The United States Bankruptcy Code, when used in a timely and systematic way, is a powerful law that may allow both consumer and business debtors to wipe out some debts and to substantially restructure others. To protect the filing debtor and allow the bankruptcy case to proceed, Section 362 of the Code prohibits most creditors from pursuing collection against the filing debtor under what is commonly known as the “automatic stay”.
But what if the creditor is the United States or, more particularly, the Internal Revenue Service?
Operation of the Automatic Stay under Section 362
Section 362(a) of the Bankruptcy Code provides that the filing of a Bankruptcy Petition “operates as a stay, applicable to all entities” of various forms of collection. Creditors and other parties are broadly stayed – or stopped – from continuing litigation, lien enforcement and other actions, judicial or otherwise, that are attempts to enforce or collect claims against the filing debtor or property of the bankruptcy estate. See Collier on Bankruptcy, 16th Edition, P 362.01 (2018).
In most cases, the “stay” is “automatic” in that the filing of the bankruptcy petition, alone, is effective to impose a duty on creditors and other parties. There is no formal notice or service of process that is required to subject a party to the stay. See Job v. Calder (In re Calder), 907 F.2d 953 (10th Cir. 1990); Smith v. First Am. Bank, N.A. (In re Smith), 876 F.2d 524 (6th Cir. 1989).
The automatic stay is frequently used by debtors are to halt sheriff’s sales, wage garnishments, and the seizure of personal property such as a vehicle or deposits in a bank account.
Sanctions for Violation of the Automatic Stay
Creditors may be sanctioned for taking action in violation of the automatic stay under 11 U.S.C. § 362(k). Creditors who receive notice of the bankruptcy filing, even if the notice is informal or oral, may be required to pay damages to a debtor for any willful violation of the stay.
An individual injured by a willful violation of the stay can “recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages. 11 U.S.C. § 362(k). “Actual damages” under Section 362(k) may include claims of damages for emotional distress. See Lodge v. Kondaur Capital Corp., 750 F.3d 1263, 71 C.B.C.2d 758 (11th Cir. 2014); In re Dawson, 390 F.3d 1139, 1148 (9th Cir. 2004); and Fleet Mortgage Group, Inc. v. Kaneb, 196 F.3d 265 (1st Cir. 1999).
Hunsaker v. United States
In Hunsaker v. United States, 2018 U.S. App. LEXIS 24721 (9th Cir., August 30, 2018), the Court of Appeals for the Ninth Circuit considered whether the Internal Revenue Service could be sanctioned for actions which were admittedly willful violations of the automatic stay and had caused damages.
The Hunsakers filed a Chapter 13 Bankruptcy Petition in an Oregon Bankruptcy Court and notified the IRS of the bankruptcy filing relating to federal tax collection. “Despite being notified of the couple’s bankruptcy, the IRS sent four notices to the Hunsakers demanding payment and threatening imminent enforcement action, including a levy on Social Security benefits.” Hunsaker at 24723.
The Hunsakers sought $4,000.00 in damages for emotional distress against the IRS for the willfull violation of the automatic stay under Section 362(k). The IRS argued that United States had not agreed to be liable for emotional distress damages under the doctrine of Sovereign Immunity.
“Sovereign immunity shields the United States from suit absent a consent to be sued that is ‘unequivocally expressed.'” United States v. Bormes, 568 U.S. 6, 9–10 (2012). Section 106(a) of the Bankruptcy Code provides various waivers by the federal government of its sovereign immunity.
In Hunsaker, the Ninth Circuit held that the IRS could be held liable for emotional distress damages to the Hunsakers. The Court disagreed with the First Circuit Court of Appeals decision in United States v. Rivera Torres (In re Rivera Torres), 432 F.3d 20 (1st Cir. 2005), which held that emotional distress damages were not among the waivers of sovereign immunity in Section 106(a).
This case presents yet another example that the current political disposition of the federal circuit in which your cause of action arises, as well as the the law and the facts of your case, are important factors in the result of any case.