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Violation of Automatic Stay Can Result in Emotional Distress and Punitive Damages, According to Ninth Circuit Ruling

HelenCobain [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/)], via FlickrWhen a debtor files for bankruptcy under Chapter 7 or Chapter 13, an automatic stay takes effect that bars most legal actions against the debtor or the debtor’s property. Violations of the automatic stay can result in substantial liability for the debtor. The Ninth Circuit Court of Appeals affirmed a judgment awarding more than $27,000 in damages to a debtor for an automatic stay violation by a payday lender. In re Snowden, 769 F.3d 651 (9th Cir. 2014). The court also held that a conditional offer of settlement by the lender, which the debtor rejected, did not preclude an award of damages as authorized by the Bankruptcy Code, 11 U.S.C. § 362(k).

The debtor took out a $575 payday loan “to make ends meet for herself and her daughter.” Snowden, 769 F.3d at 654. This is a short-term loan secured by a post-dated check. She put a stop payment on the check before its due date and informed the lender that she was considering bankruptcy. The lender’s employees began calling the debtor multiple times at the hospital where she worked as a nurse. The calls reportedly continued even after she referred the lender to her attorney, and they began to affect her work performance. When she filed for Chapter 7 bankruptcy, she did not directly inform the lender but listed it as an unsecured creditor with a claim for $575.

About a month after filing for bankruptcy, the debtor noticed that her bank account was overdrawn by more than $800. She learned that the lender had cashed the check securing the payday loan, resulting in overdraft fees. This had a substantial emotional impact on the debtor, since “her finances had careened out of control at the moment when she thought she was finally getting them together.” Id. at 655.

The debtor filed a motion for sanctions against the lender for a willful violation of the automatic stay. The lender rejected her settlement demand of $25,000 but offered to refund the loan amount, the overdraft charges, and three hours’ worth of attorney’s fees, for a total of $1,445. She rejected that offer, and after a trial, the bankruptcy court awarded her the loan amount and bank charges, $12,000 in emotional distress damages, $12,000 in punitive damages, and attorney’s fees of $2,538.55.

The Ninth Circuit affirmed each part of the damage award:

Emotional distress: The court held that the debtor suffered “significant harm,” produced sufficient evidence of the harm, and showed that the harm resulted from the automatic stay violation rather than the “anxiety and pressures inherent in the bankruptcy process.” Id. at 657, quoting In re Dawson, 390 F.3d 1139, 1149 (9th Cir. 2004).

Punitive damages: The court held that the debtor established the lender’s “reckless or callous disregard for the law,” which supported a punitive damages award. Snowden, 769 F.3d at 657, quoting In re Bloom, 875 F.2d 224, 228 (9th Cir. 1989).

Attorney’s fees: A debtor may only recover attorney’s fees under § 362(k) that are directly related to enforcing the automatic stay or remedying a violation. Sternberg v. Johnston, 595 F.3d 937, 940 (9th Cir. 2010). The question for this court was whether the lender’s $1,445 settlement offer ended the violation by giving the debtor an opportunity to be made whole. The court rejected this argument, which would limit the debtor’s attorney fee award to fees incurred before the settlement offer. The court held that the violation did not end until the date the bankruptcy court ruled that a violation had occurred.

Attorney Devin Sawdayi has represented individuals and families in Los Angeles in personal bankruptcy cases since 1997. To schedule a free and confidential consultation with a member of our team, contact us today online or at (310) 475-939.

More Blog Posts:

Debtors Allowed to Sue Loan Servicer for Charging Unapproved Fees During Chapter 13 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, December 23, 2014

Ninth Circuit Considers Whether Debtor’s Attorney’s Fees Are “Actual Damages” when Creditor Violates Automatic Stay, Los Angeles Bankruptcy Lawyer Blawg, September 19, 2014

Automatic Stay Does Not Prevent an Eviction Authorized in an Earlier Bankruptcy Case, Los Angeles Bankruptcy Lawyer Blawg, March 7, 2014

Photo credit: HelenCobain [CC BY 2.0], via Flickr.