Opinion
CASE NO. 92-05406 (GAC)
October 16, 2001
DECISION AND ORDER
The debtors filed a voluntary petition tinder Chapter 7 of the Bankruptcy Code and on January 19, 1993, this Court entered an order discharging plaintiff from certain debts, including a 1985 tax liability to the United States Revenue Service ("IRS"). (Dkt. # 21). Subsequently, the IRS reversed the litigation codes for the debtors' tax accounts, reactivating collection efforts for the discharged tax debt. Attempts to collect the tax liability included collection notices and telephonic conversations. In August 1996, the IRS applied a 1995 tax refund to the discharged 1985 tax liability.
The IRS filed a motion for summary judgment requesting that the Court dismiss with prejudice an action for contempt for violation of the discharge injunction filed by the debtors (Dkt. # 80*). The debtors filed an opposition and a cross motion for partial summary judgment (Dkt. # 86) and the Court held a hearing on the matter.
The debtors allege that the IRS reactivated its collection efforts for the discharged tax liability in violation of 11 U.S.C. § 524, and is liable for actual damages, punitive damages, attorneys fees and litigation costs. The debtors contend that the fee award should be based on statutory, equitable and inherent contempt powers and/or the Equal Access to Justice Act ("EAJA"), 28 U.S.C. § 2412.
The IRS concedes that their collection practices violated the discharge injunction yet argues that notwithstanding the violation, the debtors are not entitled to the relief sought as a matter of law. The IRS contends that the debtors are not entitled to damages for emotional distress or punitive damages. The IRS contends that an award for attorneys fees and litigation costs must be consistent with both the relevant provisions of the EAJA, 28 U.S.C. § 2412 (d)(2)(A), and the IRS Code, 26 U.S.C. § 7430. The IRS argues that the debtors failed to exhaust the IRS administrative remedies as provided in Section 7430 and that by failing to comply with the applicable fee shifting statute, they are not entitled to an award for attorneys fees and costs. At the hearing, the IRS agreed it was liable for compensatory damages.
DISCUSSION
SUMMARY JUDGMENT STANDARD
Rule 56 of the Fed.R.Civ.P., made applicable to adversary proceedings by F.R.Bankr.P. 7056, provides that, "[t]he judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Material facts are those which might affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202.
SOVEREIGN IMMUNITY
The doctrine of sovereign immunity bars the imposition of monetary damages against the United States unless it specifically consents to be sued. Effective waivers of sovereign immunity are unequivocally expressed and are generally strictly construed. United States v. Nordic Village, Inc., 503 U.S. 30, 33-34 (1992). Such a waiver is expressed in section 106 of the Bankruptcy Code, which provides, in relevant part:
(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 105, 106, . . . 524 . . . of this title.
(2)The court may hear and determine any issue arising with respect to the application of such sections to governmental units.
(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. Such order or judgment for costs or fees under this title or the Federal Rules of Bankruptcy Procedure against any governmental unit shall be consistent with the provisions and limitations of section 2412(d)(2)(A) of title 28.
(4)The enforcement of any such order, process, or judgment against any governmental unit shall be consistent with appropriate nonbankruptcy law applicable to such governmental unit . . .11 U.S.C. § 106
Section 106 is a limited waiver of the IRS's sovereign immunity. However, Section 106 is not a provision for relief; it expressly sets forth that "[n]othing in this section shall create any substantive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law." 11 U.S.C.106. Therefore, although Congress waived the IRS's sovereign immunity regarding violations of the discharge injunction, the debtors must show there exists a outside source for relief to prevail in its claim for damages. In re Jove Encrineering, Inc. 92 F.3d 1539, 1548 (11th Cir 1996).
LIABILITy UNDER 11 U.S.C. § 524
Section 106 expressly waives the IRS' s sovereign immunity with respect to the discharge injunction statute, Section 524. Section 524 provides, in relevant part:
(a)A discharge in a case under this title —
(2)operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived . . . 11 U.S.C. § 524.
This Court finds that Section 524 only provides injunctive relief and is not a provision outside of Section 106 which authorizes an award for damages.
In Chambers v. Nasco, Inc., the Supreme Court warned the courts that "[blecause of their very potency, inherent powers must be exercised with restraint and discretion." 501 U.S. 32, 44-45 (1991). Following the Supreme Court's admonition and there being an alternate route to concede damages, this Court will not find the IRS liable for monetary damages based on the Court's inherent contempt power.
LIABILITY UNDER 11 U.S.C. § 105
Section 105 grants the Court authority to enforce the discharge order by granting the Court the statutory contempt powers "[t]o issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105 (a). Section 106 unequivocally waives the IRS's sovereign immunity with respect to Section 105. Therefore, Section 105 and 106 enable this Court to grant debtors the monetary relief that is "necéssary or appropriate," excluding punitive damages. This Court concludes that debtors may seek an award for damages for the IRS's violation of the discharge injunction, with the exclusion of punitive damages. There being no dispute regarding the IRS's willful violation of the discharge injunction, the issue now turns to what damages, if any, should be awarded.
DAMAGES
The Court concludes that the damages award must be consistent with both the relevant provisions of the EAJA, 28 U.S.C. § 2412 (d)(2)(A), and the IRS Code, 26 U.S.C. § 7430. See In re Hardy, 97 F.3d 1384, 1390-91, (11th Cir 1996); In re Jove Engineering, 92 F.3d at 1559-60; In re Grewe, 4 F.3d 299 (4th Cir. 1993). Section 7430 waives sovereign immunity for attorneys fees and costs "in any . . . court proceeding which is brought . . . against the United States in connection with . . . the collection . . . of any tax." 26 U.S.C. § 7430 (a). Section 7430 provides several prerequisites for an award of attorneys fees and costs. It provides that reasonable litigation costs may not be awarded ". . . unless the Court determines that the prevailing party has exhausted the administrative remedies available to such a party within the Internal Revenue Service." 26 U.S.C. § 7430 (b)(1).
Section 7430, however, does not define "administrative remedies." A regulation adopted by the Secretary of the Treasury sets forth the circumstances in which such administrative remedies are deemed to have been exhausted within the meaning of Section 7430. The relevant provision requires the following: (a) the party should submit a written claim to the district director of the district having jurisdiction and, (b) the district director should deny the relief in writing or fail to act on the claim in a reasonable amount of time. 26 C.F.R. § 301.7430-1 (d)(i) (ii).
The Court finds that the debtors have failed to submit a written claim for relief to satisfy the requirements of Section 7430. Because the debtors have not exhausted this administrative remedy, they may not at this time recover attorneys fees and costs under Section 7430. Also, the Court finds that the debtors are entitled to recover actual damages, including out of pocket expenses, transportation costs, loss of income, and emotional damages, if any, that they may have incurred in protecting their discharge injunction rights. The First Circuit Court of Appeals has held that emotional damages qualify as "actual damages." In re Fleet Mortgage Group, Inc. 196 F.3d 265 (1st Cir 1999). An evidentiary hearing is needed for this Court to determine what damages should be awarded.
ORDER
WHEREFORE, IT IS ORDERED that the motion for summary judgment filed by the IRS (Dkt. #80*) shall be, and it hereby is, DENIED, in part, and that the cross motion for summary judgment filed by Antonio Rivera Torres and Sofia Villata Sella (Dkt. #86) shall be, and it hereby is, GRANTED, in part, as specified above.
A scheduling conference on the evidentiary hearing is hereby set for February 8, 2002 at 10:00 a.m. at the U.S. Post Office and Courthouse Building, Courtroom 3, 300 Recinto Sur Street, Old San Juan.
The ten-day period for filing a motion to alter or amend this order, pursuant to F.R.Bankr.P. 8002(a), shall commence to run upon notice of entry.