Atlanta Attorney Ralph Goldberg
Ralph Goldberg said the plaintiffs may ask the Eleventh Circuit to reconsider its ruling against them. (John Disney/Staff)

In a case against a law firm and a loan servicer, a federal appeals court has ruled that debtors may sue to recover damages for emotional distress if creditors break rules against trying to collect while the debtors are under bankruptcy protection.

But the May 8 ruling was a loss for the plaintiffs, who say they became horribly stressed after the defendants erroneously ran a Rockdale County newspaper advertisement saying the home was about to be the subject of a foreclosure. The U.S. Court of Appeals for the Eleventh Circuit panel said the plaintiffs hadn’t provided enough evidence to recover for their emotional distress. The judges also hinted that future plaintiffs might have to back up their emotional distress claims with evidence of physical or financial harm.

Ralph Goldberg of the Tucker firm Goldberg & Cuvillier, who represents the plaintiffs, said the court’s opinion contained some good in holding that a plaintiff can obtain damages for emotional distress for a violation of the automatic stay of creditors’ cases during a debtor’s bankruptcy. But he said he may ask the Eleventh Circuit to reconsider the ruling against his clients.

“I think that they read the statute incredibly narrowly,” said Goldberg. “I don’t understand why anybody would not think that … hearing that your house is about to be foreclosed upon is significant emotional distress. It seems to me they’re out of touch with how normal people lead their lives.”

McCalla Raymer lawyers J. Thomas Howell Jr. and Kimberly Wright argued at the Eleventh Circuit for their firm, a defendant, and codefendant Kondaur Capital Corp. Kent Altom, managing partner of McCalla’s trial and litigation practice in Georgia and Alabama, said in an email it was “encouraging” that the firm’s arguments had prevailed.

“Although this decision of the Eleventh Circuit Court of Appeals is characterized as being one of ‘first impression,’” said Altom, “it is supported by and consistent with the decisions of other circuits that have considered the issue, as noted in the court’s opinion.”

The case involves preliminary attempts in 2009 to foreclose on the Rockdale County home of Kenneth and Delores Lodge.

As recounted in the Eleventh Circuit ruling, the Lodges in 2000 obtained a $156,800 mortgage loan from First Franklin Financial Corp. In 2005, Kenneth Lodge filed a Chapter 13 bankruptcy petition. Under federal law, the filing of the petition automatically blocked any attempt to enforce any lien, including First Franklin’s mortgage.

In December 2008, First Franklin’s loan servicer tried to get around that automatic stay when McCalla Raymer asked the bankruptcy court to lift the stay, saying Kenneth Lodge had defaulted on the loan. Later, First Franklin assigned its interest in the loan to Kondaur Capital Corp., and an amended motion to lift the stay was filed. The bankruptcy court never ruled on either motion.

In 2009, McCalla, acting on Kondaur’s behalf, submitted a “Notice for Sale” of the Lodges’ property for publication in the Rockdale Citizen. The notice, published in the paper on March 12, 2009, said Kondaur would foreclose on the Lodges’ property on the first Tuesday of April 2009. The notice of sale appeared for one day only, as McCalla asked the newspaper to cancel publication of the notice on the same day it ran.

The Lodges did not see the notice on the day it was published, and their house was not sold at foreclosure. They acknowledge that on April 7, 2009, the day the foreclosure sale was supposed to take place, they realized it had been canceled. In January 2010, Kenneth Lodge completed his Chapter 13 plan and his debts, including the mortgage loan, were discharged.

But the Lodges nonetheless claim they were harmed by the publication of the foreclosure notice. They say that after the notice was published, they received letters from law firms informing them a foreclosure sale was about to occur. They say the impending sale caused them physical and emotional problems.

In an affidavit, Delores Lodge said that before she and her husband realized the foreclosure sale would not occur, her husband was “unbearable.” She said she was so stressed that she visited her family doctor for stress and back pain and was prescribed medication. She said she needed medication to sleep, as well.

Kenneth Lodge said in an affidavit that the publication of the foreclosure notice made him “furious” and a “bear to be around.” He said he was so stressed out he had difficulties in his job as a car salesman. He said he was unable to sleep, began having migraines and had to be prescribed medication after his preexisting acid reflux worsened.

In 2010, after Kenneth Lodge was discharged from bankruptcy, the Lodges sued Kondaur and McCalla, which has offices in Georgia, Florida and Alabama. The Lodges sought damages under federal bankruptcy law, which says someone injured by “any willful violation” of a bankruptcy stay may recover “actual damages.” The Lodges also brought a claim under a provision of the federal Fair Debt Collection Practices Act (FDCPA) that prohibits taking or threatening to take any nonjudicial action to dispossess property if there is no right to take possession of the property or the property is legally exempt from dispossession.

Both sides filed motions for summary judgment. U.S. District Judge William O’Kelley granted the defendant’s motion. Although he noted that the defendants had conceded that they willfully violated the automatic bankruptcy stay, O’Kelley said the Lodges had failed to provide sufficient evidence that they were injured as a result of the defendants’ actions. O’Kelley also granted summary judgment to the defendants on the FDCPA claim on the basis that the plaintiffs had not shown the defendants were “debt collectors” within the meaning of the statute.

The plaintiffs appealed to the Eleventh Circuit, where the case was heard by Eleventh Circuit Judge Frank Hull, Senior Judge Susan Black and visiting Senior U.S. District Judge Donald Walter of Louisiana. Hull wrote the panel’s opinion rejecting the plaintiffs’ case.

Considering the Lodges’ claim under bankruptcy law, Hull noted that the Eleventh Circuit had not previously considered what evidence of emotional distress, if any, would be enough to constitute “actual damages” under the statute. Hull wrote that three circuits—the First, Seventh and Ninth Circuits—had concluded that emotional distress could constitute actual damages under that law, and the Fifth Circuit had suggested that they could.

Reviewing those decisions, Hull said her panel had concluded that emotional distress damages fell within the term “actual damages” in the bankruptcy statute. But she did not rule out the possibility that a plaintiff would also have to show financial or physical injury before a court would award damages for emotional distress under the bankruptcy statute.

Hull wrote that the panel did not have to decide the matter of proof of financial or physical injury because the Lodges hadn’t produced sufficient evidence of emotional distress.

“We share … the Fifth, Seventh and Ninth Circuits’ caution that not every willful violation of the stay merits compensation for emotional distress and that a standard governing such claims is necessary,” wrote Hull. She said her panel was adopting a standard set by the Ninth Circuit, holding that, at a minimum, a plaintiff seeking to recover damages for emotional distress under the bankruptcy statute must clearly establish that he or she suffered “significant” emotional distress and demonstrate a causal connection between the distress and the violation of the automatic stay.

Hull wrote that the Lodges had neither shown significant emotional distress nor established a causal connection between the stay violation and their injuries. She wrote because the Lodges hadn’t specified when they received letters from law firms, it was impossible for the court to determine how long the Lodges held their mistaken belief they were about to be foreclosed on. Hull wrote that the evidence the Lodges offered about their troubles wasn’t specific enough, and the couple’s affidavits were not corroborated.

Noting Kenneth Lodge’s bankruptcy proceeding had been pending for years before the publication of the foreclosure notice, Hull said the Lodges hadn’t shown a connection between the letters they received from law firms and their stress and physical maladies. She added that there was no evidence the defendants engaged in egregious conduct, given they canceled the notice on the same day it ran.

Turning to the FDCPA claim, Hull agreed with the defendants that the Lodges hadn’t shown the defendants were “debt collectors” within the meaning of the statute. The plaintiffs had pointed to two sources in support of their argument: the defendants’ websites, which indicated their businesses concerned borrowers in default, and a document from a Georgia Press Association website that contained numerous notices of sale from 2008 and 2009 that stated McCalla sought to foreclose on properties of other individuals.

Hull wrote that the district court judge hadn’t abused his discretion in declining to take judicial notice of the defendants’ websites because, for one thing, the Lodges hadn’t provided the district judge with screenshots of the websites or the websites’ addresses. Hull said the district judge also hadn’t abused his discretion in declining to consider the document purportedly from the press association’s website because the document hadn’t been authenticated and the Lodges never mentioned this evidence to the magistrate judge who issued a report and recommendation on the motions for summary judgment.

Goldberg, the plaintiffs’ lawyer, added that he thought the Eleventh Circuit panel had misread the Ninth Circuit opinion it purported to follow. He noted that the Ninth Circuit, pointing to an example of a case in which an award for emotional distress was appropriate, cited a Southern District of Georgia case affirming in part a bankruptcy court’s award for a violation of an automatic stay when the debtor testified that she was forced to cancel her son’s birthday party because her checking account had been frozen.

The case is Lodge v. Kondaur Capital Corp., No. 13-10919.