In Hunsaker v. United States, 902 F.3d 963 (9th Cir. 2018), the United States Court of Appeals for the Ninth Circuit held that the sovereign immunity waiver of 11 U.S.C. § 106 does not preclude liability for emotional distress damages in connection with a willful violation of the automatic stay by the IRS. To read the full decision, click here.
The Hunsakers filed for relief under Chapter 13 of the bankruptcy code. Despite having notice of the bankruptcy and the automatic stay, the IRS sent four notices to the Hunsakers threatening an imminent collection action and a levy of their Social Security benefits. In response, the Hunsakers brought an adversary proceeding against the IRS in the bankruptcy court seeking damages for the IRS’ willful violation of the automatic stay under Section 362(k).
At trial on their claims, the Hunsakers only sought damages for emotional distress. The IRS conceded that its conduct violated the automatic stay, but argued it was not liable for emotional distress damages on the grounds of sovereign immunity. The bankruptcy court found that the violation of the automatic stay by the IRS increased the stress of the Hunsakers’ bankruptcy case, and in compensation therefor, awarded the Hunsakers $4,000 in damages. The IRS appealed to the district court, where its sovereign immunity argument was better received. The district court summarily dismissed the Hunsaker’s case on sovereign immunity grounds. The Hunsakers then appealed the district court’s decision to the Ninth Circuit. The Ninth Circuit agreed with the bankruptcy court, finding that the district court erred in dismissing the complaint on sovereign immunity grounds. The case was remanded back to the district court for it to consider the merits of the Hunsakers’ case.
Sovereign immunity is the principle that the United States cannot be held liable for a claim absent consent expressed unambiguously in a statute.Section 106(a) abrogates the sovereign immunity of the United States with respect to 59 sections of the bankruptcy code, including Section 362, allowing a bankruptcy court to “issue against a governmental unit an order, process, or judgment under such sections . . . including an order or judgment awarding a money recovery, but not including an award of punitive damages.” 11 U.S.C. § 106(a)(3). Section 362(k) allows recovery of “actual damages” for willful violation of the automatic stay. The issue before the Ninth Circuit was therefore whether the “money recovery” language of Section 106 included damages for emotional distress awarded under Section 362(k).
The Ninth Circuit began its analysis by stating sovereign immunity was unambiguously waived for those sections listed in Section 106, including for a “money recovery,” with the exception of punitive damages, which the Court understood as allowing monetary nonpunitive damages. The Ninth Circuit then noted that emotional distress damages are not punitive because they compensate a plaintiff for distress, an injury recognized at common law. Therefore, the Court concluded that Section 106(a) waived sovereign immunity damages for emotional distress damages under Section 362(k).
The Ninth Circuit then turned to the IRS’s proposed reading of the “money recovery” phrasing of Section 106. According to the IRS, such language refers “only to claims seeking to restore to the bankruptcy estate sums of money unlawfully in the possession of governmental entities—not to the broader measure of damages.” The Court rejected this interpretation, observing that the IRS had based its argument on a prior version of the statute. The Ninth Circuit continued that the explicit carve-out of punitive damages in Section 106 would make no sense if the section did not waive sovereign immunity for other types of damages.
The Ninth Circuit then turned to a discussion of the First Circuit case that interpreted Section 106 differently: United States v. Rivera Torres (In re Rivera Torres), 432 F.3d 20 (1st Cir. 2005) (overturning award for emotional distress damages under Section 105). The First Circuit adopted a “temporal approach” in reviewing the statute, believing Congress did not intend waive sovereign immunity regarding emotional distress damages when it adopted the current version of Section 106(a) in 1994. The Court disagreed with the First Circuit’s reasoning, primarily returning to its point that because the plain meaning of the statute was an unambiguous waiver for money recovery, including damages for emotional distress, that no extra statutory interpretation was necessary.
Ultimately, the Ninth Circuit reversed the district court’s ruling dismissing the Hunsaker’s adversary proceeding and remanded the case to the district court to review the bankruptcy court’s conclusions with respect to the merits of the Hunsakers’ case, including damages.
For a variety of reasons, governmental entities can be the most powerful creditors in a case, and they are key players in many cases, both consumer and commercial. As for violations of the automatic stay, emotional distress damages are often the only available damages a debtor can claim. This ruling puts the IRS and other governmental claimants under the same restrictions as any other creditor with respect to the automatic stay.
These materials were prepared by ILC member Thomas B. Rupp of Keller & Benvenutti LLP in San Francisco (firstname.lastname@example.org), with editorial contributions from ILC advisor Christopher O. Rivas of Reed Smith LLP in Los Angeles (email@example.com).