No. 86 B 6608United States Bankruptcy Court, N.D. Illinois, Eastern Division
June 28, 1991
Sovereign Immunity — Governmental Units — IRS —Discharge Injunction — Contempt — Sanctions. — Section 106(c) waives the sovereign immunity of the Internal Revenue Service. As a consequence, the IRS was held in contempt and assessed costs for violating the discharge injunction by offsetting a debtor’s tax refund against discharged tax liabilities. The IRS’s actions were called “flagrant.”
SONDERBY, Bankruptcy Judge
See Sec. 106 at ¶ 7046 and Sec. 524(a) at ¶ 9239, and cf. Sec. 105 at ¶ 7045.
This matter comes before the Court on the Debtor’s Petition for a Rule to Show Cause, the Response of the United States to the Debtor’s Petition for a Rule to Show Cause, the Debtor’s Reply to the Response, the United States’ Supplement to the Response of the United States, the Reply of the Debtor to the Supplement to the Response, the Debtor’s Supplemental Response to Apprise the Court of Recent Case Law in this District, the Supplemental Brief of the United States, the October 20, 1989 Letter from the United States informing the Court of Small Business Administration v. Rinehart, the Debtor’s Notice to Apprise the Court of the Status o Abernathy v. United States, the United States’ Response to the Debtor’s Notice to Apprise the Court and the February 14, 1991 Letter from the United States regarding Internal Revenue Service v. Brickell Investment Corp. and Cowart v. Internal Revenue Service. Now, therefore, for the reasons set forth below, the Debtor’s Motion is granted.[1]
Facts
On April 25, 1986, the Debtor filed a Voluntary Petition for Relief under Chapter 7 of the Bankruptcy Code. On his Schedule A-1, the Debtor listed the United States/Internal Revenue Service (“IRS”) as a priority creditor for his 1978, 1979 and 1980 tax liabilities.
Prior to the Debtor’s discharge, the Debtor received correspondence from the IRS seeking collection of the Debtor’s tax liabilities.[2]
On June 10, 1986, the Debtor’s attorney, McKenzie McKenzie, P.C. (“McKenzie”), sent the IRS a letter informing the agency of the filing and requesting that all collection matters cease. The IRS never responded to the June 10, 1986 letter, and the Debtor continued to receive collection notices. Accordingly, on July 7, 1986, McKenzie sent the IRS another letter informing it of the filing of the case and requesting that all collection efforts cease. Again, the IRS failed to respond to the letter.
Subsequently, on September 18, 1986, McKenzie sent the IRS a letter requesting that the IRS abate the debtor’s discharged tax liability and release any federal tax liens. Again, the IRS failed to respond to the letter.
On or about April 11, 1988, the IRS improperly applied the Debtor’s 1987 tax refund against the Debtor’s 1978, 1979 and 1980 discharged tax liabilities in violation of the permanent injunction established under Section 524(a) of the Bankruptcy Code. In response to the IRS’s actions, on April 15, 1988, McKenzie sent the IRS yet another letter informing it of the Debtor’s discharge, requesting an abatement of the discharged tax liabilities and a release of any federal tax liens and requesting a return of the tax refund withheld. The IRS never responded to the letter.
On September 8, 1988, approximately five months after the IRS applied the Debtor’s 1987 tax refund to the discharged tax liabilities, McKenzie called the IRS and was told that the Debtor should receive a refund within three weeks. After the three weeks passed, and Debtor failed to receive a refund, McKenzie again wrote to the IRS requesting that the agency look into the matter and refund the money owed to the Debtor. As a result of the October 24, 1988 letter, an employee of the RIS contacted McKenzie and informed him that the Debtor would have his refund within a month. In January of 1989, an attorney in McKenzie’s office again contacted the I.R.S. regarding the Debtor’s refund. At that time, the attorney was informed that the Debtor would receive a payment soon.
Prior to filing the pending Petition for a Rule to Show Cause, McKenzie contacted the Office of the District Counsel of the IRS outlining the problem and requesting assistance in resolving it. McKenzie never received a response.
Notwithstanding all of the previous correspondence from the Debtor’s attorney, on April 3, 1989, the IRS sent the Debtor a statement showing that the Debtor’s 1897 tax refund had been applied against the discharged 1978 tax liability and sent the Debtor notices showing the amounts due on the previously discharged 1978, 1979 and 1980 tax liabilities. As a result of the April 3, 1989 notices, McKenzie again sent a letter to the Office of the District Counsel demanding that the collection efforts cease and requesting a refund of the improperly withheld tax refund. Again, McKenzie never received a response.
On or about May 15, 1989, the IRS again improperly applied the Debtor’s 1988 tax refund against the Debtor’s discharged tax liabilities. On May 29, 1989, as a result of the IRS’s failure to act or even respond to McKenzie’ requests, the Debtor filed the pending Petition for a Rule to Show Cause seeking to have the United States held in civil contempt for violating the permanent injunction set forth in Section 524 of the Bankruptcy Code.
In response, the United States argues that the doctrine of sovereign immunity prohibits the Debtor from bringing this act against the United States. Additionally, the United States argues that even if the doctrine of sovereign immunity does not apply, the Debtor cannot collect monetary damages because 26 U.S.C. § 7430 requires that there be an administrative or court proceeding in “connection with the determination, collection or refund” of a tax obligation prior to making such an award. Upon reviewing the case law, however, the Court finds that this argument is without merit. See In re Conti, 50 B.R. 142, 147
(Bankr. E.D. Va. 1985) (26 U.S.C. § 7430 does not apply to bankruptcy matters. Section 7430 is intended to “protect the IRS with regard to unauthorized disclosures of tax returns and return information.”)
On February 13, 1990, the Court entered an Order deferring ruling on this matter until the United States District Court for the Northern District of Illinois, Eastern Division rendered its decisions in In re Abernathy, 89 C 9520, and in In re Price, 89 C 7852. The Abernathy an Price[3] cases involved the same issues presented in the Debtor’s Petition for a Rule to Show Cause, i.e. whether the IRS waived its sovereign immunity and whether the debtor can collect monetary damages from the United States.
In In re Abernathy, 89 C 9520, the district court, in an oral ruling and relying on the dicta in Hoffman v. Connecticut Department of Income Maintenance[4] 109 S.Ct. 2818 (1989) and the bankruptcy court’s decision in In re Price, held that Section 106(c) of the Bankruptcy Code provides for a waiver of the United States’ sovereign immunity. Accordingly, because the bankruptcy court had awarded damages in the amount of attorney fees against the IRS and then held that the IRS was immune from suit, the district court reversed and remanded the case.
Similarly, in In re Price, 89 C 7852, 1991 U.S. Dist. Lexis 4102, the district court, held that Section 106(c) of the Bankruptcy Code waived the IRS’s sovereign immunity. Thus, the district court affirmed the bankruptcy court’s decision imposing sanctions against the IRS for a willful violation of the automatic stay.
In this case, the Court has reviewed the pleadings submitted and has reviewed the relevant case law and is strongly persuaded by the reasonings set forth in Abernathy and in Price. Accordingly, the Court finds that Section 106(c) of the Bankruptcy Code waives the IRS’s sovereign immunity and thus, the IRS can be subject to a suit for contempt and damages.
It is equally clear in this case that the IRS’s continual overt post-discharge efforts to collect the Debtor’s discharged tax liabilities, including withholding overpayments from post-petition years, coupled with the remarkably flagrant indifference to counsel’s correspondence over the past five years constitutes a willful violation of the discharge order. Accordingly, the Court finds that the IRS is in civil contempt of court for willfully violating the discharge order. Therefore, the Court finds that the Debtor is entitled to damages in the form of reasonable attorney fees and costs for pursuing this issue from September 18, 1986, the date of the first post-discharge letter to the IRS, through the filing of the fee application.
IT IS HEREBY ORDERED THAT:
1. The IRS is in civil contempt of court for willfully violating the discharge order.
2. Pursuant to Bankruptcy Rule 9020, this Order shall be effective 10 days after service of the order and shall have the same force and effect as an order of contempt entered by the district court unless, within the 10 day period, the IRS serves and files with the clerk objections prepared in the manner provided in Bankruptcy Rule 9033(b).
3. If no objections are filed, the Debtor’s attorney shall file his fee application within twenty one (21) days of the date of this Order, and the IRS shall file its Response within fourteen (14) days thereafter. The Debtor shall file its Reply within seven (7) days of the filing of the Response. The Court will then take the matter under advisement and rule by mail.
Section 102(a) of the Bankruptcy Code provides:
(1) “after notice and a hearing,” or similar phrase —
(A) means after such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances, but
(B) authorizes an act without an actual hearing if such notice is given properly and if —
(i) such a hearing is not requested timely by a party in interest. . .
In this case, the Court finds that the Debtor’s Petition for a Rule to Show Cause constitutes sufficient notice under Bankruptcy Rule 9020(b), and the Court finds that the IRS failed to timely request a hearing. Accordingly, the Court will decide this issue without an actual hearing.
(1985). In dicta, the United States Supreme Court went on to say:
The construction we give to 106(c) does not render irrelevant the language of the section that it applies `notwithstanding any assertion of sovereign immunity.’ The section applies to the Federal Government as well . . . . and the language in 106(c) waives the sovereign immunity of the Federal Government so that the Federal Government is bound by the determinations of issues by the bankruptcy courts even when it did not appear and subject itself to the jurisdiction of such courts. (Citations omitted.)
109 S.Ct. at 2823.