[This is the first of many posts highlighting cases that touch on the splits among the federal circuit courts on various topical bankruptcy issues.]
“Hell hath no fury like a lover scorned” is a well-known epithet that comes to mind when reading the Tenth Circuit’s recent opinion in Cadwell v. Joelson (In re Joelson), (2005 WL 2722891) (10th Cir., 10/24/05). The case recounts how Stan Cadwell (a retired single man from Casper, Wyoming) met Joelene Joelson (a waitress) in a Casper “cafe” where Joelene worked. Stan took out a mortgage on his house for $50,000 for the benefit of his erstwhile lover, but not until after he had performed some due diligence of his own into Joelene’s claims to ownership of a sizable, though illiquid, estate. When the affair ended, and Joelene didn’t repay her debt, Stan sued Joelene in Wyoming state court on the $50,000 he had given her. Joelene demurred, saying it was but a gift from her former lover, but the state court disagreed, and entered judgment against Joelene. She later filed a petition for chapter 7 relief.
Stan proved that “hell hath no fury like a [Cadwell] scorned” and filed an adversary proceeding in the bankruptcy court seeking to bar the discharge of all of Joelene’s debts (or, at a minimum, his state court judgment). The bankruptcy court would not deny the discharge of all of her debts, but did agree that Stan’s claim was non-dischargeable under Bankruptcy Code section 523(a)(2)(A). This section states that a debt obtained by “false pretenses, a false representation, or actual fraud” is nondischargeable, subject to this important exception: if a debt is obtained by a false oral “statement respecting the debtor’s … financial condition,” the debt is dischargeable. Conversely, under Bankruptcy Code section 523(a)(2)(B), a debt obtained by a false written statement “respecting the debtor’s … financial condition” is nondischargeable, provided certain conditions are met.
In finding the debt to Stan nondischargable, the bankruptcy court found actionable Joelene’s misrepresentations to Stan that she owned “residences in both Casper and Glendo, a motel in Glendo, and a number of antique vehicles stored in Glendo.” On appeal, the BAP affirmed the ruling of the bankruptcy court, holding that some of Joelene’s misrepresentations to Stan were not statements “respecting [her] financial condition,” thus rendering her debt to Stan nondischargable.
The case is notable for its exceptional analysis of the roots of § 523(a)(2) (whose origins are found in the Bankruptcy Act of 1898) and the prevailing split in the circuits on the meaning of the phrase “respecting the debtor’s … financial condition.” In affirming the ruling of the lower courts, the Tenth Circuit outlined the respective legal positions of Stan and Joelene, and concluded that Stan’s “strict interpretation” of the phrase was “most consistent with the text and structure of the Bankruptcy Code, Congress’s intent as expressed in the legislative history of 11 U.S.C. § 523(a)(2)(A) and (B), and case law,” stating:
In this case, because most of the pre-loan communications between Joelson and Cadwell were oral, the parties focus on § 523(a)(2)(A), which addresses false oral communications. Joelson argues that the phrase “respecting the debtor’s … financial condition” should be interpreted broadly to include all oral communications that reflect on the extent of any of her assets, liabilities, and income. Joelson takes this position because under § 523(a)(2)(A), although debts obtained by “false pretenses, a false representation, or actual fraud” are not dischargeable, debts obtained by false statements “respecting the debtor’s … financial condition” are dischargeable. Thus, it is in Joelson’s interest for her communications to Cadwell to qualify as “respecting [her] financial condition,” so that the state court judgment can be discharged. As is discussed below, Joelson’s communications with Cadwell did contain some information as to her assets and income, so the state court judgment would be dischargeable under the broad interpretation she urges.
On the other hand, Cadwell argues that the phrase “respecting the debtor’s … financial condition” should be interpreted strictly to include only information as to Joelson’s overall financial health, not information as to her individual assets or liabilities. As is discussed below, none of Joelson’s communications with Cadwell contain information on Joelson’s overall net worth, overall financial condition, or overall ability to generate income. Thus, if the phrase “respecting the debtor’s … financial condition” is interpreted strictly, the state court judgment would not be dischargeable under § 523(a)(2)(A) because Joelson would have obtained a loan by “false pretenses, a false representation, or actual fraud”–not a false statement “respecting [her] financial condition.” This would prevent Cadwell from having to settle for his claim against Joelson being resolved at a discount in bankruptcy court.
Therefore, our legal interpretation of the scope of the phrase “respecting the debtor’s … financial condition” will determine the outcome of this case. For the reasons discussed below, we believe that the strict interpretation of the phrase is most consistent with the text and structure of the Bankruptcy Code, Congress’s intent as expressed in the legislative history of 11 U.S.C. § 523(a)(2)(A) and (B), and case law.
© Steve Jakubowski 2005