Murphy v. U.S. Dep't of the Treasury (In re Murphy)

• Decision Date: 20 December 2013
• Docket Number: Case No. 05-22363,Adv. Proc. No. 11-2020
• Parties: In re: William C. Murphy, Debtor William C. Murphy, Plaintiff v. United States Department of the Treasury, Internal Revenue Service, Defendant
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Maine

In re: William C. Murphy, Debtor

William C. Murphy, Plaintiff v. United States Department of the Treasury, Internal Revenue Service, Defendant

Case No. 05-22363

Adv. Proc. No. 11-2020

UNITED STATES BANKRUPTCY COURT DISTRICT OF MAINE

Date: December 20, 2013

Chapter 7

I. Introduction

For chapter 7 debtors, a discharge order relieving them of pre-petition personal debt and providing them a "fresh start" is, when earned, the deserved result. Their discharge is protected by a statutory precept broadly enjoining creditors from commencing or continuing actions to collect, recover, or offset discharged debt. This discharge injunction is enforceable by contempt. A creditor willfully violates the injunction, and can be called to answer for it, when, knowing of the debtor's discharge, it intentionally undertakes action to collect discharged debt. All this is plain. The question posed by this case is whether the Internal Revenue Service is held to the same standard as any other creditor when a discharged debtor invokes 26 U.S.C. § 7433, asking the bankruptcy court to award damages on account of IRS employees' willful violation of thedischarge injunction.

In this case, the answer is "yes." The IRS is liable for damages occasioned by the intentional acts of its agents who were aware of William Murphy's discharge. On cross motions for partial summary judgment seeking a determination of liability, I conclude that the IRS is liable for damages arising from violations of the injunction protecting Murphy's fresh start. The case will be set for trial on damages.

II. Background

William Murphy filed for chapter 7 relief on October 13, 2005. He scheduled federal income tax obligations for tax years 1993, 1994, 1996, 1997, 1998, 2000, and 2001among his debts. Murphy received his discharge on February 14, 2006. As with all chapter 7 discharges, Murphy's discharge was not absolute. Consistent with §§ 523 and 727,¹ it was subject to exceptions - some self-executing and some not. More specifically, Murphy's discharge order stated that debts for "most" taxes were not discharged.²

Following Murphy's discharge, the IRS informed him that it considered the pre-petition tax obligations he had scheduled to be excepted from discharge. He was told that collectionefforts would ensue.

Murphy then reopened his case³ and filed an adversary action,⁴ seeking a determination that the scheduled tax obligations were comprehended by his discharge, together with an award of damages occasioned by the IRS's post-discharge collection activities.

In the course, Murphy and the IRS were required to file a joint pretrial scheduling order,⁵ but they could not agree on fundamental issues, including the state of the pleadings and burdens of proof. I determined the legal and factual issues to be as follow:

As articulated by Murphy:

1. Did the discharge Murphy received on February 14, 2006, discharge his income tax obligations for the tax years 1993, 1994, 1996, 1997, 1998, 2000, and 2001?

2. Did the IRS violate the discharge injunction?

3. Were any of the tax obligations identified above excepted from the discharge pursuant to Section 523(a)(1)(B) for failure to file a return?

4. Were any of the tax obligations identified above excepted from the discharge pursuant to Section 523(a)(1)(C) for filing a fraudulent return?

5. Were any of the tax obligations identified above excepted from the discharge pursuant to Section 523(a)(1)(C) for willfully attempting to evade or defeat such tax?

As expanded upon by the IRS:

6. Were any of the tax obligations identified above excepted from the discharge pursuant to § 523(a)(1)(B) because a tax return was filed late and filed after two years before the date of the filing of the petition?

7. Were any of the tax obligations identified above excepted from the discharge pursuant to Section 523(a)(1)(C) for willfully attempting in any manner to evade or defeat such

tax?⁶

After conferring with counsel, I entered a pretrial scheduling order, and added the following:

IMPORTANT ADDITIONAL NOTE: The court considers that the Plaintiff [Murphy] bears the burden of proving a discharge issued. The Defendant [IRS] bears the burden of proving, by a preponderance, the applicability of a discharge exception to the debts at issue. Objections to this allocation must be made, if at all, by motion filed within 14 days of this date.⁷

The IRS made no complaint and the case proceeded. But the IRS did not budge from its position that Murphy was tasked with proving that none of § 523(a)(1)'s discharge exceptions applied to his prepetition tax debts. It refused to identify any specific provision of § 523(a)(1) to support its assertion that the debts survived discharge.⁸ As the case moved forward, Murphy was forced to obtain an order compelling discovery for even the most obviously pertinent information in the IRS's files.⁹

Murphy's prayer for damages was dismissed, without prejudice, by stipulation.¹⁰ And the parties agreed the count seeking injunctive relief was unnecessary, as the IRS had agreed to stand still until all other issues were put to rest.¹¹ Murphy moved for summary judgment, asking for a final determination that his discharge embraced the tax debt and for relief addressing the way inwhich post-discharge tax payments had been applied by the IRS. In the face of IRS opposition that fell far short of applicable substantive and procedural standards,¹² summary judgment entered for Murphy as follows:

This matter came before the Court on the Motion for Summary Judgment filed by the plaintiff, William C. Murphy. Upon notice and after hearing, this Court finds that there are no genuine issues of material fact in dispute and that Murphy is entitled to judgment as a matter of law. Accordingly, this Court hereby grants judgment in favor of Murphy as follows:

1. This declares that Murphy's income tax obligations for tax years, 1993, 1994, 1995, 1996, 1997, 1998, 2000, 2001 were discharged by the February 14, 2006 discharge Murphy received in this case.

2. This Court holds that the Internal Revenue Service wrongfully reversed payment of $16,500 made by Murphy toward his 2002 tax liability and applied it to the 1993 tax liability; and, therefore, this Court orders that said payment be reversed and reapplied to Murphy's 2002 tax liability effective as of the date originally made.

3. This Court holds that the Internal Revenue Service wrongfully reversed payment of $49,050 made by Murphy toward his 2003 tax liability and applied it to the 1994 tax liability; and therefore, this Court orders that said payment be reversed and reapplied to Murphy's 2003 tax liability effective as of the date originally made.¹³

The summary judgment order concluded the adversary proceeding finally. The IRS did not appeal. It has neither sought nor obtained relief from the judgment.

Murphy next pursued an administrative claim for damages.¹⁴ Meeting with no success there, he initiated this action under 26 U.S.C. § 7433(c)(3), which entitles a discharged debtor to petition the bankruptcy court for damages when "any employee of the Internal Revenue Servicewillfully violates any provision of section ... 524 of Title 11."

III. The Summary Judgment Standard

Summary judgment is called for when there is "no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Gerald v. Univ. of P.R., 707 F.3d 7, 16 (1st Cir.2013) (quoting Martínez-Burgos v. Guayama Corp., 656 F.3d 7, 11 (1st Cir.2011)); see Fed.R.Civ.P. 56(a). "The presence of cross-motions for summary judgment neither dilutes nor distorts this standard of review." Mandel v. Boston Phoenix, Inc., 456 F.3d 198, 205 (1st Cir.2006); see Atwater v. Chester, __ F.3d __, 2013 WL 5290019 (1^st Cir. Sept. 20, 2013); Fed. R. Civ. P. 56.

Our local rules spell out formal requirements for summary judgment practice in exquisite detail. See D. Me. L. Bankr. R. 7056-1, D. Me. L. R. 56. Notably,

(b) Supporting Statement of Material Facts. A motion for summary judgment shall be supported by a separate, short, and concise statement of material facts, each set forth in a separately numbered paragraph(s), as to which the moving party contends there is no genuine issue of material fact to be tried. Each fact asserted in the statement shall be simply and directly stated in narrative without footnotes or tables and shall be supported by a record citation ....

Although the parties' submissions, more particularly those of the IRS, fail to abide by the requirements of the rules,¹⁵ I can navigate the morass. The question of liability, which is all that is before me today, is not so complex as the IRS would have it.

IV. The Statutes

Murphy argues that the IRS's post discharge collection activity is actionable in this court under §7433 of Title 26 U.S.C.:

§7433. Civil damages for certain unauthorized collection actions

(a) In general

If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Except as provided in section 7432, such civil action shall be the exclusive remedy for recovering damages resulting from such actions.

(b) Damages

In any action brought under subsection (a) or petition filed under subsection (e), upon a finding of liability on the part of the defendant, the defendant shall be liable to the plaintiff in an amount equal to the lesser of $1,000,000 ($100,000, in the case of negligence) or the sum of—

(1) actual, direct economic damages sustained by the plaintiff as a proximate result of the reckless or intentional or negligent actions of the officer or employee, and

(2) the costs of the action.

(c) Payment authority

Claims pursuant to this section shall be payable out of funds appropriated under

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