Emotional Distress Damages Recoverable for Violation of Bankruptcy Automatic Stay

In Lodge v. Kondaur Capital Corp., Case No. 13-10919 (decided May 8, 2014), the United States Court of Appeals for the Eleventh Circuit decided an issue that it never previously addressed: whether a party could recover damages under 11 U.S.C. § 362(k) for emotional distress resulting from another party’s violation of the automatic stay in bankruptcy. In Lodge, the Court held that such damages were recoverable but could not be recovered in the particular circumstances of that case.

The plaintiffs owned a home subject to a mortgage. One of the owners filed for bankruptcy, which resulted in an automatic stay against all actions to collect on the loan or enforce the mortgage lien. The holder of the mortgage filed a motion for relief from stay to allow a foreclosure, but the bankruptcy court did not rule on the motion.

Despite the existence of the stay, the mortgage holder initiated foreclosure proceedings. A notice of a foreclosure sale was published on March 12, 2009. However, that same day, the attorneys for the creditor canceled the publication. That one notice was the only notice given of any attempted foreclosure. The plaintiffs never saw the notice in the newspaper. However, they were later contacted by lawyers informing them that they were about to be foreclosed on. Not later than April 7, 2009, the plaintiffs knew that the foreclosure had been canceled.

In their lawsuit, the plaintiffs sought to recover damages from the creditor and its attorneys for the willful violation of the bankruptcy stay. 11 U.S.C. § 362(k) allows a party to recover “actual damages” for a willful violation of the stay. The plaintiffs did not claim to have suffered any economic losses as a result of the violation of the stay. They claimed that they could recover damages for their emotional distress.

After reviewing decisions of other federal courts of appeal, the Eleventh Circuit determined that emotional distress damages were recoverable as “actual damages.” However, the Court set a high standard for the recovery of such damages. The Court held that, to recover emotional distress damages, “a plaintiff must (1) suffer significant emotional distress, (2) clearly establish the significant emotional distress and (3) demonstrate a causal connection between that significant emotional distress and the violation of the automatic stay.” Opinion, p. 18. In the case before it, the Court concluded that the defendants were entitled to summary judgment in their favor on the plaintiffs’ claims. The Court noted that the plaintiffs had presented only their own affidavits, offering “generalized evidence” that they were “stressed out” and had difficulty interacting with others. Opinion, p. 19. Importantly, the Court noted that the plaintiffs had failed to offer any corroborating evidence of their emotional distress such as evidence from healthcare providers. Opinion, p. 20.

This decision raises significant concerns to creditors involved in the bankruptcy. It opens the door to significant damages claims brought by individuals involved in bankruptcies. However, the decision also provides tools for opposing such claims.

For more information on XX, contact your Appellate Counsel at Smith, Gambrell & Russell, LLP.

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