An Atlanta law firm's fee fight is at the heart of a tug-of-war in the U.S. Supreme Court over a key section of the bankruptcy code that involves dishonest debtors.

The justices this week heard arguments on the law firm Lamar, Archer & Cofrin's claim that a client's fraudulent statement about a single asset does not allow his debt to the firm—more than $104,000 in unpaid legal fees—to be discharged in a bankruptcy.

The case presents the justices with a classic statutory interpretation challenge that has divided the federal courts of appeals.

At its root, the case began back in 2004 when R. Scott Appling retained the law firm to represent him in litigation against the former owner of his business. By 2005, he had paid $135,000 in fees and still owed $60,000. During a meeting in March of that year to discuss the growing balance, Appling reportedly told the law firm that he was expecting a tax refund of more than $100,000 that would enable him to pay the bill. Lamar Archer continued to represent him.

Later in November, Appling claimed he had not yet received the refund when, in fact, he had, for $59,000, which he applied to his business. After the litigation settled in 2006, Lamar Archer discovered Appling had received the refund and it was not available to pay the firm's fees.

Lamar Archer sued Appling and obtained the $104,000 judgment. Appling filed for Chapter 7 bankruptcy and Lamar Archer asserted its claim in the Middle District of Georgia that Appling's debt to the firm was not dischargeable because it was the result of “false pretenses, a false representation, or actual fraud.”

Under the bankruptcy code, if a false statement is “respecting the debtor's or an insider's financial condition,” and the statement is in writing, the debt can be discharged.

The bankruptcy court held that Appling's statements about the tax refund were not statements “respecting” his financial condition because they did not address his overall financial condition or net worth. His debt could not be discharged, according to that court. The district judge agreed, but the U.S. Court of Appeals for the Eleventh Circuit in February 2017 reversed the decision.

The appellate court concluded that a statement about an asset is one “respecting” financial condition because it is related to the debtor's net worth, and so Appling's debt is dischargeable in bankruptcy.

The dispute in the Supreme Court centers on §§523(a)(2)(A) and 523(a)(2)(B) of the bankruptcy code.

Gregory Garre (2012). Credit: Diego M. Radzinschi/ ALM

During hourlong arguments this week, Lamar Archer's counsel, former U.S. Solicitor General Gregory Garre of Latham & Watkins, told the justices, “Our view is that a statement respecting financial condition is a statement that purports to present a picture of one's overall financial situation. And there are several things that could qualify as that.”

Garre gave as examples: a balance statement or sheet; an indication of net worth and a credit score.

“All of these things look to one's overall financial situation, not to just one side of the ledger, an asset or a liability, and present a picture of overall financial status,” Garre said. Appling's interpretation, he added, would eliminate “respecting” as a term of limitation and any individual input, individual asset or individual liability would become a statement respecting financial condition.

Garre argued that Congress could not have intended for a debtor who engaged in obvious deceitful conduct against a blameless creditor to discharge that debt. “There's no reason to think Congress would want to promote that kind of behavior,” he said.

But Justice Ruth Bader Ginsburg interjected, “Why wouldn't the result be to get people, especially law firms, to do things in writing?”

Mayer Brown partner Paul Hughes, representing Appling, told the justices that the “clearest test” is to ask: “Does the statement describe what would be a line item on one's balance sheet or income statement? So I think another way to look at this case is a statement that shows ability-to-pay liquidity is a statement that goes to financial condition.”

Appling's statement about the tax refund, Hughes added, “is obviously a statement about ability to pay. And so I think that does confirm that it is a statement respecting financial condition.”

The United States is an amicus party supporting Appling and Jeffrey Sandberg, an assistant to the solicitor general, shared argument time with Hughes. Lamar Archer is supported in the high court by the National Federation of Independent Business Small Business Legal Center.