Cohen v. De La Cruz

• Decision Date: 24 March 1998
• Docket Number: 961923
• Citation: 118 S.Ct. 1212,140 L.Ed.2d 341,523 U.S. 213
• Parties: Edward S. COHEN, Petitioner, v. Hilda De La CRUZ, et al
• Court: U.S. Supreme Court

523 U.S. 213

118 S.Ct. 1212

140 L.Ed.2d 341

Edward S. COHEN, Petitioner,

v Hilda De La CRUZ, et al.

No. 96-1923.

Supreme Court of the United States

Argued Jan. 20, 1998.

Decided March 24, 1998.

Syllabus^*

After the local rent control administrator ordered petitioner to refund $31,382.50 in excessive rents he had charged respondent tenants, he sought to discharge his debts under Chapter 7 of the Bankruptcy Code. The tenants filed an adversary proceeding, arguing that the debt owed to them was nondischargeable under §523(a)(2)(A) of the Code, which excepts from discharge "any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . actual fraud.'' They also sought treble damages, attorney's fees, and costs under the New Jersey Consumer Fraud Act. The Bankruptcy Court ruled in their favor, finding that petitioner had committed "actual fraud'' within the meaning of §523(a)(2)(A) and that his conduct violated the New Jersey law. The court therefore awarded the tenants treble damages totaling $94,147.50, plus attorney's fees and costs. The District Court affirmed, as did the Third Circuit, which held that debts resulting from fraud are nondischargeable in their entirety under §523(a)(2)(A), and that the award of treble damages (plus attorney's fees and costs) in this case was therefore nondischargeable.

Held: Because §523(a)(2)(A) excepts from discharge all liability arising from fraud, treble damages (plus attorney's fees and costs) awarded on account of the debtor's fraud fall within the scope of the exception. The most straightforward reading of §523(a)(2)(A) is that it prevents discharge of "any debt'' respecting "money, property, services, or . . . credit'' that the debtor has fraudulently obtained. See Field v. Mans, 516 U.S. 59, 61, 64, 116 S.Ct. 437, 440-441, 133 L.Ed.2d 351. First, an obligation to pay treble damages satisfies the threshold condition that it constitute a "debt.'' That word is defined as liability on a "claim,'' §101(12), which in turn is defined as a "right to payment,'' §101(5)(A), which this Court has said means an enforceable obligation, Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 559, 110 S.Ct. 2126, 2131, 109 L.Ed.2d 588. An award of treble damages is an enforceable obligation of the debtor, and the creditor has a corresponding right to payment. Moreover, the phrase "to the extent obtained by'' in §523(a)(2)(A) modifies "money, property, services, or . . . credit''-not "any debt''-so that the exception encompasses "any debt . . . for money, property, [etc.], to the extent [that the money, property, etc., is] obtained by'' fraud. The phrase thereby makes clear that the share of money, property, etc., so obtained gives rise to a nondischargeable debt. Once it is established that specific money or property has been obtained by fraud, however, "any debt'' arising therefrom is excepted from discharge.

The Court rejects petitioner's argument that a "debt for'' money, property, etc., is necessarily limited to the value of the "money, property, services, or . . . credit'' the debtor obtained by fraud, such that a restitutionary ceiling would be imposed on the extent to which a debtor's liability for fraud is nondischargeable. That argument is at odds with the meaning of "debt for'' in parallel exceptions to discharge set forth in §523(a), which use "debt for'' to mean "debt as a result of,'' "debt with respect to,'' "debt by reason of,'' and the like. The Court's reading of §523(a)(2)(A) is also reinforced by the fraud exception's history. Moreover, §523(a)'s various exceptions from discharge reflect Congress' conclusion that the creditors' interest in recovering full payment of debts in these categories outweighs the debtors' interest in a complete fresh start, see Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 659-660, 112 L.Ed.2d 755. But petitioner's construction of the fraud exception would leave creditors short of being made whole whenever the loss to the creditor from the fraud exceeds the value obtained by the debtor. Because, under New Jersey law, the debt for fraudulently obtaining $31,382.50 in rent payments includes treble damages and attorney's fees and costs, petitioner's entire debt of $94,147.50 (plus attorney's fees and costs) is nondischargeable in bankruptcy. Pp. ____-____.

106 F.3d 52 (C.A.3 1997), affirmed.

O'CONNOR, J., delivered the opinion for a unanimous Court.

Donald B. Ayer, Washington, DC, for petitioner.

Gregory G. Diebold, Jersey City, NJ, for respondents.

Jeffrey A. Lamken, for U.S. as amicus curiae, by special leave of Court.

Justice O'CONNOR delivered the opinion of the Court.

Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge in bankruptcy "any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud.'' 11 U.S.C. §523(a)(2)(A). The issue in this case is whether §523(a)(2)(A) bars the discharge of treble damages awarded on account of the debtor's fraudulent acquisition of "money, property, services, or . . . credit,'' or whether the exception only encompasses the value of the "money, property, services, or . . . credit'' the debtor obtains through fraud. We hold that §523(a)(2)(A) prevents the discharge of all liability arising from fraud, and that an award of treble damages therefore falls within the scope of the exception.

I

Petitioner owned several residential properties in and around Hoboken, New Jersey, one of which was subject to a local rent control ordinance. In 1989, the Hoboken Rent Control Administrator determined that petitioner had been charging rents above the levels permitted by the ordinance, and ordered him to refund to the affected tenants, who are respondents in this Court, $31,382.50 in excess rents charged. Petitioner did not comply with the order.

Petitioner subsequently filed for relief under Chapter 7 of the Bankruptcy Code, seeking to discharge his debts. The tenants filed an adversary proceeding against petitioner in the Bankruptcy Court, arguing that the debt owed to them arose from rent payments obtained by "actual fraud'' and that the debt was therefore nondischargeable under 11 U.S.C. §523(a)(2)(A). They also sought treble damages and attorney's fees and costs pursuant to the New Jersey Consumer Fraud Act. See N.J. Stat. Ann. §§56:8-2, 56:8-19 (West 1989).

Following a bench trial, the Bankruptcy Court ruled in the tenants' favor. In re Cohen, 185 B.R. 171 (1994); 185 B.R. 180 (1995). The court found that petitioner had committed "actual fraud'' within the meaning of 11 U.S.C. §523(a)(2)(A) and that his conduct amounted to an "unconscionable commercial practice'' under the New Jersey Consumer Fraud Act. As a result, the court awarded the tenants treble damages totaling $94,147.50, plus reasonable attorney's fees and costs. Noting that courts had reached conflicting conclusions on whether §523(a)(2)(A) excepts from discharge punitive damages (such as the treble damages at issue here), the Bankruptcy Court sided with those decisions holding that §523(a)(2)(A) encompasses all obligations arising out of fraudulent conduct, including both punitive and compensatory damages.^* 185 B.R., at 188-189. The District Court affirmed. 191 B.R. 599 (1996).

The Court of Appeals for the Third Circuit affirmed in a divided opinion. In re Cohen, 106 F.3d 52 (1997). After accepting the finding of the Bankruptcy Court that petitioner had committed fraud under §523(a)(2)(A) and the New Jersey Consumer Fraud Act, the Court of Appeals turned to whether the treble damages portion of petitioner's liability represents a "debt . . . for money, property, services, or . . . credit, to the extent obtained by . . . actual fraud.'' §523(a)(2)(A). The court observed that the term "debt,'' defined in the Code as a "right to payment,'' §101(5)(A), plainly encompasses all liability for fraud, whether in the form of punitive or compensatory damages. And the phrase "to the extent obtained by,'' the court reasoned, modifies "money, property, services, or . . . credit,'' and therefore distinguishes not between compensatory and punitive damages awarded for fraud but instead between money or property obtained through fraudulent means and money or property obtained through nonfraudulent means. Id., at 57. Here, the court concluded, the entire award of $94,147.50 (plus attorney's fees and costs) resulted from money obtained through fraud and is therefore nondischargeable. Id., at 59. Judge Greenberg dissented, concluding that treble damages are not encompassed by §523(a)(2)(A) because they "do not reflect money, property, or services the debtor "obtained.''' Id., at 60.

As the Court of Appeals recognized, id., at 56, its interpretation of §523(a)(2)(A) is in accord with that of the Eleventh Circuit but in conflict with that of the Ninth Circuit. Compare In re St. Laurent, 991 F.2d 672, 677-681 (C A 11 1993), with In re Levy, 951 F.2d 196, 198-199 (C.A.9 1991). Bankruptcy courts have likewise reached differing conclusions on whether §523(a)(2)(A) prevents the discharge in bankruptcy of punitive damages awarded on account of fraud. Compare In re George, 205 B.R. 679, 682 (Bkrtcy.Ct.Conn.1997) (punitive damages not dischargeable); In re Spicer, 155 B.R. 795, 801 (Bkrtcy.Ct.DC) (same), aff'd, 57 F.3d 1152 (C.A.D.C.1995), cert. denied, 516 U.S. 1043, 116 S.Ct. 701, 133 L.Ed.2d 658, (1996); In re Winters, 159 B.R. 789, 790 (Bkrtcy.Ct.E.D.Ky.1993) (same), with In re Bozzano, 173 B.R. 990, 997-999 (Bkrtcy.Ct.M.D.N.C.1994) (punitive damages dischargeable); In re Sciscoe, 164 B.R. 86, 89 (Bkrtcy.Ct.S.D.Ind.1993) (same); In re Brady, 154 B.R. 82, 85 (Bkrtcy.Ct.W.D.Mo.1993) (same). We noted the issue without resolving it in Grogan v. Garner, 498 U.S. 279, 282, n. 2, 111 S.Ct. 654, 657, n. 2, 112 L.Ed.2d 755 (1991). We granted certiorari to...