Emotional Distress Damages Available for Stay Violation

Posted by NCBRC - April 19, 2017

Emotional distress damages may be awarded for willful violation of the automatic stay. Lansaw v. Zokaites (In re Lansaw), No. 16-1867 (3rd Cir. April 10, 2017).

Garth and Deborah Lansaw operated a day care center out of property they leased from Frank Zokaites. The Lansaws and Mr. Zokaites had numerous disputes during the course of their relationship and the Lansaws eventually entered into a lease with a third party. Mr. Zokaites asserted a lien against the Lansaws’ personal property for unpaid rent and, the next day, the Lansaws filed a bankruptcy petition. Despite notice of the bankruptcy, Mr. Zokaites entered the day care center during business hours, took photographs and behaved in a physically threatening manner toward Ms. Lansaw. Mr. Zokaites also entered the property during off hours, confronted Ms. Lansaw’s mother who was there to clean, and padlocked the door, allowing Ms. Lansaw to reenter only in the company of a police officer. Additionally, Mr. Zokaites threatened the Lansaws’ new landlord with legal action if he did not end the lease with the Lansaws. After a lengthy procedural history, and a hearing, the bankruptcy court awarded the Lansaws $7,500 for emotional distress, $2,600 in attorney fees, and $40,000 in punitive damages.

On Mr. Zokaites’ appeal, the Third Circuit, quoting Havens v. Mobex Network Servs., LLC, 820 F.3d 80, 92 (3d Cir. 2016), stated its standard of review of the bankruptcy court’s factual findings as “clearly erroneous only if it is ‘completely devoid of minimum evidentiary support displaying some hue of credibility or bears no rational relationship to the supportive evidentiary data.’”

The circuit court then turned to the question of whether section 362(k)(1)’s reference to “actual damages” includes damages for emotional distress. While the First, Ninth and Eleventh Circuits have expressly allowed such damages, the Fifth and Seventh Circuits have left the question open, and a district court out of the Sixth Circuit, United States v. Harchar, 331 B.R. 720 (N.D. Ohio 2005), found that such damages are not included in the scope of section 362(k)(1)’s “actual damages.”

The Harchar court rested its decision on legislative history, finding that prior to enactment of section 362(k)(1) in 1984, enforcement of the automatic stay provision was governed by the court’s contempt powers. When the extent of those powers was called into question by Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), Congress enacted section 362(k) to give debtors a method of enforcing the automatic stay. The district court found that section 362(k)(1) was enacted to counteract the decision in Northern Pipeline as to enforcement power, and that the non-inclusion of emotional distress damages indicated that Congress did not intend those damages to be deemed “actual damages.”

The Seventh Circuit, in Aiello v. Providian Fin. Corp., 239 F.3d 876 (7th Cir. 2001), held that because the automatic stay was intended to afford financial protection during bankruptcy, at the very least an award of damages for emotional distress had to be tied to pecuniary loss.

The Ninth Circuit, on the other hand, held in Dawson v. Washington Mut. Bank, F.A. (In re Dawson), 390 F.3d 1139 (9th Cir. 2004), abrogation on other grounds recognized in Gugliuzza v. FTC (In re Gugliuzza), –– F.3d ––, 2017 WL 1101094 (9th Cir. Mar. 24, 2017), that an award of damages for emotional distress was included in the scope of “actual damages” and need not be tied to pecuniary loss. Like the Harchar court, the Ninth Circuit looked to legislative history, but rather than limiting that analysis to the history of section 362(k), the court looked to the history of the automatic stay provision, enacted six years earlier in the 1978 amendments. It found that an important purpose of the automatic stay was to give the debtors breathing room free of financial burdens including collection efforts and harassment by creditors. Because Congress considered abusive creditor conduct when enacting the automatic stay provision, the later enforcement provision could be deemed to address those same considerations.

The Lansaw court was persuaded by the Ninth Circuit’s reasoning in Dawson. “If the automatic stay was meant to protect against non-pecuniary emotional harm, it is only logical that Congress would intend to include damages resulting from that harm when it introduced the award of ‘actual damages’ as the enforcement mechanism six years later.” In finding that emotional distress damages were available, however, the court specifically declined to decide whether a finding of pecuniary loss was a predicate to that award, finding that pecuniary damages in the form of attorney fees were present here. (In a footnote, the court suggested that since section 362(k) is likely to provide the only avenue for such relief, pecuniary loss would likely not be a prerequisite).

Addressing the specific emotional distress award in this case, the court disagreed with Mr. Zokaites that any such claim must include corroborating medical evidence. Rather, the court found that “where a stay violation is patently egregious, a claimant’s credible testimony alone can be sufficient to support an award of emotional-distress damages.” Here, the emotional distress claim was supported by the Lansaws’ credible testimony of nightmares, fear, depression, ulcer and general withdrawal from society. That, in conjunction with the evidence of Mr. Zokaites’s threatening physical behavior and interference with the Lansaws’ business and new lease, was sufficient to support the emotional distress award.

Turning, finally, to the issue of punitive damages, the court found that, based on the egregiousness of Mr. Zokaites’s behavior, the ratio between actual damages and the amount of the punitive damage award, and punitive damages awarded in similar cases, the court did not err either in the award itself or its amount.

Lansaw 3rd Cir opinion April 2017

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