The waiver of sovereign immunity in Section 106(a) allows an individual to collect damages for emotional distress resulting from the government’s willful violation of the automatic stay, according to the Ninth Circuit.
The Ninth Circuit created a split of circuits because the First Circuit had held in U.S. v. Rivera (In re Rivera), 432 F.3d 20 (1st Cir. 2005), that Section 106(a) does not waive sovereign immunity for emotional distress damages resulting from a stay violation.
Daniel Geyser of Dallas, who prevailed in the Ninth Circuit on behalf of the debtors, told ABI that “Congress waived sovereign immunity to put the government on equal footing with private parties.” The damage award, he said, “holds the government accountable for its actions — just as Congress intended.”
The Debtor Wins and Loses Below
After a couple filed their chapter 13 petition, the Internal Revenue Service sent several notices demanding payment of back taxes and threatening to levy on their bank accounts. The bankruptcy judge held the IRS in contempt of the automatic stay and imposed $4,000 in damages for “significant emotional harm.”
On appeal, the IRS conceded there was a stay violation but contended that the doctrine of sovereign immunity insulates the government from claims for emotional distress under Section 362(k). A district judge in Oregon agreed, reversed the bankruptcy court, and ordered the complaint dismissed. To read ABI’s discussion of the district court opinion, click here.
The debtor appealed and won a reversal in an August 30 opinion written for the Ninth Circuit by District Judge Cynthia A. Bashant, sitting by designation from the Southern District of California.
The Relevant Bankruptcy Code Provisions
Section 106(a)(1) waives sovereign immunity “as to a governmental unit” with regard to 59 provisions in the Bankruptcy Code, including Section 362. Section 106(a)(3) enables the court to “issue” an “order . . . or judgment” against a governmental unit, “including an order or judgment awarding a money recovery, but not including an award of punitive damages.”
Section 362(k) provides that “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”
Removing what otherwise would have been an issue on appeal, the Ninth Circuit had held in 2004 that “actual damages” in Section 362(k) includes damages for emotional distress. See Dawson v. Washington Mutual Bank, F.A. (In re Dawson), 390 F.3d 1139, 1148 (9th Cir. 2004).
The Government’s Argument
Urging the appeals court to uphold the district court, the government relied on U.S. v. Nordic Village Inc., 503 U.S. 30 (1992), where the Supreme Court ruled that Section 106, as it was then written, did not unequivocally subject the government to claims for monetary relief. At the time, Section 106 only said that the term “creditor” when used in the Bankruptcy Code applies to “governmental units” and that “an issue arising under such a provision binds governmental units.”
Congress responded to Nordic Village two years later by amending Section 106 to contain an explicit waiver of sovereign immunity. The government argued in the Ninth Circuit that the amendment only permits recovery of money unlawfully in the government’s possession.
The Circuit’s Ratio Decidendi
To analyze whether the waiver of sovereign immunity extends to damages for emotional distress, Judge Bashant began with the Supreme Court’s rule that a waiver of sovereign immunity must be “unequivocally expressed.” U.S. v. Bormes, 568 U.S. 6, 9–10 (2012) (quoting Nordic Village, 503 U.S. at 33–34).
Judge Bashant said that the government’s argument based on Nordic Village “is not plausible in light of the [amended] statute’s text.” She said that Section 106(a) “plainly waives sovereign immunity for court-ordered monetary damages under the waiver’s enumerated provisions, although the damages may not be punitive.”
Emotional distress damages, Judge Bashant said, “are a form of monetary relief — compensatory damages — but they are not punitive.” Given Dawson’s holding that emotion distress damages are permitted under Section 362(k), she held that “Section 106(a) waives sovereign immunity for emotional distress damages under Section 362(k).”
The Split with the First Circuit
Judge Bashant ended her opinion by explaining why the Ninth Circuit would not follow the First Circuit’s decision in Rivera.
Based on the so-called temporal approach, the First Circuit pronounced a convoluted theory to immunize the government for emotional distress damages sought under Section 105 for a willful stay violation.
The First Circuit understood the 1994 amendments in Section 106 to waive sovereign immunity only as to forms of monetary relief that were understood to exist at the time. Since damages for a willful stay violation in 1994 had not been understood to include emotional distress damages, the First Circuit did not find a clear intent to waive sovereign immunity.
Judge Bashant declined to follow the First Circuit because she said the “plain language of the statute is dispositive.”
The First Circuit also latched onto Section 106(a)(5), which provides that nothing in the section creates “any substantive claim for relief . . . not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law.”
Judge Basant rejected the reliance on Section 106(a)(5), saying it did not “graft a temporal restriction onto the waiver’s scope.”
Judge Basant reversed the district court and remanded for the district court to consider the government’s appeal on the merits.
Is the Issue ‘Cert-worthy’?
Since here is now a split of circuits, the government could file a petition for certiorari seeking review in the Supreme Court. The government may not bother because the issue seldom arises given that the IRS does not have a policy calling for violation of the automatic stay.
In view of the remand for the district court to analyze the merits, the judgment in the court of appeals is not a final order and thus may not warrant the granting of certiorari. However, the high court will sometimes review a non-final order that raises a pure issue of law not likely to be affected by remand.
All things considered, the Ninth Circuit’s decision is not a compelling candidate for a grant of certiorari. In terms of a circuit split involving the automatic stay, the Supreme Court will have a far more consequential case in Lorenzen v. Taggart (In re Taggart), 888 F.3d 438 (9th Cir. April 23, 2018) (petition for panel rehearing and rehearing en banc filed June 6, 2018). Taggart merits Supreme Court review because the First Circuit handed down contrary decision seven weeks later in IRS v. Murphy, 892 F.3d 29 (1st Cir. June 7, 2018).
Murphy and Taggart raise the question of whether good faith is a defense to sanctions for violating the discharge injunction. The Ninth Circuit held that good faith is a defense, while the First Circuit held it is not. The Ninth Circuit must deal with the petition for rehearing before there can be a certiorari petition. To read ABI’s discussion of those cases, click here and here.