No Harm, No Foul: Calculations of Nondischargeable Damages in Transactions Tainted by Fraud

Abstract

Section 523(a)(2)(B) of the United States Bankruptcy Code provides that a debt incurred as a result of written fraud cannot be discharged by a bankruptcy proceeding. Though section 523(a)(2)(B) provides elements of this nondischargeable fraud, one common element of fraud is conspicuously missing from this list-damages incurred as a result of the fraud. Whether damages must be shown in order to prevent discharge of a written fraud debt has been debated by courts under both the Bankruptcy Act and Code. However, despite numerous revisions to the bankruptcy laws, the need (or lack thereof) for damages remains unclear. In this article, the author suggests that preventing a discharge on the basis of fraud without requiring damages causes a windfall to the "defrauded" creditor. The author also suggests a mechanism for calculating such damages to ensure an equitable balance between the debtor and creditor in a bankruptcy proceeding, utilizing a tort-based calculation of damages.

Keywords: nondischargeable damages, bankruptcy, fraud, creditors

JEL Classification: K10, K30, K39