Monday, October 19, 2009

Outrageous Creditor Behavior Leads to Small Damage Award

A debtor's suit against an abusive creditor seemed to have all the right elements: outrageous facts, creative legal theories and a sympathetic judge; but lacked just one thing, damages. Shane Eastman v. Baker Recovery Services, Adv. No. 08-5055 (Bankr. W.D. Tex. 10/15/09). The opinion can be found here.

The Facts

Based on the opinion from Bankruptcy Judge Leif Clark, the facts were pretty outrageous. A debtor filed a no-asset chapter 7 case and received a discharge. He inadvertently omitted a credit card that had been used by his ex-wife when they were still married. That account was sold to a debt buyer, who then filed suit against someone else named Shane Eastman in California. When the debt buyer realized that he had sued the wrong Shane, instead of dismissing his case, he had Texas Shane served with process in the California action.

At this point, the debtor's lawyer wrote to the creditor's lawyer and informed him that he was violating the discharge. The debtor, believing that his lawyer's letter had done the trick, did not answer. The debt buyer apparently didn't think the discharge applied to him, so he took a default judgment against the debtor in the California action without notice to the debtor.

The debtor learned about the judgment some time later when his security clearance with the Air Force was revoked. The debtor's lawyer demanded that the judgment be released. The creditor refused to do so unless he was paid $2,500 for his trouble. The debtor then had his bankruptcy case reopened. According to the judge, "It was the reopening of the case that finally motivated Baker to abandon his efforts to extort some payment out of Eastman in exchange for releasing the judgment." The use of the word "extort" gives some insight into the judge's view of the situation. The debtor got his security clearance back some five months after it had been revoked. However, during this period, he missed out on a potential opportunity for a career-advancing placement with a general.

The discouraged debtor believed that the episode had soured his chances for advancement in the Air Force and resigned several months later, some 11 years into his military career.

Creative Causes of Action

The creditor committed the following bad acts at a minimum:

1. He filed suit on a discharged debt;
2. He sued a consumer in a state where he did not reside;
3. He took a default judgment after being notified of the discharge; and
4. He demanded payment for releasing the judgment on the discharged debt.

These facts were pretty serious. Therefore, they justified more than just a simple action for violation of the discharge. The debtor's lawyer sued for violation of the discharge, violation of the Fair Debt Collection Practices Act, violation of the Texas Debt Collection Act, violation of the Texas Deceptive Trade Practices Act and tortious infliction of emotional distress.

The Bankruptcy Court allowed the debtor to proceed with all of these causes of action, finding that the bankruptcy discharge does not preempt other claims arising out of violation of the discharge.

The Court found liability on three out of five claims. With some understatement, the Court held that, "It is obvious to this Court that the Defendants violated Sec. 524(e) of the Bankruptcy Code." Although the Defendants claimed that the debtor was precluded from urging the discharge violation based on his failure to plead this as an affirmative defense in the California suit, the judge didn't buy it.

The Fair Debt Collection Practices Act prohibits a debt collector from making a "false, deceptive or misleading representation or means in connection with the collection of any debt." The Court followed Judge Easterbrook of the Seventh Circuit in ruling that "A demand for immediate payment while a debtor is in bankruptcy (or after the debtor's discharge) is 'false' in the sense that it asserts that money is due, although, because of the automatic stay (11 U.S.C. Sec. 362(a)) or the discharge injunction (11 U.S.C. Sec. 524), it is not." Thus, it was clear that the debt buyer and his lawyer had violated the FDCPA.

The Texas Debt Collection Act has a similar provision prohibiting the use of a "fraudulent, deceptive or misleading representation . . . misrepresenting the character, extent or amount of a consumer debt or misrepresenting the consumer debt's status in a judicial or governmental proceeding." The court found that filing suit on a discharged debt fell within this provision and thus found liability under the TDCA.

The TDCA also provides that a violation is considered to be a deceptive trade practice under the Texas Deceptive Trade Practice Act. However, to recover under the DTPA, a person must be a "consumer." Since the debtor never sought to acquire goods or services from the debt buyer, he did not qualify as a consumer under the DTPA and could not take advantage of that statute's remedies.

The court also found that the defendants were not liable for tortious infliction of emotional distress. To recover under this theory, the debtor would have needed to show that the defendant's actions were taken for the primary purpose of causing emotional distress. While the debt buyer's actions were outrageous, they were aimed at collecting the debt rather than inflicting emotional distress.

The Relief Granted

Having prevailed under three theories, the big question was what relief could be granted. The debtor sought to recover (i) actual damages, statutory damages and attorney's fees under the FDCPA; (ii) actual damages and costs and attorney's fees under the TDCA; (iii) economic damages and treble damages under the DTPA; and (iv) damages for the infliction of emotional distress. The debtor apparently did not seek damages for contempt for violation of the discharge injunction.

Because the court ruled against the plaintiff on the DTPA and tortious infliction of emotional distress, the best possible recovery for the plaintiff was under the FDCPA for statutory damages, actual damages and attorney's fees. The court awarded statutory damages of $1,000 as provided by the FDCPA and held that the debtor was entitled to recover attorney's fees. However, the court ruled that the debtor did not prove an entitlement to actual damages.

The debtor's primary theory of damages was that the judgment destroyed his Air Force career when his security clearance was withdrawn and he lost the opportunity to work for the general. The debtor presented evidence of what he would have earned if he had stayed with the Air Force and been promoted to Chief Master Sergeant. The court found that this fell within the category of "special damages," meaning damages that are of such an unusual nature that they would vary from individual to individual. In order to recover special damages, they must be specifically pled and may not be "too remote, uncertain, conjectural, speculative or contingent." This was a difficult burden for the debtor to meet. He acknowledged that promotion to Chief Master Sergeant was difficult to obtain. He also acknowledged that he did not apply for the position with the general because he was told not to bother. Because the debtor voluntarily left his position with the Air Force, it was impossible to tell whether he would have made Chief Master Sergeant and therefore impossible to award damages. He also failed to provide any evidence of his mental state as a result of the defendants' actions, so that he could not recover for emotional distress. Because these were the only items of damage pled, he was not able to recover for actual damages.

Final Lessons

This is a hard case. The creditor's actions were clearly outrageous. The judge was clearly offended. However, the only relief that the debtor received was the court's finding that the debt had in fact been discharged, $1,000 in statutory damages and reimbursement for his attorney's fees. Thus, his victory was more symbolic than substantial.

The defendants did not escape unharmed. They have the stigma of a finding from a federal judge that they violated the law. They also will have to pay both their own attorney's fees (which likely were substantial given that they hired a former bankruptcy judge to defend them) as well as the plaintiff's fees. However, it could have been much worse.

The bottom line is that good liability facts do not always translate into good damage facts. It seems unmistakably clear that loss of a security clearance would cloud a military career. But how does that translate into damages? In this case, the plaintiff had to prove what would have happened over nine years of a future military career that the plaintiff walked away from. Because there was no guaranty that he would have achieved his career goals with the Air Force, the damage theory did not work. There was clearly a lost opportunity. But how do you value a possibility? The harm was quite real to the debtor. However, the true damage of lost hopes and aspirations was too intangible to value.


Patches said...

Why no sanctions under 105?

Anonymous said...

What a great resource!

Shane said...

I was Actually Harassed by this same collection agency for several months because I share the same name as this guy.

Anonymous said...

I'm currently being sued by this creditor on a time-barred debt. He is unbelievable. Great blog btw.