Cohen v. De La Cruz

Background

A landlord who owned several homes in Hoboken, New Jersey charged rents above the limits set by a local rent control rule. The Rent Control Administrator ordered him to refund $31,382.50, but he did not comply. After he filed Chapter 7 bankruptcy, the affected tenants sued in bankruptcy court, saying the rent payments were obtained by actual fraud and asking for treble damages and attorney’s fees under the New Jersey Consumer Fraud Act. The Bankruptcy Court found fraud and awarded treble damages totaling $94,147.50 plus fees. The District Court and the Third Circuit affirmed, and the case reached the Supreme Court to decide whether treble damages are dischargeable in bankruptcy under the fraud exception of the bankruptcy law.

Reasoning

The Court framed the question as whether the fraud exception bars discharge of all liability arising from fraudulent acquisition of money, property, services, or credit, or only the value of the money or property actually obtained by fraud. The Court explained that an award of treble damages is a debt under the Code because it is an enforceable obligation, and that the phrase to the extent obtained by modifies money or property, not the word debt. Reading the statute alongside related provisions, the historical practice of excluding fraud judgments from discharge, and the policy of protecting victims, the Court concluded that the fraud exception prevents discharge of any liability arising from fraud, including treble damages, attorney’s fees, and other relief that may exceed the value the debtor originally received. The Court therefore affirmed the lower courts.

Real world impact

The ruling means victims of fraudulent conduct can enforce treble damage awards and recover attorney’s fees even when a wrongdoer files for bankruptcy. It prevents debtors from using bankruptcy to escape full liability for fraud and resolves conflicting lower-court views on the point. Because the Court interpreted the fraud exception broadly, creditors who win fraud judgments can expect those judgments, including extra damages, to survive a bankruptcy discharge.