Aiello v. Providian Financial Corp.

Decision Date06 February 2001
Docket NumberNo. 00-1864,00-1864
Parties(7th Cir. 2001) Laura Anne Aiello, Plaintiff-Appellant, v. Providian Financial Corp., Defendant-Appellee
CourtU.S. Court of Appeals — Seventh Circuit

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 2811--David H. Coar, Judge. [Copyrighted Material Omitted] Before Bauer, Posner, and Easterbrook, Circuit Judges.

Posner, Circuit Judge.

The "automatic stay" is a statutory injunction against efforts outside of bankruptcy to collect debts from a debtor who is under the protection of the bankruptcy court. 11 U.S.C. sec. 362. "An individual injured by any willful violation of [the automatic stay] shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages." sec. 362(h). The question presented by this appeal is whether the term "actual damages" is intended to include damages for purely emotional injury. We can find only one federal appellate case that deals with the question, and that only tangentially: Fleet Mortgage Group, Inc. v. Kaneb, 196 F.3d 265, 269-70 (1st Cir. 1999), cited by neither party to this appeal, held that damages awarded for emotional injury caused by a willful violation of the automatic stay are "actual damages." No doubt they are; but whether their award is authorized by the statute is a separate question, one not addressed in Fleet Mortgage, the defendant apparently having waived it. That case is also distinguishable from our case, as we'll see.

Aiello had filed a petition for Chapter 7 bankruptcy (liquidation). One of her creditors, the defendant, to whom she owed a credit-card debt of about $1,000, asked her to reaffirm the debt and threatened to charge her with fraud if she refused. She did refuse, and the defendant did not charge her with fraud. She filed this class action suit to obtain redress on behalf of herself and similarly situated victims of the defendant's alleged harassment. We may assume that the defendant violated the stay and that the violation was willful. The bankruptcy court, seconded by the district court, so assumed but nevertheless granted summary judgment for the defendant on the ground that Aiello could not obtain an award of damages under section 362(h) when her only evidence of injury was the statement in her affidavit that upon receipt of the threatening letter from the defendant she "cried, felt nauseous and scared and the letter caused her to quarrel with her husband. . . . Even after her meeting with her attorney, Ms. Aiello was still frightened." Class certification was denied. The appeal challenges that denial as well as the grant of summary judgment for the creditor.

The Bankruptcy Code authorizes a creditor to ask the debtor to reaffirm the creditor's debt so that it will not be discharged along with the debtor's other debts when the debtor emerges from bankruptcy. 11 U.S.C. sec. 524(c). The request is usually made by a secured creditor, and the inducement to the debtor to accede to the request is that he avoids having his property repossessed, since the order discharging the debtor's debts that usually concludes a bankruptcy proceeding does not extinguish a creditor's security interest. Dewsnup v. Timm, 502 U.S. 410, 417-19 (1992); In re Penrod, 50 F.3d 459, 461 (7th Cir. 1995); In re Be-Mac Transport Co., 83 F.3d 1020, 1025 (8th Cir. 1996). The inducement to the creditor is that he may be undersecured, and in any event it can be costly to foreclose on a security interest. So debt-reaffirmation agreements are to the mutual benefit of debtors and creditors, and so are lawful. But the creditor may not resort to extortion to obtain such an agreement, In re Duke, 79 F.3d 43, 44-45 (7th Cir. 1996); In re Brown, 851 F.2d 81, 84 (3d Cir. 1988); Morgan Guaranty Trust Co. v. American Savings & Loan Ass'n, 804 F.2d 1487, 1491-92 (9th Cir. 1986), and Aiello claims, we must assume correctly given the procedural posture of the case, that the defendant's behavior was extortionate.

In the absence of a valid reaffirmation agreement, an effort to collect a debt directly from the debtor after the latter has filed for bankruptcy is barred by the automatic stay, an injunction that "issues" without court action upon the filing of the petition for bankruptcy, 11 U.S.C. sec. 362(a), and prevents any creditor of the debtor from attempting to collect a debt other than by prosecuting a claim within the bankruptcy proceeding itself. See In re Vitreous Steel Products Co., 911 F.2d 1223, 1231 (7th Cir. 1990); Maritime Electric Co. v. United Jersey Bank, 959 F.2d 1194, 1203-04 (3d Cir. 1991); Morgan Guaranty Trust Co. v. American Savings & Loan Ass'n, supra, 804 F.2d at 1491-92; Douglas G. Baird, The Elements of Bankruptcy 193-99 (rev. ed. 1993). The right to seek reaffirmation, which is related to the right already mentioned of a secured creditor to enforce his security interest (as distinct from seeking a judgment for the debt itself) outside of bankruptcy, is an exception to the automatic stay. If resort to the exception is vitiated by the extortionate character of the resort, the creditor has violated the automatic stay and thus brought the remedy provision, section 362(h), into play. Among the debt- collection efforts blocked by the automatic stay is foreclosure of the creditor's security interest; although the interest is not extinguished by the discharge in bankruptcy of the debtor's debts, enforcement of it is delayed until then unless the automatic stay is lifted earlier. In re Vitreous Steel Products Co., supra, 911 F.2d at 1231-32; Baird, supra, at 193.

The automatic stay is primarily for the protection of the unsecured creditors as a group. The stay prevents (without need to ask a court for an injunction) a race by the creditors to seize the debtor's assets, a race that by thwarting the orderly liquidation of those assets would yield the creditors as a group less than if they are restrained. In re Rimsat, Ltd, 98 F.3d 956, 961 (7th Cir. 1996); Martin-Trigona v. Champion Federal Savings & Loan Ass'n, 892 F.2d 575, 577 (7th Cir. 1989); Maritime Electric Co. v. United Jersey Bank, supra, 959 F.2d at 1204. But it is also for the debtor's protection, id.; In re Hellums, 772 F.2d 379, 381 (7th Cir. 1985) (per curiam); In re Little Creek Development Co., 779 F.2d 1068, 1071 (5th Cir. 1986), most obviously in a case like the present one where the debtor is being asked to waive his right to a discharge of debts, the right that is at the heart of the "fresh start" rationale of bankruptcy. A debtor bludgeoned into waiving his right of discharge is denied the protection of bankruptcy law.

That protection, however, is financial in character; it is not protection of peace of mind. Bankruptcy is a harrowing experience, for the bankrupt but sometimes for the creditors as well. The Bankruptcy Code was not drafted with reference to the emotional incidents of bankruptcy, and bankruptcy judges are not selected with reference to their likely ability to evaluate claims of emotional injury. That is not to suggest that victims of tortious infliction of emotional distress in the course of a bankruptcy proceeding are orphans of the law. A creditor who resorts to extortion or intimidation exposes himself to a suit under state tort law. The automatic stay is not an obstacle, because it does not apply to suits by the debtor. Alpern v. Lieb, 11 F.3d 689, 690 (7th Cir. 1993); Martin- Trigona v. Champion Federal Savings & Loan Ass'n, supra, 892 F.2d at 577; Maritime Electric Co. v. United Jersey Bank, supra, 959 F.2d at 1204; Carley Capital Group v. Fireman's Fund Ins. Co., 889 F.2d 1126 (D.C. Cir. 1989) (per curiam).

The office of section 362(h) is not to redress tort violations but to protect the rights conferred by the automatic stay. If one creditor muscled out the others in violation of the stay, the bankruptcy court would impose monetary sanctions under subsection (h). If the defendant here had intimidated the debtor into giving up her right of discharge, the bankruptcy court would have ordered under the authority of the same subsection the monetary relief necessary to restore her to the financial position she would have occupied had the defendant not resorted to intimidation. The interest in judicial economy, as embodied in the "clean-up" doctrine of equity, Wal-Mart Stores, Incorporated Associates' Health & Welfare Plan v. Wells, 213 F.3d 398, 400-01 (7th Cir. 2000); Medtronic, Inc. v. Intermedics, Inc., 725 F.2d 440, 442 (7th Cir. 1984); Mowbray v. Mosely, Hallgarten, Estabrook & Weeden, Inc., 795 F.2d 1111, 1114 (1st Cir. 1986); 1 Dan B. Dobbs, Dobbs on the Law of Remedies: Damages- Equity-Restitution sec. 2.7, pp. 180-81 (2d ed. 1993), might allow the court to "top off" relief designed to redress any financial injury inflicted by the violation of the automatic stay with an award of damages for incidental harms, perhaps including emotional distress if adequately proved, to spare the debtor from having to bring two suits. Fleet Mortgage may have been such a case, since the misconduct of the defendant in violating the automatic stay imposed substantial legal costs on the plaintiff, which are not alleged here....

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