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Are statutory penalties or punitive damages for fraud discharged in bankruptcy?
No. It is not only the actual value of the "money, property, services, or . . . credit" the debtor obtained through fraud that is non-dischargeable in bankruptcy, but also treble "punitive" damages and attorneys fees and costs related to the fraud. This was made clear in a March 25, 1998 decision of the Supreme Court of the United States in Cohen v. de la Cruz.
The case involved a landlord who had overcharged his tenants. The trial court found that the landlord had committed "actual fraud" within the meaning of the Bankruptcy Act and that his conduct amounted to an "unconscionable commercial practice" under New Jersey’s Consumer Fraud Act. As a result, the court awarded the tenants treble damages plus reasonable attorney's fees and costs. The debtor recognized the approximately $30,000 in improperly charged rent would not be dischargeable, but argued that he should not be stuck having to pay the $100,000 in punitive damages and attorneys’ fees the court awarded. The court decided those extra damages had been awarded as a result of his fraudulent acquisition of "money, property, services, or . . . credit." All the debtor’s obligations arising out of fraudulent conduct, including both punitive and compensatory damages, are not subject to discharge in bankruptcy.
(Reviewed 11.9.08)
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