JOURNAL
AMERICAN
BANKRUPTCY
INSTITUTE
Issues and Information for Today’s Busy Insolvency Professional
The IRS and the Inability of Debtors to
Recover Emotional Distress Damage Awards
Written by:
Richard J. Corbi
Lowenstein Sandler PC; New York
[email protected]
E
ven if the Internal Revenue Service
(IRS) causes emotional distress,
the distraught individual cannot
recover money damages for the resulting
emotional distress, at least according to
the First Circuit Court of Appeals. This
article examines the decision by the First
Circuit Court of Appeals in United States
v. Torres (In re Torres),1 which held that
the doctrine of sovereign immunity
prevented the bankruptcy court from
awarding emotional distress damages as
a contempt sanction against the IRS under
§105(a)2 of the Bankruptcy Code for a
willful violation of the discharge
injunction under §524,3 as the
government’s immunity was not waived
under §1064 of the Code.
The Factual Background
of Torres
In 1992, Antonio Rivera Torres and
Sofia Villata Sella (collectively, the
“debtors”) filed for chapter 7. The IRS
filed a proof of claim in the case for
$21,587.11, which consisted of a general
unsecured claim for self-employment
income taxes in the amount of $14,486.92
for the 1985 tax year (1985 tax debt) and
an unsecured priority tax claim of
$7,100.49 of self-employment income
1 432 F.3d 20 (1st Cir. 2005).
2 11 U.S.C. §105(a) (2008). “The court may issue any order, process, or
judgment that is necessary or appropriate to carry out the provisions of
this title. No provision of this title providing for the raising of an issue by
a party in interest shall be construed to preclude the court from, sua
sponte, taking any action or making any determination necessary or
appropriate to enforce or implement court orders or rules, or to prevent
an abuse of process.”
3 11 U.S.C. §524(a)(2) (2008). “A discharge in a case under this
title...operates as an injunction against the commencement or
continuation of an action, the employment of process, or an act, to
collect, recover or offset any such debt as a personal liability of the
debtor, whether or not discharge of such debt is waived....”
4 11 U.S.C. §106(a)(1) (2008). “Notwithstanding an assertion of sovereign
immunity, sovereign immunity is abrogated as to a governmental unit to
the extent set forth in this section with respect to the following...
Sections 105, 106...524....”
About the Author
Richard Corbi is an associate in the
Financial Restructuring Group of the New
York office of Lowenstein Sandler PC.
taxes for the years 1989 to 1992.5 In 1993,
the debtors received a discharge of all
their dischargeable debts, which included
only the IRS’s general unsecured claim
for the 1985 tax debt.6 Collection
proceedings were suspended on all debts,
including the nondischargeable debts.7 In
1995, the debtors were entitled to a tax
refund of $1,200, which the IRS retained
and applied to the 1985 tax debt.8 The
1985 tax debt was more than the 1995
refund and thus required an offset by the
IRS.9 This offset by the IRS required the
entry of particular codes into the
computer system of the IRS.10 However,
violating the discharge injunction of
§524.13 In their contempt motion, the
debtors sought emotional-distress
damages that they claimed they
experienced because of the IRS’s actions,
compensatory and punitive damages,
attorney’s fees and costs.14 The court did
not provide a detailed analysis of the
severity of the IRS’s conduct that
provided the basis for the debtors’
emotional-distress damages claim. The
IRS admitted it violated §524, but argued
that the debtors were not entitled to
emotional-distress damages.15 The
bankruptcy court held in favor of the
debtors and awarded them a total of
$10,000 in emotional-distress damages as
a result of the IRS’s conduct, which the
Bankruptcy Appellate Panel for the First
Circuit affirmed.16 The BAP held that
§105 of the Code permitted courts to
award emotional-distress damages for the
§524 violation, since §524 itself does not
Feature
a computer error occurred when the IRS
input the codes for all the debts, including
the discharged 1985 tax debt.11 As a
result, in 1996, the debtors’ 1995 refund
was applied to the discharged 1985 tax
debt and collection activities resumed on
all the debts, including the 1985 tax
debt.12
The debtors eventually filed a motion
in the bankruptcy court requesting that the
IRS cease its collection activities, and
sought to hold the IRS in contempt for
5 In re Torres, 432 F.3d at 21.
6 Id.
7 Id.
specify the remedies for its violation.17
The IRS appealed to the First Circuit
Court of Appeals.
Analysis
On appeal from the BAP to the First
Circuit Court of Appeals, the issue was
whether there is an explicit waiver of
sovereign immunity in §106 of the Code
so as to permit an award of emotionaldistress damages against the IRS under
§105—the equitable-power section of the
Code—in order to remedy a violation of
§524 of the Code, which enjoins
collection activities on discharged debts.18
8 Id.
9 Id.
13 Id.
14 Id.
10 Id.
11 Id.
15 Id. at 21-22.
16 Id. at 22.
17 Id. at 22.
12 Id.
44 Canal Center Plaza, Suite 404 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org
Section 524 does not specify remedies for
a violation of the discharge injunction,
but §105(a) authorizes courts to “issue
any order, process, or judgment that is
necessary or appropriate to carry out the
provisions of this title.”19
Waiver of the Federal Gov’t.
The First Circuit first examined the
standards for whether Congress has
waived sovereign immunity of the federal
government.20 The court explained that
a waiver has to be “unequivocally
expressed, and must be strictly construed
in favor of the sovereign, with
ambiguities construed against the
waiver.”21 In addition, “a waiver of
sovereign immunity may subject the
federal government to some categories of
damages, but not others.”22 Furthermore,
the court examined §106(a) of the Code
and found that it does not expressly refer
to emotional distress damages, although
§106 is an express waiver of sovereign
immunity with the allowance of some
money damages.23
Enumerated Provisions under
§106(a)(1) as a Waiver Source
The First Circuit explained that a
narrow approach to §106 of the Code was
appropriate.24 In the court’s narrow
analysis, the court used a temporal
approach, meaning an examination as to
what background law Congress
understood in 1994 when §106 of the
Code was amended as opposed to what
types of relief are presently available to
private parties.25 The First Circuit used
this narrow analysis for six reasons.26
First, the Supreme Court had used the
temporal approach recently.27 The First
Circuit cited the Supreme Court’s
decision of Sosa v. Alavarez-Machain,
542 U.S. 692, 711 (2004), in which the
Supreme Court had relied on the fact that
Congress’ “provision of an exception
when a claim arises in a foreign country
was written at a time when the phrase
‘arising in’ was used in state statutes to
express the position that a claim arises
where the harm occurs.”28 Second, the
temporal approach adheres to the general
18 Id. at 23.
19 Id. at 23 (citing 11 U.S.C. §§105(a) and 524 (2007)).
20 Id. at 23.
21 Id. at 23-24 (citations omitted).
22 Id. at 24 (citations omitted).
23 Id. (citing 11 U.S.C. §106(a) (2007)).
24 Id. at 25.
25 Id.
26 Id.
27 Id. (citations omitted).
28 Id.
rule “that Congress is presumed to know
the content of background law” when
enacting legislation.29 Meaning that when
Congress legislates, they do so against a
background of law already in place and
the historical development of that law.30
In this case, §106(a) is the applicable law
whose background has to be examined in
order to determine if the debtors are
entitled to emotional-distress damages.
Third, the temporal approach “gives
content as to what type of money
judgment the waiver of immunity
applies.”31 Fourth, the temporal approach
is the corollary to the rule “that the Code
itself should not be read ‘to effect a major
change in pre-Code practice’ unless the
change is the subject of ‘at least some
discussion in the legislative history.’” 32
The legislative history of §106 does not
indicate that Congress intended to make
emotional distress damages available.33
Fifth, the temporal approach avoids the
assumption “that the scope of remedies
available against private parties as the law
develops are co-extensive with those
available against the government when it
waives immunity.”34 Section 106 does not
expressly “tie the scope of government
liability to the scope of private liability”
and, as a result, the remedies that may be
imposed on private parties in bankruptcy
proceedings are not imposed on the
federal government in bankruptcy
proceedings.35 Sixth, Congress knew the
background law when it enacted §106 of
the Code in 1994 because Congress
added §106(a)(5) which stated “that no
new rights were to be created through the
mechanism of the waiver of immunity.”36
In this language of §106(a)(5), Congress
did not create new rights through the
mechanism of the waiver of immunity.37
The First Circuit was concerned with the
background law that Congress was
presumed to understand in 1994 when it
waived immunity in the enumerated
sections.38 The court assumed “that if it
were perfectly clear that the enumerated
section at issue, here §105, encompassed
the relief of emotional distress damages
at the time of the amendment of §106,
then the §106 waiver would encompass
such damages. But if [the] debtors cannot
show that the background law clearly
established that they were entitled to
emotional distress damages under the
relevant enumerated clauses, then this
argument fails.”39
The court began its analysis of
§105(a), the broad equitable powers
provision, and §524, the discharge
provision, and found that whether a §524
violation could be remedied “by an award
of damages was resolved at the time of
the amendment” of §106, the immunity
section of the Code.40 The First Circuit’s
focus was on the availability of emotional
distress damages in 1994 pursuant to
§105 of the Code.41 The First Circuit
examined the law of other circuits and
found that the Fourth Circuit, in Burd v.
Walters (In re Walters), 868 F.2d 665 (4th
Cir. 1989), did not permit emotional
distress damage awards under §§105(a)
or 524 of the Code because no authority
was “offered to support the proposition
that emotional distress is an appropriate
item of damages for civil contempt, and
we know of none.”42 Likewise, the Eighth
Circuit, in McBride v. Coleman, 955 F.2d
571 (8th Cir. 1992), rejected an award of
emotional-distress damage under §105(a)
of the Code because the “problems of
proof, assessment, and appropriate
compensation attendant to awarding
damages for emotional distress are
troublesome enough in the ordinary tort
cases, and should not be imported into
civil contempt proceeding.”43 Relying on
the Fourth and Eighth Circuit Courts of
Appeals, the First Circuit found that, at
the time of the amendment of §106 of the
Code in 1994, “the background law was
that §105(a) did not encompass an award
for monetary damages, much less for a
§524 violation,” which “argues against a
finding of emotional distress damages.”44
The debtors attempted to make an
analogy to §362(h) (now §362(k))45 of the
Code as a basis for providing emotional
distress damages.46 But the court
dismissed the debtors’ contentions
because the order entered by the courts
below was for a §524 violation of the
discharge injunction, not a §362(h)
29 Id. (citations omitted).
30 Id. (citations omitted).
31 Id.
41 Id.
42 Id. (quoting Burd v. Walters (In re Walters), 868 F.2d 665, 670 (4th
Cir. 1989)).
43 Id. (quoting McBride v. Coleman, 955 F.2d 571, 577 (8th Cir. 1992)).
32 Id. at 25 (citing Dewsnup v. Timm, 502 U.S. 410, 419 (1992)).
33 Id. at 25 n. 4.
34 Id. at 26.
35 Id. at 26 n. 5.
36 Id. at 26.
37 Id.
38 Id.
39 Id.
40 Id. at 27.
44 Id.
45 11 U.S.C. §362(h) (“An individual injured by any willful violation of a stay
provided by this section shall recover actual damages, including costs
and attorney’s fees, and, in appropriate circumstances, may recover
punitive damages.”).
46 Id. at 28.
44 Canal Center Plaza, Suite 404 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org
violation of the automatic stay.47 The court
also dismissed the debtor’s §362(h)
analogy because, although the section
provides for “actual damages,” there was
no consensus in the background law that
the “actual damages” included emotionaldistress damages at the time of the 1994
Amendment to §106 of the Code.48
The First Circuit’s Analysis
of “Money Recovery”
under §106(a)(3) of the Code
The debtors next attempted to argue
that the language in §106(a)(3), which
provides for “an order or judgment
awarding a money recovery” was broad
enough to allow damages for emotional
distress. 49 The First Circuit, however,
refused to entertain the idea of whether
“money recovery” and “money
damages” were “semantic equivalents”
that would enable the debtors to obtain
emotional-distress damages against the
IRS. 50 Instead, the First Circuit, in
acknowledging that several courts of
appeal have looked at the legislative
history of waiver immunity provisions,
noted that legislative history did not
help the debtors’ argument.51 The only
importance of the legislative history of
the waiver provisions that was relevant
to the case before the court was this:
“If the legislative history showed that
the clear intent of Congress in enacting
§106 was to overrule cases holding that
no emotional distress damages were
available, that would be significant.
But the legislative history shows no
such thing. Indeed, it works against
finding a waiver of immunity.” 52 The
type of “monetary recovery” that
Congress focused on in the 1994
Amendments to the Code did not
include a type of emotional-distress
damages.53 Based on the foregoing, the
First Circuit Court of Appeals held that
“sovereign immunity bars awards for
emotional distress damages against the
federal government under §105(a) for
any willful violation of the §524
discharge injunction, and that
sovereign immunity is not waived by
47 Id.
48 Id.
the government in §106.”54
Remand to Bankruptcy Court
The First Circuit remanded the case
to the bankruptcy court, where the IRS
sought to have the emotional-distress
damage awards entered in favor of the
debtors vacated based on the nonwaiver
of sovereign immunity. 55 The
bankruptcy court again examined the
scope of the waiver under §106(a)(3) of
the Code and concluded “that the
United States has not waived its
sovereign immunity for monetary
damages since the statute limits relief
to ‘monetary recovery,’ which does not
unambiguously mean compensatory
damages.”56 Moreover, in relying on the
Supreme Court’s decision of United
States v. United States Fid. and Guar.
Co., 309 U.S. 506, 514 (1940), the
bankruptcy court also concluded that
the government neither waived its
sovereign-immunity defense because
such defense cannot be waived in
litigation, nor did it statutorily consent
to jurisdiction, which would permit an
award of emotional distress damages.57
Consequently, the emotional-damage
award was completely vacated.58
Conclusion
This decision from the First Circuit
Court of Appeals reinforces the
importance of the doctrine of sovereign
immunity when the government is at
fault, as well as that court’s reluctance for
awarding emotional-distress damages.
The First Circuit’s opinion illustrates that
although all litigation carries some sort of
psychological and emotional distress on
the participants, damages for such
distress are not recoverable under the
Bankruptcy Code. n
Reprinted with permission from the ABI
Journal, Vol. XXVII, No. 4, May 2008.
The American Bankruptcy Institute is a
multi-disciplinary, nonpartisan organization
devoted to bankruptcy issues. ABI has more
than 11,500 members, representing all
facets of the insolvency field. For more
information, visit ABI World at
www.abiworld.org.
49 Id. at 29.
50 Id.
51 Id. at 30 (citations omitted).
52 Id.
53 Id. at 30-31. The First Circuit discussed two pre-1994 Amendment
Supreme Court cases: Hoffman v. Conn. Dep’t of Income Maint., 492
U.S. 96, 100-01 (1989); United States v. Nordic Village Inc., 503 U.S. 30
(1992). The First Circuit explained that these two Supreme Court cases
did not involve emotional distress damages, but “classic recovery of
moneys already paid to the United States that the estate wished to
recover.”
54 Id. at 31.
55 In re Torres, No. 92-05406, 2007 Bankr. LEXIS 3612, at *6 (Bankr. D.
P.R. Oct. 9, 2007).
56 Id. at *8.
57 Id. at *9 (citations omitted).
58 Id. at *9-10.
44 Canal Center Plaza, Suite 404 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org