On May 8, 2014, the Eleventh Circuit Court of Appeals decided a question of first impression within the Circuit: whether a debtor may recover “mental anguish” damages for a creditor’s willful violation of the Bankruptcy Code’s automatic stay provision, 11 U.S.C. §362(k). In Lodge v. Kondaur Capital Corporation, et al., No. 13-10919 (May 8, 2014), see opinion here, the Court followed a number of other circuits in holding that such damages are recoverable for a violation of the automatic stay. The Court also created a three-part evidentiary test that a debtor must meet to be entitled to such damages.
The creditor in Lodge violated the automatic stay by referring the debtor’s mortgage to a collections firm for foreclosure. The collections firm, in turn, published a single notice of sale in the local newspaper where the debtor lived and sent several letters to the debtor stating that they were “about to be foreclosed.” The creditor cancelled the foreclosure sale several weeks later, apparently upon realizing that the bankruptcy stay was in place.
The debtors sued the creditor and its collection firm for violating the automatic stay. In support of their claim for mental anguish damages, the debtors provided testimony that the notice of sale had left them “stressed out” for several weeks, made them difficult to be around, and caused them to lose sleep. On summary judgment, the trial court held that such testimony was too speculative and generalized to show an injury sufficient to support a recovery under 11 U.S.C. §362(k).
On appeal, the Eleventh Circuit held that emotional distress damages were included within the broad term of “actual damages,” the measure of damages provided by Section 362(k). Expressing concern that such damages could be easily fabricated, however, the Court adopted a three part judicial test for proving such damages. To recover “actual” damages for emotional distress under 362(k), a plaintiff must (1) suffer significant emotional distress, (2) clearly establish the significant emotional distress, and (3) demonstrate a causal connection between the significant emotional distress and the violation of the automatic stay.
The Court found that the generalized evidence presented by the debtors in Lodge that they were “stressed out” as a result of the creditor’s actions, without any specific details or corroborating testimony, was insufficient. The Court also concluded that the debtors had failed to show that their claimed emotional distress resulted from stay violation rather than the stress of bankruptcy itself. The Court affirmed the trial court’s summary judgment denying the debtors’ mental anguish claim.
The Eleventh Circuit’s decision provides clarity to litigants within this Circuit regarding the damages recoverable for automatic stay violations. In many cases, debtors suffer little financial loss as a result of automatic stay violations, and alleged emotional distress damages are the focus of plaintiffs’ claims in such cases. The parameters set by the Eleventh Circuit will give litigants a guide for what must be proven in order to seek such damages, and will encourage early settlement of claims for automatic stay violations that do not meet those parameters.
The Court’s discussion also has potential implications for emotional distress damage claims under other federal consumer protection statutes. Many of those statutes, including RESPA and TILA, provide a private right of action for recovery of “actual damages,” the same statutory formulation used in 11 U.S.C. §362(k). The lower courts have been divided on whether this term included emotional distress damages or was limited to financial damages. Compare Ploog v. Homeside Lending, 209 F.Supp.2d 863 (N.D. Ill. 2002) (emotional distress damages may be recovered for RESPA violation) with Katz v. Dime Sav. Bank, 992 F.Supp. 250, 255-56 (W.D.N.Y. 1997) (only pecuniary damages are “actual damages” under RESPA).
The Eleventh Court’s holding that emotional distress damages are “actual damages” under 11 U.S.C. §362(k) might be argued to support plaintiffs claiming that such damages are likewise recoverable under TILA and RESPA. At the same time, defendants will be able to argue that the judicial test that the Lodge court adopted for proving such damages applies to claims made under these other statutes as well.