A fundamental concept in bankruptcy is the “fresh start” for debtors. It is the ultimate goal of the debtor because it will generally protect the debtor from collection efforts on account of pre-petition debt. When an obligation is discharged, collection of the discharge debt is stopped, and all personal liability on account of any judgment is voided. Notwithstanding the right to discharge, there are some limitations in the bankruptcy code.
In a Chapter 7 case, Section 523 of the Bankruptcy Code enumerates a number of exceptions to the entitlement to discharge:
- Debts arising from the debtor’s fraudulent conduct,
- Claims arising from willful and malicious injury caused by the debtor,
- Criminal fines and restitution obligations, and
- Claims arising from injury or death caused by the debtor while driving while intoxicated. The discharge exceptions are designed to advance the fundamental policy of affording relief only to the honest, but unfortunate debtor.
The Supreme Court decision in Cohen v. de la Cruz1 illustrates that an individual or entity may not discharge the actual value of the “money, property, services, or… credit” obtained by actual fraud, nor the punitive damages and attorneys’ fees related to the fraud. The case involved a landlord who overcharged his tenants, and resulted in an award for improperly charged rent, plus punitive damages. The court decided those extra damages had been awarded as a result of fraudulent conduct. As such, all of a debtor’s obligations arising out of a fraudulent conduct, including both punitive and compensatory damages, are not eligible for discharge in bankruptcy.
Section 523(a)(6) of the Bankruptcy Code particularly excepts from discharge, any debt “for willful and malicious injury by the debtor to another entity or the property of another entity.” A party seeking to avoid the discharge of the debt, must prove “willful” and “malicious” by the preponderance of the evidence before the Section 523(a)(6) exception to discharge applies.2 Willful is defined as “headstrong and knowing” conduct and “malicious” as conduct targeted at the creditor at least in the sense that the conduct is certain or almost certain to cause harm.3 Malice requires more than just reckless behavior by the debtor. The debtor must have acted with the intent to harm, rather than merely acting in a way that resulted in harm.4 Likewise, punitive damages awarded for reckless behavior would not qualify for the discharge exception.
Punitive damages are monetary compensation awarded to an injured party for the purpose of punishing the wrongdoer and deterring similar wrongful conduct in the future. Under Missouri’s 2005 Tort Reform Act, punitive damages may include awards for punitive or exemplary damages, as well as awards for aggravating circumstances. Unlike most judgments against a defendant, punitive damages awards are not dischargeable in bankruptcy so long as the relevant cause of action was based upon willful and malicious actions. This rule is important for creditors, as debtors may try to hide behind bankruptcy to avoid large judgments against them. However, if a punitive damages award was based solely upon reckless indifference to the plaintiff’s rights or reckless conduct, the award is still dischargeable in bankruptcy.
In a bankruptcy court, the judge will look at whether the debtor received punitive damages for willful and malicious injury. Where the compensatory and punitive damage awards are based on the same underlying conduct, and the judgment for compensatory damages is non- dischargeable because it is based on willful and malicious injury to another, then the punitive damages award is likewise non-dischargeable.5
The discharge available to Chapter 13 debtors is broader than the discharge available in Chapter 7. But similarly to Chapter 7, the discharge exceptions include
- debts for harm to persons from willful or malicious conduct,
- drunk driving injuries6,
- criminal restitution,
- crumble fines, and
- debts arising from fraud and false statements.
Where a debtor was assigned punitive damages in any of the aforementioned circumstances, they are also non-dischargeable.
1 523 US 213 (1998)
2 Grogan v. Garner, 498 U.S. 279, 286-7 (1991)
3 In re Miera, 926 F.2d 741, 743-4 (8th Cir. 1985)
4 Kawaauhau v. Geiger, 523 U.S. 57 (1998)
5 In re Scarborough, 97-3788 (8th Cir. 1999)
6 Cassidy v. Minihan, 794 F.2d 340 (8th Cir. 1986)(An individual acts intentionally by deliberately ingesting alcohol and driving his or her car on public roads in knowing disregard of the rights to others. Thus, debt arising from drunk driving injuries is for willful and malicious injury and not dischargeable under Section 523 of the Code.)