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Chicago Daily Law Bulletin on the Web: “Bankruptcy law OoOhm non-dischargeable debts

Debts procured by written misrepresentations are not dischargeable under Bankruptcy Code, but code does not allow for debts procured by oral misrepresentations of debtor’s financial condition to be found non-dischargeable. The 7th U.S. Circuit Court of Appeals has affirmed a ruling by U.S. District Judge Blanche M. Manning.

Plaintiff Blake Berkson alleged that he was working on behalf of a real estate developer soliciting equity contributions for a La Jolla, Calif., project. In March 1995, debtor Shmuel Gulevsky contracted to invest $1.2 million in the project, but he did not make his payment by the required date. Instead, Gulevsky allegedly made repeated assurances that he would assemble the funds he owed from various accounts. At the end of the month, the developer told the plaintiff that he needed $100,000 from Gulevsky immediately for the project to go forward. The plaintiff relayed this information to Gulevsky, who said he had the funds to fully pay for his equity contribution but that he needed time to assemble the money because it was not liquid. Gulevsky asked the plaintiff to make the payment on his behalf, and the plaintiff agreed to do so. Gulevsky, however, never made any further contributions to the project. After the developer notified Gulevsky that he was in breach of their contract, Gulevsky formally withdrew from the project. He never repaid the plaintiff, who was not able to recover the $100,000 from the developer. The plaintiff alleged that Gulevsky knew he had no realistic prospect to repay the $100,000 at the time he asked for the loan. The plaintiff obtained a judgment in 1997 against Gulevsky for $124,000 and filed an adversary complaint to have the debt declared non-dischargeable under under the Bankruptcy Code.

Written misrepresentations of the debtor’s financial condition are not dischargeable under the code, and the issue in this case was whether debts procured by oral misrepresentations are also not dischargeable. The bankruptcy judge found that such debts were dischargeable and dismissed the plaintiff’s complaint.

The district judge affirmed that finding, and the appeals court agreed.

The bankruptcy court found that the plaintiff did not state a claim under the code because allowing a creditor to proceed against a debtor on the basis of oral misrepresentations would render the writing requirement of the code superfluous.

The appeals court agreed, saying that exceptions to discharge are to be construed narrowly. The appeals court said that other courts that have dealt with the dischargeability of false oral statements of financial condition are unanimous that the code cannot be used to circumvent the writing requirement.

”We agree that creditors should not be able to use [the code] in that way, in no small part because of the Pandora’s box that would be opened in the absence of [the] writing requirement,” the appeals court said.

The appeals court also rejected Gulevsky’s request for sanctions against the plaintiff on the basis that while the plaintiff’s brief was ”relatively insubstantial,” his argument was not ”so foreclosed” by precedent that it warrants sanctions.

Blake Berkson v. Shmuel E. Gulevsky, No. 03-3299. Judge Ilana Diamond Rovner wrote the court’s opinion with Judges Richard A. Posner and Richard D. Cudahy concurring. Released March 31, 2004.

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