The automatic stay, provided for in Section 362 of the Bankruptcy Code, can strike fear in the heart of any lender. Pursuant to Bankruptcy Code Section 362(k), “an individual injured by any willful violation of a stay… shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”
Fundamentally, the automatic stay is designed to give a debtor breathing room to get his financial house in order after filing for bankruptcy by preventing creditors from taking collection activity against the debtor without first getting relief from the bankruptcy court to do so. Creditors who attempt collection activities against a debtor in violation of the automatic stay can be subject to financial penalties.
Recently, the Ninth Circuit split with the First Circuit and expanded on a prior ruling finding that a creditor (this time the IRS) can be liable for damages related to a debtor’s “emotional distress” caused by the creditor’s violation of the automatic stay.
In 2004, the Ninth Circuit held that “actual damages” under Section 362(k) could include emotional distress damages.[1] In Hunsaker v. United States[2], after the debtors filed their Chapter 13 Petition, the IRS sent several notices demanding payment of back taxes and threatened to levy their bank accounts. In Hunsaker, the United States Court of Appeals for the Ninth Circuit found that this penalty for emotional distress in violation of the automatic stay now applies to all creditors including the U.S. Government. Specifically, the Court ruled that sovereign immunity would not preclude an award of emotional distress damages against the United States for a willful violation of the automatic stay, and imposed $4,000 in damages for “significant emotional harm” as well as debtors’ attorney’s fees.
A creditors’ rights, obligations, and potential liabilities under the Bankruptcy Code can be hard to navigate. If you need assistance understanding how to safely proceed in Bankruptcy Court, contact the experienced litigation attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.
[1] Dawson v. Washington Mutual Bank, F.A. (In re Dawson), 390 F.3d 1139, 1148 (9th Cir. 2004)
[2] Hunsaker v. United States, Case No. 16-35991 (Aug. 20, 2018, 9th Cir.)
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