Setting things straight: adding a provision to allow damages for emotional distress in the Bankruptcy Code could clear up a lot of confusion.

• Author: Priestaf, Nathan M.

1. INTRODUCTION

   Every year, Americans who file for bankruptcy (1) receive protection from the automatic stay, a statutory device designed to stop creditors' collection efforts while the debtor puts his financial affairs in order. (2) Despite the existence of the stay and the fact that it is automatically triggered upon a debtor's filing for bankruptcy, courts are replete with cases in which overly aggressive creditors use questionable and reprehensible means to obtain payment from delinquent debtors. (3) As a result of creditors' actions in violation of the automatic stay, an aggrieved debtor, already suffering under the weight of his financial difficulties, may experience some form of emotional distress. (4) Although the Bankruptcy Code permits an award of actual and punitive damages, as well as attorneys' fees, to an injured debtor, the Code does not explicitly address whether damages are available for emotional distress. (5) Thus, courts are left to wrangle with the issue themselves, often undertaking considerable analysis of the statutory text, statutory history, and contextual clues to address the issue. (6) Not surprisingly, this struggle often leads to divergent results between courts. With differing standards and burdens of proof depending on the court, aggrieved debtors are often at the mercy of the specific jurisdiction's precedent. (7) The inconsistent treatment of the same statutory text leaves the debtor rolling the dice--what may be a large recovery for emotional distress in one jurisdiction may amount to little or nothing in another jurisdiction. (8)

   This Comment details the history of the automatic stay, the differing treatment of the statute in various jurisdictions, and the potential ramifications to debtors. Clearly, much of the time-consuming analysis performed by courts could be avoided if the Bankruptcy Code expressly permitted recovery for emotional distress, something most courts already permit, albeit only after considerable hand-wringing and strained reasoning. As a result, this Comment proposes a statutory addition to [section] 362(k) that addresses the dual concerns of bankruptcy courts: (1) allowing a legitimately injured debtor to recover for emotional distress damages while (2) providing a standard and burden of proof narrow enough to prevent frivolous claims. The proposed addition is also broad enough to allow courts discretion to consider the type of harm alleged and the credibility of the source, while requiring "severe emotional distress"--a requirement designed to curb or eliminate frivolous claims. (9) Finally, it is also argued that as a policy matter an addition is necessary not only to meet the primary underlying objectives of the automatic stay but also to provide consistent treatment for all debtors and creditors regardless of the jurisdiction. (10)

2. LEGAL BACKGROUND

   Under the federal bankruptcy system, when a debtor files a bankruptcy petition, a bankruptcy estate is automatically created consisting of "all legal or equitable interests of the debtor in property as of the commencement of the case." (11) The filing of the petition also triggers an automatic stay pursuant to [section] 362, which is considered to be "among the most basic of debtor protections under bankruptcy law." (12) The automatic stay springs into effect immediately upon the filing of a bankruptcy petition, regardless of whether the parties to the proceeding are aware that a petition has been filed (13) and it operates without the necessity of judicial intervention. (14) Correspondingly, because the stay is automatic, it cannot be waived and relief from it "'can be granted only by the bankruptcy court having jurisdiction over a debtor's case.'" (15)

   Generally, the stay prohibits:

   "the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case." (16)

   The automatic stay also operates to prohibit "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case" (17) and it protects the debtor's assets while giving the debtor breathing room to reorganize. (18) Unless relief from the stay is granted, the stay "'continues until the bankruptcy case is dismissed or closed, or discharge is granted or denied.'" (19)

   Despite the application of the automatic stay, numerous cases detail creditors' sometimes desperate and nefarious efforts to collect from debtors, including leaving harassing phone messages, (20) telling the debtor she will be committing a "criminal felony" if she fails to surrender her vehicle, (21) sending threatening letters requesting the debtor to reaffirm the debt or she will be charged with fraud, (22) initiating proceedings to foreclose on the debtor's property, (23) freezing the debtor's bank account for seven days, (24) going to the debtor's house and using abusive language, refusing to leave, and making obscene gestures, (25) carrying a firearm during repossession, (26) entering the debtor's house, turning off the lights, pointing finger at debtor's head (to resemble a gun) and screaming at the debtor, (27) and kicking in the debtor's door, thereby scaring the debtor's children. (28) However, not all violations of the automatic stay involve egregious or outrageous creditor conduct. In fact, violations occur for much more mundane reasons like "technical" violations, such as "a demand or collection letters, account statements, notices of intent to levy or collection letters issued by the IRS, mortgage acceleration letters and similar communications" (29) which are "unaccompanied by any financial loss or property deprivation." (30) To avoid potential liability, one court suggested that:

   a creditor advised that a bankruptcy has been filed or is being filed should continue the conversation only long enough to obtain information to verify the bankruptcy, i.e., the creditor should ask for the case number and the district and division in which the case is pending. If this information is unavailable, the creditor should ask for the name of the debtor's attorney and then promptly hang up. Questions regarding the debtor's intentions with respect to collateral are inappropriate. (31) If a creditor violates the automatic stay, the 1984 amendments to the Bankruptcy Code give an individual debtor a cause of action in bankruptcy against such creditor under [section] 362(k). (32) This code section provides in part that "an individual 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." (33) Thus, a party seeking damages for a stay violation must establish that: (1) a violation occurred; (2) the violation was committed willfully; (3) the violation caused actual damages; and if punitive damages are sought, (4) that the circumstances are such that punitive damages should be awarded. (34)

   Generally, courts find a violation to be "willful" if a creditor had knowledge of the bankruptcy filing and deliberately acted in such a way that violated the stay. (35) The willfulness element does not require that the creditor have a specific intent to violate the automatic stay; rather, a willful violation occurs when the creditor knew of the automatic stay and intentionally acted in violation of the stay. (36) In cases where the creditor receives actual notice of the stay, courts presume the violation was deliberate. (37) Furthermore, it is typically the debtor's responsibility to provide the creditor with actual notice of the filing. (38) Once the debtor proves that he provided notice to the creditor of the bankruptcy petition, the burden shifts to the creditor to prove that its actions were not violations of the automatic stay. (39) However, even an innocent stay violation in which the creditor does not have knowledge of the stay becomes willful if the violator fails to remedy the violation after receiving notice of the stay. (40) While "the Bankruptcy Code does not require a debtor to warn his creditors of existing violations [of the automatic stay or other such protective provisions] prior to moving for sanctions," (41) the debtor must "exercise due diligence in protecting and pursuing his rights" (42) and in mitigating his damages with regard to such violations. (43)

   If a debtor can successfully prove a willful violation of the automatic stay, (44) an award of actual damages, including costs and attorney's fees incurred by the debtor to remedy the stay violation, is mandatory. (45) Courts have held that [section] 362(k)'s "shall recover" language indicates Congressional intent to require a mandatory award of actual damages without judicial discretion in the matter. (46) Accordingly, the bankruptcy court may not award actual damages in an amount greater than that which is supported by either "credible" (47) or "concrete" evidence shown with "reasonable certainty." (48) Because of the recent increase in bankruptcy filings, courts are more frequently confronted with the issue of the damages available to debtors affected by violations of the automatic stay. This increase has also forced courts to confront the issue of whether damages should be available for emotional distress claims and, if so, what amount is appropriate.

3. RECENT DEVELOPMENTS

   1. Actual Damages

      One of the most oft-cited cases addressing the issue of the availability of damages for emotional distress is the Seventh Circuit's decision of Aiello v. Providian Financial Corp. (49) In this case, a debtor attempted to recover under the "actual damages" provision of [section] 362(h) (50) after the creditor sent the debtor letters "ask[ing] her to reaffirm the debt and...