of a governmental unit, that is not compensation for

actual pecuniary loss.

Paragraph (8) excepts from discharge debts that the

debtor owed before a previous bankruptcy case con-

cerning the debtor in which the debtor was denied a

discharge other than on the basis of the six-year bar.

Subsection (b) of this section permits discharge in a

bankruptcy case of an unscheduled debt from a prior

case. This provision is carried over from Bankruptcy

Act § 17b. The result dictated by the subsection would

probably not be different if the subsection were not

included. It is included nevertheless for clarity.

53a

Subsection (c) requires a creditor who is owed a debt

that may be expected from discharge under paragraph

(2), (4), or (6) (false statements, embezzlement or lar-

ceny, or willful and malicious injury) to initiate pro-

ceedings in the bankruptcy court for an exception to

discharge. If the creditor does not act, the debt is dis-

charged. This provision does not change current law.

Subsection (d) is new. It provides protection to a

consumer debtor that dealt honestly with a creditor

who sought to have a debt excepted from discharge

on grounds of falsity in the incurring of the debt.

The debtor is entitled to costs of and a reasonable

attorney’s fee for the proceeding to determine the

dischargeability of a debt under subsection (a)(2), if

the creditor initiated the proceeding and the debt was

determined to be dischargeable. The court is permit-

ted to award any actual pecuniary loss that the debtor

may have suffered as a result of the proceeding (such

as loss of a day’s pay). The purpose of the provision is

to discourage creditors from initiating false financial

statement exception to discharge actions in the hopes

of obtaining a settlement from an honest debtor

anxious to save attorney’s fees. Such practices impair

the debtor’s fresh start.

§ 524. Effect of discharge

Subsection (a) specifies that a discharge in a bank-

ruptcy case voids any judgment to the extent that it is

a determination of the personal liability of the debtor

with respect to a prepetition debt, and operates as an

injunction against the commencement or continuation

of an action, the employment of process, or any act,

including telephone calls, letters, and personal con-

tacts, to collect, recover, or offset any discharged debt

as a personal liability of the debtor, or from property

of the debtor, whether or not the debtor has waived

54a

discharge of the debt involved. The injunction is to

give complete effect to the discharge and to eliminate

any doubt concerning the effect of the discharge as a

total prohibition on debt collection efforts. This para-

graph has been expanded over a comparable provision

in Bankruptcy Act § 14f to cover

* * *

55a

Act of November 6, 1978, 92 Stat. 2590

* * *

§ 523. Exceptions to discharge

(a) A discharge under section 727, 1141, or 1328(b)

of this tale, does not discharge an individual debtor

from any debt—

(1) for a tax or a customs duty—

(A) of the kind and for the periods specified in

section 507(a) (2) or 507(a) (6) of this title, whether

or not a claim for such tax was filed or allowed;

(B) with respect to which a return, if required-

(i) was not filed; or

(ii) was filed after the date on which such

return was last due, under applicable law or

under any extension, and after two years before

the date of the filing of the petition; or

fraudulent return or willfully attempted in any

manner to evade or defeat such tax;

(2) for obtaining money, property, services, or an

extension, renewal, or refinance of credit, by—

(A) false pretenses, a false representation, or

actual fraud, other than a statement respecting

the debtor’s or an insider’s financial condition; or

(B) use of a statement in writing-

(i) that is materially false;

(ii) respecting the debtor’s or an insider’s

financial condition;

56a

(iii) on which the creditor to whom the debtor

is liable for obtaining such money, property,

services, or credit reasonably relied; and

(iv) that the debtor caused to be made or

published with intent to deceive;

(3) neither listed nor scheduled under section

521(1) of this title, with the name, if known to the

debtor, of the creditor to whom such debt is owed, in

time to permit—

(A) if such debt is not of a kind specified in

paragraph (2), (4), or (6) of this subsection, timely

filing of a proof of claim, unless such creditor had

notice or actual knowledge of the case in time for

such timely filing; or

(B) if such debt is of a kind specified in para-

graph (2), (4), or (6) of this subsection, timely filing

of a proof of claim and timely request for a deter-

mination of dischargeability of such debt under

one of such paragraphs, unless such creditor had

notice or actual knowledge of the case in time for

such timely filing and request;

(4) for fraud or defalcation while acting in a

fiduciary capacity, embezzlement, or larceny;

(5) to a spouse, former spouse, or child of the

debtor, for alimony to, maintenance for, or support

of such spouse or child, in connection with a separa-

tion agreement, divorce decree, or property settlement

agreement, but not to the extent that—

(A) such debt is assigned to another entity,

voluntarily, by operation of law, or otherwise; or

(B) such debt includes a liability designated as

alimony, maintenance, or support, unless such

57a

liability is actually in the nature of alimony,

maintenance, or support;

(6) for willful and malicious injury by the debtor

to another entity or to the property of another entity;

(7) to the extent such debt is for a fine, penalty,

or forfeiture payable to and for the benefit of a

governmental unit, and is not compensation for

actual pecuniary loss, other than a tax penalty—

(A) relating to a tax of a kind not specified in

paragraph (1) of this subsection; or

(B) imposed with respect to a transaction or

event that occurred before three years before the

date of the filing of the petition;

(8) to a governmental unit, or a nonprofit institu-

tion of higher education, for an educational loan,

unless—

(A) such loan first became due before five years

before the date of the filing of the petition; or

(B) excepting such debt from discharge under

this paragraph will impose an undue hardship on

the debtor and the debtor’s dependents; or

(9) that was or could have been listed or scheduled

by the debtor in a prior case conceining the debtor

under this title or under the Bankruptcy Act in which

the debtor waived discharge, or was denied a discharge

under section 727 (a) (2), (3), (4), (5), (6), or (7) of this

title, or under section 14c (1), (2), (3), (4), (6), or (7) of

such Act.

(b) Notwithstanding subsection (a) of this section,

a debt that was excepted from discharge under

subsection (a) (1), (a) (3), or (a) (8) of this section, under

section 17a(1), 17a(3), or 17a(5) of the Bankruptcy Act,

58a

under section 4391 of the Higher Education Act of

1965 (20 1087-3), or under section 733(g) of the Public

Health Services Act (42 U.S.C. 294f) in a prior case

concerning the debtor under this title, or under the

Bankruptcy Act, is dischargeable in a ease under this

title unless, by the terms of subsection (a) of this

section, such debt is not dischargeable in the case

under this title.

this section, the debtor shall he discharged from a debt

specified in paragraph (2), (4), or (6) of subsection (a)

of this section. unless, on request of the creditor to

whom such debt is owed, and after notice and a

hearing, the court determines such debt to be excepted

from discharge under paragraph (2), (4), or (6), as the

case may be, of subsection (a) of this section.

(d) If a creditor requests a determination of dis-

chargeability of a consumer debt under subsection

(a) (2) of this section, and such debt is discharged, the

court shall grant judgment against such creditor and

in favor of the debtor for the costs of, and a reasonable

attorney’s fee for, the proceeding to determine dis-

chargeability, unless such granting of judgment would

be clearly inequitable.

§ 524. Effect of discharge

(a) A discharge in a case under this title—

(1) voids any judgment at any time obtained, to

the extent that such judgment is a determination of

the personal liability of the debtor with respect to

any debt discharged under section 727, 944, 1141, or

1328 of this title, whether or not discharge of such

debt is waived;

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(2) operates as an injunction against the commence-

ment or continuation of an action, the employment

of process, or any act, to collect, recover or offset

any such debt as a personal liability of the debtor,

or from property of the debtor, whether or not

discharge of such debt is waived; and

(3) operates as an injunction against the commence-

ment or continuation of an action, the employment

of process, or any act, to collect or recover from, or

offset against, property Of the debtor of the kind

specified in section 541(a) (2) of this title that is

acquired after the commencement of the case, on

account of any allowable community claim, except a

community claim that is excepted from discharge

under section 523 or 1328(c) (1) of this title, or that

would be so excepted, determined in accordance

with the provisions of sections 523(c) and 523(d) of

this title, in a case concerning the debtor’s spouse

commenced on the date of the filing of the petition

in the case concerning the debtor, whether or not

discharge of the debt based on such community

claim is waived.

(b) Subsection (a) (3) of this section does not apply

if—

(1) (A) the debtor’s spouse is a debtor in a case

under this title, or a bankrupt or a debtor in a case

under the Bankruptcy Act, commenced within six

years of the date of the filing of the petition in the

case concerning the debtor; and

(B) the court does not grant the debtor’s spouse

a discharge in such case concerning the debtor’s

spouse; or

(2) (A) the court would not grant the debtor’s

spouse a discharge in a ease under chapter 7 of this

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title concerning such spouse commenced on the date

of the filing of the petition in the case concerning the

debtor; and

(B) a determination that the court would not so

grant such discharge is made by the bankruptcy

court within the time and in the manner provided

for a determination under section 727 of this title

of whether a debtor is granted a discharge.

the debtor, the consideration for which, in whole or

in part, is based on a debt that is dischargeable in a

case under this title is enforceable only to any

extent enforceable under applicable nonbankruptcy

law, whether or not discharge of such debt is waived,

only if—

(1) such agreement was made before the granting

of the discharge under section 727,1141, or 1328 of

this title;

(2) the debtor has not rescinded such agreement

within 30 days after such agreement becomes

enforceable;

*x* * *

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.