More Than Money: Emotional Distress Damages in Bankruptcy Proceedings
| Publication year | 2015 |
More than Money: Emotional Distress Damages in Bankruptcy Proceedings
H. Thomas Shaw
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The bankruptcy process is often viewed as purely financial, evoking images of only dollars and cents, secured and unsecured debts, and reorganization. However, there is more involved than purely financial matters. It can be personal, emotional, and leave a lasting effect upon the debtor's life. Historically, bankruptcy could be devastating to an individual, leading to public shame and humiliation.1 Although the public is now more accepting of a debtor's plight, it is still a harrowing experience. Due in part to the sensitive nature of bankruptcy, the drafters of the Constitution gave Congress the ability to pass uniform
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bankruptcy laws throughout the United States.2 With this power, Congress drafted the Bankruptcy Code3 with a primary focus on compensation and equitable distribution to creditors.4 However, Congress also sought to protect debtors by assuring their fair treatment, especially in Chapters 7 and 13 of the Bankruptcy Code.5 Intending to provide a "breathing spell" to debtors, Congress enacted legislation requiring an automatic stay on collection attempts following a bankruptcy petition's filing.6 Later, Congress gave teeth to its protection of debtors by providing a cause of action for "actual damages" resulting from a creditor's willful violation of the automatic stay.7
A debtor may incur varying degrees of emotional distress from the bankruptcy process. A creditor's violation of the automatic stay can exacerbate this stress, and courts have struggled with whether a debtor may be compensated for this increased emotional distress.8 Within the Eleventh Circuit, courts have routinely held that emotional damages fit within actual damages; however, a consensus approach has alluded the courts.9 The recent decision in Lodge v. Kondaur Capital Corporation10 provides a framework from which Eleventh Circuit courts may approach claims for emotional distress.11 However, there are still gaps in the decision and, until those are filled, the ability to recover emotional distress damages creates a potential for abuse and distortion of the purpose of the Bankruptcy Code.
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Kenneth and Delores Lodge acquired a $156,800 loan from First Franklin Financial Corporation (First Financial) in 2000. Additionally, they executed a security deed granting First Financial the right to foreclose on their property if the Lodges failed to uphold their obligations. In September of 2005, Kenneth Lodge filed a petition for Chapter 13 bankruptcy, and an automatic stay was imposed on any collection attempts by creditors.12
First Financial sold their interest in the Lodges' property to Kondaur Capital Corporation (Kondaur) which, to no avail, attempted to have the automatic stay lifted through its legal representative, defendant McCalla Raymer, LLC (McCalla).13 In January of 2009, Kondaur submitted a foreclosure referral to McCalla, who then had a "Notice of Sale" (the Notice) published in a local newspaper, the Rockdale Citizen. The Notice, published on March 12, 2009, stated the foreclosure sale was to occur on April 7, 2009. McCalla requested the notice to be taken down, and it was after only one day. The Lodges never saw the Notice in the newspaper. Regardless, Kondaur's actions constituted a willful violation of the automatic stay. At some time after the publication date, March 12, 2009, the Lodges received letters from attorneys informing them of the impending foreclosure. However, the purported date of the sale, April 7, 2009, passed without incident, ending the threat of foreclosure.14
Pursuant to § 362(k),15 on March 12, 2010, the Lodges filed a complaint against both McCalla and Kondaur. The complaint sought damages for emotional distress resulting from the defendant's willful violation of the automatic stay. The defendants admitted the willful violation; however, they contested whether the Lodges deserved compensation for emotional distress.16
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The Lodges claimed the stress induced by the defendant's actions caused Kenneth to experience insomnia, migraine headaches, and a worsening of his pre-existing acid reflux condition. In addition, Kenneth claimed a loss of productivity at his job and an inability to maintain personal relationships. Delores alleged that she sought medical attention for stress-induced insomnia.17 The United States District Court for the Nothern District of Georgia found the Lodges' allegations to be "too generalized and speculative" to warrant an award of emotional damages under § 362(k).18 In addition, the court noted the Lodges' failure to prove a causal link between the harm and the defendant's actions. Therefore, the district court ruled in favor of the defendants, granting their motion for summary judgment on the automatic stay claim.19
The primary function of the automatic stay is to protect unsecured creditors by ensuring equitable distribution of the debtor's estate; however, the Bankruptcy Code's legislative history also displays an intent to protect debtors.20 Providing a breathing spell to debtors, whose perilous finances may permeate all aspects of their lives, in the form of the automatic stay, Congress sought to prevent harassment by creditors and limit the inherent stress upon a debtor.21 Congress granted debtors a cause of action for actual damages incurred due to a creditor's willful violation of the automatic stay through the addition of what is now § 362(K).22 The actual damages are meant to compensate the debtor and make whole any damages incurred due to the willful
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violation of the automatic stay.23 However, a difficult legal question has arisen as to whether actual damages under § 362(k) encompass emotional damages and, if so, under what circumstances they should be granted.
Prior to the United States Court of Appeals for the Eleventh Circuit's decision in Lodge, other circuits confronted the issue of whether emotional distress damages may be awarded due to a violation of automatic stay.24 The United States Court of Appeals for the First Circuit, in Fleet Mortgage Group v. Kaneb,25 considered the issue and held that actual damages under former § 362(h)26 encompassed damages for emotional distress.27 In that case, the First Circuit affirmed an award to an eighty-five-year old widower who sought compensation for stress and a decline in social invitations due to the creditor's willful violation of the stay.28 The emotional distress was induced by the defendant's initiation of foreclosure proceedings and the plaintiff's resultant uncertainty regarding his living arrangements.29 The decision lauded the plaintiff's specific allegations of emotional distress, as opposed to mere "generalized assertions."30 The court failed to comment on the need for corroborating evidence because the defendant had waived arguments regarding the sufficiency of evidence by not raising them at the lower court level.31 However, the court did clarify that the mere fact that a defendant did not act deliberately does not prevent potential liability.32
In Aiello v. Providian Financial Corp.,33 the United States Court of Appeals for the Seventh Circuit upheld a denial of emotional distress damages.34 The creditor in the case threatened the debtor, who had filed under Chapter 7, with a fraud claim if the debtor refused to
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reaffirm his debt.35 While emphasizing the financial character of the intended automatic stay protection, Judge Posner's decision stated that damages for emotional distress were not warranted when the violation of the automatic stay caused no financial injury.36 The Seventh Circuit espoused that the relief allowed under the Bankruptcy Code meant to compensate for financial injury; therefore, the award of emotional distress damages absent such an injury would distort its fundamental purpose.37 Additionally, Judge Posner expressed concern over the potential for abuse from the grant of emotional distress damages under these circumstances.38 Specifically, Judge Posner highlighted the aggressive strategy pursued by the plaintiff-debtor's attorney as foreshadowing potential litigious abuse due to the availability of emotional distress damages.39
In Young v. Repine (In re Repine),40 the United States Court of Appeals for the Fifth Circuit considered the claims of a plaintiff-debtor who was incarcerated when the defendant-creditor, his ex-wife, willfully violated the automatic stay by attempting to collect child support debt from the debtor's property.41 The court denied the Chapter 13 debtor's attempts at emotional distress damages due, in part, to the debtor's failure to provide sufficient "specific information" concerning his alleged emotional distress.42 In so doing, the court followed Kaneb's emphasis on the minimum requirement for a plaintiff to provide specific allegations of the emotional distress to receive compensation for a willful violation of the automatic stay.43
In Dawson v. Washington Mutual Bank (In re Dawson),44 the United States Court of Appeals for the Ninth Circuit determined that the language of § 362 was ambiguous and looked to the legislative history of the Bankruptcy Code to determine if actual damages encompassed damages for emotional distress.45 In this examination, the court determined that Congress, when enacting the Bankruptcy Code, was not concerned with protecting debtors from financial loss and non-financial
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injury as well.46 Therefore, emotional distress damages may be considered actual damages, and further, a financial injury was not a prerequisite for emotional distress damages.47 In addition, the court provided specific guidelines for the award of emotional distress damages by stating a plaintiff must (1) prove they suffered significant harm, (2) clearly establish...
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