Debtors in Distress: When Can You Sue for Emotional Injury?
Winter 2011

Reprinted from Norton Annual Survey of Bankruptcy Law & Practice, 2011 Edition, with permission. Copyright © (2011) Thomson Reuters/West. For more information about this publication please visit www.west.thomson.com.


Debtors in bankruptcy frequently seek emotional distress damages for violations of the automatic stay. Debtors typically claim damages for embarrassment, sleeplessness, anxiety, and the like. Section 362(k)(1) of the Bankruptcy Code mandates an award of “actual damages, including costs and attorneys' fees” to an “individual injured by any willful violation” of the automatic stay. Courts have divided over whether “actual damages” includes emotional distress damages, and the courts concluding that such damages are available have failed to articulate a workable standard for determining when emotional distress damages may be awarded. The only thing that the courts do agree on is that the phrase “actual damages” is ambiguous.

In Sternberg v. Johnston, the Ninth Circuit upheld its prior ruling in Dawson v. Washington Mutual Bank, F.A. (In re Dawson) (Dawson II), that debtors may recover for emotional distress under § 362(k). The First Circuit in Fleet Mortgage Group v. Kaneb, and the Fifth Circuit in In re Repine, have also suggested that such damages are available under § 362(k). The First Circuit has subsequently noted, however, that it has never expressly ruled on this issue, describing its discussion in Fleet Mortgage as dicta. Repine similarly appears to have merely assumed that emotional distress damages are available.

The Seventh Circuit, however, ruled in Aiello v. Providian Financial Corp., that emotional distress damages are not available under § 362(k). In the Seventh Circuit, debtors may recover emotional distress damages only when the debtor suffers a financial loss that is compensable under 362(k). Under Aiello, emotional distress damages are not recoverable under § 362(k) itself but may be recovered under the “clean-up doctrine” if emotional distress damages are available under an independent state law tort theory. The clean-up doctrine is a theory of supplemental jurisdiction that permits courts of equity to dispose of an entire controversy in order to promote judicial economy.

Thus there is a split among the circuits regarding whether emotional distress damages are available under § 362(k), and the analytical difficulties become even more pronounced when the courts attempt to articulate and apply standards to determine what circumstances justify an award of emotional distress damages and how much an award should be.

Aiello is not without flaws, but the Seventh Circuit's reasoning is more consistent with the history, language, and intent of § 362(k), and if the Supreme Court ever takes review of the issue, it should decide that emotional distress damages are not available for violations of the automatic stay. Sternberg sought review from the Supreme Court after the Ninth Circuit chose to adhere to Dawson, but the Court denied review without comment.

1. The enactment of § 362(k)

Under the 1898 Bankruptcy Act, a stay did not automatically arise upon the filing of a bankruptcy petition; the debtor or trustee had to request that the court stay creditor action. Beginning in 1973, the stay became automatic under the Bankruptcy Rules and Official Bankruptcy Forms, and the automatic stay became statutory in 1978 with the enactment of the Bankruptcy Code.

Before 1978, courts enforced stays of collections through their contempt power. After 1978, courts enforced the statutory automatic stay through their contempt power. However, the authority of bankruptcy courts to use contempt to remedy a statutory violation, as opposed to a court rule or order, became controversial. After the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipeline Co., which held the jurisdictional underpinning of the Bankruptcy Code to be unconstitutional because the Code gave Article I bankruptcy judges Article III powers, the ability of bankruptcy judges to impose ...

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