Academic journal article The University of Memphis Law Review

Alice's Restaurant: An Analysis of the Dischargeability of Punitive Damages under (Sec) 523(a)(2)(a), (A)(4),and (a)(6) of the Bankruptcy Code

Academic journal article The University of Memphis Law Review

Alice's Restaurant: An Analysis of the Dischargeability of Punitive Damages under (Sec) 523(a)(2)(a), (A)(4),and (a)(6) of the Bankruptcy Code

Article excerpt

WILLIAM M. GOTTEN*

I. INTRODUCTION

In the song made famous by Arlo Guthrie, "Alice's Restaurant," there are lyrics that say, "You can get anything you want at Alice's Restaurant." The same would appear to have been true when analyzing cases dealing with the dischargeability of punitive damages under the Bankruptcy Code1 (the Code)-one literally could find authoritative support for whatever position one wished to take on the issue. Depending on the circuit, the lower courts were in little agreement as to their reasoning for discharging, or not discharging, punitive damage awards.

As this Article was being written, the United States Supreme Court heard oral arguments on January 20, 1998, in the case of Cohen v. De La Cruz (In re Cohen),2 on appeal from the Third Circuit Court of Appeals, and rendered its decision sixty-three days later.3 The author received these announcements with somewhat less than unbridled enthusiasm-first, as a lawyer placed in the unenviable position of attempting to divine what the Supreme Court's decision would be on this issue, and second, as an author placed in the even more unenviable position of incorporating the Supreme Court's definitive pronouncement into this Article. Detailed discussion of the Cohen case, as well as the author's opinion as to its soundness and its potential ramifications will be reserved for Part V. Before addressing the Cohen case, this Article will discuss the status of the law prior to March 24, 1998, when Alice's Restaurant was clearly still open for business.

There is a necessary precursor to the examination of this issue, however-the effect that courts have given the doctrine of collateral estoppel or issue preclusion.4 With virtually all complaints objecting to the discharge of punitive damages in bankruptcy court, the punitive damages resulted from a prior federal or state court judgement, rather than from the immediate bankruptcy case. Thus, the question arises whether bankruptcy judges should be required to go beyond establishing that the party against whom a prior adverse decision is asserted had a full and fair opportunity to litigate the issues in the earlier case and that the particular requirements for application of collateral estoppel, whether state or federal, have been met.

This Article will examine the standard of review used by the courts and the preclusive effect of collateral estoppel argued both for and against the dischargeability of punitive damages on legal and societal grounds, which, in the final analysis, is one of the reasons that the lower courts are in conflict. Does the bankruptcy court have the power to negate damages assessed against a debtor as punishment for wrongful acts, and, if it does, should it exercise that power to give a "fresh start" to individuals whose acts do not warrant such leniency?

As the reported cases are examined, it is important to distinguish the precise subsection of (sec)523(a) - (sec)523(a)(2)(A), (a)(4), or (a)(6)that was alleged in the complaint excepting to discharge.5 A distinction has been made, for instance, between punitive damages awarded for acts considered "fraudulent" in nature,6 which are sometimes found dischargeable, and punitive damages for acts that were considered "willful and malicious,"7 which are generally found to be nondischargeable.

Finally, reference will be made to the debate that has arisen in cases interpreting the wording "to the extent obtained by" as found in(sec)523(a)(2). Should punitive damages be discharged because they are the product of either an award or a statutory embellishment and, therefore, were not "obtained by" the particular fraudulent act for which the debtor was monetarily punished? What was the intent and significance of the 1984 amendment to (sec)523(a)(2)(A) that produced this phrase and was it meant by Congress to be exclusionary?8

II. COLLATERAL ESTOPPEL

The doctrine of collateral estoppel, stated in its simplest terms, is that once an issue has been actually and necessarily litigated and determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action when asserted against a party to the prior litigation. …

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