Langston v. Internal Revenue Serv. (In re Langston)

• Citation: 600 B.R. 817
• Decision Date: 27 March 2019
• Docket Number: Adv. Proceeding No. 17-1044-B,Case No. 17-10236-B-13
• Parties: IN RE Paul Dayton LANGSTON and Kathleen Louise Langston, Debtors. Paul Dayton Langston and Kathleen Louise Langston, Plaintiffs, v. Internal Revenue Service, Defendant.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Eastern District of California

600 B.R. 817

IN RE Paul Dayton LANGSTON and Kathleen Louise Langston, Debtors.

Paul Dayton Langston and Kathleen Louise Langston, Plaintiffs,

v.Internal Revenue Service, Defendant.

Case No. 17-10236-B-13

Adv. Proceeding No. 17-1044-B

United States Bankruptcy Court, E.D. California, Fresno Division.

Date: March 20, 2019

Signed March 27, 2019

Gabriel J. Waddell, Fresno, CA, for Plaintiffs.

Jonathan M. Hauck, Washington, DC, for Defendant.

MEMORANDUM DECISION

René Lastreto II, Judge

INTRODUCTION

Even the Internal Revenue Service ("IRS" or "Defendant") must obey the bankruptcy code's automatic stay. If the IRS willfully violates the stay, it is liable for an individual debtor's actual damages including costs and attorney's fees. The IRS, here, admittedly violated the automatic stay by offsetting taxes owed pre-petition with the debtors' annuity payments to be received post-petition. Before filing an administrative claim for relief with the IRS, the debtors filed an adversary proceeding. After a trial on the severed issue of actual damages, this court ruled the debtors could not prove the actual damage claim.

The debtors' attorney's fees are a different story. Two provisions of the Internal Revenue Code ( 26 U.S.C. §§ 7430 ; 7433) and related regulations ( 26 C.F.R. 301.7430-1(a) and (e) ; 301.7433-2) require the debtors to exhaust administrative remedies before filing an adversary proceeding to recover their attorney's fees for the automatic stay violation. The necessary administrative claim must first be filed with the "Chief, Local Insolvency Unit, for the judicial district in which the bankruptcy petition" was filed. 26 C.F.R. 301.7433-2(e).

But there is a problem: there is no "Chief, Local Insolvency Unit, for the judicial district." The IRS now concedes after nearly two years of litigation that after filing the adversary proceeding the debtors did properly file an administrative claim - they just needed to file it before the adversary proceeding was filed.

While the current application of this exhaustion requirement appears to be regulatory legerdemain, our circuit requires exhaustion. The broad waiver under 11 U.S.C. § 106 must be tempered by the relevant provisions of the Internal Revenue code that require exhaustion of administrative remedies before the IRS can be found to have waived their sovereign immunity. For that reason and because the IRS now concedes the debtors here have satisfied the requirements, the court is constrained to dismiss the attorney's fees claim without prejudice for lack of subject matter jurisdiction.

FACTS

Paul Langston ("Paul") once worked for the Federal Government. While he worked there, Paul earned a defined benefit annuity payment which was administered by The Office of Personnel Management ("OPM") who distributed those payments to Paul. He also owed nearly $ 88,000.00 to the IRS.

Paul and his wife, Kathleen, (collectively "Langston," "Langstons," of "Plaintiffs") filed this Chapter 13 case in January 2017. About two weeks later, the IRS learned of the Langstons' bankruptcy case. In less than a week, the IRS filed a claim in the bankruptcy case. About two months after this case was filed, and while the automatic stay ( 11 U.S.C. § 362(a) )¹ was in effect, Paul received a letter from OPM telling him the IRS would be withholding $ 339.17 of his April 3, 2017 annuity payment "because [Paul] owe[s] the Government." The IRS withheld Paul's post-petition annuity payments for the months of April through July 2017.

After the failure of informal attempts by the Langstons' counsel to convince the IRS to return the payments, the Langstons filed this adversary proceeding on May 3, 2017. The Langstons did not pursue any administrative remedies until after this suit was filed. But, the IRS returned the April and May annuity payments within two weeks after the adversary proceeding was filed and the June and July payments shortly thereafter. The IRS released the OPM levy on June 23, 2017 and notified Langstons' counsel.

The IRS answered the complaint. Then, Langstons' counsel tried without success to find the right "Chief, Local Insolvency Unit" to receive an administrative claim. Many web searches and even formal discovery was met with no identified "Chief, Local Insolvency Unit." Exasperated, Langstons' counsel sent the administrative claim addressed to "Chief, Local Insolvency Unit" to every IRS office located within this district. The IRS admitted in discovery that to their knowledge no employee retains the title of "Chief Local Insolvency Unit" after the IRS reorganized in 2010. The IRS instead referred debtors' counsel to a listing of "Collection Advisory Groups." The IRS did respond after receiving debtor's administrative claim noting they were referring it to the "Local Insolvency Unit." But the IRS did not name a "Chief" of that unit. And so, it goes.²

At the Pretrial Conference in this matter, the court and the parties agreed the "actual damages" portion of the debtors' claim should be tried first. It was. The court issued an oral ruling finding the Plaintiffs did not meet their burden of proof for being "actually" damaged.³

The IRS then filed this motion to dismiss the attorney's fees claim for lack of subject matter jurisdiction under Civil Rules 12(b)(1), (h)(3) and (i) (made applicable to bankruptcy adversary proceedings by Rule 7012).⁴ The IRS argues that this court does not yet have subject matter jurisdiction to decide the attorney's fees issue because the debtors filed this adversary proceeding before filing an administrative claim with the IRS. They reason that their waiver of sovereign immunity under § 106(a)(1) for attorney's fees claims stemming from automatic stay violations is conditioned upon a debtor's compliance with 26 U.S.C. §§ 7430 and 7433 and the applicable regulations before filing suit. Counsel for the United States noted in oral argument that the Plaintiffs have now complied with the exhaustion requirement because they filed the administrative claim, albeit at the wrong time and that more than six months have passed with no action by the IRS. 26 C.F.R 301-7433-2(d)(ii).⁵

Plaintiffs argue that complying with the administrative remedy in this case is impossible because there is indisputably no "Chief, Local Insolvency Unit" identified to accept the claim even if it was filed before the adversary proceeding. Since the law does not require pursuit of an administrative remedy that is impossible to achieve, Plaintiffs argue, even if they dismissed the suit and filed another administrative claim they could not comply.⁶

In reply the IRS argues the Plaintiffs have successfully submitted an administrative claim. So, they contend, the lack of an individual who is the "Chief, Local Insolvency Unit" does not mitigate the conditional waiver of sovereign immunity for attorney's fees claims for automatic stay violations: first exhaust administrative remedies before filing this adversary proceeding.

JURISDICTION

The United States District Court for the Eastern District of California has jurisdiction of this bankruptcy case and adversary proceeding under 28 U.S.C. § 1334(b) as this is a proceeding arising under Title 11 of the United States Code and arising in a case under Title 11. The District Court has referred this case to this court under 28 U.S.C. § 157(a). This is a "core" proceeding under 28 U.S.C. § 157(b)(2)(A), (C) and (O). If the proceeding is not deemed "core" the parties have agreed to have this court enter a final judgment in the matter. Jurisdiction to determine issues arising about the application of the automatic stay to the IRS is also conferred by § 106(a)(2).

DECISIONAL STANDARDS

The existence of sovereign immunity is a question of law. Arizona v. Bliemeister (In re Bliemeister), 296 F.3d 858, 861 (9th Cir. 2002) ; Montana v. Goldin (In re Pegasus Gold Corp.), 394 F.3d 1189, 1193 (9th Cir. 2005). So too are questions whether a plaintiff has exhausted administrative remedies, Williams v. Paramo, 775 F.3d 1182, 1191 (9th Cir. 2014) or whether a plaintiff must, Chang v. United States, 327 F.3d 911, 919 (9th Cir. 2003).

A federal court is compelled to dismiss an action if at any time it determines it lacks subject matter jurisdiction. Civil Rule 12(h)(3).

ANALYSIS

The IRS asks the court to dismiss this adversary proceeding because this court lacks jurisdiction over the Langstons' claim for attorney's fees. Doc. # 57. The IRS asserts that this court does not have subject matter jurisdiction because the IRS has not waived its sovereign immunity; that exhaustion of administrative remedies is a prerequisite for waiver of sovereign immunity and the Langstons have not exhausted the requisite administrative remedies. Id.

The Langstons, on the other hand, argue that they did in fact exhaust all available administrative remedies "in that the only remedy outlined in federal regulations is actually impossible to comply with, and cannot be ‘available’ to Plaintiff." Doc. # 102. They cite Ninth Circuit case law holding that § 106"plainly waives sovereign immunity for court-ordered monetary damages under the waiver's enumerated provisions ..." ( Hunsaker v. United States, 902 F.3d 963, 968 (9th Cir. 2018) ) and that "one need not exhaust administrative remedies that would be futile or impossible to exhaust." Singh v. Ashcroft, 362 F.3d 1164, 1169 (9th Cir. 2004) (citing Taniguchi v. Schultz, 303 F.3d 950, 957 (9th Cir. 2002) (plaintiffs need not exhaust administrative remedies when doing so would be futile (citing Aleknagik Natives Ltd. v. Andrus, 648 F.2d 496, 499 (9th Cir. 1981) ).

The IRS maintains, though: first, "all that is required to satisfy the plain language of the regulation is that a writing be sent to ‘Chief, Local Insolvency Unit’," the actual existence of an individual with that title being immaterial for compliance, and; second, Plaintiffs' reliance on Hunsaker is misplaced because Hunsaker does not address a situation where the only issue remaining is Plaintiffs' claim...