District Court Reverses Bankruptcy Court and Finds that Emotional Distress Alone Insufficient to Justify Awarding of Damages When IRS Violates Stay on Collection

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Earlier this year in Migraine Caused by Improper IRS Collection Action During Bankruptcy Stay Triggers Damages for Emotional Distress I discussed Hunsaker v US, where a bankruptcy court held that IRS was on the hook for damages arising for violations of the stay on collection even when the only damages were from the emotional distress and were not actual economic damages. Last week a district court in Oregon reversed the bankruptcy court, finding that there was no clear waiver of the government’s sovereign immunity  in the absence of direct economic damages.

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In my post earlier this year, I described what led to the Hunsakers suing the government. It started with financial problems when they realized that their “homestead was discovered to be subject to disputed claims by secured creditors, in turn complicated by claims of Marion County, Oregon, that the purchase of the homestead created an unlawful partition.” In September 2012 the Hunsakers filed a Chapter 13 bankruptcy reorganization. IRS received notice of the filing, and it filed a proof of claim for $ 9,301. As I previously discussed, “at the moment of the Chapter 13 filing, the automatic stay under the Bankruptcy Code came into place. In a Chapter 13 case it continues throughout the life of the case, which usually means it lasts for three to five years until completion of the plan or dismissal of the case.”

So IRS had notice of the plan, and should have backed off on collection. IRS however failed to back off and on numerous occasions sought payment and in fact served levies on Social Security payments even though the Hunsakers’ attorney contacted IRS and reminded IRS of the stay and the illegality of the IRS collection actions.

At the Bankruptcy Court, the judge found a specific connection between the IRS misconduct and an increase and aggravation of the Hunsakers’ anxiety and stress and awarded them $4,000 on account of that stress and anxiety, which in the judge’s opinion contributed to the onset and severity of Mrs. Hunsaker’s migraines. In reaching that conclusion, the bankruptcy court relied on and discussed a 9th Circuit case, In re Dawson that, on reconsideration, concluded that emotional distress stemming from violations of the bankruptcy stay can give rise to actual damages even if the debtor suffers no pecuniary losses.

On appeal, the district court noted that Dawson did not address the government’s violations of the stay; that case involved a private creditor. That was a key difference.

I will avoid the temptation to provide the NSFW link to Mel Brooks’ History of the World Part 1 where he reminds us that it is indeed good to be the king. While we no longer have royalty, sovereign immunity remains and limits the opportunities for private parties to sue the government. It stems from the adage that the king can do no wrong. While IRS most certainly can and does do wrong, the principle protects IRS from damages unless there is a specific and clear Congressional expression allowing the government to be sued.

The district court provided the framework:

Section 106(a) of the Bankruptcy Code clearly waives sovereign immunity for some claims under § 362(k). See 11 U.S.C. § 106(a) (“[S]overeign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to . . . [§] 362[.]”). Section 362(k) allows individual debtors injured by a creditor’s willful violation of the automatic stay to recover “actual damages.”

The opinion then goes on to discuss how in Dawson the 9th circuit provided that “allowing emotional distress damages best fulfills legislative intent to protect debtors from excessive psychological and emotional harm.” But that was not enough for the Hunsakers, as the creditor in Dawson was a private party and not Uncle Sam:

That emotional distress damages are available against private parties does not automatically authorize them against the federal government. After all, “when it comes to an award of money damages, sovereign immunity places the Federal Government on an entirely different footing than private parties.” Lane v. Pena, 518 U.S. 187, 196 (1996).

The opinion discusses how that different footing requires a clear expression that Congress meant for the government to be sued, and the district court said that was not present in these circumstances:

The Dawson court concluded the phrase “actual damages” was ambiguous even given the text and context of § 362(k) as a whole. 390 F.3d at 1146. The legislative history discussed in Dawson cannot waive sovereign immunity where the text of § 362(k) otherwise remains ambiguous. See Cooper, 132 S. Ct. at 1448 (“Legislative history cannot supply a waiver that is not clearly evident from the language of the statute.”). Because the phrase “actual damages” is ambiguous, this Court must construe § 362(k) in favor of immunity. See id. (any ambiguities in the statutory language must be strictly construed in favor of immunity, including ambiguities regarding the scope of the waiver). Reinforcing this conclusion is the fact that, before concluding “actual damages” includes emotional distress damages, the Dawson panel came to the opposite conclusion in an opinion it later withdrew. Dawson v. Washington Mutual Bank, F.A., 367 F.3d 1174 (9th Cir.), withdrawn, 385 F.3d 1194 (9th Cir. 2004). The two Dawson opinions provide compelling proof that any waiver of sovereign immunity as to emotional distress damages in § 362(k) is, at best, implicit.

(emphasis added).

The cite in the above block quote is to a 2012 Supreme Court case, F.A.A. v. Cooper, 132 S. Ct. 1441, 1448 (2012). The district court notes that Cooper supports its holding as well, as in that case the Supreme Court in examining a possible cause of action under the Privacy Act looked to “essentially the same question: if a statute waives sovereign immunity for “actual damages,” does that waiver include emotional distress damages? Id. at 1447–48. The Supreme Court answered no.”

Parting Thoughts

For good measure, the Hunsaker opinion discusses how even if there were no sovereign immunity issue it was skeptical that in fact there was an injury that was sufficient to warrant damages anyway, pointing to “alleged only brief losses of appetite, stress, and mounting frustration after receiving the IRS notices.” When I wrote my original post on the bankruptcy court case I said I was somewhat surprised at the outcome and I am not surprised that the district court reversed. On the other hand, the IRS conduct in this case is nothing to write home about.

I understand the government wanting to limit the possibility that other debtors similarly suffering from IRS mistakes in this process would sue and connect their stress from the IRS mistakes to an award, even a smallish one. It does seem that there should be some ramification for IRS mistakes, especially when the mistakes are repeated and the taxpayer/debtor has made a good faith effort to ensure that the government is aware of the stay. I note that Congress last systematically looked at these issues was in 1998 when it added Section 7433(e), allowing for an alternate statutory hook for taxpayers to petition the bankruptcy court for actual, direct economic damages and costs of the action if the IRS willfully violated the automatic stay injunction (7433(e) is also now the exclusive means for IRS violations of the discharge). I am not aware how often IRS whiffs on respecting these provisions so perhaps the issue is one rarely encountered in practice.

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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