Sovereign immunity insulates the government from claims for emotional distress arising from violation of the automatic stay, according to a district judge in Eugene, Ore.
Since District Judge Michael McShane said that Section 106(a)(1) “clearly waives sovereign immunity for some claims under Section 362(k),” how did he conclude that there was no waiver for claims of emotional distress? The answer lies in the clarity with which emotional distress damages are allowed under Section 362(d).
After a couple filed their chapter 13 petitions, the Internal Revenue Service sent them several notices demanding payment of back taxes and threatened to levy on their bank accounts. The bankruptcy judge held the IRS in contempt of the automatic stay and imposed damages for “significant emotional harm.”
On appeal, the IRS contended that the doctrine of sovereign immunity insulates the government from claims for emotional distress under Section 362(k). Judge McShane agreed with the government in his Oct. 20 opinion, even though Section 106(a)(1) waives sovereign immunity with respect to Section 362.
Section 362(k) allows an individual to recover “actual damages” for willful violation of the automatic stay, including costs, attorneys’ fees, and punitive damages, “in appropriate circumstances.”
Judge McShane began from the proposition that immunity “can only be waived by unequivocal, clear statutory language.” Next, he looked at the Ninth Circuit’s Dawson decision from 2004, which held that “actual damages” under Section 362(k) include claims for emotional distress.
However, Dawson did not involve an automatic stay violation by the government. Significantly, Dawson held that the right to damages for emotion distress was “ambiguous” given the language of Section 362(k).
Since the entitlement to emotional distress damages was ambiguous, Judge McShane reversed the bankruptcy court because the waiver of sovereign immunity as to emotional distress was not clear and unequivocal under Section 106.