Court Opinion

ID: 9686036
Source: CourtListenerOpinion
Date Created: 2023-08-24 15:19:27.001544+00
Date Added: 2024-06-11T18:18:11.803206
License: Public Domain

PAPPAS, Bankruptcy Judge,
dissenting:
I must dissent.
The debtor deceived Creditor. The state court found that the debtor employed “a false representation, a fraudulent representation, and a false statement knowingly made ...” about the status of his licensure as a contractor to induce Creditor to enter into the construction contracts. Because his conduct was fraudulent, under the time-tested policies of the Bankruptcy Code and Supreme Court case law, all debts that debtor owes to Creditor arising from that fraudulent relationship must be excepted from his discharge in bankruptcy under § 523(a)(2)(A). That includes the debtor’s statutory liability to Creditor under Cal. Bus. & Prof.Code § 7031(b).
Our analysis should be driven by the facts, not concerns for a hypothetical “innocent” unlicensed contractor. Here, the debtor is precluded from contesting that he lied to Creditor, telling him his business held a state contractor’s license; that, solely in reliance upon this false representation, Creditor was induced to contract with the debtor, and thus paid him $123,000; and that, at the time of contracting, the debtor knew his statements to Creditor were false. These facts unmistakably describe fraud, and based upon these findings, the state court ordered the debtor to repay all the monies he received from Creditor, as required by the California statute,10 and in addition, to pay a statutory penalty, and to pay Creditor’s attorneys fees.
The debtor’s attempt to discharge Creditor’s claim should have been rebuffed by the bankruptcy court because “[t]he Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, embodying a basic policy animating the Code of affording relief only to an ‘honest but unfortunate debtor.’ ” Cohen v. De La Cruz, 523 U.S. 213, 217, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998), quoting Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). We recently reiterated this fundamental policy. Albarran v. New Form, Inc. (In re Albarran), 347 B.R. 369, 379 (9th Cir. BAP 2006)(noting, in deeming statutory damages for copyright infringement nondischargeable, that “only the ‘honest but unfortunate’ debtor is entitled to an entirely unencumbered fresh start.”)
To implement this fundamental bankruptcy policy, Cohen instructs that § 523(a)(2)(A) be read in a “straightforward” fashion, to prevent discharge of any debt respecting money, property, services or credit that the debtor has fraudulently obtained. 523 U.S. at 218, 118 S.Ct. 1212. According to the Court, this discharge exception “makes clear” that “[o]nce it has been established that specific money or property has been obtained by fraud, ... ‘any debt’ arising therefrom is excepted from discharge.” Id. In other words, if a debt “results from” or is “traceable to” fraud, it can not be discharged in bankruptcy. Id.11
*9The majority reasons that because even an innocent unlicensed contractor is liable to a homeowner in California to disgorge payments under § 7031(b), this debtor should also get a pass. While acknowledging Cohen, the majority relies upon cases which, while not dealing precisely with § 523(a)(2)(A), and in some instances pre-dating Cohen, advise that the Code’s exceptions to discharge should be interpreted “narrowly” or “strictly.”
We should decline to employ a general rule of construction in favor of the specific interpretation given the same statute at issue in this appeal by Cohen. Here, the facts show that but for the debtor’s fraud, Creditor would have never hired nor paid him. Plainly, the debtor’s responsibility to disgorge payments to Creditor is directly traceable to his deception.
At bottom, the majority aligns with a debtor who, as to his dealings with Creditor, was not honest. We should instead protect the victim of the debtor’s fraud. Cohen, 523 U.S. at 223, 118 S.Ct. 1212 (observing that it is “unlikely that Congress ... would have favored the interest in giving perpetrators of fraud a fresh start over the interest of protecting victims of fraud.”), quoting Grogan, 498 U.S. at 287, 111 S.Ct. 654. Cohen admonishes that all financial liability stemming from a fraudulent act, whether it be compensatory, punitive or statutory, is excepted from discharge. Since it is undisputed that this debtor is not an honest, unfortunate one, he is undeserving of a discharge of this debt. I therefore dissent.

. In enforcing § 7031(b), the state court noted it was implementing the California legislature’s goal of "protecting the homeowner" by providing a "stimulus” to contractors to obey the law.

. Indeed, in contrast to the approach taken by the majority, our court of appeals has endorsed an expansive reading of Cohen. For example, in a slightly different context, the court indicated that it is not necessary for a *9debtor to have received any benefit from his or her fraudulent conduct for the resulting debt to be excepted from discharge in bankruptcy. Muegler v. Bening, 413 F.3d 980, 983-84 (9th Cir.2005) citing with approval, Deodati v. M.M. Winkler & Assoc. (In re M.M. Winkler & Assoc.), 239 F.3d 746, 749 (5th Cir.2001) (observing that, as interpreted by Cohen, § 523(a)(2)(A) must be read to "protect fraud victims rather than debtors.”), and Pleasants v. Kendrick (In re Pleasants), 219 F.3d 372, 375 (4th Cir.2000). This holding should assuage the majority’s concerns that the $123,000 awarded to Creditor did not represent “compensatory damages.” As Cohen underscores, § 523(a)(2) excepts "any liability” arising from a debtor’s fraud, "including treble damages, attorney’s fees, and other relief that may exceed the value obtained by the debtor.” Cohen, 523 U.S. at 223, 118 S.Ct. 1212(emphasis added).