Cohen v. de la Cruz

PETITIONER: Cohen
RESPONDENT: de la Cruz
LOCATION: National Endowment for the Arts

DOCKET NO.: 96-1923
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Third Circuit

CITATION: 523 US 213 (1998)
ARGUED: Jan 20, 1998
DECIDED: Mar 24, 1998

ADVOCATES:
Donald B. Ayer - Argued the cause for the petitioner
Gregory G. Diebold - Argued the cause for the respondents
Jeffrey A. Lamken - On behalf of the United States, as amicus curiae supporting the respondents

Facts of the case

After the local rent control administrator ordered Edward S. Cohen to refund $31,382.50 in excessive rents he had charged Hilda de la Cruz and other tenants, Cohen sought to discharge his debts under Chapter 7 of the Bankruptcy Code. The tenants filed an adversary proceeding, arguing that the debt Cohen 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." The tenants 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 Cohen had committed "actual fraud" within the meaning of ?523(a)(2)(A) of the Code 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 Court of Appeals, which held that debts resulting from fraud are nondischargeable under ?523(a)(2)(A) of the Code, and that the award of treble damages (plus attorney's fees and costs) in this case was therefore nondischargeable.

Question

May individuals who commit fraud discharge their debts, including damages awarded to those who were defrauded, under the Bankruptcy Code?

Media for Cohen v. de la Cruz

Audio Transcription for Oral Argument - January 20, 1998 in Cohen v. de la Cruz

William H. Rehnquist:

We'll hear argument now in Number 96-1923, Edward S. Cohen v. Hilda de la Cruz.

Mr. Ayer.

Donald B. Ayer:

Mr. Chief Justice, and may it please the Court:

Section 523 (a)(2) of the Bankruptcy Code creates an exception to discharge for individual bankruptcies applicable to, quote, debts for money, property, services, or extensions of credit to the extent obtained by fraud.

The required fraud under that section includes not only representations that are consciously false, but also reckless false statements, and the issue in this case is whether this exception reaches beyond the amounts actually obtained by the debtor to except from discharge a treble damage award ordered for reckless fraud.

Where the fraud involves intentional falsehoods and results in wilful and malicious injury, the damages, punitive and otherwise, are nondischargeable under a different section, 523 (a)(6).

Anthony M. Kennedy:

And you agree with that reading?

Donald B. Ayer:

We do.

Anthony M. Kennedy:

So then you would have a lack of parallelism between the section you're addressing here and subsections (4) and subsection (6).

Donald B. Ayer:

We would Your Honor and, in fact, we think that's quite clear from the language, that the structure of the 523 sections as they work, given the literal reading of 523 (a)(2), works quite well.

523 (a)(2) is a provision which, by its terms, is directed to the actual fruits of the fraud.

It's a simple, clear directive that tells people, if they commit fraud, what they get by the fraud will not be discharged.

Anthony M. Kennedy:

Would that include accounting... if the defrauding party, the wrongdoer, makes profits from the property that he steals, are those profits recoverable?

Donald B. Ayer:

I think they would not be, Your Honor.

I think that... that the other provisions that deal with--

Anthony M. Kennedy:

That's property obtained by the fraud.

Donald B. Ayer:

--Well, it... I think the most reasonable interpretation is to focus upon the amounts obtained by the act of the fraud, which I would think most immediately would be the amounts obtained in the fraud.

What is very--

Sandra Day O'Connor:

So you think it wouldn't even include attorney's fees and costs in the very action in which the recovery is made?

Donald B. Ayer:

--I think it would not, Your Honor.

I think that the other provisions, the (a)(6) provision in particular, which this Court will address tomorrow in the Geiger case, is a provision which is generally applicable, essentially, among other things, to all torts, and it sets a standard which says wilful and... a debt for wilful and malicious injury.

That has been interpreted reasonably, we think, to include punitive damages, to include other penalty sums, to include consequential damages, to include contractually arranged for attorney's fees, and is a reasonable and uniform way of dealing with what I'll call damages and consequential payments that are owed.

Our--

Anthony M. Kennedy:

Your answer to Justice O'Connor, it seems to me, follows easily from the answer you gave me.

I think attorney's fees are even further removed--

Donald B. Ayer:

--Right.

Anthony M. Kennedy:

--under your interpretation--

Donald B. Ayer:

Correct, Your Honor.

Anthony M. Kennedy:

--than profits that the tortfeasor gains.

Donald B. Ayer:

Correct.