The U.S. Court of Appeals for the Eighth Circuit recently affirmed a punitive damages award in an approximately 8-to-1 ratio to compensatory damages to a borrower who sued her mortgage loan servicer for alleged common law invasion of privacy and for allegedly violating the Fair Credit Reporting Act (FCRA), the Fair Debt Collection Practices Act (FDCPA) and the Real Estate Settlement Procedures Act (RESPA).
In so ruling, the Court also held that the trial court properly excluded the testimony of a non-party consumer who was supposedly treated similarly by the servicer to rebut the servicer’s assertions of good faith conduct, explaining that the testimony would have been unfairly prejudicial and “would result in ‘mini trials’ that would needlessly confuse and distract the jury.”
A copy of the opinion is available at: Link to Opinion.
The borrower obtained a loan secured by a $100,000 mortgage in order to purchase her home in Missouri. She defaulted shortly thereafter and filed a Chapter 13 bankruptcy proceeding. The reorganization plan provided for payment of the mortgage arrearage over five years.
The borrower received a discharge, and asked the loan servicer to resume sending her monthly mortgage statements. The first statement she received allegedly contained several errors, including that the account was delinquent by more than $8,500.
The servicer allegedly began trying to collect the delinquent amount by placing phone calls to the borrower’s personal and work numbers. The borrower claimed she repeatedly tried to explain the problem, but the servicer’s employees, relying on incorrect records, supposedly only reiterated what the records showed.
After several months, the servicer determined it had made an accounting error and “escalated” the dispute to its research department, requesting that the borrower’s account be credited from the servicer’s “internal bankruptcy fund.” The servicer’s “cash department rejected the requested credit, however, because [the borrower] had been discharged from bankruptcy and her account no longer reflected a bankruptcy code.”
The servicer allegedly continued with its collection efforts, despite the borrower’s supposedly repeated attempts to point out the accounting errors. The borrower continued to make her monthly payments, but the servicer stopped accepting them several months after it discovered the accounting error “because its internal policy required it to accept only full payments” and according to its records the account was still delinquent.
The borrower’s counsel sent a letter to the servicer in an attempt to explain the errors. In response, the servicer “verified the debt and enclosed the note, deed of trust and a payment history.” When the borrower’s attorney asked for a substantive response, the servicer responded that a foreclosure sale was scheduled and conducted multiple inspections of the home “allegedly in preparation for the foreclosure sale.”
The borrower sued in Missouri state court and moved for a temporary restraining order stopping the foreclosure sale, alleging that the servicer’s conduct (a) violated her right of privacy under Missouri law; (b) willfully and negligently violated the FCRA; (c) violated the FDCPA; and (e) violated RESPA. The servicer removed the case to federal court and cancelled the foreclosure sale.
After several months of investigation, the servicer credited the borrower’s account $5,162, but allegedly did not remove the improper ‘lender-paid’ expenses or correct the rejection of the borrower’s monthly payments. Accordingly, the servicer’s records continued to show a delinquency for some eight months after the lawsuit was filed, at which time the account balance was finally corrected.
At trial, the borrower testified about her efforts to get the servicer to correct its errors as well as how her credit score was adversely affected “because [the servicer] reported a delinquent debt that she did not owe.” The borrower and her doctor also testified that she “experienced symptoms of severe stress attributable to [the servicer’s conduct], including abdominal pain, vomiting, depression and anxiety.” Finally, the borrower testified that the servicer ignored her repeated requests to stop calling her, especially at work.
The servicer admitted that it made multiple errors regarding the borrower’s account, but argued that its mistakes were not “intentional or the product of an institutionalized corporate practice.”
The jury awarded the borrower $50,000 in compensatory damages and $400,000 in punitive damages on her state law invasion of privacy claim, and $50,000 in compensatory damages for the servicer’s negligent credit reporting under FCRA. The servicer moved to alter or amend the judgment, which was denied by the trial court.
The servicer appealed, arguing there was insufficient evidence to support the jury’s award of punitive damages “because [the borrower] failed to present clear and convincing evidence that [the servicer] acted with an evil motive or with a reckless indifference to [the borrower’s] rights.” Alternatively, the servicer argued that the punitive damages award was “unconstitutionally excessive in violation of the Due Process Clause of the Fourteenth Amendment to the United States Constitution.”
The borrower cross-appealed as to the trial court’s exclusion of testimony at trial and its jury instruction on her RESPA claim.
The Eighth Circuit began its analysis by noting that “[u]nder Missouri law, punitive damages may be awarded for invasion of privacy. … Whether the evidence is sufficient to support an award of punitive damages is a question of law, which we review de novo.”
The Court explained that because punitive damages “are an extraordinary remedy that should be awarded sparingly[,] … [b]efore punitive damages can be awarded, a plaintiff must present clear and convincing evidence of a defendant’s culpable mental state. … This standard requires proof that the defendant acted with either an evil motive or a reckless indifference to the plaintiff’s rights. … Such proof can be established by direct or circumstantial evidence. … A jury may infer that a defendant has the requisite culpable motive when evidence of the defendant’s reckless indifference to the interests and rights of the plaintiff is presented. … Such evidence supporting punitive damages need not be—and often is not—separate from the evidence supporting a substantive claim.” Since it is the jury’s job “’to evaluate evidence and decide what inferences should be drawn from it,’” the jury’s verdict will be overturned “only when ‘there is a complete absence of probative facts’ such that ‘no proof beyond speculation [supports] the verdict.’”
Concluding that the record “presents no basis to reject the jury’s determination[,]” the Eighth Circuit rejected the servicer’s argument that insufficient evidence supported the punitive damages award because it believed in good faith that its actions were lawful because the Court had rejected that same argument in a 2008 decision in which it explained that “'[s]imply presenting … evidence of good faith to the jury does not immunize a defendant from punitive damages.’”
The Eighth Circuit agreed with the borrower that evidence that the servicer acted with “reckless indifference to her rights is legally sufficient to establish the requisite mental state to support the punitive damages awarded by the jury….” In the Court’s view, such evidence included the facts that despite the borrower’s many attempts to correct the errors and seek assistance, the servicer “aggressively pursued collection,” initiated “foreclosure and conducted inspections of her residence” instead of “suspending its efforts.” The Court noted that “it was the jury’s responsibility to determine the credibility and weight of the evidence presented … [it] was free to reject [the servicer’s] characterization of its conduct and determine these facts and circumstances warranted punitive damages.”
Turning to the servicer’s argument the jury’s award of $400,000 in punitive damages was excessive and violated the Due Process Clause, the Eighth Circuit explained that “[a]lthough juries have considerable flexibility in determining the amount of punitive damages, the Due Process Clause serves as a governor and prohibits ‘grossly excessive civil punishment.’ … Punitive damages are grossly excessive if they ‘shock the conscience’ of the court or ‘demonstrate passion or prejudice on the part of the trier of fact.’”
The Court then addressed the following “three factors when determining whether a punitive damages award shocks the conscience or demonstrates passion or prejudice …[:] ‘(1) the degree of reprehensibility of the defendant’s conduct; (2) the disparity between actual or potential harm suffered and the punitive damages award (often stated as a ratio between the amount of the compensatory damages award and the punitive damages award); and (3) the difference between the punitive damages award and the civil penalties authorized in comparable cases.’”
Addressing each factor in turn, the Eighth Circuit first found that the servicer’s conduct was sufficiently reprehensible to warrant punitive damages because the borrower suffered physical harm in the form of severe stress that caused “abdominal pain, vomiting, depression and anxiety” rather than just economic harm and “[t]he presence of just one indicium of reprehensibility is sufficient to render conduct reprehensible and support an award of punitive damages.” In addition, “the jury specifically determined that [the servicer] acted with a reckless indifference to [the borrower’s] substantive rights[,]” which is relevant to a determination of reprehensibility.
Moreover, the Court noted that the servicer conceded that the borrower was financially vulnerable, and the conduct in question was not just an isolated incident because the servicer “invaded [the borrower’s] privacy over the course of two years through actions including making collection calls to [her] at her workplace, conducting home inspections and sending foreclosure letters.”
Turning to the second factor, the disparity between actual or potential harm suffered and the punitive damages award, the Eighth Circuit rejected the servicer’s argument that “the 8-to-1 ratio between [borrower’s] $400,000 punitive award and $50,000 compensatory award is too great.”
The Court explained that under the Supreme Court of the United States’ and Eighth Circuit’s precedent, while courts “do not apply ‘a simple mathematical formula’ to determine the constitutionality of a punitive damages award[,] … few awards exceeding a single-digit ratio of punitive to compensatory damages will satisfy due process.” However, “[a] higher ratio may be justified when the injury is hard to detect or the monetary damages are difficult to quantify.”
Relying on its 1999 decision in Morse v. S. Union Co., which approved $70,000 in compensatory damages and $400,000 in punitive damages in a case under the Age Discrimination in Employment Act, a ratio of less than 6-to-1, and where the amount of punitive damages was “less than one one-thousandth” of the employer’s net worth, the Eighth Circuit found that the 8-to-1 ratio in the case at bar “does not set off any alarm bells” given that the punitive award “also accounts for thirty-three-ten-thousandths of one percent (0.00033) of [the servicer’s] approximate $1.2 billion net worth.”
The Eighth Circuit found that the final factor, the “disparity between the punitive damages award and the civil penalties authorized or imposed in comparable cases[,]” did not violate the Due Process Clause of the 14th Amendment. The parties conceded “that there are no comparable civil penalties in this case because there is no civil penalty for invasion of privacy under Missouri law and the civil penalties for [the borrower’s] federal claims are nominal.” However, the Court noted that because there was “no way to discern which conduct the jury considered to be an invasion of [the borrower’s] privacy[,]” and in light of the similarities between this case and others in which we have upheld an award of punitive damages,” it concluded that “the absence of comparable civil penalties does not render the punitive damages award unconstitutionally excessive.”
The Court then addressed the borrower’s two arguments on cross-appeal.
First, the borrower argued that the trial court erred in excluding the testimony of a non-party consumer who was treated similarly by the servicer because such testimony “would have rebutted [the servicer’s] claims of good faith and established that [the servicer’s] conduct was reckless and reprehensible.” The Court affirmed the trial court’s exclusion of the testimony because it amounted to “improper, prejudicial propensity evidence” and “admission of such evidence would result in ‘mini trials’ that would needlessly confuse and distract the jury….”
Second, the Eighth Circuit rejected the borrower’s argument that the trial court’s jury instruction on the RESPA claim was wrong, finding that because the borrower failed to make a detailed objection on the record as required by Federal Rule of Civil Procedure 51, reversal would be proper only if the trial court committed “plain error.” “Plain error review is narrow and ‘confined to the exceptional case in which error has seriously affected the fairness, integrity, or public reputation of the judicial proceedings.”
The Court concluded that even assuming the instruction was incorrect, “such an error would not entitle [the borrower] to a reversal under plain-error review” because it did not fundamentally affect the fairness or integrity of the trial, especially in light of the fact that the borrower “recovered $500,000 in damages, a circumstance that undermines any argument that the alleged RESPA error resulted in a miscarriage of justice.”
The Eighth Circuit affirmed the jury’s award of compensatory and punitive damages on all grounds.