In Re: Edward Cohen v.

Opinions of the United
1997 Decisions States Court of Appeals
for the Third Circuit
2-6-1997
In Re: Edward Cohen v.
Precedential or Non-Precedential:
Docket 96-5155
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 96-5155
_____________
IN RE: EDWARD S. COHEN, Debtor,
EDWARD S. COHEN,
Appellant,
-vs-
HILDA DE LA CRUZ; NELFO C. JIMENEZ;
MARIA MORALES; GLORIA SANDOVAL; HECTOR SANTIAGO;
SANTIA SANTOS; ELBA SARAVIA;
ELVIA SIGUENZIA; ENILDA TIRADO.
____________
Appeal from the United States District Court
for the District of New Jersey
(D.C. Case No. 95-cv-04958)
____________
Submitted Under Third Circuit LAR 34.1(a)
October 10, 1996
Before: MANSMANN and GREENBERG, Circuit Judges,
and HILLMAN, District Judge*
(Filed February 6, 1997)
* Honorable Douglas W. Hillman of the United States District
Court for the Western District of Michigan, sitting by
designation.
1
Edward S. Cohen (pro-se)
6021 Fountain Park Lane
Apt. #10
Woodland Hills, CA 91367
Appellant
GREGORY G. DIEBOLD, Esquire
Hudson County Legal Services Corp.
574 Newark Avenue
Jersey City, New Jersey 07306
Attorneys for Appellees
___________
OPINION OF THE COURT
____________
HILLMAN, District Judge.
Edward S. Cohen appeals from the order of the New
Jersey District Court affirming the bankruptcy judge's
determination that certain debts were nondischargeable in
bankruptcy because they were obtained by fraud, as defined in 11
U.S.C. § 523(a)(2)(A). Because we conclude that section
523(a)(2)(A) excludes punitive as well as compensatory damages
from discharge, we will affirm.
I.
In 1985, appellant, Edward Cohen ("Cohen"), and his
father, Nathan Cohen, purchased an 18-unit residential apartment
building at 600 Monroe Street in Hoboken, New Jersey. They held
title to the Monroe Street property until December 1989. The
Cohens also owned several other residential properties: another
2
multi-family apartment building in Hoboken, one in Union City,
two in Paterson, one in Jersey City and one in Newark.
The Hoboken Rent Leveling Act (The Act) is a
comprehensive rent control ordinance which governed the Monroe
Street property. The rents set by the Cohens were approximately
double what they could legally charge under the Act. Most of the
tenants in the Monroe Street units were non-native speakers of
English with little education.
In 1989, the Hoboken Rent Control Administrator
determined that the Cohens had violated the Act. The Cohens were
ordered to refund amounts totaling $31,382.50. The amounts were
not refunded and the Cohens failed to perfect an appeal from the
determination of the Administrator. Thereafter, the Cohens filed
for Chapter 7 bankruptcy, seeking to discharge these as well as
other debts.
On February 14, 1991, the tenants filed an adversary
proceeding against Edward Cohen in the bankruptcy court. They
claimed that the debts owed to them were procured by fraud and
were thus nondischargeable in bankruptcy under 11 U.S.C. §
523(a)(2)(A). Additionally, each tenant sought a judgment for
three times the amount of the refund pursuant to New Jersey's
Consumer Fraud Act, N.J.Stat.Ann. §§ 56:8-1 to 8-9.
At trial, the plaintiffs testified that they had no
knowledge of the legal amount of rent. Most were unaware that
any rent control ordinance governed the property. Cohen admitted
3
that at the time he purchased the property, he was aware that the
rent control ordinance existed. He claimed, however, that he
never inquired about the requirements of the ordinance nor was he
advised of its provisions. He testified that he was aware that
he could not raise rents more than 6% per annum, but claimed to
believe that he could charge new tenants any amount up to fair
market value. In fact, the Act limited the amount of rent the
Cohens could charge existing and new tenants.
After hearing the testimony, the bankruptcy judge
determined that the debts were nondischargeable and that the
Consumer Fraud Act applied. The court found that Cohen, despite
being represented by counsel, recklessly made no effort to
investigate the statute and selectively inquired about its
application. The court further found that Cohen conveniently
understood that the ordinance allowed him to surcharge his
tenants for increases in water bills and taxes and he knew where
he could apply for such relief. Cohen claimed, however, that he
did not think to investigate how much he could charge new
tenants. Based on these facts, the bankruptcy court found that
Cohen had selectively understood and applied the provisions of
the ordinance that were to his benefit, but wilfully failed to
ascertain the less advantageous provisions. On the basis of
Cohen's admittedly selective understanding of the statute, the
bankruptcy court concluded that he had committed fraud within the
meaning of the bankruptcy code. The court also held that Cohen's
4
conduct violated the New Jersey Consumer Fraud Act, N.J. Stat.
Ann. 56:8-1, and that Cohen was statutorily liable for treble
damages. The bankruptcy court held that the treble damage award
also was nondischargeable in bankruptcy, and it entered a total
judgment for $94,147.50. The district court affirmed. In re
Cohen, 191 B.R. 599 (D.N.J. 1996).1
In his appeal, Cohen contends that the district court
erred in affirming the order of the bankruptcy court. First, he
asserts that, in finding that appellant's conduct amounted to
nondischargeable fraud under 11 U.S.C. § 523(a)(2)(A), the
bankruptcy court and the district court applied incorrect
principles of law and made clearly erroneous factual findings.
Second, he argues that, even if his conduct amounted to fraud
under the bankruptcy code, it did not constitute a violation of
1
The district court had jurisdiction to hear this case
pursuant to 28 U.S.C. § 158(a). Because the bankruptcy court
first heard this case, Bankruptcy Rule 8013 governed the district
court's standard of review:
On an appeal the district court or bankruptcy appellate panel may
affirm, modify, or reverse a bankruptcy judge's
judgment, order or decree or remand with instructions
for further proceedings. Findings of fact, whether
based on oral or documentary evidence, shall not be set
aside unless clearly erroneous, and due regard shall be
given to the opportunity of the bankruptcy court to
judge the credibility of witnesses.
Our jurisdiction rests on 28 U.S.C. § 1291 and 28 U.S.C. §
158(d). 8013. We exercise plenary review over the district
court's order, because a district court sits as an appellate
court in bankruptcy court. In re Cohn, 54 F.3d 1108, 1113 (3d
Cir. 1995). We review the bankruptcy court's findings of fact
for clear error. Id. We exercise plenary review over questions
of law. Id.
5
the New Jersey Consumer Fraud Act, N.J. Stat. Ann. § 56:8-1.
Third, he contends that the treble damage provision of the New
Jersey Consumer Fraud Act is a punitive damage award. As such,
Cohen contends that the treble damage portion of the debt is
dischargeable under 11 U.S.C. § 523(a)(2)(A).
We have carefully considered both the facts and the law
and we find no error in the district court's conclusion that
Cohen committed fraud within the meaning of 11 U.S.C.
§ 523(a)(2)(A) and N.J. Stat. Ann § 56:8-1. Both the bankruptcy
court and the district court applied the correct principles of
law, and the factual findings of the bankruptcy court were not
clearly erroneous. Because Cohen's objections to the bankruptcy
court's findings of fraud raise no substantial questions not
fully addressed by the courts below, we affirm without discussion
the district court's order affirming the bankruptcy judge's
findings of fraud under both the bankruptcy code and the New
Jersey Consumer Fraud Act.
However, because the question of whether punitive
damages2 are dischargeable under 11 U.S.C. § 523(a)(2)(A) is the
subject of a split in the circuits, we will address that issue in
full.
II.
2
We assume without deciding for purposes of this opinion that the treble damages
provision of N.J. Stat. Ann. § 56:8-9 is purely punitive and does not serve a compensatory
function. But see Cox v. Sears Roebuck & Co., 138 N.J. 2, 24, 647 A.2d 454, 465 (N.J. 1994)
(suggesting that purpose of treble damage and attorney fee awards was partly compensatory).
6
Section 523(a) of the federal bankruptcy statute
provides limited exceptions to the general dischargeability of
debts of eligible claimants under the statute. Specifically,
section 523(a) sets forth sixteen types of debts that are
nondischargeable under the code. The subsection at issue here --
523(a)(2)(A) -- originally excepted from discharge any debt "for
obtaining money, property [or] services . .. by . . . actual
fraud. . . ." Federal courts interpreted this provision to
include punitive as well as compensatory damages within the
exception to discharge. See, e.g., In re Maxwell, 51 F.R. 244,
246 (Bankr. S.D. Ind. 1983); In re Carpenter, 17 B.R. 563, 564
(Bankr. E.D. Tenn. 1982). Cf. Birmingham Trust Nat. Bank v.
Case, 755 F.2d 1474, 1477 (10th Cir. 1985).
Congress amended this provision in 1984, thereby giving
rise to the issue we now address. See Bankruptcy Amendments and
Federal Judgeship Act of 1984, Pub.L.No. 98-353, 1984
U.S.C.C.A.N. (98 Stat.) 333, 376. We must determine whether
punitive damages are nondischargeable under the second of these
exceptions, which provides in relevant part:
(a) A discharge under . . . this title does not
discharge an individual debtor from
any debt --
. . .
(2) for money, property, services, or an
extension, renewal or refinancing
of credit, to the extent obtained
by --
7
(A) false pretenses, a false
representation, or actual
fraud . . . .
11 U.S.C. § 523(a)(2)(A) (emphasis added).
A number of courts, including two courts of appeals,
have interpreted this provision and have come to conflicting
conclusions about its meaning. Several courts, including the
Court of Appeals, for the Ninth Circuit, have held that, by
including the phrase "to the extent obtained by" in the
exception, Congress intended to limit the exception strictly to
compensatory damages for the actual amount caused by the fraud.
Consequently, those courts have held that punitive damages for
fraud are dischargeable, notwithstanding § 523(a)(2)(A). See,
e.g., In re Levy, 951 F.2d 196 (9th Cir. 1991), (the language of
the statute suggests that the subsection limits
nondischargeability to the amount of benefit to the debtor or
loss to the creditor the act of fraud itself created); In re
Auricchio, 196 B.R. 279, 289-90 (Bankr. D.N.J. 1996); In re
Bozzano, 173 B.R. 990, 998 (Bankr. M.D.N.C. 1994); In re Suter,
59 B.R. 944, 947 (Bankr. N.D. Ill. 1986).
Other courts, however, including the Eleventh Circuit,
have concluded that the language of the statute is ambiguous and
that, because Congress' intent in adding the language is not
clear, all damages resulting from fraud, whether punitive or
compensatory, are nondischargeable under § 523(a)(2)(A). See,
e.g., In re St. Laurent, 991 F.2d 672, 677-81 (11th Cir. 1993);
8
In re Roberti, 201 B.R. 614, 622-23 (Bankr. D. Conn. 1996); In re
Winters, 159 B.R. 789, 790 (Bankr. E.D. Ky. 1993); In re Manley,
135 B.R. 137, 144-45 (Bankr. N.D. Okla. 1992). See also 3
Collier on Bankruptcy, ¶ 523.08 at 523-52 n.27 (15th ed. 1996)
("The phrase ``to the extent obtained by . . . actual fraud,'
which was added to section 523 in 1984, should not be read to
limit a finding of nondischargeability only to the compensatory
aspects of a fraud judgment."). Cf. In re Gerlach, 897 F.2d
1048, 1051 n.2 (10th Cir. 1990) (holding that, with respect to a
fraudulently obtained extension of credit, the language "to the
extent obtained by" had not altered the amount of debt made
nondischargeable under § 523(a)(2)(A)). See also 3 Collier on
Bankruptcy. ¶ 523.08 at 523-52 n.27 (15th ed. 1996) (The phrase
"to the extent obtained by . . . actual fraud," which was added
to section 523 in 1984, should not be read to limit a finding of
nondischargeability only to the compensatory aspect of a fraud
judgment.).
We find the careful analysis of the Eleventh Circuit to
be more persuasive than that of the Ninth Circuit. We conclude
that the language "to the extent obtained by" was not intended by
Congress to limit the amount of debt considered nondischargeable
under § 523(a)(2)(A). We therefore hold that debts caused by
fraud under § 523(a)(2)(A) are nondischargeable in their
entirety.
9
A. The Plain Meaning of the Statute
Liability under state law for damages caused by fraud,
whether punitive or compensatory, clearly represents a debt
within the meaning of the bankruptcy code. In re Bugna, 33 F.3d
1054, 1058 (9th Cir. 1994); In re St. Laurent, 991 F.2d at 678.
Under the Code, a "debt" is defined as "liability on a claim."
11 U.S.C. § 101(12). A "claim" is further defined as a "right to
payment, whether or not such right is reduced to judgment . . .
." 11 U.S.C. § 101(5)(A). See In re St. Laurent, 991 F.2d at
678. "A ``right to payment' is ``nothing more nor less than an
enforceable obligation, regardless of the objectives . . . to
[be] serve[d] in imposing the obligation.'" Id. (quoting
Pennsylvania Dep't of Pub. Welfare v. Davenport, 495 U.S. 552,
559 (1990)).
Despite the broad sweep of this definition of "debt,"
courts have held that punitive damages resulting from fraud as
defined by § 523(a)(2)(A) are nevertheless dischargeable because,
by including in § 523(a)(2)(A) the language "to the extent
obtained by," Congress intended "to limit the nondischargeable
debt to the amount ``obtained by actual fraud.'" In re Levy, 951
F.2d at 198 (quoting In re Ellwanger, 105 B.R. 551, 555 (B.A.P.
9th Cir. 1989)). In In re Levy, the Ninth Circuit reasoned
that, because punitive damages "do not represent losses to the
victim of fraud or increases in the wealth of the debtor who
engages in fraud," they "``are not a debt for fraud.'" Id.
10
(quoting In re McDonald, 73 B.R. 877, 882 (Bankr. N.D. Tex.
1987)).
At the heart of the Ninth Circuit's analysis is an
assumption that the words "to the extent obtained by" modify the
word "debt." We disagree with such a reading of the statute.
First, the word "debt" appears in the general section
preceding all sixteen specific exceptions to dischargeability.
In contrast, the words "to the extent obtained by" follow most
directly after a listing of other nouns: "money, property,
services, or an extension, renewal, or refinance of credit." It
is most sensible and most in accord with general linguistic
analysis to apply a modifying phrase to the nearest objects, in
this case "money, property, services, or an extension, renewal,
or refinance of credit."
In addition, it strains the structure of the statute as
a whole to conclude that the definition of the word "debt," which
applies to all sixteen exceptions to dischargeability and
elsewhere in the bankruptcy code, is altered by language
contained in the second of these exceptions, and that the meaning
of the word "debt" is different only with respect to that single
exception. Indeed, one of the basic canons of statutory
construction is "that identical terms within an Act bear the same
meaning. “Thus, Congress' expansive definition of ``debt' applies
to each subsection of § 523(a), absent clear intent to the
11
contrary." In re St. Laurent, 991 F.2d at 680 (citations
omitted).
We conclude that Congress intended the language "to the
extent obtained by" to modify not "debt," but "money, property,
services, and extension . . . of credit." This conclusion is
reinforced when one analyzes the provision with specific
attention to the items in the list other than "money" -- i.e.,
"property," "services" or "extension of credit." It may at first
blush appear plausible that Congress intended to limit some
damage portion of the nondischargeable debt when one asks whether
the debt in issue is a "debt . . . for money, . . . to the extent
obtained by the fraud." However, when one asks whether the debt
is a "debt . . . for refinancing of credit, . . . to the extent
obtained by the fraud," it is apparent that the meaning of "to
the extent obtained by the fraud" is to distinguish between
fraudulently and legally refinanced credit, not to limit the
objectives being "serve[d] in imposing the obligation."
Davenport, 495 U.S. at 559. See In re Manley, 135 B.R. at 145.
So understood, the language appears not to distinguish actual
from punitive damages, but "contractual debts tainted with fraud
from debts for mere breach of contract or ``failure to pay.'" In
re Manley, 135 B.R. at 145.
In the instant case, Cohen obtained substantial sums in
rent from plaintiffs, only $31,382.50 of which was obtained by
fraud. As a result, the amount of Cohen's debt for this
12
fraudulently-obtained sum is nondischargeable. The dissent
agrees with our analysis that "to the extent obtained by"
modifies "money" not "debt." It suggests, however, that the
amount in excess of $31,382.50 awarded as treble damages was not
obtained by fraud and therefore is not within the exception.
However, the statutory language specifically states that the
"debt for . . . money . . . to the extent obtained by . . .
fraud" is not dischargeable. One's debt for fraudulently
obtained monies may and frequently does exceed the actual sum of
the fraud. For example, the debt normally includes interest,
costs of recovery and attorney fees, as well as compensatory and
punitive damages. Under New Jersey law, one's debt for such
fraudulently obtained monies includes three times the amount of
the fraudulently obtained sum. Nothing in the language "to the
extent obtained by" requires distinguishing between the theories
of recovery under which the debt is owed.
We therefore conclude that the language on its face
does not clearly limit nondischargeable damages under §
523(a)(2)(A) to compensatory damages only.
B. Legislative History
Where, as here, statutory meaning is at best unclear,
we look to the legislative history to resolve any conflict. See
Patterson v. Shumate, 504 U.S. 753, 761 (1992) (stating that
resort to statutory history is appropriate where language of
statute is ambiguous or confusing). "The normal rule of
13
statutory construction is that if Congress intends for
legislation to change the interpretation of a judicially created
concept, it makes that intent specific." Kelly v. Robinson, 479
U.S. 36, 47 (1986). In particular, the Supreme Court has
observed that a court should "not read the Bankruptcy Code to
erode past bankruptcy practice absent a clear indication that
Congress intended such a departure." Davenport, 495 U.S. at 563.
As the Tenth Circuit previously has observed about the
1984 amendments,
there is no reason to conclude that the 1984
amendments were anything but
technical and cosmetic. We have
found no legislative history
reflecting that Congress intended
to significantly alter the rights
and obligations of creditors and
debtors governed by this section .
. . .
In re Gerlach, 897 F.2d 1048, 1051 n.2 (10th Cir. 1990) (holding
that "to the extent obtained by" was not intended to limit the
amount of nondischargeable credit extensions). See also In re
St. Laurent, 991 F.2d at 680.
Prior to the 1984 bankruptcy amendments, the statute
provided that a debtor was not entitled to a discharge of "any
debt . . . for obtaining money, property, services, or an
extension, renewal, or refinance of credit, by . . . false
pretenses, a false representation, or actual fraud . . . ." The
language change in 1984 merely struck "obtaining" preceding
"money," and added "to the extent obtained" at the end of the
14
list of things which may be obtained by fraud. In this
historical context, the language seems a simple (though arguably
less clear) rewording of the earlier phrasing.
Nothing in the 1978 version of the statute suggests
that punitive damages for fraud should be distinguished from the
compensatory portion of such debt. Instead, under the 1978
phrasing, subsection (2) of section 523(a) should be interpreted
consistently with the other exceptions, which have been broadly
construed to cover both punitive and compensatory portions of
debt for culpable conduct, even by those courts that have
rejected such a broad interpretation of the modified §
523(a)(2)(A). See, e.g., In re Bugna, 33 F.3d 1054, 1058-59 (9th
Cir 1994) (punitive damages nondischargeable under § 523(a)(4));
In re Britton, 950 F.2d 602, 606 (9th Cir. 1991) (punitive
damages nondischargeable under § 523(a)(6)). In fact, prior to
the 1984 amendments, courts had held that punitive damages as
well as compensatory damages for fraud were nondischargeable
under § 523(a)(2). See, e.g., In re Maxwell, 51 B.R. 244, 246
(Bankr. S.D. Ind. 1983) ("Punitive damages awarded pursuant to
state law for actions which would render a debt nondischargeable,
see 11 U.S.C.A. § 523(a)(2), (4), and (6), are nondischargeable
in bankruptcy."); In re Carpenter, 17 B.R. 563, 564 (Bankr. E.D.
Tenn. 1982) (both compensatory and punitive damages
nondischargeable under § 523(a)(2). Cf. Birmingham Trust Nat.
Bank v. Case, 755 F.2d 1474, 1477 (10th Cir. 1985) ("[T]he plain
15
language of the statute suggests that dischargeability is an ``all
or nothing' proposition.").
The Supreme Court's dicta in Grogan v. Garner, 498 U.S.
279, 282 n.2 (1991), is not to the contrary. In Grogan, the
Court specifically declined to address the question presently
before us: "whether § 523(a)(2)(A) excepts from discharge that
part of a judgment in excess of the actual value of money or
property received by a debtor by virtue of fraud." Id. While
the Court recognized that such a proposition was "arguable," it
expressly avoided deciding the issue. The Court's mere
acknowledgment of an arguable position not only is dicta, but
also does not suggest any future direction of the Court. As a
practical matter, the Grogan Court actually reinstated a district
court’s decision that a state court judgment for fraud, including
punitive and compensatory damages, was nondischargeable under §
523(a)(2)(A).
We therefore conclude from the legislative history that
Congress intended with § 523(a)(2)(A) to create an exception for
a type of debt caused by limited, culpable conduct. Congress did
not intend, however, that the amount of such debt or claim,
including the theories of recovery for such conduct, was to be
limited by the section.
C. Policy Considerations
Sound policy also supports our decision. First, in the
absence of the fraud that gave rise to the nondischargeable,
16
compensatory portion of the debt, there would be no liability for
punitive damages. "To discharge an ancillary debt which would
not exist but for a nondischargeable debt seems erroneous." In
re Roberti, 201 B.R. at 623 (quoting In re Weinstein, 173 B.R.
258, 273-75 (Bankr. E.D.N.Y. 1994)) (internal quotations
omitted).
Second, our result is consistent with the "fresh start"
policy of the bankruptcy code. As the Supreme Court has stated,
"the opportunity for a completely unencumbered new beginning [is
limited] to the “honest but unfortunate debtor.” Grogan, 498
U.S. at 286-87. Where a debtor has committed fraud under the
code, he is not entitled to the benefit of a policy of liberal
construction against creditors. Id.; Birmingham Trust, 755 F.2d
at 1477. Cf. In re Braen, 900 F.2d 621, 625 (3d Cir. 1990)
("Although it is true that the bankruptcy laws were generally
intended to give troubled debtors a chance, the
nondischargeability exceptions reflect Congress' belief that
debtors do not merit a fresh start to the extent that their debts
fall within § 523."), cert. denied, 498 U.S. 1066 (1991). We
think it unlikely that Congress, in excepting fraud from
dischargeability, "would have favored the interest in giving
perpetrators of fraud a fresh start over the interest in
protecting victims of fraud." Grogan, 498 U.S. at 287.
Furthermore, the amount of actual damages in consumer
fraud cases, although significant to the plaintiffs, is often not
17
large. Without including treble damages in the nondischargeable
debt, victims of fraud will have even greater difficulty
obtaining competent legal representation to pursue adversarial
actions in bankruptcy court and prevent fraudulent debtors from
using the Bankruptcy Code to evade lawful state judgments.
Finally, we observe that our decision is consistent
with the punitive damages at issue in this case. Under New
Jersey law, treble damages are statutorily mandated for every
violation of the Consumer Fraud Act. See Cox v. Sears, Roebuck &
Co., 647 A.2d 454, 465 (N.J. 1994). As a result, the debtor is
fully aware at the time of his commission of a fraud of the full
amount of the "debt" he will owe on a determination that he has
committed such fraud. In this practical, additional sense,
treble damages should be nondischargeable as an indistinguishable
component of the debt owed.
18
III.
For the above reasons, we conclude that punitive
damages are nondischargeable under 11 U.S.C. § 523(a)(2)(A).
Accordingly, the district court’s decision affirming the judgment
of the bankruptcy court will be affirmed.
In re Cohen, No. 96-5155
19
GREENBERG, Circuit Judge, dissenting.
Judge Hillman obviously has written a thoughtful
opinion. Nevertheless, I respectfully dissent insofar as the
majority holds that the damages to the extent trebled are not
dischargeable. In this opinion I will treat the trebled portion
of the damages as punitive damages in accordance with the
majority opinion.
11 U.S.C. § 523(a)(2)(A) provides that a discharge
"does not discharge an individual debtor from any debt for money,
property, services, or an extension, renewal, or refinancing of
credit, to the extent obtained by false pretenses, [or] a false
representation . . . ." The initial issue on this appeal is thus
whether "to the extent obtained" relates to "debt" or to "money,
property, [or] services." The majority holds that "to the extent
obtained" refers to "money, property, [or] services" and I agree.
After all, it would be awkward to think that the debtor
"obtained" a "debt," for what the debtor obtains is something of
value, thus creating a debt.
But at that point I part company with the majority
because treating "to the extent obtained" as referring to "money,
property, [or] services," makes it clear to me that punitive
damages are dischargeable, for the punitive damages do not
reflect money, property, or services the debtor "obtained."
Punitive damages are simply a penalty and are something a debtor
20
pays rather than obtains. Here, Cohen "obtained" only the
overcharges which are reflected in the compensatory damages which
we all agree are not dischargeable.
Furthermore, if Congress intended that punitive damages
under section 523(a)(2)(A) were to be non-dischargeable, as the
majority holds, it seems to me that the statute simply would read
that "A discharge . . . does not discharge an individual debtor
from any debt for false pretenses, [or] a false representation. .
. ." That formulation would be consistent with treating punitive
damages as part of the debtor's "debt." In other words, if
punitive damages are not to be dischargeable, there is no need
for the "money, property, services . . . to the extent obtained"
provision in section 523(a)(2)(A). I believe that we should not
construe a statute so as to render portions of it superfluous.
Congress used the structure that I suggest would
support the majority's result in 11 U.S.C. § 523(a)(4) which
recites that "A discharge . . . does not discharge an individual
debtor from any debt for fraud or defalcation while acting in a
fiduciary capacity, embezzlement, or larceny." Thus, in a
section 523(a)(4) case the exception to the discharge is not
confined by a provision equivalent to the "money, property,
services . . . to the extent obtained" provision in section
523(a)(2). There is a structure similar to section 523(a)(4) in
11 U.S.C. § 523(a)(6) which provides that "A discharge . . . does
not discharge an individual debtor from any debt for willful and
21
malicious injury by the debtor to another entity or to the
property of another entity." It therefore follows that
fiduciaries in the enumerated cases, embezzlers, thieves and
persons who commit willful and malicious torts cannot obtain
discharges of punitive damage awards.
Congress thus carefully distinguished the types of
wrongdoing when it set forth the exceptions to a discharge. I,
like the majority, would honor that distinction by holding that
"to the extent obtained" in section 523(a)(2) relates to "money,
property [or] services" and not to "debt," but would go further
and hold that the punitive damages simply are not "money,
property, [or] services" as those three terms relate to something
the debtor obtained. Thus, punitive damages are dischargeable in
cases coming within section 523(a)(2). I point out that while I
have reached my result through my own analysis, it is hardly
innovative as I merely am taking the position taken by most other
courts. See In re Auricchio, 196 B.R. 279, 290 (Bankr. D.N.J.
1996). ("Most courts have found that punitive damages awards are
dischargeable under § 523(a)(2).") (collecting cases).
There is court of appeals support for my position for,
as the majority points out, the Court of Appeals for the Ninth
Circuit has reached a result opposite to that the majority
reaches today. See In re Levy, 951 F.2d 196 (9th Cir. 1991),
cert. denied, 504 U.S. 985, 112 S. Ct. 2965 (1992); see also In re
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Bugna, 33 F.3d 1054, 1058-59 (9th Cir. 1994). That court in
Bugna explained the law as follows:
This plain reading of section 523(a)(4) is
consistent with our interpretation of other
subsections within section 523(a). We have
interpreted section 523(a)(6), which contains
language similar to that in section
523(a)(4), as barring discharge of punitive
damages liability. See In re Britton, 950
F.2d 602, 606 (9th Cir. 1991); In re Adams,
761 F.2d 1422, 1427-28 (9th Cir. 1985). And,
though we have said that section 523(a)(2)
does not bar discharge of punitive damages,
In re Levy, 951 F.2d 196, 199 (9th Cir.
1991), that section is clearly
distinguishable: '[U]nlike sections
523(a)(4) and 523(a)(6), [section 523(a)(2)]
does not bar discharge of punitive damages.'
Id. at 198. Congress specifically limited
the application of section 523(a)(2) to 'debt
. . . to the extent obtained by false
pretenses, a false representation, or actual
fraud.' 11 U.S.C. § 523(a)(2)(A) (emphasis
added). Because punitive damages are not
obtained by fraud but rather imposed because
of it, they are not restitutionary as
required under section 523(a)(2). Levy, 951
F.2d at 199. Section 523(a)(4), like section
523(a)(6), conspicuously lacks this limiting
language.
Bugna, 33 F.3d at 1058-59. The majority criticizes the analysis
in Levy because Levy presumes "that the words 'to the extent
obtained by' modify the word 'debt'." Majority typescript at 9.
While I agree that "to the extent obtained by" does not modify
"debt," still it seems clear to me that the Court of the Appeals
for the Ninth Circuit correctly distinguished between section
523(a)(2) on the one hand and sections 523(a)(4) and (a)(6) on
the other.
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I believe my proposed result is consistent with the
fresh start policy of the Bankruptcy Code. While the majority
expresses concern that a debtor acting fraudulently will escape
the consequences of his or her action, I think it is important to
understand how broadly fraud has come to be defined. See N.J.
Stat. Ann. § 56:8-2 (West 1989) (definition of conduct wrongful
under the Consumer Fraud Act). Consider fraud under RICO. As
every federal judge knows, in RICO civil cases plaintiffs
frequently allege mail fraud as the racketeering activity in
situations in which no United States Attorney would seek a RICO
indictment. See 18 U.S.C. § 1961(1)(B). In RICO cases, just as
under the New Jersey Consumer Fraud Act, treble damages are
recoverable. 18 U.S.C. § 1964(c). This case will come to be
authority that the trebled portion of the damages in a civil RICO
case are not dischargeable, even though the dispute leading to
the judgment is essentially commercial, and the racketeering
activity is mail fraud.
Indeed, in this case, while I have not dissented from
the finding that Cohen committed fraud, his conduct was hardly
shocking. The district court described Cohen's conduct as
follows: "[Cohen] made an implicit representation regarding the
rent he charged -- his silence coupled with the rental amount
fixed constituted a representation that he was charging lawful
rent." In re Cohen, 191 B.R. 599, 605 (D.N.J. 1996).
Furthermore, the finding of fraud was not predicated on Cohen's
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actual knowledge. Rather, as the district court explained, it
was based on his reckless disregard of the truth.
I recognize that Cohen's situation is not one that can
generate much sympathy. He was, after all, a landlord dealing
with persons whose primary language was Spanish and who had
little education. Id. at 602. Nevertheless, if "an implicit
representation" can give rise to a non-dischargeable punitive
damages judgment, in some cases poor or uneducated people may
feel the thrust of our opinion as such persons may make "implicit
representation[s]" just as Cohen did. The majority's opinion may
come to haunt such people seeking to make a fresh start.
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