Debtors May Recover Damages for Emotional Distress from IRS

Posted by NCBRC - February 16, 2016

Sovereign Immunity does not preclude emotional distress damages for violation of the automatic stay by the IRS. Hunsaker v. United States (In re Hunsaker), 2016 Bankr. LEXIS 134, No. 12-64782, Adv. Proc. 14-6218 (Bankr. D. Or. January 13, 2015).

When the Hunsakers filed for chapter 13 bankruptcy the IRS filed a claim for over $9,300. Though the case was complicated by competing claims against the debtors’ homestead property and the county’s assertion that the homestead constituted an unlawful partition, a plan was confirmed and the Hunsakers maintained their plan payments. During the course of the case, while the automatic stay was in force, the IRS sent the Hunsakers four notices demanding payment and threatening various enforcement actions including seizing Social Security payments, a state tax refund, and other property. In response to two of the notices, the debtors’ attorney sent the IRS a letter informing it of the bankruptcy and demanding that the collection efforts cease. At their adversary proceeding the Hunsakers testified to the stress these collection efforts caused. Mrs. Hunsaker suffered migraine headaches within hours of receiving the notices, and they suffered anxiety over the threat to levy the Social Security income as that would render their plan infeasible. The stress was exacerbated by the difficulty of their case due to the homestead issues and the fact that the threats continued despite their attorney’s assurances that they could not be lawfully carried out.

The IRS conceded that its actions violated the automatic stay but argued that, as a governmental entity, it could not be charged with damages for emotional distress.

Noting that Ninth Circuit precedent, Dawson v. Washington Mutual Bank (In re Dawson), 390 F.2d 1139 (9th Cir. 2004), permits awards of emotional distress damages for stay violations, the bankruptcy court looked to sections 106 and 362(k) to determine the impact of sovereign immunity on the issue.

Section 106 provides:

(a) Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following: (1) Sections. . .362

(3) The court may issue against a governmental unit an order, process, or judgment under such sections or the Federal Rules of Bankruptcy Procedure, including an order or judgment awarding a money recovery, but not including an award of punitive damages. . . .

Section 362(k) provides for an award of “actual damages” in recompense for a violation of the automatic stay.

The IRS argued that because its sovereign immunity was not explicitly waived for emotional distress awards it remains in place with respect to those claims. The bankruptcy court disagreed finding that the IRS’s reading of the provision would put all damage claims out of reach. Rather, it read section 106(a)(3) to say that immunity is waived as to all claims except those for punitive damages.

The court turned to the standards for awarding emotional distress damages finding that the debtor must prove significant harm and a causal connection between the harm and the creditor’s actions. “Significant,” means the claim for emotional distress must not be frivolous, and the harm must not be trivial or insubstantial such that a “reasonable person” could suffer comparable injury. Testimony by the debtors as to the impact of the automatic stay violation may be sufficient proof without corroboration.

Turning to the evidence of emotional distress presented by the Hunsakers, the court found they met this standard. The threats of levy were significant in that, if carried out, they would have defeated the Hunsakers’ attempt to reorganize, and their continuation despite the debtors’ lawyer’s efforts to stop them, increased the sense of helplessness. Although the Ninth Circuit has not establish the level of proof necessary to show emotional harm, the court found that even under the most stringent standard of clear and convincing evidence, the Hunsakers proved their case.

For the appropriate amount of damages, the court noted that there was no evidence that the stay violation was a result of anything other than negligence. It awarded $3,000 to Mrs. Hunsaker and $1,000 to Mr. Hunsaker. The IRS has filed an appeal to the District Court.

Hunsaker Bankr D Or opinion

[Contrast this case with United States v. Rivera Torres, 432 F.3d 20 (1st Cir. 2005), in which the court found that sovereign immunity was not waived for emotional distress damages based on violation of the discharge injunction because in 1994, when section 106 was enacted, damages for emotional distress under section 105(a) were generally not available to private parties. The fact that such damages may be available currently was held to be irrelevant to the inquiry.]


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