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    The Lawletter Blog

    BANKRUPTCY: Damages Awarded for Pursuit of Divorce Case in Violation of Automatic Stay

    Posted by April Wimberley on Wed, Dec 15, 2021 @ 10:12 AM

    The Lawletter Vol 46 No 7

    April Wimberley—Senior Attorney, National Legal Research Group

                A bankruptcy court recently awarded attorney’s fees, compensation for emotional distress, and punitive damages to a debtor whose ex-husband continued litigating their divorce case in violation of the automatic stay. In re Payne, No. 20-30524 (Bankr. E.D. Va. Mar. 22, 2021). On January 15, 2020, the Circuit Court of Chesterfield County, Virginia, entered a final decree in the divorce case between Cynthia Payne and Thomas Payne. Thereafter, on January 31, 2020, Ms. Payne filed a Chapter 13 bankruptcy petition in the Bankruptcy Court for the Eastern District of Virginia. In response to the debtor’s bankruptcy filing, the ex-husband, through his attorney, filed several documents in the divorce case, including a motion to stay and a motion to rehear and reconsider. The respondents maintained that the purpose of the motion to stay was to prevent the expiration of the state court’s jurisdiction due to the debtor’s bankruptcy and to address her alleged failure to disclose the existence of a bank account during the divorce litigation. The motion to rehear and reconsider aimed to have the state court reconsider issues of equitable distribution. The respondents did not seek stay of relief from the bankruptcy court before filing the state court motions. The debtor then requested the bankruptcy court to enter an order to show cause against Mr. Payne and his attorney for their alleged violations of the automatic stay provided by § 362 of the Bankruptcy Code. Ms. Payne sought attorney’s fees, reimbursement for counseling and medical services, an award for emotional distress, and punitive damages.

                Section 362 of the Bankruptcy Code prohibits “the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the [bankruptcy] case.” 11 U.S.C. § 362(a)(1). The automatic stay is “one of the fundamental debtor protections provided by the bankruptcy laws,” providing the debtor “a breathing spell from its creditors” and a respite from “the financial pressures that drove him into bankruptcy.” S. Rep. No. 95-989, 95th Cong., 2d Sess. 54-55 (1978). Accordingly, the Bankruptcy Code provides that an individual injured by any willful violation of an automatic stay may recover actual damages, including costs and attorney’s fees, and “in appropriate circumstances,” punitive damages. 11 U.S.C. § 362(k)(1). In the Fourth Circuit, a debtor may recover damages upon a showing that (1) the creditor committed an act that violated the stay, (2) the act was willful, and (3) the debtor suffered damages as a result. See In re Seaton, 462 B.R. 582, 591 (Bankr. E.D. Va. 2011). Emotional distress damages are compensable, even in the absence of related financial loss, but only if the debtor can establish that he or she suffered a significant harm and a causal connection between the harm and the actions taken in violation of the stay. Id.

                The court first held that the actions of Mr. Payne and his counsel clearly violated the automatic stay. By their own admission, they continued to pursue the divorce case in state court despite their knowledge of the debtor’s bankruptcy filing. Moreover, their actions went beyond merely attempting to preserve the status quo; they sought to continue the divorce action against Ms. Payne and, indeed, requested to relitigate several issues. This constituted a clear, intentional, and willful violation of § 362. Accordingly, the debtor was awarded $2,550 in attorney’s fees, representing the amount she was forced to spend to respond to the ex-husband’s motions in state court.

                As to damages for emotional distress, Ms. Payne testified that the ex-husband’s actions in state court caused her significant distress. She had understood that upon filing her bankruptcy case, litigation in the divorce case, for which she had already expended $100,000 in attorney’s fees, would end. The actions of the respondents “shattered that expectation” and Ms. Payne was “distraught to discover that the divorce case was continuing.” Although the debtor’s testimony was the only evidence of emotional distress, the court found her distress “readily apparent” and her testimony sufficient to support an award for emotional distress. The court concluded it was “obvious that a reasonable person would have suffered significant emotional harm” from the ex-husband’s actions and characterized the respondents’ conduct as “egregious.” The court seemed particularly bothered that the respondents continued to insist that their conduct was proper, arguing during the show cause hearing that their actions in the divorce court did not violate the automatic stay. The court concluded that it was “difficult, if not impossible,” to see how Mr. Payne and his counsel could have legitimately believed that filing the motions in state court for the purpose of enhancing a potential recovery against the debtor was not a violation of the automatic stay. Accordingly, the court awarded Ms. Payne $1,000 as compensation for emotional distress. Notably, the court made this award even though it observed that there were several other potential causes of the debtor’s distress, including the recent death of her mother, ill health of her father, and the stress of caring for two special needs children.

                However, the court declined to award damages for medical and counseling expenses, as Ms. Payne’s counseling and medication courses began before the actions of her ex-husband and his attorney. Moreover, she presented no evidence that their actions in violation of the stay had caused those courses to be extended, and there was no evidence of any financial cost to the debtor for the counseling or pharmacy services.

                The court then considered the question of punitive damages. When determining whether punitive damages are appropriate, courts consider the nature of the creditor’s conduct; the creditor’s ability to pay damages; the motive of the creditor; and any provocation by the debtor. In re Seaton, 462 B.R. at 595. Often, an award of punitive damages is reserved for cases in which the misconduct was egregious and intentional. Id. Here, the court found that the ex-husband and his attorney acted “in flagrant disregard of the automatic stay.” Indeed, the respondents argued that the ex-wife had filed the bankruptcy petition prior to the final decree of divorce in an effort to avoid the court’s balancing of the equities between the parties. They then requested a rehearing of the matters previously adjudicated in the state court—in other words, the bankruptcy court wrote, the ex-husband and his counsel requested the state court to “ignore the bankruptcy filing and continue the Divorce Case against the Debtor.” Finding such conduct “egregious” and “motivated by the desire to enhance Mr. Payne’s position” in the divorce case, and with no evidence of provocation by the debtor, the court awarded punitive damages in the amount of $2,500. In total, then, Mr. Payne and his attorney were jointly and severally liable for $6,050 in damages to Ms. Payne for their actions in violation of the automatic stay.

    Topics: bankruptcy, April Wimberley, violation of automatic stay, recovery of actual and punitive damages

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