Williams-McAuliffe v. United States (In re Williams McAuliffe)
| Decision Date | 26 May 2022 |
| Docket Number | 3:16-bk-00110,AP 1:20-ap-0044 |
| Parties | IN RE: BRIAN JAMES McAULIFFE and SUZANNE M. WILLIAMS-McAULIFFE, Debtors. v. UNITED STATES OF AMERICA, DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE, Defendant. SUZANNE M. WILLIAMS-McAULIFFE, Plaintiff, |
| Court | U.S. Bankruptcy Court — Northern District of West Virginia |
Suzanne Williams-McAuliffe (the "Plaintiff") seeks damages against the Internal Revenue Service ("IRS") for alleged violations of the discharge order when it attempted to collect tax debts previously discharged in bankruptcy. The Plaintiff seeks costs of the action and damages related to the sale of her residence at a reduced value. She also seeks legal fees, despite counsel being her spouse.[1] The IRS argues that because it sent its collection attempts by automated delivery systems affected by the COVID-19 pandemic, there was no willful violation of the discharge order. Further, the IRS contends that the Plaintiff cannot recover fees for legal work performed by her spouse.
For the reasons stated herein, the court awards Plaintiff damages of $498.21 and will refund the $235 fee for reopening the Chapter 13 case.
The Plaintiff and her husband, Brian J. McAuliffe, were co-debtors in a Chapter 13 case they filed on February 19 2016. Of some importance to this case, both debtors are licensed attorneys in the state of West Virginia, and although the Plaintiff in this action does not routinely practice bankruptcy, Mr. McAuliffe is a frequent litigant in this court and is well-versed in the intricacies of the Bankruptcy Code.[2] Accordingly, Mr. McAuliffe represented himself and the Plaintiff in their bankruptcy case. The IRS asserted a claim for $13, 624.58 relating to tax years 2010 and 2011, of which $7, 230.78 was secured. Before bankruptcy the debtors paid the IRS pursuant to a 2012 installment agreement, but the debtors terminated the agreement in bankruptcy and instead paid the debts through their repayment plan. The court confirmed the plan on November 16, 2016, and the debtors received a discharge on September 24, 2019.[3] During the case, however, the debtors accrued a new liability for the 2018 tax year.[4]
Several months after the discharge and prior to effects of the COVID-19 pandemic reaching the United States, the IRS sent the debtors two demand letters―dated February 5, 2020 and March 4, 2020―seeking to collect the liabilities from the 2010 and 2011 tax years. Mr. McAuliffe, on the couple's behalf, sent a letter to the IRS's Cincinnati Service Center in March 2020 contesting the collection and advising the IRS of the discharge. On August 15, 2020, the debtors received another demand letter and filed a motion to reopen the bankruptcy case shortly thereafter. Despite this third demand letter, the IRS did not acknowledge Mr. McAuliffe's March 2020 letter until September 29, at which point it communicated it would need sixty days to review the liability.[5] Contrary to this communication, the IRS had already abated the 2010 and 2011 taxes the previous day. The IRS attributes the seven-month delay and miscommunications to a combination of the COVID-19 pandemic and Mr. McAuliffe's mailing of communications to the wrong IRS office. Further, the IRS blames the effects of COVID-19 for the "delay before the IRS applied the discharge order to the federal tax accounts" of the Plaintiff, which presumably led to the automated notices.
The court reopened the debtors' bankruptcy case on December 1, 2020, and the debtors filed this adversary proceeding three days later.[6] While the IRS granted no relief through administrative remedies, it sent another letter to the debtors dated August 9, 2021, stating an intent to terminate their installment agreement and that $1, 150 was due immediately to avoid default.[7] In addition, the notice stated the IRS "may levy (seize) your state income tax refund or other property or rights to property and apply the proceeds to the total amount of your unpaid liability." Around the same time, the debtors received separate communications from the IRS accepting the installment plan regarding the 2018 debts, nearly twenty months after Mr. McAuliffe's initial request.[8] It is the Plaintiff's contention that entrance into the 2018 debt installment plan was inhibited by the IRS's mistaken belief that the 2010 and 2011 debts were still owed.[9]
Mr. McAuliffe continued to represent the Plaintiff, despite filing a motion to remove himself as a plaintiff in the action on the eve of the trial. The Plaintiff testified at trial that at no point had the couple established a fee agreement or contract for the legal services, nor had she made any payments to her husband for the representation. Nevertheless, she seeks to recover legal fees for pursuing the action. Beyond legal costs, the Plaintiff claims that the couple intended to sell their Martinsburg residence and while it was initially listed for $295, 000, the couple took the first offer they received as a result of the August notice of intent to levy. The accepted offer was $280, 000, representing a sale for $15, 000 less than listing price. The Plaintiff asserts that a fear of the IRS's possible levy resulted in the hastened sale and accordingly seeks to recover the difference. Plaintiff lastly seeks costs associated with filing the action and accrued interest and penalties relating to the 2018 tax liability.
An evidentiary hearing was conducted, after which the parties filed proposed findings of fact. The matter is now ripe for adjudication.
The Plaintiff seeks multiple forms of damages related to months of attempted collection of discharged debts and later miscommunication resulting in non-payment of post-petition tax liability despite good faith attempts to do so. The IRS admits that letters were sent relating to debts discharged in the bankruptcy but nevertheless contends that there was not a willful and intentional violation by the agency and its employees. Instead, it argues that the attempts were inadvertent and thus damages cannot be awarded under 26 U.S.C. § 7433(e). Although the Plaintiff was represented by her husband, she seeks to recoup legal fees in addition to costs and damages.[10]Regardless of the claim's viability, the IRS asserts that the Plaintiff is not entitled to legal fees and any recovery against it must be within the restricted confines of 26 U.S.C. § 7433(e).
A discharge in bankruptcy allows the debtor the fresh start envisioned by the Bankruptcy Code. A prohibition on attempted collection of discharged debts is integral to that fresh start and the peace of mind it brings to a debtor. Bessette v. Avco Fin. Servs., 230 F.3d 439, 444 (1st Cir. 2000); Bradley v. Fina (In re Fina), 550 Fed.Appx. 150, 156 (4th Cir. 2014). The Bankruptcy Code prescribes that a discharge order "operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover, or offset" a debt which was previously discharged in bankruptcy. Taggart v. Lorenzen, 139 S.Ct. 1795, 1801 (2019) (citing 11 U.S.C. § 542(a)(2)). Notably, § 524 does not prescribe a specific remedy for a debtor which has been wronged by a violation of the discharge order. Harlan v. Rosenberg & Assocs. LLC (In re Harlan), 402 B.R. 703, 710 (Bankr. W.D. Va. 2009). Generally speaking, the bankruptcy court may issue any order, process, or judgment that is necessary to carry out the discharge order and protect the principles of the Bankruptcy Code. Id. at 1801; 11 U.S.C. § 105. However, the discretion afforded by § 105 is significantly curtailed in cases involving the IRS. See Kovacs v. United States, 614 F.3d 666, 672 (7th Cir. 2010) () and Kight v. IRS (In re Kight), 460 B.R. 555 ("Paragraph (e) of § 7433 is the only statute under which a debtor can petition a bankruptcy court to recover damages against the IRS for a willful violation of the discharge injunction.").
To succeed in an action for violation of the discharge order, a debtor must show by clear and convincing evidence that the defendant "had knowledge [actual or constructive] of the discharge and willfully violated it by continuing with the activity complained of." Torres v. Chase Bank U.S.A., N.A. (In re Torres), 367 B.R. 478, 490 (Bankr. S.D.N.Y. 2007). While "willfully" is not defined, at minimum the word acts to differentiate between deliberate and unwitting conduct. Bryan v. United States, 524 U.S. 184, 191 (1998). The IRS here further contends that within the context of an IRS violation, 26 U.S.C. § 7433(e) requires proof that a specific IRS officer or employee willfully violated the discharge order, rather than the entity as a whole. This application does not appear accurate. See IRS v. Murphy, 892 F.3d 29, 39 (1st Cir. 2018) ().
The IRS argues that none of its employees willfully violated the discharge order. It further contends that a creditor should not be held in contempt when the violation was inadvertent and due to clerical error, citing In re Helmes (In re Helmes), 336 B.R. 105 (Bankr. E.D. Va. 2005). This is true, but only supports the Plaintiff's position. The court there stated that a violation occurs when the creditor knows of the pending petition and intentionally attempts to collect in spite of it. Id. at 109 (citing Hamrick v. United States (In re Hamrick), 175 B.R 890 (W.D. N.C. 1994)). Neither Helmes nor Hamrick...
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