The Third Circuit joined a growing number of courts that allow damages for emotional distress resulting from a willful violation of the automatic stay under Section 362(k)(1).
In his April 10 opinion, Circuit Judge Michael J. Melloy did not need to decide whether “financial injury is a necessary predicate to recovery for emotional distress” because the debtors incurred $2,600 in attorneys’ fees as a result of the stay violation. Judge Melloy was sitting by designation from the Eighth Circuit.
The ‘Egregious’ Stay Violation
The individual debtors’ landlord had locked them out of the premises, where they operated a daycare business. He also physically threatened the wife and threatened to sue the debtors’ new landlord unless he terminated their lease and they renewed a lease with him.
According to Bankruptcy Judge Thomas P. Agresti of Erie, Pa., the stay violation was the “most egregious” he had seen during his tenure on the bench. He said the debtors’ testimony about having nightmares and becoming depressed was “compelling.”
In addition to $2,600 in attorneys’ fees, Judge Agresti awarded $7,500 for emotional distress and $40,000 in punitive damages against the debtors’ landlord. Judge Agresti was upheld in district court and again in the Third Circuit, where the appeals court said the stay violations were “patently egregious.”
Emotional Distress Damages Are ‘Actual’
The landlord contended in the Third Circuit that damages for emotional distress are not “actual damages” and are thus not permitted under Section 362(k)(1). That section provides that “an individual injured by any willful violation of [the automatic stay] shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”
Judge Melloy said that the Third Circuit had not yet decided whether “actual damages” includes damages for emotional distress. He said that the First, Ninth and Eleventh Circuits permit emotional distress damages for willful stay violations.
The Seventh Circuit, he said, was “skeptical” about emotional distress damages but “might” permit an award “where the plaintiff is already seeking damages for financial injury.” A district court in Ohio ruled in 2005 that emotional distress damages do not qualify as “actual damages.”
Although Section 362(k)(1) is “indisputably ambiguous,” Judge Melloy concluded that “Congress intended the automatic stay to protect both financial and non-financial interests.” He therefore joined “the growing number of circuits” by concluding that “actual damages” includes damages resulting from emotional distress.
Judge Melloy did not decide “whether financial injury is a necessary predicate” to damages for emotional distress because the debtors incurred $2,600 in attorneys’ fees.
Since debtors will invariably incur some attorneys’ fees after a stay violation, the Third Circuit opinion seems to mean that emotional distress damages will be available, at least where the stay violation was egregious.
The Sufficiency of the Evidence
The landlord contended that the debtors had not proven that the stay violation caused the debtors’ emotional distress because they introduced neither medical documentation nor expert medical testimony.
Judge Melloy declined to “adopt a bright-line rule requiring” corroborating medical evidence, “at least where a stay violation is patently egregious.” In those circumstances, he said that “a claimant’s credible testimony alone can be sufficient to support an award of emotional-distress damages.”
Likewise, the debtors were not required to show causation with “absolute precision” when the stay violation was “so egregious that a reasonable person could be expected to suffer some emotional harm.”
Since the bankruptcy court awarded “a comparatively modest $7,500” for emotional distress, Judge Melloy said the damages were not unduly speculative.”
Punitive Damages
Judge Melloy said that the $40,000 punitive damage award “comports with due process,” given that the “repeated stay violations” were “sufficiently reprehensible.”
Since actual damages were about $10,000, the 4-1 ratio between punitive and actual damages was “in line with awards previously deemed acceptable by the Supreme Court” and was not so excessive as to be unconstitutional.