Landlords Who Violate Bankruptcy Stay May be Ordered to Pay Emotional Distress Damages and Punitive Damages

Monday, May 1, 2017

Landlords should use caution in attempts to take possession of leased space once a tenant files bankruptcy.  Recently, in Lansaw v. Zokaites, the Third Circuit Court of Appeals upheld an order of the Bankruptcy Court for the Western District of Pennsylvania awarding of emotional distress damages and punitive damages against a landlord who violated the automatic stay. 

Under section 362(a) of the Bankruptcy Code, the filing of a bankruptcy petition operates as a stay against debt collection activities by creditors.  For violations of the stay, individual debtors can recover actual damages, including costs and attorneys’ fees, and punitive damages.  

In Lansaw v. Zokaites, the debtors operated a daycare in leased space.  The court found that the landlord violated the automatic stay on three separate occasions.

The first violation consisted of the landlord and his attorney visiting the daycare during business hours to take photographs of the debtors’ personal property.  During that visit, the landlord intimidated one of the debtors and backed her against a wall.

For the second violation, the landlord visited the daycare after business hours using his own key to enter and padlocked and chained the doors.  The landlord left an “interim standstill agreement” on the door, which provided that the landlord would remove the chains if the debtors agreed to certain conditions, including reaffirming the lease with the landlord.

For the third violation, the debtors had found a new property to lease but still had property in the old leasehold.  The landlord directed his attorney to send a letter to the debtors’ new landlord, demanding that the new landlord terminate a lease with the debtors, and stated that, if the new lease was not terminated, the landlord would file a complaint against the new landlord.  The landlord’s attorney also called the new landlord multiple times in an attempt to have the new lease terminated. 

For these violations of the automatic stay, the debtors were awarded $7,500 for emotional distress, $2,600 in legal fees, and $40,000 in punitive damages from the landlord. 

In the opinion, the Third Circuit Court of Appeals found that the bankruptcy code authorizes the award of emotional distress damages as a form of “actual damages,” and that the debtors presented sufficient evidence to support such a claim.  Additionally, the Court found that the debtors were properly awarded punitive damages. 

When a tenant files bankruptcy, a landlord should be extremely cautious in attempts to collect back rent, take possession of the property, or evict a tenant.  Lansaw v. Zokaites was an extreme case; however, violations of the automatic stay may arise from typical landlord activities, such as sending certain notices and applying a setoff against a security deposit.

Bodie B. Colwell practices as an associate with Preti Flaherty's Bankruptcy, Creditors’ Rights and Business Restructuring group from the Portland office. She focuses on supporting bankruptcy, insolvency, and creditors’ rights clients.

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