United States Bankruptcy Appellate Panel

For the Eighth Circuit

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No. 15-6013

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In re: John Lloyd Broos; Carol Jean Broos

lllllllllllllllllllllDebtors

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John Lloyd Broos; Carol Jean Broos

lllllllllllllllllllll Plaintiffs - Appellants

v.

United States of America

lllllllllllllllllllll Defendant - Appellee

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Appeal from United States Bankruptcy Court 

for the District of Minnesota - St. Paul

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 Submitted: July 6, 2015

 Filed: July 16, 2015

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Before SCHERMER, NAIL, and SHODEEN, Bankruptcy Judges. 

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SCHERMER, Bankruptcy Judge
John Lloyd Broos and Carol Jean Broos(Debtors) appeal from the Bankruptcy

Court’s order substituting the named defendants, several employees of the Internal 1

Revenue Service (IRS), for the United States, and dismissing their complaint. The

Debtors’ complaint alleged violations of 26 U.S.C. § 7433 and 11 U.S.C. § 524. We

have jurisdiction over this appeal. 28 U.S.C. § 158(b). We affirm.

ISSUES

1. Was it proper to substitute the United States as the defendant?

2. Was it proper to deny the Debtors’ request for entry of default judgment?

3. Did the Debtors have standing to bring an action for damages without first

following the remedies under 26 U.S.C. § 7433?

BACKGROUND

On July 21, 2009, the Debtors filed a petition for Chapter 7 relief. On their

schedules, the Debtors listed the IRS as an unsecured creditor holding a claim in the

amount of $249,085. They received a discharge on October 21, 2009.

Following the close of their Chapter 7 case, several IRS employees including,

TimSherrill, Bart Brellenthin, G.J. Carter-Louis, V.A. Ris, and Michael W. Cox (IRS

employees), issued IRS levies and filed Notices of Federal Tax Liens with respect to

the Debtors’ federal tax debt.

The Honorable Gregory F. Kishel, Chief Judge, United States Bankruptcy

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Court for the District of Minnesota.

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The Debtors filed their adversary proceeding, naming each IRS employee as

a defendant. The complaint alleges that the IRS employees violated 26 U.S.C. § 7433

by issuing levies and filing the Notices of Federal Tax Liens. As a result, the Debtors

seek actual and punitive damages.

The United States, believing itself to be the proper party defendant, filed a

motion to dismiss. The Bankruptcy Court subsequently entered an order substituting

the United States as the sole defendant, denying the Debtors’ request for default

judgment, and dismissing the Debtors’ complaint. The Debtors timely appealed. 

STANDARD OF REVIEW

We review the Bankruptcy Court’s findings of fact for clear error and its

conclusions of law de novo. Wilson v. Walker (In re Walker), 528 B.R. 418, 427

(B.A.P. 8th Cir. 2015) (citing Heide v. Juve (In re Juve), 761 F.3d 847, 851 (8th

Cir.2014)). All three issues before us involve purely legal questions. Therefore, we

exercise de novo review with respect to all three.

DISCUSSION

1. Substitution of the United States was Proper because the United States is

the Proper Party Defendant

In general, a private litigant may not sue the United States or any of its officers

and employees without a waiver ofsovereign immunity. United States v. Nordic Vill.

Inc., 503 U.S. 30, 33-34(1992). Section 7433 of the Internal Revenue Code provides

such a waiver. It permits suits against the United States only:

If, in connection with any collection of Federal tax with respect to a

taxpayer, any officer or employee of the Internal Revenue Service

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recklessly or intentionally, or by reason of negligence, disregards any

provision of this title, or any regulation promulgated under this title,

such taxpayer may bring a civil action for damages against the United

States ... (emphasis added).

26 U.S.C. § 7433(a). 

Individual federal employees may not be sued for actions taken in the

performance of their official duties. See Searcy v. Donelson, 204 F.3d 797, 798 (8th

Cir. 2000) (collecting cases). Sovereign immunity still applies in such cases. Id. As

a result, the Debtors may not bring suit against the IRS employees under § 7433

because the actionsthat the Debtors allege violated § 7433–the issuance of levies and

filing of notices of federal tax liens–were performed in the IRS employees’ official

capacities as tax collectors. 

The issuance of levies and the filing of notices of federal tax liens are actions

to collect federal tax debt. “Official-capacity suits typically involve either allegedly

unconstitutional state policies or unconstitutional actions taken by state agents

possessing final authority over a particular decision.” Nix v. Norman, 879 F.2d 429,

431 (8th Cir. 1989). Actions to collect federal tax debt do not fit either description.

Indeed, it is difficult to imagine what actions would be included in the IRS

employees’ official duties if not the ones at issue here. We conclude that the claims

brought against the IRS employees are barred by sovereign immunity because the

employees were acting in their official capacities. As a result, the United Statesisthe

proper party defendant and substitution of the United States for the IRS employees

as the party defendant was proper.

2. The Debtors were not Entitled to Default Judgment

The Debtors argue that they are entitled to default judgment against either the

IRS employees or the United States. Default judgment is appropriate “[w]hen a party

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against whom a judgment for affirmative relief is sought has failed to plead or

otherwise defend, and that failure is shown by affidavit or otherwise...” Fed. R. Civ.

P. 55(a); Fed. R. Bankr. P. 7055. Default judgment may only be entered against the

United States, its officers, or its agencies “if the claimant establishes a claim or right

to relief by evidence that satisfies the court.” Fed. R. Civ. P. 55(d); Fed. R. Bankr. P.

7055.

The Debtors are not entitled to default judgment against the IRS employees or

the United States. Since the IRS employees were not the proper party defendants, an

entry of default judgment against the IRS employees would be inappropriate under

Rule 7055 because they are not parties to this proceeding and the Debtors have no

right to relief. An entry of default judgment against the United States is improper as

well. The United States did not fail “to plead or otherwise defend” its position

because it timely entered its appearance before the Bankruptcy Court. Under the

circumstances, therefore, denial of default judgment against the IRS employees and

the United States was appropriate.

3. Dismissal was Proper because the Debtors Lack Standing to Bring an

Action Under 26 U.S.C. § 7433 and 11 U.S.C. § 524

The Debtors may not bring an action for damages under § 7433 because they

have failed to exhaust their administrative remedies. 26 U.S.C. § 7433(d). Section

7433(b)(1) permits recovery of actual damages and costs when a violation occurs. A

bankruptcy court may also award damagesfor willful violations of the automatic stay

under 11 U.S.C. § 362 and the discharge injunction under 11 U.S.C. § 524 committed

by employees of the IRS. 26 U.S.C. § 7433(e)(1). However, a bankruptcy court may

not award punitive damages. 11 U.S.C. § 106(a)(3). Importantly, actual damages may

not be awarded unless “the court determines that the plaintiff has exhausted the

administrative remedies available to such plaintiff within the Internal Revenue

Service.” 26 U.S.C. § 7433(d).

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The procedure a litigant must follow in order to exhaust their remedies under

§ 7433(d) for violations of the bankruptcy discharge under 11 U.S.C. § 524 is

enumerated in 26 CFR 301.7430-1 and 301.7433-2(e). A litigant must file a written

administrative claim for damages or for relief with the Chief, Local Insolvency Unit

for the corresponding judicial district in which the bankruptcy petition was filed. Id.

Such claimmust contain the taxpayer's name, taxpayer identification number, current

address, current home and work telephone numbers, the location of the bankruptcy

court in which the underlying bankruptcy case was filed, the case number of the

bankruptcy case in which the violation occurred, a description of the violation and

injuries, the dollar amount of the injuries, and the signature of the taxpayer or the

taxpayer’s representative. 26 CFR 301.7433-2(e). The taxpayer must then wait until

the earlier of six months or the date on which the IRS has rendered a decision on the

claim.

The Debtors have failed to do so. The Bankruptcy Court determined that the

Debtors had not filed an administrative claim for damages with the IRS. Therefore,

they may not bring an action for damages under § 7433. And, even if the Debtors did

have standing to bring a claim for actual damages under § 7433(b), their request for

punitive damages would be denied as such damages are unavailable as a matter of

law. 11 U.S.C. § 106(a)(3). Consequently, we must affirm the dismissal of the

Debtors’ complaint. If the Debtors wish to sue the government for violations of the

bankruptcy discharge under 11 U.S.C. § 524, they must first exhaust their

administrative remedies.

CONCLUSION

For the reasons stated, we affirm the Bankruptcy Court’s order dismissing the

Debtors’ complaint and substituting the United States as the sole defendant.

 

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