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When a private party violates the law, there are often consequences. This is especially true for the automatic stay that protects individuals in bankruptcy from collections actions during the bankruptcy proceeding. In Hunsaker v. United States, Case No. 6:16-cv-00386-MC, the Ninth Circuit Court of Appeals concluded that the IRS’s repeated violations of these laws does not allow for an award of damages for emotional distress.
The Bankruptcy Automatic Stay
Once a bankruptcy petition is filed, Bankruptcy Code § 362(a)(1) prohibits “the commencement or continuation, including the issuance or employment of process, of a judicial, administrative or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case. . . .”
This is commonly referred to as the automatic stay against collections. It prevents creditors from pursuing collection actions while the bankruptcy case is open.
Bankruptcy Code Section § 362(k) goes on to say that a willful violation of the automatic stay entitlse the debtor to recover actual damages, including costs and attorneys fees, as well as punitive damages in appropriate circumstances.
IRS Collections Notices Violate the Automatic Stay
Once the automatic stay is in place, most efforts by the IRS to collect an unpaid tax debt violate the automatic stay. This includes IRS sending collection notices. In Hunsaker, these notices include:
- A notice of intent to levy, and a demand for payment.
- A notice of levy on Social Security benefits and a demand for payment.
- A notice of intent to seize (“levy”) state tax refund “or other property” and demanding payment.
- A levy on Social Security benefits and a demand for payment.
The IRS conceded that these actions violated the automatic stay.
The IRS’s Sovereign Immunity
The IRS generally enjoys sovereign immunity, so it cannot be sued for a recovery of damages. There are exceptions. Section 106 of the Bankruptcy Code is one such exception.
Section 106 says that sovereign immunity is waived for violation of Section 362 of the Bankruptcy Code, which deals with the automatic stay.
The bankruptcy court in Hunsaker concluded that this language allowed the court to award damages for emotional distress for violations of the automatic stay. The court awarded the Hunsakers $4,000 for emotional distress related to the four IRS collection actions that violated the automatic stay.
Actual Damages Does Not Include Emotional Distress
On appeal, the Ninth Circuit considered the language in Section 106 of the Bankruptcy Code and prior case law.
It concluded that the term “actual damages” does not include damages for emotional distress. In construing its prior case law, it noted that damages for emotional distress are available when a private party violates the automatic stay, but not between the IRS violates the automatic stay.
The appeals court was not persuaded by the bankruptcy court’s reasoning that the term “actual damages” includes damages for emotional distress because the term “emotional distress” is not specifically set out in Section 106. According to the bankruptcy court, because the term “actual damages” is not defined to include different types of damages, by excluding damages for emotional distress, it could be argued that all types of damages could be excluded from the definition of “actual damages.”
The appeals court concluded that it would not be possible to exclude “economic damages,” when construing the term “actual damages.” So it reversed the bankruptcy court’s award of damages for emotional distress.
Given the repeated violations of the automatic stay here, and the fact that the debtor’s attorney had specifically notified the IRS that its actions violated the automatic stay and the IRS did not stop its collection actions, the bankruptcy court should have awarded the debtor punitive damages. Punitive damages are intended to penalize this type of behavior. Unlike damages for emotional distress, Section 106 of the Bankruptcy Code specifically allows for punitive damages.