In Re: Shmuel E. Gulevsky, Debtor. Blake Berkson v. Shmuel E. Gulevsky
Docket: 03-3299
Court: Court of Appeals for the Seventh Circuit; March 31, 2004; Federal Appellate Court
Section 523(a)(2)(B) of the Bankruptcy Code states that debts resulting from written misrepresentations about a debtor's financial condition are nondischargeable. The court addressed whether Section 523(a)(6) also applies to debts arising from oral misrepresentations. The bankruptcy court ruled that it does not, leading to the dismissal of Berkson's complaint, a decision later affirmed by the district court.
The case was reviewed de novo under Rule 12(b)(6), accepting the complaint's allegations as true. Berkson alleged that Gulevsky contracted to invest nearly $1.2 million in a La Jolla real estate project but failed to make timely payments despite assurances of funding. Gulevsky requested Berkson to pay $100,000 on his behalf, claiming he would reimburse him, but never did, leading to Berkson's financial loss.
Berkson had previously obtained a $124,000 judgment against Gulevsky and sought to declare the debt nondischargeable under 11 U.S.C. § 523(a)(2)(A) and § 523(a)(6). The bankruptcy court concluded that Gulevsky's oral misrepresentations did not meet the criteria under § 523(a)(2) and that pursuing a claim under § 523(a)(6) would undermine the written requirement of § 523(a)(2)(B). Berkson contended that the Supreme Court's interpretation in Kawaauhau v. Geiger established that the standards for § 523(a)(6) claims are more stringent, which he argued does not negate the writing requirement for § 523(a)(2)(B), allowing for a distinction between written and oral fraud.
Normal rules of statutory construction indicate that exceptions to discharge under 11 U.S.C. § 523 should be interpreted narrowly, ensuring that no subsection becomes superfluous. When both specific and general provisions apply, the specific one prevails. Berkson alleges the Debtor provided false financial statements to induce a loan, claiming that this constitutes fraud, which can be nondischargeable under § 523(a)(6). However, not all debts obtained through fraud are nondischargeable under this subsection, as it would render other subsections like § 523(a)(2), § 523(a)(4), and § 523(a)(11) redundant. Berkson argues that § 523(a)(6) requires a higher proof standard regarding intentional injury compared to § 523(a)(2)(B), suggesting that the latter has a lower burden for proving nondischargeability based on false financial statements.
The court finds Berkson's distinction tenuous, as both subsections require demonstrating intent to deceive or cause injury. Previous cases uniformly hold that § 523(a)(6) cannot be used to bypass the writing requirement of § 523(a)(2)(B) for false oral statements of financial condition. The court agrees that allowing such circumvention could lead to significant complications. Additionally, the request for sanctions against Berkson for filing a frivolous appeal is denied due to noncompliance with procedural requirements. While Berkson's arguments are weak, they are not entirely meritless, thus not warranting sanctions. The appeal is affirmed.
