Emotional Distress Damages: Should They Be Permitted Under the Bankruptcy Code for a Willful Violation of the Stay

Masthead Logo DePaul Business and Commercial Law Journal Volume 1 Issue 3 Spring 2003 Article 3 Emotional Distress Damages: Should They Be Permitted Under the Bankruptcy Code for a Willful Violation of the Stay Ralph C. McCullough II Follow this and additional works at: https://via.library.depaul.edu/bclj Recommended Citation Ralph C. McCullough II, Emotional Distress Damages: Should They Be Permitted Under the Bankruptcy Code for a Willful Violation of the Stay, 1 DePaul Bus. & Com. L.J. 339 (2003) Available at: https://via.library.depaul.edu/bclj/vol1/iss3/3 This Article is brought to you for free and open access by the College of Law at Via Sapientiae. It has been accepted for inclusion in DePaul Business and Commercial Law Journal by an authorized editor of Via Sapientiae. For more information, please contact , . Emotional Distress Damages: Should They Be Permitted Under the Bankruptcy Code for a Willful Violation of the Stay Ralph C. McCullough, H* I. INTRODUCTION An emerging topic in bankruptcy law is whether the term "actual damages" includes damages for emotional injury.' If such a recovery is possible, then it must come from 11 U.S.C. §362 which provides in pertinent part that: "[a]n individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorney's' fees, and, in appropriate circumstances, may recover punitive damages." '2 This article will explore how certain bankruptcy courts have dealt with the issue of emotional damages and compensation for willful violations of automatic stays, through a detailed examination of lower court decisions and the two appellate court decisions that have addressed these issues. It is becoming quite apparent that bankruptcy courts, district courts and appellate courts are willing to compensate a debtor, under appropriate circumstances, for emotional injury when a creditor willfully violates the automatic stay. * Mr. McCullough was admitted to the Louisiana Bar in 1965 and the South Carolina Bar in 1974. Mr. McCullough was a member of the Tulane Law Review from 1964 to 1965. He was author of State Law School Curriculum - The Future, 23 J. LEGAL EI'uc. 528 (1971); CIVIL TRIAL MANUAL, with Figg & Underwood in 1974, and supplements in 1976, 1977, 1978 and 1979. Mr. McCullough was co-author with: UNDERWOOo, CIVIL TRIAL MANUAL II (1981), supplemented in 1982, 1983, 1984, 1985, and 1986; FINKEL, SOUrH CAROLINA TORTS, (Palmetto Law Publishers 1981); FINKEL, SOUTH CAROLINA TORTS II AND SOUTH CAROLINA TORTS III. He is the author of numerous articles in Commercial Law and Bankruptcy. Mr. McCullough is currently a Distinguished Chair Professor of Law Emeritus at the University of South Carolina School of Law where he has served as a faculty member since 1968. Mr. McCullough held the American College of Trial Lawyers Chair for Advocacy and has served as a member of the United States Panel Trustees since 1975. He also has served as a Chapter 11 Trustee in numerous complex cases. Mr. McCullough was elected a Life Member of the American Law Institute in 1999. He serves as a member of the Fourth Circuit Advisory Committee on Rules and Procedures for the United States Court of Appeals. The author would like to thank Michael Brown for his assistance with this article. 1. See, e.g., Aiello v. Providian Fin. Corp., 239 F.3d 876, 878 (7th Cir. 2001). 2. 11 U.S.C. § 362(h) (2002). 340 DEPAUL BUSINESS & COMMERCIAL LAW JOURNAL II. [Vol. 1:339 WILLFUL VIOLATION OF THE AUTOMATION STAY A debtor must prove that a creditor has willfully violated the automatic stay in order to recover damages pursuant to §362(h). 3 All courts agree that the debtor bears the burden of proving that the violation was willful. However, the courts disagree as to what standard of proof the debtor must establish in order to prove a willful violation. 4 Bankruptcy courts have also been divergent about the definition of what constitutes a willful violation of the automatic stay. The essential elements appear to be: 1) notice of the bankruptcy; and 2) a deliberate act that violates the stay. 5 However, as noted in In re Putnam,6 an early court used a "more narrow definition [which] finds a willful violation when 'a deliberate and intentional act [is] done with the knowledge that the act is in violation of the stay."' 7 Most courts have rejected the narrow requirement that a creditor know the act is in violation of the stay, and only requires that the creditor's act is intentional and violates the stay. 8 Most courts also agree that the creditor need not have the specific intent of violating the stay to commit a willful violation and that the creditor's good faith belief that they are entitled to the property is not relevant to the inquiry of whether the violation was willful. 9 3. See In re Bennett, 135 B.R. 72 (Bankr. S.D. Ohio 1992). 4. See, e.g., Boone v. Fed. Deposit Ins. Corp. (In re Boone), 235 B.R. 828, 833 (Bankr. D.S.C. 1998) (clear and convincing evidence); Diviney v. Bank of Tex. (In re Diviney), 211 B.R. 951, 961 (Bankr. N.D. Okla. 1997) (clear and convincing evidence); Meis-Nachtrab v. Griffin (In re MeisNachtrab), 190 B.R. 302, 305 (Bankr. N.D. Ohio 1995) (preponderance standard); In re Sielaff, 164 B.R. 560, 571 (Bankr. W.D. Mich. 1994) (preponderance standard); In re Bennett, 135 B.R. at 76 (clear and convincing evidence). 5. See, e.g., Covington v. Internal Revenue Serv. (In re Covington), 256 B.R. 463, 466 (Bankr. D.S.C. 2000) ("In order to find a willful violation of the stay, all this Court needs to find is that 'the entity engaged in a deliberate act to violate the stay with the knowledge that the debtor has filed for bankruptcy.' Where actual notice of the bankruptcy case is proven, a violation of the stay is presumed." (citations omitted)); In re Carrigan, 109 B.R. 167, 171 (Bankr. W.D.N.C. 1989) ("'Willful' means intentional or deliberate conduct. A willful violation occurs when a creditor with notice of the bankruptcy case nevertheless performs one of the acts prohibited by § 362(a)." (citations omitted)). 6. 167 B.R. 737 (Bankr. D.N.H. 1994). 7. Id. at 740 (quoting Forty-Eight Insulations, Inc. v. Lipke (In re Forty-Eight Insulations, Inc.), 54 B.R. 905, 909 (Bankr. N.D. Il1. 1985). 8. See sources cited supra note 5. 9. See Fleet Mortgage Group, Inc. v. Kaneb, 196 F.3d 265, 268-69 (1st Cir. 1999); In re Diviney, 211 B.R. at 966; see also United States v. Flynn (In re Flynn), 185 B.R. 89, 92 (S.D. Ga. 1995) (applying the same definition of willfulness to a government creditor). 20031 III. EMOTIONAL DISTRESS DAMAGES EMOTIONAL DAMAGES FOR WILLFUL VIOLATIONS OF THE AUTOMATIC STAY Although the topic of whether emotional damages should be compensable under § 362(h) as actual damages has only become a highly contested topic in the past few years, some bankruptcy courts have awarded damages for emotional injury as far back as the 1980s.10 This section will examine the dec (...truncated)