District Court Oversteps on Issue of Sovereign Immunity in Section 362

Posted by NCBRC - November 8, 2016

Sovereign immunity precludes a damages award for emotional distress based on the IRS’s violation of the automatic stay. Hunsaker v. United States, No. 16-386 (D. Or. Oct. 20, 2016). The district court reversed the bankruptcy court’s damage award (blogged here), finding that sovereign immunity can be waived only by “unequivocal, clear statutory language. F.A.A. v. Cooper, 132 S. Ct. 1441, 1448 (2012).”

The district court began with the premise that the scope of any waiver of sovereign immunity must be strictly construed in favor of the United States. It then looked to the relevant waiver provision in the Code. Section 106 waives sovereign immunity with respect to actions under section 362. Section 362(k) provides: “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” In In re Dawson, 390 F.3d 1139 (9th Cir. 2004), the Ninth Circuit determined that the term “actual damages,” as used in section 362(k), was ambiguous but that the legislative history of section 362 indicated Congress’s intent to protect debtors from serious psychological harm. Based on that, the circuit court concluded that damages for emotional distress are “actual damages.”

This should have been an end to the matter: sovereign immunity was waived for “actual damages,” emotional distress is an “actual damage.” The district court did not end there, however. In finding sovereign immunity precluded emotional distress damages, the district court reasoned that, notwithstanding the Ninth Circuit’s finding in Dawson, there was lingering doubt as to the inclusion of emotional distress damages under the heading “actual damages.” In the opinion of the court, the doubt arose out of the fact that the Dawson panel initially found actual damages did not include emotional distress but later withdrew that opinion and entered the opposite result. Dawson v. Washington Mutual Bank, F.A., 367 F.3d 1174 (9th Cir.), withdrawn, 385 F.3d 1194 (9th Cir. 2004). From this, the district court concluded that there are many plausible interpretations of the term “actual damages,” and that in light of the ambiguity, the term must be interpreted in favor of the government. Further, the court found the fact “[t]hat emotional distress damages are available against private parties does not automatically authorize them against the federal government.”

In so holding, the court relied in part on the decision in FAA v. Cooper, 132 S. Ct. 1441 (2012). In that case, the Supreme Court was faced with the question of whether Congress’s waiver of sovereign immunity for actual damages caused by violation of the Privacy Act, was broad enough to encompass damages for emotional distress in the absence of pecuniary loss. The Court found that the phrase “actual damages” is open to interpretation depending upon the “particular context in which the term appears.” In the face of ambiguity, the Court looked to the specific history, purpose and language of the Privacy Act and found that it was comparable to the common law torts of libel per quod and slander, which require a showing of pecuniary harm. In light of the fact that it was dealing with a waiver of sovereign immunity, the Court held that Congress did not intend to include emotional distress damages in its definition of “actual damages.” Cooper turned on the Supreme Court’s disagreement with the Ninth Circuit on the issue of what constitutes “actual damages” within the meaning of the Privacy Act.

Unlike the Supreme Court in Cooper, however, the district court in Hunsaker was not called upon to determine whether the Ninth Circuit’s precedential holding that “actual damages” includes those based on emotional distress. Yet that is essentially what it did.



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