Cohen, In re

• Decision Date: 10 October 1996
• Docket Number: No. 96-5155,96-5155
• Citation: 106 F.3d 52
• Parties: , 37 Collier Bankr.Cas.2d 666, 30 Bankr.Ct.Dec. 389, Bankr. L. Rep. P 77,265 In re Edward S. COHEN, Debtor, Edward S. COHEN, Appellant, v. Hilda DE LA CRUZ; Nelfo C. Jimenez; Maria Morales; Gloria Sandoval; Hector Santiago; Santia Santos; Elba Saravia; Elvia Siguenzia; Enilda Tirado. . Submitted Under Third Circuit LAR 34.1(a)
• Court: U.S. Court of Appeals — Third Circuit

Page 52

106 F.3d 52

65 USLW 2522, 37 Collier Bankr.Cas.2d 666,

30 Bankr.Ct.Dec. 389,

Bankr. L. Rep. P 77,265

In re Edward S. COHEN, Debtor,

Edward S. COHEN, Appellant, v. Hilda DE LA CRUZ; Nelfo C. Jimenez; Maria Morales; Gloria

Sandoval; Hector Santiago; Santia Santos; Elba

Saravia; Elvia Siguenzia; Enilda Tirado.

No. 96-5155.

United States Court of Appeals, Third Circuit.

Submitted Under Third Circuit LAR 34.1(a)

Oct. 10, 1996.

Decided Feb. 6, 1997.

Edward S. Cohen, Woodland Hills, CA, pro se.

Gregory G. Diebold, Hudson County Legal Services Corp., Jersey City, New Jersey, for Appellees.

Before: MANSMANN and GREENBERG, Circuit Judges, and HILLMAN, District Judge ^*

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 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 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 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 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 damages ² 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.

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 B.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 (11th 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--

(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); 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, p 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. p 523.08 at 523-52 n. 27 (15th ed. 1996) (The phrase "to the extent obtained by ... actual fraud,"...