A recent decision by the Third Circuit should serve as a clear warning to overly-aggressive landlords who are dealing with bankrupt tenants. In Lansaw v Zokaites (In re Lansaw), 2017 U.S. App. Lexis 6121 (3d Cir. 2017), the appellate court affirmed awards of emotional distress damages and punitive damages against a landlord who demonstrably went way over the line in dealing with his bankrupt tenants.[caption id="attachment_21087" align="aligncenter" width="550"] Photo courtesy of Stocksnap.io[/caption]
Debtors Garth and Deborah Lansaw operated a daycare center in premises owned by Frank Zokaites. Disputes arose, and the Lansaws signed a lease with a different landlord. Zokaites did not take this well and served a notice of distraint, claiming a lien against the Lansaws’ property for unpaid rent. The Lansaws responded by filing bankruptcy.
Under §362 of the Bankruptcy Code, 11 U.S.C. §362, filing a bankruptcy automatically causes an injunction (the so-called “automatic stay”) to go into effect. This automatic stay forbids any party from pursuing any action against the debtor or against the debtor’s property.** A willful violation of the automatic stay is a contempt of court and subjects the creditor to actual damages and, in appropriate circumstances, punitive damages.
The Incident(s) In Question
Zokaites’ actions went way over this bright line. First, after the bankruptcy was filed, he arrived at the Daycare premises during business hours, entered the office of Mrs. Lansaw, backed her against the wall close enough for her to feel his breath, and repeatedly asked her “Do you want to hit me?” Next, he visited the premises after business hours and padlocked the door. When the Lansaws removed the chains, he took their keys, including personal keys, and left the premises. Finally, Zokaites got in touch with the new landlord and threatened him with a complaint if he would not terminate his lease with the Lansaws.
Issue Before the Third Circuit
The Third Circuit noted that §362(k) of the Bankruptcy Code provides that an individual injured by a willful violation of the automatic stay may recover actual damages “and, in appropriate circumstances, may recover punitive damages.” The issue before the court, however, was whether the term “actual damages” included the emotional distress damages which the Lansaws had sought. The court concluded that Congress intended the automatic stay to protect both financial and nonfinancial interests. It, therefore, joined “a growing number of circuits” in determining that emotional distress damages resulting from a willful violation of the automatic stay were in fact contemplated by the statute. Moreover, the court declined to require corroborating medical evidence in all cases of emotional distress damages, finding sufficient evidence of emotional distress in Zokaites’ actions. As the Court noted:
"But, at least where the evidence also shows that the stay violations were patently egregious, a plaintiff’s credible testimony that the violations did in fact cause emotional distress is sufficient to support an award of damages."
The court therefore affirmed an award of $7500 for emotional distress damages and further affirmed a $40,000 award for punitive damages – all based upon Zokaites’ conduct.
The Bottom Line
All creditors get significantly annoyed, if not violently angry when their playmates and other business contacts go bankrupt on them. Nevertheless, caution should always be exercised. Bankruptcy judges take very seriously their obligation to protect the interests of debtors, and actions that go over the line will invariably draw the court’s ire. It’s always best to seek competent bankruptcy counsel from an attorney and not to let your spleen dictate your actions.
**The quip used in bankruptcy circles is, “If you’re thinking of taking any action against a bankrupt, and what you’re thinking of doing might tend to make you smile, DON’T DO IT!” You’ll find yourself standing before a federal judge, who will politely ask if you have your toothbrush in your pocket (because you’re not going to be sleeping at home that night).