An Oral Agreement Is Not Worth the Paper It’s Printed On

On June 4, 2018, the U.S. Supreme Court held that an individual’s false oral statement about his assets would not support a finding of fraud under the relevant provision of the U.S. Bankruptcy Code. That provision required the false statement to be in writing if it were to serve as the basis of a fraud claim. (Lamar Archer & Cofrin LLP v. R. Scott Appling, Case Number 16-1215, 584 U.S. ___ (2018), issued on June 4, 2018.)

In this case, Mr. Appling hired a law firm to represent him in some litigation. When he had fallen behind on his legal bill to the extent of some $60,000, the firm threatened to withdraw from the case. He told the firm that he was expecting a tax refund of about $100,000 which would cover that bill and all future fees. Relying on Mr. Appling’s assertion, the law firm continued with the representation.

As you probably have concluded by now, there was no $100,000 refund. It was only $60,000, and Mr. Appling invested it in his business rather than paying his attorneys. Worse, when his attorneys subsequently asked about the refund, Mr. Appling lied and told him that he hadn’t received the refund yet.

Mr. Appling subsequently filed a Chapter 7 bankruptcy case, and the law firm sued him, saying that his lies about his tax refund constituted fraud. Because all of his statements had only been made orally, the Supreme Court found that the firm had not made its case under the Bankruptcy Code.

Although this case arose in a narrow bankruptcy context, it serves as a great reminder for every business and every individual: If you are going to rely on something somebody tells you in making a decision, get the statement in writing.

This applies in any context you can imagine.

• If you owe money and the creditor is promising to give you a break, get the promise in writing.
• If you are a lender and you feel more comfortable because the borrower has provided some additional information about his ability to repay, get the information in writing.
• If you are a tenant and the landlord has made some promises to you, be sure it’s in the lease or in a separate written document.

As the Supreme Court stated in the debtor-creditor context, parties to a transaction should “insist that the representations respecting the debtor’s financial condition on which they rely in extending money, property, services, or credit are made in writing. Doing so will likely redound to their benefit, as such writings can foster accuracy at the outset of a transaction, reduce the incidence of fraud, and facilitate the more predictable, fair, and efficient resolution of any subsequent dispute.”

Good advice in all contexts.

Bonus Tip:

• If you agree that you will be personally liable on a contract, promissory note, or other document, just sign your name.
• If you intend that your business or some other individual or entity will be liable under the contract, and not you, don’t sign your own name.
  • You must sign in a representative capacity, to show that you are signing on behalf of your company and not personally.
  • For instance, if I were signing a document on behalf of my law firm, I would sign Danna McKitrick, P.C. by A. Thomas DeWoskin, Vice President. That shows for whom I am signing the document and my position with the firm.

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years.