On March 29, 2017, the U.S. Court of Appeals for the Eighth Circuit upheld a punitive damages award for a state law invasion of privacy claim arising from improper debt-collection practices. The award, which was eight times greater than the compensatory award for the same claim, was supported by the evidence and did not “shock the conscience.”
The facts in May v. Nationstar Mortgage, LLC were undisputed. The borrower bought a home in 2007, secured by a $100,000 mortgage. Shortly thereafter, the borrower defaulted, filed for Chapter 13 bankruptcy, and entered into an agreement with the servicer to pay down the mortgage and arrears. Following bankruptcy discharge, the servicer sent the borrower a mortgage statement that erroneously included thousands of dollars in “lender-paid” expenses and misstated a $51 credit as a $5,162 debit.
The servicer initiated collection efforts, and reported the erroneous debit to credit agencies. The borrower attempted for two years to get the servicer to correct the errors, to no avail. The servicer engaged in additional collection efforts, including: threatening foreclosure; conducting periodic property inspections; and making additional collection calls.
The servicer ultimately initiated foreclosure, but the borrower filed a separate lawsuit alleging, among other things: invasion of privacy under state law; and a willful violation of the Fair Credit Reporting Act (FCRA). The jury awarded the borrower compensatory damages of $50,000 and punitive damages of $400,000 for the invasion of privacy, resulting in a punitive award eight times greater than the compensatory award for that claim. The jury also awarded an additional $50,000 in compensatory damages for the FCRA violation.
On appeal, the servicer admitted it made many mistakes regarding the borrower’s loan, but argued that its errors were inadvertent, and did not rise to the level of reckless indifference or evil motive required to support an award of punitive damages under state law. The servicer also argued the punitive damages award was excessive and violated its due process rights under the Fourteenth Amendment.
The Court disagreed, finding sufficient evidence to support the jury’s finding that the servicer acted with reckless indifference. The Court also found the punitive damages award did not violate the servicer’s due process rights. The Court explained a due process violation required a showing that the punitive damages shocked “the conscience of the court or demonstrate[d] passion or prejudice on the part of the trier of fact.” A court must consider: the degree of reprehensibility; the compensatory to punitive damages ratio; and awards in similar cases. In considering these factors, the Court found that sufficient evidence of reprehensibility was presented, including physical harm, indifference or reckless disregard of health or safety of others, financial vulnerability of the victim, and repeated and intentional conduct.
The Court also found that the 8-to-1 award ratio did not render the award unconstitutional, as it accounted for only thirty-three thousandths of one percent of the servicer’s approximate $1.2 billion net worth. In determining the appropriateness of the ratio of punitive to compensatory damages, the Court appeared to ignore the additional $50,000 in compensatory damages for the FCRA violation. Finally, the Court determined that the award was in line with awards granted in cases with similar facts.
The Eighth Circuit’s March 29, 2017 opinion can be viewed here: http://media.ca8.uscourts.gov/opndir/17/03/161285P.pdf.