District court reverses emotional distress damages award against the IRS

The District Court of Oregon held that taxpayers could not recover damages from the IRS for emotional distress due to its violations of an automatic stay while the taxpayers were under bankruptcy protection, reversing a decision of a U.S. bankruptcy court. According to the district court, sovereign immunity barred the taxpayers’ claim.

Facts: In 2012, Jonathan and Cheryl Hunsaker filed for Chapter 13 bankruptcy protection, creating an automatic stay that blocked creditors’ collection efforts. Despite the stay, the IRS sent four collection notices to the Hunsakers, who claimed the notices caused them emotional distress. The taxpayers filed suit with the bankruptcy court and were awarded emotional distress damages of $4,000 plus attorneys’ fees (see “Tax Matters: Damages Awarded to Taxpayers for IRS Violation of Bankruptcy Stay,” JofA, April 2016). The IRS appealed the decision to the District Court for Oregon.

Issues: Under U.S. bankruptcy laws, debtors are protected from creditor collection efforts by an automatic stay that becomes effective immediately upon the filing of a bankruptcy petition. If an individual is injured by a creditor’s willful violation of a stay, the individual is entitled to recover actual damages, including costs and attorneys’ fees, and possibly punitive damages. In Dawson v. Washington Mutual Bank, 390 F.3d 1139 (9th Cir. 2004), actual damages included damages for emotional distress.

The doctrine of sovereign immunity can protect the federal government from litigation; however, 11 U.S.C. Section 106 waives sovereign immunity for awards of compensatory damages related to violations of automatic stays under federal bankruptcy laws. The Supreme Court has held that the waiver of sovereign immunity for actual damages does not include emotional distress damages under a different federal law, the Privacy Act (Federal Aviation Administration v. Cooper, 132 S. Ct. 1441 (2012)).

The Hunsakers argued that actual damages include emotional distress damages and, as a result, sovereign immunity is waived for emotional distress damages. The IRS argued that the taxpayers are not entitled to damages because 11 U.S.C. Section 106 does not explicitly waive sovereign immunity for emotional distress damages.

Holding: The court agreed with the IRS and held that the Hunsakers were not entitled to emotional distress damages because sovereign immunity prevents such claims for violations of federal bankruptcy laws. According to the court, sovereign immunity is waived only for those damages that are explicitly waived by the applicable law, and federal bankruptcy law is ambiguous regarding whether sovereign immunity is waived for a claim for emotional distress damages. Thus, sovereign immunity barred the taxpayers’ claim. The court also held that the holding in Dawson v. Washington Mutual Bank was not relevant in this case because that case involved two private parties, and thus the issue of sovereign immunity did not apply.

• Hunsaker, No. 6:16-cv-00386-MC (D. Or. 10/20/16), rev’g No. 12-64782-fra13 (Bankr. Or. 1/13/16)

—By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota—Duluth.