In re Cohen

• Decision Date: 07 February 1996
• Docket Number: Civ. No. 95-4958 (WHW).
• Citation: 191 BR 599
• Parties: In re Edward S. COHEN, Debtor. Hilda DE LA CRUZ, Nelfo C. Jiminez, Maria Morales, Gloria Sandoval, Hector Santiago, Santia Santos, Elba Saravia, Elvia Siguenzia, Enilda Tirado, Plaintiffs-Appellees, v. Edward S. COHEN, Defendant-Appellant.
• Court: U.S. District Court — District of New Jersey

191 B.R. 599 (1996)

In re Edward S. COHEN, Debtor Hilda DE LA CRUZ, Nelfo C. Jiminez, Maria Morales, Gloria Sandoval, Hector Santiago, Santia Santos, Elba Saravia, Elvia Siguenzia, Enilda Tirado, Plaintiffs-Appellees, v. Edward S. COHEN, Defendant-Appellant.

Civ. No. 95-4958 (WHW).

United States District Court, D. New Jersey.

February 7, 1996.

COPYRIGHT MATERIAL OMITTED

Gregory G. Diebold, Hudson County Legal Services Corp., Timothy K. Madden, Director, Jersey City, New Jersey, for Plaintiffs-Appellees.

Robert Zeller, Rem, Zeller and Associates, P.C., Hackensack, New Jersey, for Debtor-Defendant-Appellant.

OPINION

WALLS, District Judge.

Debtor Edward S. Cohen brings this appeal from a final judgement of the bankruptcy court in which plaintiffs were awarded punitive and compensatory damages of $94,147.50.

BASIS OF APPELLATE JURISDICTION

28 U.S.C. § 157 confers upon bankruptcy courts the power to hear and determine all court proceedings arising under Title 11, arising in or related to a case under Title 11, and all core proceedings under Title 11. 28 U.S.C. § 158(a) confers jurisdiction on district courts to hear appeals from final judgments of bankruptcy courts in cases and proceedings under 28 U.S.C. § 157.

This appeal arises from a final judgment of the Honorable Rosemary Gambardella, United States Bankruptcy Judge for the District of New Jersey, in which she awarded compensatory and punitive damages against the debtor after determining the debt to be "non-dischargeable" under 11 U.S.C. § 523(a)(2)(A). Accordingly, this Court has jurisdiction.

UNCONTESTED FINDINGS OF FACT BY THE BANKRUPTCY COURT

The debtor and his father, Nathan Cohen, owned, managed and operated real estate housing from October 1984 until the end of 1990. Their first purchase was a multiple dwelling building at 502 Jefferson Street, Hoboken, New Jersey. See Transcript of November 12, 1993 trial (Trans.) at 47. In August 1985 they purchased another multiple dwelling property at 600 Monroe Street in Hoboken. Trans. at 44. And thereafter, they purchased more real estate: 711 Palisades Avenue, Union City; 34-40 Plum Street, Paterson; 210 South Street, Jersey City, 14 Beech Street, Paterson. Trans. 48-50, 64.

Because he could no longer cover the expenses of his properties, on November 21, 1990, the Debtor filed a chapter 7 petition with the United States Bankruptcy Court in the District of New Jersey. Trans. at 50.

In the period before he filed for bankruptcy the debtor operated the Monroe property and rented the 18 apartments within. Sandy, his superintendent, managed the property and was responsible for renting the apartments. Trans. at 18. This property, for the duration of the debtor's ownership, was regulated by a Hoboken Rent Control ordinance which limited the amount of, and increase in, rent that could be charged. See Hoboken Code § 155 et seq. The debtor was notified by the Rent Leveling and Stabilization Board (the "Board") in September of 1989 that he was charging some of his tenants rents in excess of that allowed by the ordinance. Trans. at 56-57. Those tenants who were overcharged and identified by the Board to the debtor are the plaintiffs: Hilda De La Cruz, Nelfo C. Jimenez, Maria Morales, Gloria Sandoval, Hector Santiago, Santia Santos, Elba Saravia, Elvia Siguenzia, and Enilda Tirado.

All of the plaintiffs were born in South America, spoke Spanish as their primary, if not only, language, and, except for Ms. Tirado, who completed high school, none had received an education beyond grade level six. Trans. at 19-30. The parties stipulated the amount of overpayment charged to each plaintiff — the total amount was $31,382.50.¹

The debtor was aware of the existence of the rent control ordinance at the time he purchased the property. Based on discussions had with other landlords, he believed that he was permitted to charge the fair market value for each apartment but could only increase the rent of existing tenants by six percent. Trans. at 51-52. He was not aware that the rent control ordinance set limits on the amount of rent that could be charged for a vacant apartment. Trans. at 53. He had had no formal or informal discussions or inquiries with the local Rent Leveling Board concerning the effect of the rent control ordinance on the rent he could charge. Trans. at 53. Furthermore, even though he was represented by an attorney at the time he purchased the subject property, he never consulted with that, or any other attorney about the rent control ordinance. Trans. at 53-54, 72-73. He also never read, nor obtained a copy of the ordinance. Trans. at 72-73. At trial the parties stipulated that the debtor had made no claims to the plaintiffs that the rents he had set conformed to the rent leveling ordinance, and that, at the time the apartments were rented, there were no discussions about rent control between the plaintiffs and him. Trans. at 7.

While he had never sought to learn from the Rent Control Board the amount of rent he could set, the debtor did inquire about surcharging his tenants for the increases in taxes and water charges imposed by the City of Hoboken in 1986 and again in 1988. Trans. at 70. He was informed that he could surcharge for these amounts, and did so. Trans. at 70-72.

After he received notice of the Board's decision that he had overcharged the plaintiffs, he failed to perfect his appeal. Trans. at 79. Yet he did not reimburse any of the plaintiffs. Id.

PROCEDURAL HISTORY

Plaintiff tenants filed an adversary proceeding against the debtor on February 11, 1991. The complaint sought a declaration that debts owed by the debtor to the plaintiffs were non-dischargeable under 11 U.S.C. § 523(a), damages equal to the amount of overpayment of rent, treble damages, and reasonable attorneys fees pursuant to the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 et seq.

On November 12, 1993, the bankruptcy court conducted a trial of the issue of whether the debt was dischargeable under 11 U.S.C. § 523(a). On October 24, 1994, the court by opinion declared the debt non-dischargeable. In re Cohen, 185 B.R. 171, 172 (Bankr.D.N.J.1994) (the "First Opinion"). Thereafter the court received briefs from the parties and conducted a damages hearing. The amount of rent overcharge was not disputed — rather the parties disagreed over the applicability of the New Jersey Consumer Fraud Act (the "Act") providing for the imposition of treble damages. In an opinion of June 19, 1995, the court held that the Act applied, that the debtor had violated it and that he was therefore liable for punitive and compensatory damages. In re Cohen, 185 B.R. 180, 183 (Bankr.D.N.J.1995) (the "Second Opinion").

The debtor now brings this appeal to this Court, and seeks reversal on the following grounds: 1) that the debt in question is dischargeable; 2) that the New Jersey Consumer Fraud Act does not apply to the dispute; 3) that fraud had not been established under the Act; and 4) that the punitive damages imposed are not excepted from discharge under 11 U.S.C. § 523(a)(2)(A).

STANDARD OF REVIEW

Bankruptcy Rule 8013 provides that a bankruptcy judge's findings of fact "shall not be set aside unless clearly erroneous." Conclusions of law, however, are subject to de novo review. See Universal Minerals, Inc. v. C.A. Hughes and Co., 669 F.2d 98, 102 (3d Cir.1981).

It is not always clear, though, whether a matter of dispute is factual or legal. The Third Circuit, in Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir.1981), has defined the criteria courts should use to determine whether to apply the clearly erroneous or the de novo standard of review.² It noted that the beginning place of inquiry involves the status to be accorded each determination by the trial court, and whether that determination involves basic facts, inferred facts or ultimate facts. Id. at 102. Basic facts are the "historical and narrative events elicited from the evidence presented at trial, admitted by stipulation, or not denied, where required, in responsive pleadings." Id. Inferred facts are "drawn" from the basic facts and may be found "only when, and to the extent that, logic and human experience indicate a probability that certain consequences can and do follow from the basic facts." Id. Both basic and inferred factual determinations involve no legal conclusions and thus should be disturbed only when clearly erroneous. Id.

An ultimate fact, however, "is usually expressed in the language of a standard enunciated by case-law rule or by statute, e.g., an actor's conduct was negligent; the injury occurred in the course of employment; the rate is reasonable; the company has refused to bargain collectively. `The ultimate finding is a conclusion of law or at least a determination of a mixed question of law and fact.'" Id. (quoting R. Aldisert, The Judicial Process 694 (1976)).

Consequently, this Court shall apply the appropriate standard of review to each finding of the Bankruptcy Court based upon whether it involves a basic, inferred or ultimate fact.

DISCUSSION

I. The Dischargeability of the Debt

11 U.S.C. Section 523(a)(2)(A) provides:

(a) A discharge under section 727, 1141, 1228(a), 1228(b) or 1328(b) of 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, other than a statement representing the debtor\'s or other insider\'s financial condition . . . ³

In order to prevail under this section the creditor must show: "(1) the debtor obtained money, property or services through a material misrepresentation; (2) the debtor, at the time, knew the representation was false or made with gross recklessness as to its truth; (3) the debtor intended to deceive the creditor; (4) the creditor reasonably relied on the debtor's false representations; and (5) the...