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

Article originally appeared in Norton's Annual Survey of Bankruptcy Law on 11/4/11


By Justin J. Henderson and Susan M. Freeman*

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.1 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.2 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.3 In Sternberg v. Johnston,4 the Ninth Circuit upheld its prior ruling in Dawson v. Washington Mutual Bank, F.A. (In re Dawson) (Dawson II),5 that debtors may recover for emotional distress under § 362(k).6 The First Circuit in Fleet Mortgage Group v. Kaneb,7 and the Fifth Circuit in In re Repine,8 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.9 Repine similarly appears to have merely assumed that emotional distress damages are available. The Seventh Circuit, however, ruled in Aiello v. Providian Financial Corp.,10 that emotional distress damages are not available under § 362(k). In the Seventh Circuit, debtors may recover emotional distress damages only when the debtor suers a nancial loss that is compensable under 362(k).11 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.12 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.13 Thus there is a split among the circuits regarding whether emotional distress damages are available under § 362(k), and the analytical diculties 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 aws, but the Seventh Circuit's reasoning is more consistent with the history, language, and intent of from the Supreme Court after the Ninth Circuit chose to adhere to Dawson, but the Court denied review without comment.14

1. The enactment of § 362(k)

Under the 1898 Bankruptcy Act, a stay did not automatically arise upon the ling of a bankruptcy petition; the debtor or trustee had to request that the court stay creditor action.15 Beginning in 1973, the stay became automatic under the Bankruptcy Rules and Ocial Bankruptcy Forms,16 and the automatic stay became statutory in 1978 with the enactment of the Bankruptcy


Before 1978, courts enforced stays of collections through their contempt power.18 After 1978, courts enforced the statutory automatic stay through their contempt power.19 However, the authority of bankruptcy courts to use contempt to remedy a statutory violation, as opposed to a court rule or order, became controversial.20 After the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipeline Co.,21 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 contempt sanctions became even more suspect.22 Section 362(k) was enacted in 1984 with the Bankruptcy Amendments and Federal Judgeship Act of 1984 (BAFJA), as part of Congress's response to Marathon.23 This historical background suggests that the primary purpose of § 362(k) was to merely provide explicit statutory authorization for bankruptcy judges to award damages as a remedy for a stay violation.24 In other words, because the 1984 amendments were about bankruptcy judges' powers, the addition of 362(k) was intended to specically provide the power to judges to remedy stay violations, not alter the scope of remedies debtors would enjoy. It was generally recognized before § 362(k) was enacted that appellate courts had rejected emotional distress damages in contempt actions, including contempt of bankruptcy court orders and rules.25 Congress presumably knew this, and there is no legislative history that speaks to the emotional distress issue. The lack of legislative history means that there is also no Congressional record of intent to create under § 362(k) a cause of action not generally available at common law for torts associated with property rights or wrongful debt collection. Emotional distress was not compensable in such cases absent egregious  conduct and intense mental distress.26 The Supreme Court has stated that in the absence of any discussion in the legislative history, the provisions of the Bankruptcy Code should be construed in accordance with pre-Code practice.27 Thus because the pre- Code practice was to deny emotional distress damages for stay violations, the Code should be interpreted in the same way. The courts, however, have taken very dierent approaches to the issue.

2. Aiello

In Aiello, one of the debtor's creditors asked her to rearm her credit card debt and threatened to charge her with fraud if she refused.28 The debtor led a class action, seeking damages for the creditor's violation of the automatic stay.29 Writing for the Seventh Circuit, Judge Posner concluded that emotional distress damages are not available under § 362(k). The primary rationale for the decision was that the Bankruptcy Code is concerned exclusively with nancial matters.30 While recognizing that the automatic stay is intended to protect debtors, the court stated that the main goal of the stay is to protect unsecured creditors by promoting an orderly liquidation of assets.31 The protection provided to the debtor is “nancial in character; it is not protection of peace of mind.”32 Rather than providing for emotional distress damages, the court found that § 362(k) was but a “footnote to the power, now more than a century and a half old, to stay creditors' collection eorts in order to preserve the debtor's estate.”33 The court perceived nothing that indicated § 362(k) was intended to change the character of bankruptcy remedies.34 While Aiello did not canvas the history surrounding the enactment of § 362(k), this aspect of its reasoning is certainly consistent with that history. The other major theme of Aiello was the long-standing general suspicion of emotional distress damages in the law, due to the fact that “they are so easy to manufacture.”35 The court also distrusted the ability of bankruptcy judges to evaluate emotional distress claims.36 Aiello maintained that debtors who suered emotional distress as a result of stay violations were not “orphans of the law” because they retained the ability to sue on state law tort claims.37 It was this conclusion that led to the Seventh Circuit's caveat providing for emotional distress damages when a debtor suered an economic loss. Because economic loss plainly qualies as “actual damages,” equity's “clean-up doctrine” would permit the bankruptcy court to “top-o” relief by awarding adequately proven emotional distress damages to save the debtor the trouble of bringing a state law tort claim in another court and to promote judicial economy.38 Aiello does not hold, however, that emotional distress damages are available under § 362(k) itself. Rather, the Seventh Circuit views a claim for emotional distress damages as compensable only under a tort theory such as intentional iniction of emotional distress.39 Thus under Aiello, the availability of emotional distress damages is dependent upon the concurrent availability of emotional distress damages under state law.40

3. Sternberg and Dawson

The Ninth Circuit originally concluded in Dawson I that Aiello was correctly decided, and that the “interests served by § 362(h) are economic.”41 The court noted that the text of the statute suggests that it is directed toward economic injuries because “actual damages” includes “costs and attorneys' fees,” which are “kinds of economic harm.”42 While it did not expressly invoke the doctrine, this analysis is an application of the ejusdem generis canon of statutory interpretation under which general words in a statute are given meaning by reference to specic words that follow.43 This could have been the end of the matter,44 but the court also drew an analogy to its cases under the Copyright Act and the Securities Act, in which the relevant statutes also provided for“actual damages.”45 In those cases, the court had concluded that “actual damages” means only nancial losses.46 After rehearing, however, the panel switched course and held that emotional distress damages were available under § 362(k). The court's conclusion was based on two grounds. First, § 362(k) applies only to an “individual.”47 Thus the Ninth Circuit concluded that “Congress [had] signaled its special interest in redressing harms that are unique to human beings. One such harm is emotional distress, which can be suered by individuals but not by organizations.”48 The court was not convinced that this resolved the matter, however, and found that the statute remained ambiguous.49 The court then consulted the legislative history behind the enactment of the automatic stay, which provided the second ground for its holding. The House Report for the Bankruptcy Reform Act of 1978 detailed various methods of collecting on overdue debts such as abusive telephone calls, threats of court action, attacks on the debtor's reputation, warnings that employers re “deadbeats,” and threats of wage garnishment.50 The House Report said that the automatic stay is intended to stop all of these tactics and create a “breathing spell” for the debtor.51 Thus, the court concluded, Aiello was wrong to conclude that the automatic stay is intended only to serve a nancial purpose because Congress was also concerned with “the emotional and psychological toll that a violation of a stay can exact from an individual.”52 According to the Ninth Circuit, this “human side” of the bankruptcy process suggests that emotional distress damages are available.53 After concluding that emotional distress damages are available under § 362(k), the court needed to formulate a standard to determine when it is appropriate to award them. Recognizing the potential for abuse inherent in claims for emotional distress, the court held that a debtor must “(1) suer signicant harm, (2) clearly establish the signicant harm, and (3) demonstrate a causal connection between that signicant harm and the violation of the automatic stay (as distinct, for instance, from the anxiety and pressures inherent in the bankruptcy process).”54 “Fleeting or trivial anxiety” is insucient.55 The types of evidence that will “clearly establish the signicant harm” are:

1) Corroborating medical evidence;

2) Non-expert testimony by family members, friends, or coworkers showing manifestation of mental anguish;

3) Proof of egregious conduct where it would be “readily apparent” that signicant harm resulted; or

4) Proof of circumstances that would “make it obvious that a reasonable person would suer signicant emotional harm,” even in the absence of egregious conduct.56

In Sternberg, the Ninth Circuit rearmed Dawson II, noting that Sternberg's arguments that emotional distress damages were unavailable were precluded by Dawson II.57

4. Repine and Fleet Mortgage

As noted above, Fleet Mortgage did not conclude that emotional distress damages are available under § 362(k). It also did not decide the proper standards or methods of proof because the defendant had waived those issues.58 The court did articulate a threshold test, however, for determining when emotional distress damages might be available. Plaintis must provide “specic information” about the distress, rather than “generalized assertions” of their emotional states.59 Despite the fact that Fleet Mortgage did not decide the issue, courts frequently cite the case for the proposition that emotional distress damages are available under § 362(k).60 In Rivera Torres, however, the First Circuit appeared to retreat from its earlier position, stating that the Ninth Circuit was the only circuit court to hold that “actual damages” encompasses emotional distress damages, and quoting Aiello at length.61 In Repine, the Fifth Circuit, like the First Circuit in Fleet Mortgage, merely assumed that emotional distress damages were available, and concluded that the plainti had not even satised the Fleet Mortgage “specic information” threshold test.62 Notably, Repine cited Aiello but did not cite Dawson II. The Fifth Circuit also stated that it “share[d] the Seventh Circuit's caution in arming emotional distress awards.”63 The favorable citations to Aiello in Rivera Torres and Repine suggest that the Ninth Circuit may have prematurely declared that it was joining an “emerging consensus”64 supporting its conclusion that emotional distress damages are available under § 362(k). Rivera Torres and Repine suggest that when the First and Fifth Circuits squarely address the issue, they would side with the Seventh Circuit.65

5. Questions about the reasoning of Aiello and Dawson II

There is a serious question about Aiello’s fundamental assumption that a state law tort claim could be available to a debtor whose automatic stay is violated. Several courts have concluded that the Bankruptcy Code preempts state law tort claims relating to violations of the automatic stay.66 On the other hand, the fact that state law claims may be preempted by the Bankruptcy Code does not necessarily mean that Congress intended for emotional distress damages to be available under § 362(k). Aiello’s main premise—that bankruptcy is intended to redress only nancial harms — is fully consistent with the conclusion that emotional distress damages are not “actual damages.” Section 362(k) provides for costs and attorneys' fees, and even punitive damages “in appropriate circumstances.” These sanctions are adequately compensatory, and will have the eect of deterring creditors from violating the automatic stay.67 Aiello also says that there is “[n]o doubt” that “damages awarded for emotional injury caused by a willful violation of the automatic stay are ‘actual damages.’ ’’68 The court considered the issue of “whether their award is authorized by the statute” to be a dierent question.69 However, the statute seems to answer that question because it makes an award of actual damages mandatory by stating that a person injured by a stay violation “shall” be awarded actual damages.70 The aws in Dawson II are more signicant. First, one of Dawson II’s premises has divided the circuits. Dawson II turns in part on the word “individual,” which the Ninth Circuit had previously interpreted to exclude corporations and other business entities.71 Other circuits have also concluded that corporations do not qualify as “individuals” under § 362(k).72 The Third and Fourth Circuits have concluded that corporations are Dawson II recognized its previous holding that a creditor may recover under § 362(k) but then noted that only a human creditor could so recover.76 It is indisputable that corporate and other non-human creditors constitute the vast majority of creditors in bankruptcy cases, but Dawson II’s reasoning would exclude all of those creditors from recovering under § 362(k), eectively limiting the statute's scope to encompass only human debtors. There is no rational reason why Congress would extend the protections of § 362(k) to human creditors but not business creditors. Dawson II’s holding is thus inconsistent with its own recognition that the automatic stay is intended to protect both debtors and creditors.77 Furthermore, under Dawson II, a human creditor would be entitled to recover emotional distress damages, despite the fact that the legislative history the Ninth Circuit consulted, and which appears to have provided the primary basis for its holding, spoke only about debtors. The more reasonable reading of § 362(k) is that the word “individual” was chosen not to indicate any particular concern with the “human side” of bankruptcy but rather to make clear that persons and entities other than the debtor could recover for stay violations. In other words, Congress's choice of the word “individual” reects a choice between “debtor” and “individual,” not a choice between “individual” and “corporation.” In Goodman, the Ninth Circuit recognized an alternative way for corporations and other business entities to recover for damages resulting from automatic stay violations—the bankruptcy courts' contempt powers.78 However, as described above, the entire purpose for adding § 362(k) was to address concerns that bankruptcy courts could not remedy violations of the automatic stay through exercise of contempt powers.79 This part of Goodman raises serious constitutional questions. Third, Dawson II looked to the wrong legislative history to determine the statute's meaning. Dawson II concluded that the statute was still ambiguous, even after taking note of Congress's choice of the word “individual.”80 Because the statute was ambiguous, the court resorted to legislative history,81 but there is no legislative history to § 362(k) that sheds light on whether it permits recovery of emotional distress damages. Dawson II looked instead to the legislative history of Bankruptcy Reform Act of 1978 in determining that bankruptcy had a “human side.”82 What Congress had to say in 1978 about § 362(a) tells us little about what Congress meant in 1984 when it enacted § 362(k) in response to Marathon.83 Indeed, the court's reliance on the legislative history of the Bankruptcy Reform Act is particularly perplexing given that in the same opinion, it declined to analogize to other federal statutes containing the words “actual damages” that had been interpreted to preclude damages for emotional distress.84 The court explained that it found those cases unpersuasive “[b]ecause the question in each instance is what Congress intended in enacting the particular statute at issue, we nd little assistance in analogizing to dierent laws passed at dierent times, and, instead, analyze the Bankruptcy Reform Act of 1978.”85 This explanation might have been satisfactory if § 362(k) were part of the Bankruptcy Reform Act of 1978, but it was not.86 The relevant background for determining the meaning of “actual damages” is not the 1978 Act, but Marathon and the fact that Congress had to reform the Bankruptcy Code in 1984 to address the Supreme Court's holding that the 1978 Act was unconstitutional because it provided Article I judges with Article III powers.87 The thrust of the 1984 amendments was to spell out the proper sources and uses of bankruptcy judges' powers. The addition of § 362(k) is consistent with this overall focus on power, due to the controversy over bankruptcy judges' power to award damages for violations of the automatic stay. It may be true that bankruptcy has a “human side” to it, but there is simply no indication that Congress was dealing with it in enacting § 362(k). Some authorities have noted, however, that § 362(k) was added as part of the Act entitled “Consumer Credit Amendments,”88 and have stated that the changes were intended to work substantive changes in the Bankruptcy Code. The Second Circuit has argued that the changes were intended to “benet only natural persons”;89 but the Consumer Credit Amendments were not intended to “bene t” consumer debtors; they were intended for the opposite purpose—to curb abuses of the bankruptcy process by consumers.90 It is true that § 362(k) generally works against creditors, 91 but this is still consistent with the theory that the addition of § 362(k) was intended to merely eliminate the controversy over whether bankruptcy judges had the power to award damages for violations of the automatic stay. In other words, because the Consumer Credit Amendments were generally anti-debtor, and were intended to curb abuses of the bankruptcy system, it would be anomalous to construe § 362(k) to permit emotional distress damages, especially when all the authorities recognize that such damages inherently carry the potential for signicant abuse.92 Last, the Ninth Circuit failed to give any signicance to the word “actual,” which signies that the scope of available damages should be at least partially circumscribed. In 1939, the Supreme Court interpreted “actual damages” as used in the Bankruptcy Act to mean “only those damages susceptible of denite proof” with “evidence [that] must show damages to reasonable  certainty.”93 “Denite proof” and “reasonable certainty” are problematic when it comes to emotional distress. The Restatement of Torts recognizes that because intensity, duration, and other factors in considering emotional distress are all indenite, “it is impossible to require anything approximating certainty of amount even as to past harm.”94

6. Should emotional distress damages be available as a remedy for stay violations?

Most commentators have concluded that, as a policy matter, emotional distress damages should be available.95 But there are equally compelling reasons that such damages should not be

awardable. Courts have overwhelmingly concluded that violations of the automatic stay do not require intent to violate the stay; a creditor need only intend the act that violates the stay.96 However, inadvertent violations are extremely common and could give rise to tens of thousands of dollars in mandatory damages. In numerous cases, damages are awarded under § 362(k) when the creditor proceeds with a good faith dispute over the applicability of the automatic stay,97 makes an inadvertent mistake,98 or there is a computerized process underway that is infeasible to stop quickly, such as a computer freeze of a tax refund withholding or social security oset.99 Indeed, the Fifth Circuit has ruled that a creditor taking action as to property that is merely “arguably” property of the estate violates § 362(a)(3) and is liable for § 362(k) damages even if there is a good faith dispute over ownership and the creditor turns out to be correct.100 The great potential for a disproportionate amount of damages when compared to the culpability of the creditor is unfair. Moreover, governmental agencies are frequently called to account for minor stay violations, and the impact on the public sc is signicant. In 2004, the U.S. led an amicus brief in the Ninth Circuit on the issue presented here, arguing that emotional distress damages were not available under § 362(k).101 The government pointed out that, as a frequent respondent in automatic stay violation claims, the U.S. has an

interest in ensuring that damages are limited to those authorized by Congress.102 In most cases, the automatic stay itself should suce to prevent creditors from attempting to collect from debtors in bankruptcy. The legislative history to 362(a) conrms this, stating that “[t]he automatic stay at the commencement of the case takes the pressure o the debtor.”103 And as noted above, § 362(k) expressly provides for attorney's fees, economic damages, and, when appropriate, punitive damages, which should be enough to deter creditors from violating the automatic stay. Additionally, the lower courts have struggled to award emotional distress damages in a principled manner. In his petition for certiorari, Sternberg included a chart of over 100 cases in which bankruptcy courts, district courts, and bankruptcy appellate panels addressed emotional distress damages.104 These cases show that damages are routinely awarded, but on an unprincipled basis, because determining a proper amount of damages is a nearly impossible task. The amounts awarded vary wildly—from $1 to $50,000—and the egregiousness of the stay violation is often completely incongruous with the amount awarded. For example, in In re Wagner, a creditor entered the debtor's home at night, turned o the lights, and pretended to hold a gun to the debtor's head while telling the debtor that “next time” he was going to “blow [the debtor's] brains out” if the debtor did not return the creditor's trucks.105 That court awarded only $100 in damages.106 In Fleet Mortgage, the creditor commenced a foreclosure action in violation of the automatic stay, and when the debtors' neighbors found out about the foreclosure, they invited him to social events less frequently.107 The bankruptcy court awarded $25,000 in emotional distress damages.108 In In re Smith, the creditor repossessed the debtor's mobile home while she was in it, which required her to jump from the moving vehicle.109 In carrying out this shocking repossession, the creditor destroyed many of the debtor's possessions, including photographs and home movies of her deceased son, and rendered the mobile home uninhabitable.110 As a result of the repossession, the debtor became homeless, lost her job, and had to seek psychiatric treatment.111 She was awarded $25,000 in compensatory damages, which included emotional distress and lost wages.112 If these three creditor actions were ranked on a scale of “egregiousness,” most people would undoubtedly agree that the Fleet Mortgage debtor would be at the bottom, with the Wagner and Smith debtor competing for the top spot. The experiences of the Wagner and Smith debtors were orders of magnitude worse than the Fleet Mortgage debtor. Yet the Fleet Mortgage debtor received more in emotional distress damages than the Smith debtor because the Fleet Mortgage debtor's award was purely in the form of emotional distress damages, and the Smith debtor's award included lost wages. The Fleet Mortgage debtor wasawarded 250 times the amount of damages as the Wagner debtor. Thus the Seventh Circuit's fear that awards of emotional distress damages are unpredictable and arbitrary is borne out by the cases. Bankruptcy courts have recognized the potential for abuse of § 362(k), and that “rewarding debtors too lavishly in § 362(h) actions will encourage a cottage industry of precipitous § 362(h) litigation.”113 In the absence of express authority for bankruptcy courts to award emotional distress damages, the courts should be reluctant to further encourage debtors to use the automatic stay as a sword rather than a shield.114 The Ninth Circuit's framework for culling out legitimate emotional distress damages is not up to the task. Until fairly recently, the common law required proof of physical injury before emotional distress damages would even be considered, under the theory that purely emotional damages were dicult to verify objectively.115 Physical injury is likely to be extremely rare in automatic stay violation cases, but it is perhaps that fact that makes emotional distress damages so problematic under § 362(k). The imsiest method of proof permissible under Dawson II is through evidence that would “make it obvious that a reasonable person would suer signicant emotional harm.”116 This method of proof would permit an emotional distress award based solely

on the debtor's inevitably self-serving testimony, which is patently improper.117 Permitting proof of emotional injury through the testimony of friends, family members, or co-workers is also problematic because the proof will often come from interested parties, which increases the likelihood of fraud.118 Proof of egregious circumstances where it would be “readily apparent” that signicant harm resulted carries the risk that punitive damages will masquerade as emotional distress damages.119 Thus, despite the Ninth Circuit's intentions, the Dawson II standards for awarding damages fail to eliminate meritless claims, and Dawson II will foster the very claims that the court sought to preclude. Not only does Dawson II invite abuse but the availability of attorneys' fees under 362(k) provides an added incentive for excessive litigation of automatic stay violations. Indeed, it was in the context of attorney's fees that the Ninth Circuit BAP warned of the spectre of a “cottage industry” of stay violation litigation that would fail to further the purposes of the Bankruptcy Code.120 If, however, as we should be able to presume, attorneys are properly advising their clients that creditor acts in violation of the stay may be stopped through the bankruptcy court at little to no cost to the debtor, and that any acts taken by a creditor during the pendency of the automatic stay are void or voidable,121 then most debtors should not suer signicant emotional distress when a

creditor violates the automatic stay. Moreover, Aiello’s conclusion that the automatic stay is intended primarily to protect nancial interests is consistent with the overall purpose of the Bankruptcy Code. The Code is

intended to adjust economic relationships between debtors and creditors.122 Damages awards under statutes that similarly protect property or nancial interests such as the Securities Act and the Copyright Act have been limited to economic losses.123 In contrast, statutes that have been interpreted to encompass emotional distress damages are civil rights laws and other statutes enacted for the fundamental purpose of protecting human dignity, which encompasses reputational and mental wellbeing. 124 The Bankruptcy Code is not a human rights or consumer protection statute.125

7. Conclusion.

It is certainly the case that some debtors may feel stress, anxiety, irritation, and embarrassment when a creditor violates the automatic stay; but without any indication that Congress intended to address emotional distress damages through 362(k), and given the near impossibility to formulate reliable standards for separating legitimate claims from frivolous ones, courts should not compensate debtors for their emotional distress. When creditors engage in egregious behavior, the punitive damages are available to the debtor, and attorney's fees are available under the statute for work done to stop any violation of the automatic stay, even nonegregious violations. This should be sucient to make the debtor whole and to deter creditors from violating the stay in the rst place. Emotional distress damages have too much potential to grant a windfall to a debtor for them to be awarded, particularly as routinely as they currently are, and to deplete the assets of the estate otherwise available for distribution to the creditors.

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