Davis v. IRS
| Decision Date | 29 January 1992 |
| Docket Number | Civ. A. No. 91-129-N. |
| Citation | 136 BR 414 |
| Court | U.S. District Court — Eastern District of Virginia |
| Parties | Toni Lee DAVIS, Plaintiff/Appellee, v. INTERNAL REVENUE SERVICE, Defendant/Appellant. |
B. Cullen Gibson, Norfolk, Va., for plaintiff/appellee.
J. Phillip Krajewski, Asst. U.S. Atty., Norfolk, Va., Margaret M. Earnest, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., for defendant/appellant.
This matter comes before the court pursuant to 28 U.S.C. § 158(a) on appeal of the bankruptcy court's order of February 20, 1991. In its order of February 20, 1991, the bankruptcy court enjoined the Internal Revenue Service ("IRS") from proceeding against debtor Toni Lee Davis ("debtor") and ordered the IRS to pay debtor $475.00 in compensatory damages, $700.00 in attorney's fees, and $3,525.00 in punitive damages. 131 B.R. 50.
Debtor filed a chapter 13 petition in bankruptcy on September 23, 1988, and listed the IRS as a creditor. The IRS filed two proofs of claim: one for $1,358.90 and the other for $998.95. See Debtor Master Report by Frank J. Santoro, Standing Chapter 13 Trustee.1
On July 20, 1990, debtor commenced an adversary proceeding against the IRS by filing in bankruptcy court a two-count Complaint for Contempt and Damages ("complaint"). The basis for debtor's complaint was numerous alleged violations of the automatic stay of 11 U.S.C. § 362(a) by the IRS.2 In Count I, debtor asked the bankruptcy court to hold the IRS in contempt; to direct the IRS to release its attachment of debtor's 1989 tax refund; and to punish the IRS for its contemptuous behavior by assessing a fine, compensatory damages in the amount of $475.00, attorney's fees, and punitive damages. In Count II, debtor asked the bankruptcy court to award, pursuant to 11 U.S.C. § 362(h), actual damages, including costs and attorney's fees, and punitive damages.
The parties stipulated that notwithstanding the IRS's knowledge of debtor's bankruptcy filing, the IRS violated the automatic stay of 11 U.S.C. § 362(a) on three occasions: 1) on August 3, 1989, the IRS filed against debtor a garnishment; 2) on or about March 28, 1990, the IRS filed against debtor a Notice of Federal Tax Lien Under Internal Revenue Laws; and 3) in May, 1990, the IRS attached debtor's 1989 tax refund. Stipulation of Facts (Nov. 28, 1990).
The matter was tried by the bankruptcy court on November 30, 1990. The IRS argued at trial that it enjoys sovereign immunity from money damages in this action and, alternatively, that even if the IRS is not entitled to sovereign immunity from money damages, the facts and circumstances of this case do not warrant the assessment of punitive damages. Transcript at 14-18 (Nov. 30, 1990) ("Tr.").
After hearing testimony and argument of counsel the bankruptcy court took a brief recess and then articulated its ruling from the bench. The bankruptcy court found "absolutely no merit" in the IRS's claim of sovereign immunity3 and found the IRS to be "in contempt of court" for having violated the automatic stay of 11 U.S.C. § 362(a) "with reckless disregard." Tr. at 19, 21 (Nov. 30, 1990). Notwithstanding these findings the bankruptcy court imposed no money damages.4 Instead, the bankruptcy court imposed the following sanctions:
Tr. at 22 (Nov. 30, 1990). Counsel for debtor then was instructed to prepare an order setting forth the bankruptcy court's decision.
Counsel could not agree on the terms of the order. In particular, counsel disagreed on the contents of the "clean letter" and requested the bankruptcy court to clarify its ruling. See Letter of B. Cullen Gibson (Dec. 12, 1990). By letter of December 17, 1990, the bankruptcy court clarified its ruling, stating, in part, that the "clean letter" was to include a statement that as of November 30, 1990, debtor was in good standing, i.e., that no further tax problems existed. The IRS objected to providing the "clean letter," as clarified. Specifically, the IRS objected to stating that debtor was a taxpayer in good standing and that no further tax problems existed, except to the extent that it related to the payment of debtor's outstanding tax liabilities under debtor's chapter 13 plan. Notice of Filing (Jan. 8, 1991).5 As an alternative, the IRS submitted a proposed order.6 Following its receipt of the IRS's objections and proposed order, the bankruptcy court noticed counsel that a hearing had been scheduled for reargument and redecision of this matter. Notice of Hearing (Jan. 14, 1991).
On January 29, 1991, the matter came before the bankruptcy court for reargument and redecision. Following a brief hearing,7 during which the parties introduced no new evidence,8 the bankruptcy court ruled anew. The sanctions imposed by the bankruptcy court's decision of January 29, 1991, sharply contrasted with those imposed by its decision of November 30, 1990. The bankruptcy court found that the IRS's "utterly reckless disregard" of the automatic stay of 11 U.S.C. § 362(a) constituted an "assault" and justified not only the reaffirmation of the injunction against the IRS from proceeding against debtor but also justified the assessment of money damages. Tr. at 7-8 (Jan. 29, 1991). Accordingly, the bankruptcy court ordered the IRS to pay debtor $475.00 in compensatory damages, $700.00 in attorney's fees, and $3,525.00 in punitive damages.9 Tr. at 8-9 (Jan. 29, 1991).
The bankruptcy court's decision of January 29, 1991, was memorialized by its order of February 20, 1991, which was drafted by debtor's counsel and entered by the bankruptcy court without prior circulation to opposing counsel. It is from this order of February 20, 1991, that the IRS now appeals.
The IRS noticed seven issues for appeal.10 These seven issues raise three principal matters: 1) the scope of the injunction issued by the bankruptcy court enjoining the IRS from proceeding against debtor; 2) whether Congress, by virtue of 11 U.S.C. §§ 106 and 362, has waived the IRS's sovereign immunity from money damages; and 3) if the IRS's sovereign immunity from money damages has been waived, then whether the facts and circumstances of this case warrant the assessment of compensatory and/or punitive damages.11
A proceeding to prosecute a violation of the automatic stay of 11 U.S.C. § 362 is a core proceeding within the meaning of 28 U.S.C. § 157(b)(1) and (2). Budget Serv. Co. v. Better Homes of Virginia, Inc., 804 F.2d 289, 293 (4th Cir.1986). The standard of review for a core proceeding is set forth in Bankruptcy Rule 8013. Pursuant to Bankruptcy Rule 8013, the bankruptcy court's findings of fact are not to be set aside unless they are "clearly erroneous." The bankruptcy court's conclusions of law, however, are subject to de novo review. See, e.g., Brown v. Mt. Prospect State Bank (In re Muncrief), 900 F.2d 1220, 1224 (8th Cir.1990); Arizona Appetito's Stores, Inc. v. Paradise Village Inv. Co. (In re Arizona Appetito's Stores, Inc.), 893 F.2d 216, 218 (9th Cir.1990); Bangert v. McCauley (In re McCauley), 105 B.R. 315, 318 (E.D.Va.1989).
The bankruptcy court's order of February 20, 1991, provides, in part, "that the IRS is enjoined from proceeding against the Debtor. . . ." Order at 3 (Feb. 20, 1991). No language qualifying or limiting the scope of this injunction is included in this order, and the IRS objects to such to the extent it can be interpreted as precluding the IRS from proceeding against debtor in a lawful manner in the future. The court finds legal merit in the IRS's argument. The bankruptcy court may not enjoin the IRS from proceeding in the future against a debtor in a lawful manner. Therefore, the bankruptcy court's order of February 20, 1991, enjoining the IRS from proceeding against debtor is REVERSED to the extent it precludes the IRS from proceeding against debtor in a lawful manner in the future.12
The United States may not be sued absent a waiver of its sovereign immunity. See, e.g., Block v. North Dakota, 461 U.S. 273, 280, 103 S.Ct. 1811, 1816, 75 L.Ed.2d 840 (1983); United States v. Mitchell, 445 U.S. 535, 538, 100 S.Ct. 1349, 1351, 63 L.Ed.2d 607 (1980). Only Congress can waive the United States' sovereign immunity, and such waivers are to be construed strictly. See United States v. Sherwood, 312 U.S. 584, 587, 590, 61 S.Ct. 767, 770, 771, 85 L.Ed. 1058 (1941). On appeal, the IRS argues that Congress has not waived the IRS's sovereign immunity from money damages under 11 U.S.C. § 362(h) for violations of the automatic stay of 11 U.S.C. § 362(a). The court disagrees and concludes that, in limited situations in the bankruptcy context, Congress specifically has waived sovereign immunity for governmental units such as the IRS.
Title 11 U.S.C. § 106 provides three instances in which Congress has waived sovereign immunity for governmental units in bankruptcy cases. First, when a governmental unit asserts a claim, subsection (a) waives the government's sovereign immunity for any claim that is property of the estate and arises "out of the same transaction or occurrence" as the government's claim. Second, regardless of whether the estate's claim against the government arises out of the same transaction or occurrence as the government's claim, subsection (b) waives sovereign immunity for any claim against the government that is property of the estate, but only up to the allowed amount of the...
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