One day apart, bankruptcy judges in the Ninth Circuit disagreed on the availability of emotional distress damages to remedy violations of the discharge injunction in Section 524.

Relying on authorities from the Ninth Circuit and the Ninth Circuit Bankruptcy Appellate Panel, Bankruptcy Judge Benjamin P. Hursh of Butte, Mont., awarded the debtor $1,000 in emotional distress damages for a discharge violation that inflamed the debtor’s stress-induced irritable bowel syndrome.

Believing that Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), barred noncompensatory damages for discharge violations, Bankruptcy Judge Christopher D. Jaime of Sacramento, Calif., relied on English law and Supreme Court decisions from the late nineteenth and early twentieth centuries to say:

[T]he weight of historical authority compels the court to hold that [the debtor] may not recover nonpecuniary emotional distress damages based on a claim under § 524(i) which treats a violation of its terms as a violation of § 524(a)(2).

The Montana Decision

Before the debtor received her discharge, the creditor received notice of the filing. After discharge and after the creditor was given notice of the discharge, the creditor on multiple occasions took actions aimed at collecting the discharged debt. The collection actions even occurred after the debtor and her counsel, orally and in writing, notified the creditor several times about the discharge.

The debtor reopened her chapter 7 case and filed a motion seeking an injunction and sanctions for violating the discharge injunction.

In his April 29 opinion, Judge Hursh cited Taggart and said, “A court may impose civil contempt sanctions pursuant to 11 U.S.C. § 105(a) when there is ‘no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.’ Taggart v. Lorenzen, 139 S. Ct. 1795, 1801 (2019).”

Judge Hursh went on the cite the Ninth Circuit for saying that damages awarded for civil contempt under Section 105(a) may include compensatory damages and attorneys’ fees. He also cited the Ninth Circuit for saying that “‘relatively mild’ non-compensatory fines may be necessary under some circumstances.” Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1193 (9th Cir. 2003).

“Compensatory damages are intended to redress the concrete loss that the plaintiff has suffered by reason of the defendant’s wrongful conduct,” Judge Hursh said, citing Bayer v. Neiman Marcus Grp., 861 F.3d 853, 871 (9th Cir. 2017). Again citing the Ninth Circuit, he said, “Emotional distress damages are a form of compensatory damages and are not punitive. Hunsaker v. United States, 902 F.3d 963, 968 (9th Cir. 2018).”

In the Ninth Circuit, Judge Hursh said “there is no controlling law . . . as to whether emotional distress damages for violation of the discharge injunction may be included in compensatory damages.” Citing three bankruptcy court decisions from California and Nevada between 2011 and 2023, he said that “the general trend among trial courts in this circuit is to allow emotional distress damages.”

To recover for emotional distress, Judge Hursh said that “the individual must suffer a significant harm, must clearly establish the significant harm, and must establish a causal connection to the conduct.” With regard to the weight of the evidence, he quoted the Ninth Circuit BAP:

Emotional distress may be “readily apparent” without need for medical evidence or corroborating testimony, such as when a creditor engages in egregious conduct or the circumstances may make it obvious that a reasonable person would suffer significant emotional harm. Bauer v. Northeast Neb. Fed. Credit Union (In re Bauer), 2010 Bankr. LEXIS 5096, at *24 (B.A.P. 9th Cir. 2010).

Evaluating the evidence, Judge Hursh awarded about $3,800 in attorneys’ fees plus $130 to the debtor for time lost from work. Regarding emotional distress, he said that the debtor’s “testimony was candid, credible, and uncontroverted.” Although there was no medical evidence, he found that the debtor had satisfied all three prongs of the test under Bauer, because the debtor testified that the discharge violations “caused Debtor’s stress-induced irritable bowel syndrome and general anxiety disorder to flare-up.”

Judge Hursh awarded $1,000 for emotional distress plus another $5,000 for the creditor’s 10 violations of the discharge injunction. The total damages totaled almost $10,000.

The Sacramento Decision

The debtor filed an adversary proceeding alleging violations of the discharge injunction by a secured lender following the completion of payments under the debtor’s chapter 13 plan. The complaint included a claim for emotional distress damages.

The defendant filed a motion to dismiss the emotional distress claim. In his April 30 decision, Judge Jaime said that the count “fails as a matter of law.”

On the merits, Judge Jaime said that the Ninth Circuit “has not directly addressed” the availability of emotional distress damages for discharge violations and that there is disagreement among courts in the Ninth Circuit on the issue. He said that a decision from a bankruptcy court in Idaho was “an exception to the general practice by courts in the Ninth Circuit which is to award emotional distress damages by analogizing discharge injunction violations — and awards of compensatory damages thereunder — to violations of the automatic stay — and awards of compensatory damages thereunder.”

Judge Jaime said that In re Nordlund, 494 B.R. 507 (Bankr. 19 E.D. Cal. 2011), had allowed emotional distress damages “by relying on the automatic stay violation analysis in” Dyer, supra. He went on to say that the “Ninth Circuit Bankruptcy Appellate Panel reached a similar conclusion based on a similar analysis six years later in Ocwen Loan Servicing, LLC v. Marino (In re Marino), 577 B.R. 772 (B.A.P. 9th Cir. 2017), aff’d in part on other grounds, appeal dismissed in part, Ocwen Loan Servicing, LLC v. Marino (In re Marino), 949 F.3d 483 (9th Cir. 2020), cert. denied, Marino v. Ocwen Loan Servicing, LLC (In re Marino), 141 S. Ct. 1683 (2021).” To read ABI’s report on Marino, click here.

“Notably,” Judge Jaime said that “Nordlund and Marino predate Taggart” and that “Taggart changes the civil contempt landscape as it pertains to the discharge injunction and the compensatory damages that a bankruptcy court may award to enforce the discharge injunction or remedy its violation.”

Noting the significance of Taggart, Judge Jaime first said that the standards are different for violation of the automatic stay and the discharge injunction. Second, he said that Taggart makes it  “unmistakably clear” that violation of the discharge injunction is governed by “historical standards” pertaining to civil contempt. Third, and “most important,” he said, was the “reference to the ‘old soil’ of civil contempt.”

From Taggart, Judge Jaime drew two conclusions:

First, the place to look to determine if the civil contempt remedy allows bankruptcy courts to award emotional distress damages for violations of the discharge injunction is the “old soil” of injunction enforcement and its “traditional principles” of civil contempt and not § 362 by analogy. Second, the duty of the bankruptcy court is to apply the “old soil” and “traditional principles” concepts “straightforwardly” to the discharge injunction.

Judge Jaime read Taggart to mean that discharge violations may be enforced through civil contempt citations under Section 105(a), which “bring with it the potential liability for compensatory damages.” However, he said, “the Supreme Court and the Ninth Circuit put emotional distress damages in the nonpecuniary category.” [Emphasis in original.]

Next, Judge Jaime said:

Characterization of damages for emotional distress as nonpecuniary is significant because the “old soil” of injunction enforcement and its “traditional principles” of civil contempt did not compensate parties injured by injunction violations or other acts of disobedience of court process for nonpecuniary loss, emotional distress or otherwise. In other words, the historical measure of compensation awarded in civil contempt actions was pecuniary loss.

Judge Jaime went on to say that the U.S. “largely adopted” the English notion of civil contempt, leading the Supreme Court to recognize in 1897 that “English courts limited compensation for civil contempt to pecuniary loss.” Hovey v. Elliott, 167 U.S. 409 (1897).

In a Supreme Court decision 14 years later, Judge Jaime cited Gompers v. Buck’s Stove & Range Company, 221 U.S. 418, 443-44 (1911), for saying that the “only possible relief” was a fine “measured in some degree by pecuniary loss.” Referring to decisions from the Second, Fourth and Eighth Circuits, he said that the “weight of authority from other Circuits also supports the conclusion that the civil contempt remedy does not include nonpecuniary compensation for emotional distress.”

Judge Jaime dismissed the claim for emotion distress damages, saying that the “measure of recovery for civil contempt under § 105(a) for a violation of § 524(a)(2) — either directly or through § 524(i) — is compensatory damages for pecuniary loss.”

Sacramento Update

Following issuance of the original opinion on April 30, the debtor filed a motion for reconsideration. Judge Jaime amended his opinion on May 17. He once again dismissed the emotional distress claims with prejudice to the extent reliant on violations of Section 524(i) and 524(a)(2), but dismissed the emotional distress claims without prejudice to the extent based on facts and conduct not constituting violations of Section 524(i) and 524(a)(2).

Observation

The time for appealing the Montana decision has run. The debtor filed an appeal from the dismissal order in Sacramento and requested that the appeal be heard by the Ninth Circuit Bankruptcy Appellate Panel. It remains to be seen whether the lender will have the appeal heard in district court.

The opinions are In re Griffin, 23-90128 (Bankr. D. Mont. April 29, 2024); and Valdellon v. Wells Fargo Bank N.A. (In re Valdellon), 21-2008 (Bankr. E.D. Cal. April 30, 2024).