Don't Rely on Plain Meaning, Trust Your Intuition: Trustees Are Not "individuals" Eligible to Recover Punitive Damages Under § 362(k)

• Publication year: 2013

Don't Rely on Plain Meaning, Trust Your Intuition: Trustees Are Not "Individuals" Eligible to Recover Punitive Damages Under § 362(k)

Kelly Gould

DON'T RELY ON PLAIN MEANING, TRUST YOUR INTUITION: TRUSTEES ARE NOT "INDIVIDUALS" ELIGIBLE TO RECOVER PUNITIVE DAMAGES UNDER § 362(K)

Abstract

To help debtors obtain a fresh start post-bankruptcy, § 362(a) of the Code provides for an automatic stay, which enjoins creditors from taking any collection action against a debtor immediately upon the debtor's filing for bankruptcy. Originally, victims of a stay violation relied solely on the bankruptcy court's contempt power to recover damages. In 1984, Congress added a new subsection to § 362, now codified as § 362(k), to specifically authorize bankruptcy courts to award damages to an "individual injured" by a violation of the stay. Most importantly, § 362(k) permits bankruptcy courts to award punitive damages, which typically are not an available remedy for civil contempt.

The circuit courts are split on whether a trustee may be considered an "individual injured" under § 362(k). The Third and Fourth Circuits hold that non-natural persons like trustees cannot recover damages under § 362(k), whereas the Second, Eighth, and Ninth Circuits hold that they can. Because the Code's commercial and remedial provisions affect society in pervasive ways, the importance of a consistent interpretation of the Code should not be underestimated.

Since punitive damages are only available under § 362(k), whether a trustee is considered an "individual" for the purposes of this statute can significantly affect his total damage award. Similarly, the issue of whether a party is an "individual" arises when other parties, such as chapter 11 debtors or non-violating creditors that are corporations or other business entities, seek to remedy a violation of the stay.

Utilizing the Supreme Court's established method of interpreting the Code, this Comment first argues that the term "individual" under § 362(k) should only include entities that are (1) natural persons and (2) injured by the violation of the stay. Because a trustee is not a natural person, but a representative of the bankruptcy estate, and is not personally injured by a violation of the stay, § 362(k) should not protect the trustee.

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Next, this Comment applies a law-and-economics perspective to argue that awarding punitive damages to a trustee runs contrary to the policy rationale behind punitive damages. Thus, to be in accordance with congressional intent, a trustee should not be considered an "individual" under § 362(k) and should instead have to rely on the contempt remedy to receive damages for a violation of the stay.

Introduction

The stay provision in § 362(a) of the Code¹ is a fundamental protection designed to offer debtors the "breathing spell" they need from creditors to be able to obtain a "fresh start" after bankruptcy.² The automatic stay, which takes effect upon a debtor's filing for bankruptcy, penalizes creditors who take any action against the debtor's property without the court's approval.³ Despite the automatic stay's protection, however, bankruptcy courts are filled with heartbreaking stories of debtors whose lives were upended by creditors who willfully violated the stay by seizing debtors' homes and cars,⁴ shutting off debtors' utilities,⁵ and even repossessing debtors' personal belongings⁶ to collect outstanding debts.

One such story is of Robert and Cindy Baker, chapter 7 debtors whose outstanding debt included a purchase-money loan for household furniture.⁷ Even after receiving notice of the Bakers' filing, the creditor attempted to repossess the furniture to satisfy a small, unpaid loan, thereby violating the automatic stay.⁸ This creditor also violated the automatic stay in another bankruptcy proceeding by trying to repossess other debtors' furniture.⁹ The bankruptcy judge noted that the debtor in the other bankruptcy proceeding was

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in tears at the prospect of losing her furniture.¹⁰ While the judge found no actual loss and no basis for compensatory damages, he nevertheless instructed the creditor to pay punitive damages to deter future violations.¹¹

Awarding punitive damages to debtors like those in In re Baker is intuitively appropriate because debtors rely on the automatic stay to offer guidance in times of extreme financial difficulty, to ensure that their property will be protected, and to provide relief in case their property is not protected.¹² Yet, sophisticated creditors take advantage of a debtor's vulnerability and lack of familiarity with the bankruptcy rules and proceedings, sometimes maliciously and repeatedly.¹³ The bankruptcy court's position reflects this intuition. In awarding punitive damages, courts have taken into account the effect of any such repossession of property on a debtor and his family,¹⁴ the motive of the repossessing creditor, and the relation between the debtor and the creditor.¹⁵

While punitive damages may be appropriate for individual debtors in some circumstances, the debtor is not always the one to pursue a case against a creditor for violating the automatic stay. As a representative of the bankruptcy estate, a chapter 7 trustee also has standing to seek a remedy for a violation of the automatic stay.¹⁶ However, cases brought by trustees contrast starkly with those brought by individual debtors because a trustee's case lacks the human element that characterizes cases like In re Baker. Unlike the debtor, the trustee does not suffer from bankruptcy and is simply doing his job to liquidate the debtor's property and distribute the proceeds to creditors as efficiently as possible.¹⁷

Furthermore, a trustee likely would not represent the estate against a creditor in a case like In re Baker in which the violation of the stay involved personal property or property with nominal value. In In re Baker, the furniture

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debt likely would have been either exempted from the estate or worth too little to justify the trustee's time and expense in asserting the stay.¹⁸ Because a trustee is not permitted to liquidate exempt property—which often includes homes, cars, and household furniture¹⁹ —and generally does not liquidate property that has little value to the estate,²⁰ a trustee does not have an interest in claiming a violation of the stay regarding such property.²¹

Automatic stay violations resulting in small monetary damages but large intangible or emotional harm to the debtor, such as the violation in In re Baker,²² are precisely the ones that most warrant an award of punitive damages.²³ In such cases, punitive damages are necessary to adequately deter creditors from violating the stay and punish violating creditors for their unconscionable actions against vulnerable debtors.²⁴ In most cases brought by trustees, however, punitive damages are not necessary to accomplish the goals of deterrence and punishment,²⁵ which are consistently cited as the primary policy reasons for awarding punitive damages.²⁶ Compensatory damages and attorneys' fees are sufficient to reach these ends.²⁷

This Comment argues that Congress did not intend for chapter 7 trustees to have access to the same options for recovery that are available to individual debtors. Section 362(k)²⁸ provides an "individual injured" by a violation of the stay with a specific statutory remedy.²⁹ This section enables an "individual" to recover compensatory damages, attorneys' fees, and even punitive damages.³⁰

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Prior to the enactment of § 362(k), the contempt remedy under § 105(a)³¹ provided the only remedial option for those victimized by violations of the stay.³² However, punitive damages are not available under § 105(a).³³ The fact that Congress specifically used the term "individual" in § 362(k), rather than a broader term that encompasses both natural and non-natural persons, suggests that Congress intended to preclude trustees and other non-natural persons from recovering punitive damages under § 362(k).³⁴

Currently, the circuit courts are split on whether trustees qualify as individuals for purposes of § 362(k)³⁵ —the Ninth Circuit holds that a trustee is not an individual, while the Third Circuit holds that a trustee is an individual.³⁶ While many circuits have not yet ruled on a trustee's status, the Second, Eighth, Ninth, and Eleventh Circuits have held that corporate debtors, as non-natural persons, should not be considered individuals under § 362(k), while the Fourth Circuit has held the opposite.³⁷ Meanwhile, the district courts and bankruptcy courts of the undecided circuits have issued conflicting holdings on these two issues.³⁸

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Considering the pervasive nature of bankruptcy law and the importance of the automatic stay provision in bankruptcy cases,³⁹ it is crucial for the courts to consistently define who is able to recover under § 362(k).⁴⁰ Bankruptcy experts assert that divergent interpretations increase costs, harm bankruptcy law by preventing the courts from developing a coherent bankruptcy policy and jurisprudence, and undermine the predictability and stability of the bankruptcy system.⁴¹ Furthermore, Justice Sandra Day O'Connor, in a dissenting Supreme Court opinion, highlighted the importance of resolving such issues by aptly pointing out that every dollar spent litigating an issue is a dollar removed from a bankruptcy estate that may already be inadequate to satisfy creditors' claims.⁴²

This Comment argues that a trustee is not an "individual" under § 362(k) and should therefore be limited to the remedies available under § 105, which do not include punitive damages. Part I gives a brief background of the statutory development and legislative history leading up to the 1984 amendment that introduced § 362(k) into the Code, the current Code and its important automatic stay provision, and an explanation of the current dispute over who should qualify as an "individual" under § 362(k).

Part II argues that the...