NACBA Helps Debtor Win on Sovereign Immunity Issue

Posted by NCBRC - September 6, 2018

“Sovereign immunity does not preclude an award of emotional distress damages against the United States for willful violation of the Bankruptcy Code’s automatic stay.”  Hunsaker v. U.S.A., No. 16-35991 (9th Cir. Aug. 30, 2018).

After Jonathan and Cheryl Hunsaker filed for chapter 13 bankruptcy the IRS continued to send them collection notices. The bankruptcy court found the IRS’s conduct was a willful violation of the automatic stay under section 362(k) and awarded damages for emotional distress. The district court reversed on the grounds that Congress did not waive sovereign immunity for emotional distress damages.

The Hunsakers appealed and NACBA/NCBRC filed an amicus brief in support of reversal.

On appeal, the Ninth Circuit was faced with the question of whether section 106(a)’s waiver of sovereign immunity for a “money recovery,” other than punitive damages, based on willful violation of the automatic stay under section 362(k) includes damages for emotional distress. Section 362(k) permits recovery of “actual damages” based on willful violation of the automatic stay and in Dawson v. Washington Mutual Bank, F.A. (In re Dawson), 390 F.3d 1139, 1148 (9th Cir. 2004), the court determined that “actual damages” includes damages for emotional distress.

To the extent there is ambiguity in the scope of a waiver of sovereign immunity, courts will interpret the waiver narrowly in favor of the government. Therefore, the circuit court began with the plain language of section 106(a). There, the court found the only limitation on the monetary damages was for punitive damages. Under this broad provision, the court reasoned, Congress clearly waived sovereign immunity for all other monetary awards including emotional distress damages where those damages were permitted by the underlying statute.

The court rejected the government’s argument that section 106(a)’s reference to “money recovery” was limited to recovery of money unlawfully held by the government. If, as the government argued, the waiver applied only to the return of money already held by the government, there would have been no need for Congress to have included the exception for punitive damages.

The court noted that its decision ran counter to the holding in United States v. Rivera Torres (In re Rivera Torres), 432 F.3d 20 (1st Cir. 2005), where the First Circuit held that Congress had not waived sovereign immunity for emotional distress damages awarded under section 105 of the Bankruptcy Code. In Rivera Torres, the court took a temporal approach, looking to the remedies available when section 106(a) was enacted and finding that damages for emotional distress were not available. The Ninth Circuit disagreed with its sister court’s interpretation of section 106(a)(5), which prohibits creation of any substantive law, as creating a temporal limitation on available remedies. Rather, the Hunsaker court found that section 106(a)(5) merely demands that the party claiming waiver of immunity show a basis for his or her claim in a source outside the waiver provision. Furthermore, the court found that, even in 1994, section 362(k) permitted an award of damages for emotional distress and, on that basis alone, the government’s argument failed.

The court reversed the decision of the district court and remanded to allow the bankruptcy court to address the merits of the Hunsaker’s claim against the government.

Hunsaker 9th Cir Aug 2018

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