Opinion ID: 573207
Heading Depth: 2
Heading Rank: 2

Heading: The Structure of Section 523

Text: 16 An examination of the structure of section 523 also suggests that section 523(a)(2)(A) does not bar discharge of punitive damages. 17 In ruling on Palmer's appeal, the BAP stated that it was bound by its earlier decision in Ellwanger. There, the BAP relied on a footnote to the Supreme Court case of Kelly v. Robinson. In Kelly, the Supreme Court considered the scope of section 523(a)(7), which excepts from discharge a debt to the extent such debt is a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss. 11 U.S.C. § 523(a)(7). It held that restitution obligations imposed in state criminal proceedings are not dischargeable. In a footnote to Kelly, the Supreme Court noted that, It seems likely that the limitation of § 523(a)(7) to fines assessed 'for the benefit of a governmental unit' was intended to prevent application of that subsection to wholly private penalties such as punitive damages. Kelly v. Robinson, 479 U.S. 36, 51 n. 13, 107 S.Ct. 353, 361 n. 13, 93 L.Ed.2d 216 (1986). Interpreting this footnote, the Ellwanger court concluded, The language of § 523(a)(2) and § 523(a)(7) when read in harmony compels the conclusion that Congress intended noncompensatory damages to be excepted from discharge only where they are owed to a governmental entity. Ellwanger, 105 B.R. at 556. 18 While we agree with Ellwanger's holding that section 523(a)(2)(A) does not except punitive damages from discharge, we find that this conclusion is overbroad. Even if private creditors cannot avail themselves of section 523(a)(7), they can still rely on other subsections of section 523. See Placer v. Dahlstrom (In re Dahlstrom), 129 B.R. 240, 246 (Bankr.D.Utah 1991) (There is nothing in the language of § 523(a) or its legislative history to indicate that subsection (a)(7) was intended to preclude private entities from pursuing nondischargeability judgments of punitive damages under other subsections.) Moreover, Ellwanger's suggestion that no subsection of section 523 bars the discharge of punitive damages conflicts with the Ninth Circuit's holding in Adams that punitive damages are excepted from discharge under section 523(a)(6). See Lock v. Scheuer (In re Scheuer), 125 B.R. 584, 593 (Bankr.C.D.Cal.1991) (discussing Adams and Ellwanger). 19 The footnote to a more recent Supreme Court case suggests a reading of section 523 that does distinguish among its subsections. In Grogan v. Garner, --- U.S. ----, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991), the Supreme Court held that facts in support of the section 523 exceptions need only be proven by a preponderence of the evidence. In a footnote, the Court stated that it did not consider the question whether § 523(a)(2)(A) excepts from discharge that part of a judgment in excess of the actual value of money or property received by a debtor by virtue of fraud. It noted, however, [a]rguably, fraud judgments in cases in which the defendant did not obtain money, property, or services from the plaintiffs and those judgments that include punitive damages awards are more appropriately governed by § 523(a)(6). Grogan v. Garner, 111 S.Ct. at 657, n. 2 (citations omitted). The Court cited to a footnote in In re Rubin in which the Ninth Circuit observed that: 20 [t]he paradigmatic case for § 523(a)(2)(A) seems to arise when a debtor lies to a creditor to obtain a loan and the creditor seeks repayment of the loan in bankruptcy. The paradigmatic case for § 523(a)(6), by contrast, seems to arise when a debtor intentionally injures a creditor and the creditor seeks to make nondischargeable a judgment that he has won in a state court tort action. 21 Rubin v. West (In re Rubin), 875 F.2d 755, 758 n. 1 (9th Cir.1989) (citations omitted). 22 The Grogan and Rubin footnotes reinforce the notion that distinctions should be made among the subsections of section 523. In the regime they suggest, a creditor should seek nondischargeability of a debt for fraud alone under section 523(a)(2). However, where the debtor inflicted willful or malicious injury, such that punitive damages were awarded, the creditor should seek nondischargeability under 523(a)(6). For punitive damages, then, the appropriate exception to discharge is 523(a)(6); they are not covered by 523(a)(2). 23 Thus, Grogan and Rubin, read together with the statutory language, suggest that there are distinctions among the subsections of section 523, and that section 523(a)(2) does not provide a bar to discharge of punitive damages. 3 24 The BAP's holding that section 523(a)(2) did not except from discharge the punitive damages portion of Palmer's judgment against Levy is therefore AFFIRMED.