Olachi Amadi, Too Indebted to Be Stressed: Refining the Standards of Proof Required to Award Damages for Emotional Injuries Under Sec. 362(k)

• Publication year: 2011

TOO INDEBTED TO BE STRESSED: REFINING THE STANDARDS OF PROOF REQUIRED TO AWARD DAMAGES FOR EMOTIONAL INJURIES UNDER Sec. 362(k)

INTRODUCTION

Filing for bankruptcy is a harrowing experience that can understandably cause anxiety and high levels of stress for any debtor. A majority of debtors who file for bankruptcy are insolvent.¹On average, the bankrupt debtor owes more than a year's income in both short and long term debts such as car loans, credit cards, home mortgages, and utility bills.²Few of these debtors can make ends meet. The constant barrage of phone calls from bill collectors, not being able to pay bills, and worrying about whether one's home or car will be in jeopardy during a bankruptcy proceeding can exact an emotional toll on a person's psyche.

Section 362 of the Bankruptcy Code provides one of the most vital protections for a debtor during the course of a bankruptcy proceeding: the automatic stay. The automatic stay halts collection efforts against the debtor during the course of the bankruptcy proceeding.³The protection afforded by the automatic stay serves the fundamental twin goals of bankruptcy: to give the debtor a fresh start and to guarantee the equitable distribution of assets to creditors.⁴

Because the automatic stay is such an integral part of a debtor's fresh start, Congress imposed consequences on creditors for willful violations of the stay by allowing a debtor to recover damages.⁵Under the provisions of 11 U.S.C.

Sec. 362(k), a debtor who has been "injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages."⁶Unfortunately, the statute provides no definition of the term

"actual damages." This vagueness has resulted in an inconsistent application of the provision in federal courts. A particularly disputed issue is whether "actual damages" under Sec. 362(k) includes mental and emotional injuries sustained as a result of a creditor's willful violation.⁷Overwhelmingly, the circuit courts that have encountered the issue have held that a debtor may recover emotional distress damages under Sec. 362(k).⁸However, a minority of courts have applied the plain language approach to find that emotional distress claims are not recoverable as actual damages under Sec. 362(k).⁹

While the majority of circuit and bankruptcy courts permit recovery of emotional distress claims under Sec. 362(k), they have reached no consensus as to the standard of proof necessary for a debtor to claim emotional distress.¹⁰

Emotional injuries differ substantially from physical or financial ones; the latter types can be objectively measured, whereas emotional injuries often elude meaningful quantification.¹¹This characteristic of emotional injuries raises proof issues and concerns that courts would be flooded with fraudulent and frivolous lawsuits.¹²

This Comment addresses the competing interests of affording a debtor protection for genuine emotional injuries sustained as a result of a willful stay violation, and judicial concerns with limiting frivolous and fraudulent claims of emotional distress. This Comment argues that while emotional distress claims from willful violations of the automatic stay are valid, courts must adopt a clear standard that lays out specific requirements a debtor must meet before becoming entitled to emotional damages as actual damages under

Sec. 362(k).

Part I of this Comment provides background information about the automatic stay and the various ways courts impose sanctions for a violation of the stay. Part II addresses the text, legislative history, and congressional intent for enacting Sec. 362(k). Part III analyzes the circuit courts' varying interpretations of emotional damages under Sec. 362(k). Part IV compares various emotional distress claims in non-bankruptcy cases and considers remedies from other areas of law. Finally, Part V introduces a new proof model and argues that compensable mental injury should be proved by appropriate evidentiary methods such as: palpable physical symptoms, expert testimony, and objective medical evidence. This part also analyzes the distinctions among the different methods and explains why the proposed new standard is superior to the circuit courts' interpretations. Part VI applies the new standard to the already decided circuit court cases to determine if there would be different outcomes.

I. SECTION 362: BACKGROUND AND PURPOSE

A. The Automatic Stay

The automatic stay prohibits creditors from initiating or continuing actions against a debtor or the debtor's property and becomes effective immediately upon the filing of a bankruptcy petition.¹³The stay prohibits any act to "collect, assess or recover a claim" outside of the bankruptcy forum.¹⁴The stay functions as a statutory injunction and is analogized to "closing the windows and locking the doors" so as to prevent property from leaving the debtor's estate.¹⁵The court ultimately oversees the gathering and distribution of a debtor's assets, but until that time or until the stay is lifted, creditors are prohibited from taking any individual action against the debtor, his property, or the estate.¹⁶Once a bankruptcy petition is filed, the stay becomes effective and notice to creditors at the commencement of the stay is not necessary.¹⁷In most cases, the filing of a petition serves as notice.¹⁸The stay remains in effect until: (1) the property in question is no longer property of the estate;¹⁹(2) the bankruptcy case is closed, dismissed, or a discharge is granted or denied;²⁰or (3) the automatic stay is terminated, annulled, or modified.²¹

The imposition of the stay serves one of the fundamental functions of bankruptcy law. It protects debtors from creditors' efforts to collect debts outside of the formal bankruptcy arena and proceedings. By halting collection efforts, the stay gives a debtor a "breathing spell" and a chance to gain a fresh start.²²This breathing spell offers the debtor a relief from the financial burdens that led the debtor into bankruptcy.²³The automatic stay is vital because it allows a debtor to attempt reorganization, repay debts, or otherwise obtain temporary relief from his financial burdens.²⁴

Besides serving as a protective device for debtors, the automatic stay also protects the interests of creditors by making sure that the property of the estate is not diminished.²⁵The provisions of the stay are designed to treat creditors equally. To that end, individual creditors are not allowed to pursue alternative methods of collecting their debts to the detriment of other creditors.²⁶Without the stay, creditors who acted first would obtain preferential payments of their claims to the disadvantage of other creditors who did not act as quickly.

Finally, the stay serves the orderly process by which a debtor's estate is handled, one of the fundamental operations of bankruptcy. The stay protects creditors and debtors by forcing creditors to adhere to the Bankruptcy Code's liquidation process²⁷and allowing debtors to resolve their debts in an orderly fashion.²⁸By halting most collection actions, the bankruptcy court can bring all judicial disputes pertaining to the bankruptcy petition under a single forum and sort out matters without outside proceedings affecting the process.

B. Sanctions for Violation of the Stay

Under the Bankruptcy Act of 1898, the stay of collection proceedings against a debtor was not statutory.²⁹Before 1973, the stay of collection proceedings against a debtor was imposed by court order on the debtor's application and later by general order.³⁰A violation of court ordered stays was dealt with in accordance with procedures for contempt of court.³¹After 1973, the stay of collection proceedings was available under the Bankruptcy Rules and Official Bankruptcy Forms, which were approved by the United States Supreme Court.³²The rules adopted in 1973 also gave bankruptcy judges the power to cite and punish parties for civil and criminal contempt by imposing fines.³³

In 1978, Congress passed the Bankruptcy Reform Act ("Bankruptcy Code" or "Code"), which replaced the 1898 Bankruptcy Act.³⁴Unlike the pre-1973 collection proceedings, the 1978 Code designed the stay to go into effect automatically upon filing a petition.³⁵This Section addresses the specific sanctions for stay violations that were adopted under the 1978 Code and their evolution up to the present time.

1. Civil Contempt

Under the 1978 Code, a creditor who violated the automatic stay could be held in contempt of court because the stay was the equivalent of an injunction.³⁶The Code did not provide a mechanism for enforcement of the automatic stay because of the legislature's expectation that enforcement would continue through the contempt procedures of the court.³⁷As a result, until the

1984 amendments, debtors injured by a creditor's violation of the automatic stay had to resort to the bankruptcy court's civil contempt power under

Sec. 105(a) to redress their injuries.³⁸For a party to be held in civil contempt, a court had to find that the party violated the specific and definite court order, had notice of the order and, knew of the proscribed conduct.³⁹Bankruptcy courts preferred to enforce stay violations by holding any action taken in violation of the stay to be "void and without effect."⁴⁰

Creditors called into question the suitability of using contempt procedures to remedy automatic stay provisions. They questioned the authority of bankruptcy judges to enforce the automatic stay through traditional contempt sanctions by arguing that it was not possible to be in "contempt" of a rule or statute as opposed to an order of a court.⁴¹While the Supreme Court visited the issue in Northern Pipeline Construction Co. v. Marathon Pipe Line Co.,⁴²

Sec. 105(a) contempt proceedings are still used when there is no recovery for a debtor under Sec. 362(k).⁴³An award of damages under the civil...