Source: https://procedurallytaxing.com/district-court-reverses-bankruptcy-court-and-finds-that-emotional-distress-alone-insufficient-to-justify-awarding-of-damages-when-irs-violates-stay-on-collection/
Timestamp: 2019-04-21 10:12:56+00:00

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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.
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.
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 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.
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.

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