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Migraine Caused by Improper IRS Collection Action During Bankruptcy Stay Triggers Damages for Emotional Distress

Posted on Jan. 30, 2016

In re Hunsaker No. 12-64782-fra13 (free link not available), a case out of the bankruptcy court in Oregon, caught my attention. It involved Jonathan Hunsaker, a retired Oregon state trooper and his wife Cheryl Hunsaker. The Hunsakers ran into financial problems, leading to a bankruptcy filing. Following the filing, IRS violated the Bankruptcy Code’s stay on collection, leading to a suit where the Hunskakers sought $5,000 in damages. The court held that the Hunsakers were entitled to damages from that the emotional distress that the improper IRS collection efforts caused, and awarded the Hunsakers $4,000.

I describe how it got there below.

The Hunsaker’s financial problems stemmed from when their “homestead was discovered to be subject to disputed claims by secured creditors, in turn complicated by claims of Marion County, Oregon, that the purchase of the homestead created an unlawful partition.” As a result, in September 2012 the Hunsakers filed a reorganization under Chapter 13 of the Bankruptcy Code. Shortly thereafter, the IRS received notice of the filing, and filed a proof of claim, in the amount of $ 9,301. At the moment of the Chapter 13 filing, the automatic stay under the Bankruptcy Code came into place. In a Chapter 13 case it continues throughout the life of the case which usually means it lasts for three to five years until completion of the plan or dismissal of the case. The Chapter 13 plan was confirmed in the fall of 2014 long after the filing of the petitioner; however, the timing of the confirmation does not impact the existence of the automatic stay if the case remains open.

Sometimes the IRS does things it is not supposed to do and that’s what happened here. Despite the stay, IRS sought collection on the assessed liability on four separate occasions over a one-year period:

  1. December 12, 2013: A notice of intent to levy, and a demand for payment of $ 9,685.65;
  2. February 10, 2014: A notice of levy on Social Security benefits, and a demand for payment of $ 9,814.28;( as a side note, one of the benefits of a Chapter 13 plan is that interest does not run on the claim and if the claim is paid the liability is satisfied. So, the increasing amounts you see on these later notices are amounts the debtor will likely never pay).
  3. September 1, 2014: A notice of intent to seize (“levy”) debtors’ state tax refund “or other property,” demanding $ 10,158.69; and
  4. December 8, 2014: A levy on Social Security benefits, and a demand for payment of $ 10,234.25.

The Hunsakers told their attorney each time; he assured them that the IRS actions were “unlawful.” In addition, in December of 2013 and February of 2014 (around the time of the first two collection actions) the attorney contacted the IRS advising it of the bankruptcy filing and that any collection actions were illegal

The opinion states that the Hunsakers were “adversely affected” by the IRS actions:

The stresses naturally inherent to a complex bankruptcy case were exacerbated by the perceived threat of additional collection actions by the Internal Revenue Service. Mrs. Hunsaker, in particular, testified to the onset of migraine headaches within hours of receipt of each of the notices. Each spouse noted signs of tension and anxiety in the other, which in turn added to his or her own stress. The Plaintiffs were especially concerned with the threat to levy on Mr. Hunsaker’s Social Security income, because loss of a substantial portion of their income would render their plan of reorganization unfeasible. Although their attorney assured them that the automatic stay prevented the actions threatened by the notices, the effect of the attorney’s assurances began to wear thin as the notices continued to come.

Statutes in Effect

The relevant statutes are as follows. Bankruptcy Code section 362(a)(6) prohibits “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.”

Bankruptcy Code section 362(k) [previously found in 362(h)] provides that an individual injured by a willful violation of the stay shall recover actual damages, including costs and attorney’s fees, as well as punitive damages in appropriate circumstances.

The issue in the case was whether the emotional distress the Hunsakers suffered gave rise actual damages under 362(k). The government argued, as you would expect, no, primarily on the basis that the Hunsakers did not suffer any actual damages even though the IRS foot-faulted with its collection action. The Court found to the contrary based on a 2004 case, In re Dawson, 390 F 3d 1139 (9th Cir. 2004). In that case, on reconsideration, the Ninth Circuit held that emotional distress stemming from violations of the stay can give rise to actual damages under Section 362(k) even if there are no pecuniary losses.

I was a bit surprised by that holding, and Dawson itself makes for interesting reading to get to the conclusion that you can suffer “actual damages” under the statute even without pecuniary loss associated with emotional distress, including a look at “contextual clues” of the damage provision (“by limiting damages to individuals Congress emphasized harms that are unique to human beings, [such as] emotional distress, which can be suffered by individuals but not by organizations”) and the stay’s legislative history where Congress discussed both financial and nonfinancial harms that may befall debtors when creditors violate the stay.

Dawson sets out then that pecuniary loss is “not required in order to claim emotional distress damages, [though] not every willful violation merits compensation for emotional distress.” To limit frivolous claims and guide courts, Dawson sets out the following questions as factors that courts weigh to determine if damages are appropriate:

  1. Did the debtor suffer significant harm?
  2. Did the debtor clearly establish the significant harm? and
  3. Did the debtor “demonstrate a causal connection between that significant harm and the violation of the automatic stay (as distinct, for instance, from the anxiety and pressures inherent in the bankruptcy process)”?

Back to Hunsaker

Using Dawson as a guide, the court found that this emotional distress was serious enough to warrant damages, noting that “[t]he injuries described by the Plaintiffs at trial, particularly Mrs. Hunsaker’s migraine headaches, were clearly established as neither trivial nor insubstantial, and are compensable under the Dawson standards.” In addition to Dawson, the Hunsaker court also looked to a 1995 bankruptcy case out of Georgia, In re Flynn, where the court awarded $ 5,000 award of emotional distress damages stemming from IRS stay violations “based on plaintiff’s uncorroborated testimony that she was forced to cancel a child’s birthday party because her checking account had been frozen.”

The main part of the court’s analysis is where the court isolates the effect of the IRS misconduct from the general stress of bankruptcy and a “demonstration of circumstances which may make it obvious that a reasonable person would suffer significant emotional harm.” Here the court looked to the IRS sending four separate notices even though the attorney told the IRS to stop when it improperly sent the first two letters:

In the instant case, the Plaintiffs received four notices from the Internal Revenue Service, each of which indicated that the Service intended to take steps which would, once carried out, likely defeat their efforts to reorganize their finances through Chapter 13. The notices continued notwithstanding their attorney’s efforts to stop them, and it is not unreasonable that they were concerned that the Government might take the action threatened notwithstanding their attorney’s assurances.

The Court of Appeals points out that the harm sustained because of the stay violation must be distinct from the “anxiety and pressures inherent in the bankruptcy process.” This requirement may be satisfied by a showing that the stay violation increased or aggravated the stress and anxiety inherent in the underlying proceedings. It is not, however, necessary that plaintiffs provide corroborating evidence, or establish that the violation was egregious.

From the judge’s perspective, the wife’s testimony was enough to show that the IRS, and not the general stress of the bankruptcy, caused her migraines.

The evidence here sufficiently demonstrates that the “inherent” tension and stress of the Plaintiffs’ bankruptcy was exacerbated by the stay violation. The case was progressing well, and a plan was finally confirmed shortly before the fourth notice was sent. Mrs. Hunsaker testified that she suffered from migraines attributable to the notices.

After establishing that the debtors satisfied the Dawson test (using a clear and convincing standard, and based on their testimony alone), the court turned to damages:

The Plaintiffs seek a modest award of $ 5,000 for the two of them. This circumspect demand is appropriate: while the Court finds that the Plaintiffs have satisfied their burden of establishing that their claim is significant — that is, not trivial or insubstantial — their damages are, compared to many, not overwhelming. Nor is there any reason to find that the Government’s actions were egregious: there was, in fact, no evidence as to why the violations took place, and the events are more likely the result of error and oversight than malice. The evidence established that each of the Plaintiffs, suffered harm, and that, of the two, Mrs. Hunsaker’s was more intense. Considering all the circumstances, Mrs. Hunsaker should be awarded damages of $ 3,000, and Mr. Hunsaker $ 1,000, for a total of $ 4,000.

Brief Analysis

As a longtime migraine sufferer, I sympathize with Mrs. Hunsaker. I understand the court’s inclination to punish the IRS. For many people, collection letters from the IRS cause particular stress. In addition, the Hunsakers promptly told their attorney about the IRS collection efforts, and the attorney told the IRS (in writing) to stop, which the IRS ignored. A number of cases have found that the burden is on the IRS to show that its procedures take into account the stay, and that IRS must establish procedures to avoid violations. Absent imposing some sanction on the IRS, it seems unfair (though certainly not unprecedented) if there is no consequence when IRS violates a clear statute. The stay on collection is a fundamental debtor protection. Perhaps a slap on the wrist for causing a headache is the right result.

In any event, the Hunsaker’s $4,000 damages is likely gross income, given that damages on account of emotional distress, even when accompanied by physical symptoms such as headaches or stomach disorders, do not fit within the definition of damages on account of a physical injury.  That inquiry leads us to a stroll down IRC Section 104(a)(2), legislative history accompanying the 1996 changes to that statute, and a number of cases that parse the difference between a physical symptom of emotional distress and an actual physical injury, though that discussion perhaps waits for another day and another dispute.

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