A recent decision by the U.S. Court of Appeals for the Ninth Circuit in a bankruptcy case highlights a risk to consumer lenders and suggests a practical approach to risk management through clear policies and employee training. The court upheld a damages award based on a finding of the lender’s willful violation of the automatic stay invoked under Section 362 of the Bankruptcy Code, which takes effect when a borrower files for bankruptcy.
The automatic stay prohibits most activities related to the collection of a pre-bankruptcy debt and most actions against any property of the debtor serving as collateral for that debt. In consumer cases, Section 362(k) of the Bankruptcy Code allows a debtor injured by a lender’s willful violation of the stay to recover actual damages, punitive damages, and costs and attorneys’ fees.
In Rupanjali Snowden v. Check Into Cash of Washington, a decision issued on September 12, 2014, the Ninth Circuit addressed a stay violation by a payday lender that extended a $575 payday loan to the debtor secured by the debtor’s post-dated check. Before she filed for bankruptcy, the debtor put a stop payment on the check and advised the lender that she intended to file for bankruptcy protection. This began a series of calls from the lender to the debtor at her place of employment, despite debtor’s request that the lender not make such calls and instead contact the debtor’s attorney.
After the bankruptcy was filed, the lender used an electronic fund transfer (EFT) authorization to debit debtor’s bank account for $816.88 and continued to place calls to debtor’s workplace. The EFT resulted in the debtor’s bank account becoming overdrawn. The debtor alleged that these actions caused emotional distress and stress-related physical problems.
The Ninth Circuit upheld a damages award against the lender of $27,483.55. The award consisted of $12,000 for emotional distress damages, $12,000 in punitive damages, $2,538.55 in attorneys’ fees, $370 in overdraft fees, and the $575 loan amount. This award was based on a finding of the lender’s willful violation of the automatic stay, with punitive damages awarded under a “reckless or callous disregard for the law” standard.
The court based the punitive damages award on the lender’s failure “to provide a policy or employee training about how to deal with debt collection following a bankruptcy filing.” Ideally, the existence of a policy and/or employee training to address post-bankruptcy collection procedures could help lenders avoid violations of the automatic stay. In any event, the decision suggests that such policy and training might create an affirmative defense against punitive damage awards if the stay is violated by an employee who inadvertently fails to follow his or her training and established written policies. Conversely, the absence of a policy and employee training can be used as a basis to award punitive damages.
Consumer lenders should carefully review their internal policies and procedures, as well as employee training programs, to evaluate whether this simple and prudent protection against punitive damage awards is in place. A modest investment in risk management may provide protection from damage awards far in excess of the modest amount of the individual consumer loan involved with a stay violation. Of course, good policies and procedures are also helpful in satisfying the ever-increasing demands of the Consumer Financial Protection Bureau, the Federal Trade Commission, state and federal banking regulators, and state attorneys general.
