U.S. v. Harchar

• Decision Date: 28 September 2005
• Docket Number: No. 1:02CV79.,1:02CV79.
• Parties: UNITED STATES of America, Appellant, v. Andrea HARCHAR, et al., Appellees.
• Court: U.S. District Court — Northern District of Ohio

331 B.R. 720

UNITED STATES of America, Appellant, v. Andrea HARCHAR, et al., Appellees.

No. 1:02CV79.

United States District Court, N.D. Ohio, Eastern Division.

September 28, 2005.

Emily M. Sweeney, Richard J. French, Office of the United States Attorney, Anita A. Gill, Cleveland, OH, Peter Sklarew, U.S. Department of Justice, Washington, DC, for Appellant.

Susan M. Gray, Rocky River, OH, for Appellees.

MEMORANDUM OF OPINION AND ORDER DISALLOWING APPELEES' CLAIM FOR EMOTIONAL DISTRESS DAMAGES UNDER 11 U.S.C. § 362(h) AND REVERSING THE ORDER OF THE BANKRUPTCY COURT WHICH PERMITTED THE APPELLEES TO AMEND THEIR COMPLAINT (NUNC PRO TUNC FOR TYPOGRAPHICAL ERROR)

WELLS, District Judge.

This case focuses on an issue of statutory construction and is before the Court on the United States' appeal from a decision by Bankruptcy Judge Pat E. Morgenstern-Clarren to allow Andrea and Kenneth Harchar (collectively the "Harchars") to amend their complaint to add a claim for emotional distress damages allegedly caused by the United States violating the automatic stay provision of the Bankruptcy Code, 11 U.S.C. § 362(a).

The primary issue before this Court is whether or not emotional harm is an "injury" compensable as "actual damages" under 11 U.S.C. § 362(h). The answer to this question will resolve the secondary issue on appeal — whether or not the bankruptcy court properly allowed the Harchars to amend their complaint to seek damages based upon emotional distress (i.e. whether it would be "futile" to include claims for such damages in an amended complaint alleging violations of 11 U.S.C. § 362(a)).

Section 362(h) provides: "An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages." 11 U.S.C. § 362(h). Based upon an analysis of the statutory text, the purpose and historical context of the enactment of § 362(h), as well as legislative history and pertinent case law, this Court finds that "actual damages" referenced in § 362(h) do not include those intangible damages arising from injury to one's peace of mind. Because § 362(h) does not provide for recovery of damages related to emotional distress it would be futile for the Harchars to amend their complaint to include a demand for such damages. Therefore, the question of injury by willful violation of a stay need not be addressed. The Bankruptcy Court erred in granting the Harchars' motion to amend their complaint.

I. FACTUAL AND PROCEDURAL HISTORY¹

On 1 May 1998, the Harchars filed a petition for bankruptcy under Chapter 13 of the Bankruptcy Code. (Third Amended Complaint, ¶ 17 (provided at pages 112-125 of the record on appeal)). The Harchars named the IRS as secured and unsecured creditors in the bankruptcy proceeding, and the Internal Revenue Service ("IRS") filed amended prepetition claims including a $353 priority tax claim and a general unsecured tax claim of $6,335. (Id. at ¶¶ 8 & 19). On 2 October 1998, the bankruptcy court confirmed the Harchars' plan providing for full payment of the $353 priority tax claim and partial payment of the $6,335 unsecured tax claim over a period of 60 months (the "Plan"). (Id. at ¶ 18).

After confirmation of the Plan, and while the Harchars were making payments in compliance with the same, the Harchars filed their 1999-year income tax return claiming a refund of $4,303. (Id. at ¶¶ 29 & 47). The tax refund was not automatically paid to the Harchars because the IRS had placed a "freeze code" on IRS computers as a result of the Harchars' bankruptcy filing in 1998.² (Id. at ¶¶ 9-28 & 32-33). Mrs. Harchar contacted the IRS in April of 2000 and was told that her refund would not be released "because of her prepetition tax obligations." (Id. at ¶¶ 40-41). Mrs. Harchar then enlisted the assistance of her attorney to obtain the 1999-year refund. (Id. at ¶ 42). In May of 2000, the Harchars' attorney filed the underlying suit alleging that the IRS was in violation of the automatic stay.³ Before learning of the Harchars' filing of a complaint against it, in July of 2000, the IRS paid the Harchars $4,404.69 for the 1999-year return (which included $101.69 in statutory interest). (Record, at 25, ¶ 8(e)).

In early 2001, the Harchars again experienced problems in obtaining their tax refunds for the year 2000. (Third Amended Complaint, at ¶¶ 55-77). On 30 January 2001, Mr. Harchar filed his 2000-year return showing a refund due to him in the amount of $2,934. (Id. at ¶ 58). Later, Mrs. Harchar filed her own 2000-year tax return showing a refund due to her in the amount of $2,353. Because the freeze code was still in place, the Harchars did not automatically receive their refunds as expected. (Id. at ¶¶ 65-70). Again, the Harchars attempted to resolve the situation with calls to the IRS and their attorney. (Id. at ¶¶ 71-72). Ultimately, the IRS manually issued the Harchars' 2000-year refunds after satisfying itself that Mr. Harchar did not improperly claim two dependent children on his 2000-year tax filing.

On 16 April 2001, the Harchars designated an expert to testify hi the bankruptcy court as to the emotional distress they allegedly suffered due to the IRS's handling of the Harchars' 1999-year tax refund. (Bankruptcy Docket No. 35, Record, at 72-73).⁴ The government objected that testimony from the Harchars' designated expert should not be permitted because the Harchars' complaint did not specifically seek recovery of emotional distress damages as required under Rule 9(g) of the Federal Rules of Civil Procedure.⁵ The bankruptcy court agreed with the government and instructed the Harchars that they might file a motion for leave to amend the complaint. (Bankruptcy Docket No. 38, Record at 006).

On 9 May 2001, the Harchars submitted their motion for leave to amend their complaint to "specifically state" their claims for damages related to emotional distress and to add a claim that the government had violated the bankruptcy stay a second time by delaying the Harchars' 2000-year tax refunds.⁶ (Bankruptcy Docket Nos. 46 & 47). At paragraph 88 of the proposed amended complaint, the Harchars allege that the IRS's use of the "freeze code" and delay in paying the Harchars their 1999 and 2000-year tax refunds caused the Harchars both financial and emotional injury including:

mental anguish, impairment of the enjoyment of life, pain and suffering, loss of consortium, and aggravation of marital difficulties in the amount of at least $20,000, or an amount proven at trial through the testimony of Mr. and Mrs. Harchar and an expert witness ....⁷ (Third Amended Complaint, at ¶ 88).⁸ The government opposed the Harchars' motion to amend their complaint to include the foregoing language based upon the futility of seeking damages for emotional harm under § 362(h).⁹

In ruling on the Harchars' motion to amend, the bankruptcy court observed that futility is a proper basis to deny a motion to amend. Nonetheless, the bankruptcy court granted the Harchars' motion to amend without reaching the legal issue of whether recovery for emotional harm is permitted under § 362(h). The bankruptcy court indicated that this legal issue should be resolved in a different procedural posture — after the parties had more fully developed the facts. The government appealed this ruling, and on 31 October 2003, this Court granted the government's motion for leave to appeal. (Docket No. 25). On 19 November 2003, the United States filed its opening brief. (Docket No. 26). On 12 December 2003, the Harchars filed their response. (Docket No. 27). On 18 December 2003, the United States filed a reply brief. (Docket No. 28).

II. STANDARD OF REVIEW

On appeal from a bankruptcy court decision, a district court reviews questions of law de novo. In re Gardner, 360 F.3d 551, 557 (6th Cir.2004). Statutory interpretation, which is central to the instant appeal, involves pure questions of law. In re Danny's Markets, Inc., 266 F.3d 523, 525 (6th Cir.2001). Therefore, this Court reviews the bankruptcy court's decision to allow the Harchars to amend their complaint to add a claim for emotional distress, de novo.

III. ANALYSIS

Under § 362(a) of the Bankruptcy Code, the filing of a petition for bankruptcy creates an automatic stay which precludes all debt collection efforts outside the bankruptcy proceedings. 11 U.S.C. § 362(a). The § 362(a) automatic stay is enforced by a separate provision, at issue in this case, that requires courts to award "actual damages, including costs and attorneys' fees," as well as punitive damages under appropriate circumstances, to individuals injured by a creditor's "willful violation of a stay."¹⁰ 11 U.S.C. § 362(h). The issue in this appeal, one in which the United States is the creditor, is whether § 362(h) authorizes compensation for injuries such as emotional distress. The government frames the issue on appeal as follows:¹¹ Does § 362(h) include the possibility of awarding damages to compensate for emotional distress — i.e., does emotional distress qualify as "injury" within the meaning of the statute and/or are damages awarded therefor "actual damages"?

(Docket No. 26, at 3). The government posits several arguments in support of answering this question in the negative. First, the government contends that the "statute is ambiguous as to the kinds of `injury' recognized and the meaning of `actual damages.'" (Id. at 13, ¶ 2.a). These ambiguities should be resolved, according to the government, by interpreting the statute "in light of the nature and purposes of the bankruptcy laws generally, which are financial in character" and by giving the modifier "actual" its only "logical meaning" which is "that the damages must be able to be fixed objectively." (Id.). Further, the government argues that § 362(h) should be given a narrow construction because it "is part of a statutory waiver of sovereign immunity." (Id. at 14...