DAVID W. HERCHER, Bankruptcy Judge.
The State of Oregon, Department of Human Services, filed a complaint against chapter 7 debtors Blake Mcharo and India Rose Mcharo, seeking to except its fraud claim against them from their bankruptcy discharge.
I entered judgment against India,
Given Blake's default, I assume the truth of the state's allegations against him.
The Mcharos applied to the state in 2011 for cash benefits through the Temporary Assistance for Needy Families program.
When the Mcharos submitted their initial, joint application in August 2011, they truthfully reported that Blake was unemployed.
They received benefits from September 2011 until June 2012. During that time, Blake did not report that he was working and earning income, despite his earlier promise to report any changes to his job status.
Due to the Mcharos' misrepresentations, the state overpaid them benefits of $5,047, of which $1,276 has been recovered, leaving a balance due, with interest, of $3,843 as of April 22, 2018.
In the complaint, the state contends that Blake's debt to the state for benefit overpayments is nondischargeable under 11 U.S.C. § 523(a)(2), without specifying whether it relies on subparagraph (A) or (B) of that subsection.
In 1986, the Ninth Circuit held in Eitel v. McCool that, in the exercise of a trial court's discretion whether to enter a default judgment, the factors the court may consider include "the merits of plaintiff's substantive claim" and "the sufficiency of the complaint."
Accordingly, I need not grant the state's request for default judgment against Blake if the facts the state alleges do not support a determination of nondischargeability as a matter of law.
Section 523(a)(2) makes nondischargeable the obtaining of money or property by several types of misrepresentation. Subparagraph (A) addresses three types of misrepresentation: false pretenses, false representation, or actual fraud—other than a statement respecting the debtor's or an insider's financial condition. Those types of misrepresentation need not be in writing to give rise to a nondischargeable claim. Subparagraph (B) addresses the use of a written statement that is materially false, respecting the debtor's or an insider's financial condition, on which the creditor reasonably relied, and that the debtor caused to be made or published with intent to deceive. Thus, a nondischargeability action based on a false statement regarding the debtor's financial condition can only be brought under section 523(a)(2)(B)—which requires that the statement be in writing.
In 1996, the Ninth Circuit held in In re Eashai that a debtor's failure to disclose the intent not to pay credit-card debt can constitute actual fraud under section 523(a)(2)(A).
The court also observed with approval bankruptcy court holdings that "a debtor's silence or omission regarding a material fact can constitute a false representation" under section 523(a)(2)(A) when the debtor was under a duty to disclose the fact.
Under Eashai, then, the state is correct that silence in the face of an obligation to disclose can constitute a representation supporting nondischargeability for actual fraud under section 523(a)(2)(A).
The state doesn't dispute that Blake's failure to report his income change is a representation "respecting" his financial condition. The only open question is whether that representation is also a "statement" under section 523(a)(2). If it is, the representation—being, by definition, unwritten—cannot support a determination of nondischargeability.
Earlier this year, the Supreme Court held in Lamar, Archer & Cofrin, LLP v. Appling
The state argues that concealment of information cannot be a "statement" and therefore is not addressed by subparagraph (B).
Although I must pay respectful attention to every word of a Supreme Court opinion, the Court has frequently admonished that its discussion of issues that are neither in dispute nor essential to a decision should not be treated as binding. For example, in Kirtsaeng v. John Wiley & Sons, Inc., the Supreme Court refused to give binding effect to a statement in a previous statutory-construction case, saying: "The language [at issue] was not at issue in [the previous case]; the point before us now was not then fully argued; we did not canvas the considerations we have here set forth."
In Lamar, whether a statement respecting a debtor's financial condition must be affirmative and express, rather than an omission, was not in dispute, was not argued, and was not considered at any length by the Court. Rather, it identified "respecting" as "the key word in the statutory phrase."
Other than the paragraph from Lamar, the state refers to no authority supporting its contention that, under section 523(a)(2), a "statement" must be express, rather than implied by omission.
A leading dictionary of legal terminology, Black's, includes as a meaning of "statement" the definition supplied by Federal Rule of Evidence 801(a): "a person's . . . nonverbal conduct, if the person intended it as an assertion."
Under Lamar, If Blake had telephoned the Department of Human Services in October 2011 and said, "I have no income," that statement undoubtedly be one respecting his financial condition and thus, not being written, could not support a nondischargeability judgment. But, according to the state, a representation implied by silence cannot be a statement, so judgment in its favor would be warranted if Blake failed to say anything at all. In other words, according to the state, Blake could have protected himself by actively lying about his new job rather than staying silent. I doubt that Congress intended to treat more leniently those debtors who actively deceive their creditors than those who fail to disclose information—even when disclosure is required.
The state's approach would eliminate the debtor-protective function of the writing requirement in section 523(a)(2)(B). Each time a debtor makes an oral, and thus express, financial-condition misstatement on which a creditor justifiably and detrimentally relies, the debtor's later failure to correct the misstatement constitutes a series of implicit representations that the prior misstatement was correct. Under the state's approach, even though the oral financial-condition misstatement is protected from nondischargeability by section 523(a)(2)(A) and (B), each later implicit representation of the correctness of the express misrepresentation would be a representation, but not a statement, thus rendering the claim nondischargeable under subparagraph (A).
Even if Blake's failure to comply with his duty to disclose his income change is a representation supporting a claim for false pretenses, a false representation, or actual fraud, it is also an implied, and thus unwritten, statement respecting his financial condition. Thus, his failure to disclose his income change cannot render nondischargeable the state's claim against him for that omission.
I will enter judgment against the state on its claim against Blake.