United States Court of Appeals
For the First Circuit
No. 17-1601
INTERNAL REVENUE SERVICE,
Defendant, Appellant,
v.
WILLIAM CHARLES MURPHY,
Plaintiff, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. D. Brock Hornby, U.S. District Judge]
Before
Lynch, Circuit Judge,
Souter, Associate Justice,*
and Stahl, Circuit Judge.
Peter Sklarew, with whom David A. Hubbert, Acting Assistant
Attorney General, Paul A. Allulis, Gilbert S. Rothernberg, Thomas
J. Clark, Attorneys, Tax Division, Department of Justice, and
Halsey B. Frank, United States Attorney, were on brief, for
appellant.
John H. Branson, with whom Branson Law Office, P.A., was on
brief, for appellee.
* Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
June 7, 2018
STAHL, Circuit Judge. In this case, we need to determine
whether an employee of the Internal Revenue Service ("IRS")
"willfully violate[d]" an order from the bankruptcy court
discharging the debts of debtor-taxpayer William C. Murphy, as
that term is used in 26 U.S.C. § 7433(e). After careful
consideration, we hold that an employee of the IRS "willfully
violates" a discharge order when the employee knows of the
discharge order and takes an intentional action that violates the
order. Under § 7433(e), the IRS's good faith belief that it has
a right to collect the purportedly discharged debts is not relevant
to determining whether it "willfully violate[d]" the discharge
order. Because the IRS's actions in this case meet this standard,
we affirm.
I.
On October 13, 2005, Murphy filed a Chapter 7 petition
in the United States Bankruptcy Court for the District of Maine.
On Schedule E of his bankruptcy petition, Murphy listed his income
tax obligations to the IRS for the years of 1993-1998, 2000, 2001,
and 2003, as well as a 2003 tax obligation to the Maine Revenue
Services. Murphy's tax obligations were by far the largest
liabilities he sought to discharge. In his petition, Murphy listed
total liabilities of $601,861.61, of which $546,161.61 were tax
obligations. On January 20, 2006, Assistant U.S. Attorney
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Frederick Emery, Jr. ("AUSA Emery") filed an appearance on behalf
of the IRS in the bankruptcy proceeding.
On February 14, 2006, the bankruptcy court granted
Murphy a discharge. The discharge order, which appears to be a
standard form, reads:
It appearing that the debtor is entitled to a
discharge,
IT IS ORDERED:
The debtor is granted a discharge under
section 727 of title 11, United States Code,
(the Bankruptcy Code).
Beneath the bankruptcy judge's signature, there is a notice that
states, in bold and capital letters, "SEE THE BACK OF THIS ORDER
FOR IMPORTANT INFORMATION." The back of the order provides an
explanation of bankruptcy discharge in a Chapter 7 case, stating
that "[t]he discharge prohibits any attempt to collect from the
debtor a debt that has been discharged." The order lists "[s]ome
of the common types of debts which are not discharged" and
specifically notes that "[d]ebts for most taxes" are not
discharged.
It does not appear that the IRS objected to Murphy's
discharge prior to the bankruptcy court entering its discharge
order. On February 16, 2006, the IRS received notice of the
discharge order.
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The IRS did not believe that the discharge relieved
Murphy of his tax obligations. Rather, the IRS viewed Murphy's
taxes as excepted from discharge under 11 U.S.C. § 523(a)(1)(C),
which excepts from discharge any tax if "the debtor made a
fraudulent return or willfully attempted in any manner to evade or
defeat such tax." Based on its earlier investigations into
Murphy, the IRS believed that Murphy had willfully attempted to
evade taxes during all of the years in question.
From February 2006 to February 2009, the IRS repeatedly
informed Murphy that it did not view his tax obligations as
discharged and that it planned to collect what it believed was
owed. On February 20, 2009, the IRS issued levies against several
insurance companies with which Murphy then did business in an
attempt to collect on these tax obligations. Margurite Gagne, a
revenue officer for the IRS, signed the levy notices sent to the
insurance companies.
On August 14, 2009, Murphy filed an adversarial
proceeding seeking a declaration that his tax obligations from
1993-1998, 2000, and 2001 had been discharged. In this proceeding,
AUSA Emery represented the IRS. According to the IRS, AUSA Emery
"took only minimal discovery in the case" and failed to submit
evidence to the bankruptcy court that the IRS had developed during
its investigation into Murphy's tax obligations. Instead, the IRS
claims that AUSA Emery merely filed a summary of the IRS's
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allegations of Murphy's tax evasion, without submitting any
admissible evidence to support the allegations.
On June 22, 2010, the bankruptcy court granted summary
judgment in Murphy's favor and declared that Murphy's tax
obligations had been discharged. The bankruptcy court later noted
that it granted summary judgment in large part because the IRS's
opposition to summary judgment "fell far short of applicable
substantive and procedural standards." Murphy v. IRS (In re
Murphy), No. 05-22363, 2013 WL 6799251, at *2 (Bankr. D. Me. Dec.
20, 2013). The IRS did not appeal the bankruptcy court's 2010
summary judgment ruling.
Subsequently, AUSA Emery was diagnosed with
frontotemporal dementia ("FTD"). According to the IRS, symptoms
of FTD include "impairment of executive function, such as the
cognitive skill of planning and organizing." Based on AUSA Emery's
medical records and the opinions of three physicians, the IRS
believes that AUSA Emery was already experiencing the symptoms of
FTD in 2010.
In February 2011, Murphy filed a complaint against the
IRS under § 7433(e), alleging that an employee of the IRS willfully
violated the bankruptcy court's 2006 discharge order in February
2009 by issuing levies against the insurance companies with which
he did business and thereby attempting to collect on his discharged
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tax obligations.1 The IRS responded that it did not willfully
violate the order because it reasonably believed his tax
obligations were excepted from discharge under § 523(a)(1)(C)
based on its investigation into his alleged tax evasion.
On December 20, 2013, the bankruptcy court granted
summary judgment for Murphy for his § 7433(e) claim. The court
found that the term "willfully violates" has an established meaning
in the context of violations of automatic stays and discharge
orders issued in bankruptcy proceedings: a willful violation
occurs "when, with knowledge of the discharge, [a creditor] intends
to take an action, and that action is determined to be an attempt
to collect a discharged debt." In re Murphy, 2013 WL 6799251, at
*7. The court further found that the 2010 summary judgment ruling
collaterally estopped the IRS from relitigating whether Murphy's
tax obligations were discharged, whether the IRS knew they were
discharged, and whether it took actions which violated the
discharge order. Id. at *8.
After the bankruptcy court denied the IRS's motion for
reconsideration, the IRS appealed to the district court, which
vacated the bankruptcy court's decision. IRS v. Murphy, 564 B.R.
96, 98 (D. Me. 2016). The district court concluded that the
bankruptcy court should have considered AUSA Emery's impairment
1 Prior to filing his complaint, Murphy exhausted his
administrative remedies as required by 26 U.S.C. § 7433(1).
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before finding that the 2010 summary judgment ruling collaterally
estopped the IRS from relitigating issues related to Murphy's
discharge. Id. at 112.
However, the district court agreed with the bankruptcy
court's definition of "willfully violates" as used in § 7433(e).
Id. at 106. The district court found that, by 1998, the term had
an established meaning in the context of violations of both
automatic stays and discharge injunctions, and under this
established meaning, a creditor's "good faith belief in a right to
the property is not relevant to a determination of whether the
violation was willful." Id. (quoting Fleet Morg. Grp., Inc. v.
Kaneb, 196 F.3d 265, 269 (1st Cir. 1999)).
On remand, the parties entered into a settlement
agreement, whereby the IRS waived its collateral estoppel
arguments and accepted that the 2010 summary judgment ruling
conclusively determined that Murphy's tax obligations had been
discharged. The IRS reserved the right:
for further appeal(s) only its arguments that
that [sic] a debtor is not entitled to damages
where a creditor's violation of the discharge
reflects a reasonable belief that the debt
involved was excepted from discharge, and/or
that the "willfully violates" language in IRS
§ 7433(e) should be construed to permit the
IRS to defend against liability for violating
the discharge on the basis that its employee
reasonably believed that the tax involved is
excepted from discharge [hereinafter "the
willfully violates issue"].
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As part of the settlement, the IRS agreed to pay $175,000 as
Murphy's damages once it had exhausted the reserved right to appeal
if the appeal was lost. The settlement did not "resolve whether
or not the deficiencies in in [sic] the United States' response to
plaintiff's motion for summary judgment . . . were caused by any
mental disability of the former Assistant United States Attorney
at the time of the summary judgment proceedings." Based on this
agreement, on January 4, 2017, the bankruptcy court entered final
judgment against the United States, and the district court affirmed
the judgment on appeal. The IRS timely appeals to this court.2
II.
We are, at this stage, confronted solely with the
bankruptcy court's resolution of a legal question, which we review
de novo. Wilding v. CitiFinancial Consumer Fin. Servs., Inc., (In
re Wilding), 475 F.3d 428, 430 (1st Cir. 2007). The parties'
settlement agreement reserved for the IRS the right to appeal only
the bankruptcy court's construction of the phrase "willfully
violates" as used in § 7433(e).
2Section 7433(e) allows a debtor "to recover damages against
the United States." (emphasis added). As the district court noted
in its September 7, 2016 decision, it appears that the United
States, and not the IRS, "is the real party in interest" in this
case. Murphy, 564 B.R. at 98 n.1. "Like the appellant's brief,
however, for simplicity" we will refer "to the appellant as 'the
IRS.'" Id.
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The IRS argues it does not "willfully violate" an
automatic stay or discharge order if it has a good faith belief
that its actions do not violate the bankruptcy court's order. In
support of its position, the IRS presents two somewhat conflicting
arguments. First, it claims that, before Congress enacted
§ 7433(e) in 1998, all creditors could raise a good faith defense
to allegations that they willfully violated an automatic stay or
discharge order. Second, it posits that even if most creditors
could not raise a good faith defense, such a defense must be
available to the IRS because § 7433(e) is a waiver of sovereign
immunity that must be construed narrowly.
We begin our interpretation of § 7433(e) "where all such
inquires must begin: with the language of the statute itself."
Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 69 (2011) (quoting
United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989)).
Section 7433(e) provides that:
If, in connection with any collection of
Federal tax with respect to a taxpayer, any
officer or employee of the Internal Revenue
Service willfully violates any provision of
section 362 (relating to automatic stay) or
524 (relating to effect of discharge) of title
11, United States Code (or any successor
provision), . . . such taxpayer may petition
the bankruptcy court to recover damages
against the United States. (emphasis added).
Congress did not define "willfully" or the phrase "willfully
violates" as used in § 7433(e). "[W]e attribute to words that are
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not defined in the statute itself their ordinary usage, while
keeping in mind that meaning can only be ascribed to statutory
language if that language is taken in context." Brady v. Credit
Recovery Co., Inc., 160 F.3d 64, 66 (1st Cir. 1998).
"The statutory term 'willfully' is a chameleon." United
States v. Marshall, 753 F.3d 341, 345 (1st Cir. 2014). At a
minimum, "willfully" "differentiates between deliberate and
unwitting conduct." Bryan v. United States, 524 U.S. 184, 191
(1998); see also McLaughlin v. Richland Shoe Co., 486 U.S. 128,
133 (1988) ("In common usage the word 'willful' is considered
synonymous with such words as 'voluntary,' 'deliberate,' and
'intentional.'"). In criminal law, it "typically refers to a
culpable state of mind," such that a "willful violation" occurs
only when a defendant "act[s] with knowledge that his conduct [is]
unlawful." Bryan, 524 U.S. at 191-92. In contrast, "[c]ivil use
of the term . . . typically presents neither the textual nor the
substantive reasons for pegging the threshold of liability at
knowledge of wrongdoing." Safeco Ins. Co. of Am. v. Burr, 551
U.S. 47, 57 n.9 (2007).
In sum, as the Supreme Court has repeatedly stated,
"'willfully' is a 'word of many meanings whose construction is
often dependent on the context in which it appears.'" Id. at 57
(quoting Bryan, 524 U.S. at 191); see also Ratzlaf v. United
States, 510 U.S. 135, 141 (1994); United States v. Murdock, 290
- 11 -
U.S. 389, 394-95 (1933). We look then to the context in which the
word "willfully" appears in § 7433(e) to ascertain its meaning.
Section 7433(e) directly links the phrase "willfully
violates" to two pre-existing sections of the Bankruptcy Code:
section 362, which addresses automatic stays, and section 524,
which addresses discharges and discharge orders. "We generally
presume that Congress is knowledgeable about existing law
pertinent to the legislation it enacts." Goodyear Atomic Corp. v.
Miller, 486 U.S. 174, 184-85 (1988). This presumption is
particularly appropriate when the new legislation invokes and
builds off an existing statutory framework. See, e.g., Trans World
Airlines, Inc. v. Thurston, 469 U.S. 111, 126 (1985). We turn
then to examine how courts had interpreted sections 362 and 524 of
the Bankruptcy Code in the years before Congress enacted § 7433(e),
looking first at violations of automatic stays and then turning to
violations of discharge orders.
III.
A.
The automatic stay is "one of the fundamental debtor
protections provided by the bankruptcy laws." Midlantic Nat. Bank
v. N.J. Dept. of Envtl. Prot., 474 U.S. 494, 503 (1986) (quoting
S. Rep. No 95-989, p. 54 (1978); H.R. Rep No. 95-595, p. 340
(1977)). "The stay gives a 'breathing spell' to the debtor and
stops 'all collection efforts, all harassment, and all foreclosure
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actions.'" Tringali v. Hathaway Mach. Co., Inc., 796 F.2d 553,
562 (1st Cir. 1986) (quoting H.R. Rep. No. 95-595, p. 340)).
Congress enacted then-section 362(h) of the Bankruptcy
Code in 1984 to provide a private cause of action to "[a]n
individual injured by any willful violation of a stay . . . ." 11
U.S.C. § 362(h) (West 1998); see Vahlsing v. Comm. Union Ins. Co.,
Inc., 928 F.2d 486, 489 n.1 (1st Cir. 1991).3 Before this provision
was added to the Bankruptcy Code, some courts had imposed sanctions
for willful violations of automatic stays "pursuant to the
authority of bankruptcy courts to order parties in contempt."
Crysen/Montenay Energy Co. v. Esselen Assocs., Inc. (In re
Crysen/Montenay Energy Co.), 902 F.2d 1098, 1104 (2d Cir. 1990).
For this reason, the standard courts had used for evaluating
whether a violation was willful was the standard that "governed
contempt proceedings: a party generally would not have sanctions
imposed . . . as long as it had acted without maliciousness and
had had a good faith argument and belief that its actions did not
violate the stay." Id. However, because § 362(h) created "an
independent statutory basis" to hold violators of the automatic
stay liable, courts began to apply "a standard less stringent than
maliciousness or bad faith to govern the imposition of sanctions
in bankruptcy cases." Id.
3A similar provision can be found today at 11 U.S.C.
§ 362(k)(1).
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Prior to the enactment of § 7433(e), nearly all courts,
and a majority of the circuits, had held that a willful violation
of an automatic stay under § 362(h) occurs when an individual knows
of the automatic stay and takes an intentional action that violates
the automatic stay. See, e.g., Jove Eng'g, Inc. v. IRS (In re
Jove Eng'g, Inc.), 92 F.3d 1539, 1555 (11th Cir. 1996); Price v.
United States (In re Price), 42 F.3d 1068, 1071 (7th Cir. 1994);
In re Crysen/Montenay Energy Co., 902 F.2d at 1105; Cuffee v. Atl.
Bus & Cmty. Corp. (In re Atl. Bus. & Cmty. Corp.), 901 F.2d 325,
329 (3d Cir. 1990); Knaus v. Concordia Lumber Co. (In re Knaus),
889 F.2d 773, 775 (8th Cir. 1989); Goichman v. Bloom (In re Bloom),
875 F.2d 224, 227 (9th Cir. 1989); Budget Serv. Co. v. Better Homes
of Am., 804 F.2d 289, 292-93 (4th Cir. 1986). These courts refused
to incorporate a bad faith or maliciousness requirement, and in
fact many specifically rejected good faith defenses. In re
Crysen/Montenay Energy Co., 902 F.2d at 1104-05; In re Atl. Bus.
& Cmty. Corp., 901 F.2d at 329; see also Pinkstaff v. United States
(In re Pinkstaff), 974 F.2d 113, 115 (9th Cir. 1992) ("As it is
undisputed that the IRS acted with knowledge of the bankruptcy
filing, it necessarily follows that the government willfully
violated the automatic stay." (internal quotation marks and
citations omitted)).
Contemporary versions of leading bankruptcy treatises
defined a "willful violation" of the automatic stay in the same
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manner. See George M. Treister et al., Fundamentals of Bankruptcy
Law (4th ed. 1996) § 5.01(c) ("A willful violation of the stay .
. . does not require an intent to violate nor an awareness that
the conduct was prohibited by the stay. It suffices that the
violator knew of the existence of the stay, i.e., that he knew of
the pendency of the bankruptcy, and that he intentionally did the
violating act."); David G. Epstein et al., Bankruptcy (1992) § 3-
33(c) ("A specific intent to violate the stay is not required, or
even an awareness by the creditor that her conduct violates the
stay. It is sufficient that the creditor knows of the bankruptcy
and engages in deliberate conduct that, it so happens, is a
violation of the stay."). These contemporary sources further show
that the phrase "willful violation" had a generally accepted
meaning at the time Congress enacted § 7433(e). See Hamilton v.
Lanning, 560 U.S. 505, 515-16 (2010) (considering circuit court
decisions and contemporary bankruptcy treatises when interpreting
undefined term in the Bankruptcy Code).
The IRS claims that before 1998, a few circuits,
including this circuit, had adopted a "less stringent standard"
that allowed alleged violators to raise a good faith defense. We
disagree. The three circuit court decisions cited by the IRS do
not provide an alternative definition of the phrase "willful
violation." Nelson v. Taglienti (In re Nelson), 994 F.2d 42, 45
(1st Cir. 1993); Andrews Univ. v. Merchant (In re Merchant), 958
- 15 -
F.2d 738, 742 (6th Cir. 1992); Sherk v. Tex. Bankers Life & Loan
Ins. Co. (In re Sherk), 918 F.2d 1170, 1178 (5th Cir. 1990)
abrogated on other grounds by Taylor v. Freeland & Kronz, 503 U.S.
638, 643 (1992). Rather, these three decisions all appear to be
limited resolutions of idiosyncratic fact patterns, with two
arising in the context of domestic relations, see In re Nelson 994
F.2d at 45; In re Sherk, 918 F.2d at 1178, without a broader
analysis of the meaning of "willful violation." Indeed, in In re
Nelson, we avoided adopting a particular definition of "willful
violation" by specifically limiting our holding to "the peculiar
'facts' of th[e] case." 994 F.2d at 45.4
A review of cases from within these circuits
demonstrates that these three decisions did not announce an
alternative "less stringent standard" for violations of automatic
stays. Even after these decisions were issued, courts continued
to apply the generally accepted definition of "willful violation"
and rejected good faith defenses. See, e.g., Stmima Corp. v.
Carrigg (In re Carrigg), 216 B.R. 303, 305 (B.A.P. 1st Cir. 1998);
Shadduck v. Rodolakis, 221 B.R. 573, 577, 582-83 (D. Mass. 1998)
4 As Murphy correctly notes in his brief, when we later adopted
the generally accepted definition of "willful violation" for
violations of automatic stays in Fleet Mortgage Group, Inc. v.
Kaneb, we did not reference any departure from our prior precedent.
In fact, we adopted the generally accepted definition because we
"decline[d] to create a new standard for willfulness. Fleet Mortg.
Grp., Inc., 196 F.3d at 268.
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(finding willful violation of automatic stay by IRS despite its
argument that it acted in good faith); In re Walker, 168 B.R. 114,
121 (E.D. La. 1994) ("Willfulness is not measured by specific
intent to violate a court order . . . ."); In re Timbs, 178 B.R.
989, 997 (Bankr. E.D. Tenn. 1994) ("[A] good faith mistake of the
law, a legitimate dispute as to legal rights or even good faith
reliance on an attorney's advice do[es] not relieve a willful
violator from the consequences of his act."); Smith v. GTE N. Inc.
(In re Smith), 170 B.R. 111, 115, 117 (Bankr. N.D. Ohio 1994) (no
good faith defense to willful violation of automatic stay).
The IRS also points to the Third Circuit's decision in
University Medical Center v. Sullivan (In re University Medical
Center), 973 F.2d 1065 (3d Cir. 1992) as an example of a court
adopting a good faith defense for willful violations of automatic
stays. It is true that, if read broadly, In re University Medical
Center could allow a creditor to raise a good faith defense in any
situation where existing law leads a creditor to reasonably believe
"its actions to be in accord with the stay." Id. at 1088.5
However, pre-1998 decisions from within the Third Circuit
demonstrate that courts did not read In re University Medical
5 One judge dissented from this part of In re University
Medical Center, stating that he would have found a willful
violation of the automatic stay because the Third Circuit had
already "explicitly rejected good faith as a defense to
'willfulness.'" 973 F.2d at 1089 (Becker, J., concurring in part
and dissenting in part).
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Center so broadly. In a decision issued only eight months after
In re University Medical Center, the Third Circuit itself
reaffirmed that "[w]illfulness does not require that the creditor
intend to violate the automatic stay provision" and that "a
creditor's 'good faith' belief that he is not violating the
automatic stay provision is not determinative of willfulness under
§ 362(h)." Lansdale Family Rests., Inc. v. Weis Food Serv. (In re
Lansdale Family Rests., Inc.), 977 F.2d 826, 829 (3d Cir. 1992)
(citing In re Univ. Med. Ctr., 973 F.2d at 1087-88). And, in a
case involving a taxpayer's suit against the IRS, the Bankruptcy
Court for the Middle District of Pennsylvania rejected the IRS's
argument that it relied in good faith on existing procedure set
out in the IRS manual, concluding that "[e]ven a good faith belief
that a party is not violating a stay is insufficient to escape
liability." Weisberger v. United States (In re Weisberger), 205
B.R. 727, 731 (Bankr. M.D. Pa. 1997) (citing In re Univ. Med. Ctr.,
973 F.2d at 1088).
In sum, we find the phrase "willful violation" had an
established meaning in the context of violations of automatic stays
as of 1998: a creditor willfully violated the automatic stay if
it knew of the automatic stay and took an intentional action that
violated the automatic stay. A good faith belief in a right to
the property was not relevant to determining whether the creditor's
violation was willful.
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B.
A discharge order issued pursuant to § 524(a) generally
"relieves a debtor from all pre-petition debt" and "permanently
enjoins creditor actions to collect discharged debts." Bessette
v. Acvo Fin. Servs., Inc., 230 F.3d 439, 444 (1st Cir. 2000). In
this way, the discharge order is designed "to ensure that debtors
receive a 'fresh start' and are not unfairly coerced into repaying
discharged prepetition debts." Pratt v. Gen. Motors Acceptance
Corp. (In re Pratt), 462 F.3d 14, 19 (1st Cir. 2006); see also
Hardy v. United States (In re Hardy), 97 F.3d 1384, 1388-89 (11th
Cir. 1996) (discussing how § 524 "embodies the 'fresh start'
concept of the bankruptcy code").
By 1998, bankruptcy courts had relied on their equitable
powers, granted by § 105(a), to sanction parties that willfully
violated discharge orders, see Bessette, 230 F.3d at 445 (citing
In re Hardy, 97 F.3d at 1389; In re Elias, 98 B.R. 332, 337 (N.D.
Ill. 1989); Matthews v. United States (In re Matthews), 184 B.R.
594, 598 (Bankr. S.D. Ala. 1995)), and had begun to apply the same
generally accepted definition of "willful violation" used for
violations of automatic stays to violations of discharge orders.
In In re Hardy, the Eleventh Circuit used the same willfulness
definition when determining whether the IRS violated a debtor's
discharge order. 97 F.3d at 1390. Other bankruptcy courts from
outside the Eleventh Circuit followed its lead. See In re Hill,
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222 B.R. 119, 122-23 (Bankr. N.D. Oh. 1998); In re Lovato, 203
B.R. 747, 749 (Bankr. D. Wyo. 1996); see also Behrens v. Woodhaven
Ass'n, 87 B.R. 971, 976 (Bankr. N.D. Ill. 1988), aff'd, No. 83 B
4896, 1989 WL 47409 (N.D. Ill. Mar. 8, 1989) (finding willful
violation of discharge order in case before In re Hardy when
creditor sued debtor on a prepetition contract "with full knowledge
of the Debtors' Chapter 7 case and discharge").
As Murphy concedes, fewer courts had addressed the
standard for willful violations of discharge orders by 1998 than
those that had discussed the meaning in the context of automatic
stays and § 362(h). However, we find that when Congress enacted
§ 7433(e), it sought to apply the same generally accepted standard
to violations of both automatic stays and discharge orders.
First, the plain language of § 7433(e) does not
distinguish between the two orders. The object of the verb/adverb
combination "willfully violates" in § 7433(e) is "any provision of
section 362 (relating to automatic stay) or 524 (relating to effect
of discharge) . . . ." Based on this structure, it would seem odd
to imbue "willfully violates" with two different meanings, one for
automatic stays and one for discharge orders.
Second, preexisting provisions of the Tax Code already
allowed the IRS to raise its good faith belief, not as a defense
to liability, but as a means of mitigating damages. Under 26
U.S.C. § 7430, a taxpayer who "prevails" in an action against the
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IRS may recover reasonable attorney's fees. However, there is an
exception to this rule: a taxpayer will not be treated as the
prevailing party "if the United States establishes that the
position of the [IRS] in the proceeding was substantially
justified." 26 U.S.C. § 7430(c)(4)(B).
Section 7430(c)(4)(B) was already in place in 1998, see
26 U.S.C. § 7430(c)(4)(B) (West 1998), and similar protections had
been in place since 1982, see 26 U.S.C. § 7430(c)(2)(A) (West 1982)
(party not a prevailing party against the United States unless it
"establishes that the position of the United States in the civil
proceeding was unreasonable"); Kaufman v. Egger, 758 F.2d 1, 3-4
(1st Cir. 1985). As the bankruptcy court recognized below,
§ 7430(c)(4)(B) "acknowledges that liability under the Code may
flow from good faith actions of the IRS, but that 'substantial
justification' may mitigate the damages available to the aggrieved
party." In re Murphy, 2013 WL 6799251, at *9 (emphasis added);
see also Kovacs v. United States, 739 F.3d 1020, 1026 (7th Cir.
2014) (discussing interplay between § 7430 and § 7433(e)). While
the IRS cannot rely on its good faith belief that it could collect
from Murphy as a defense to liability, it can invoke its good faith
belief to limit Murphy's recovery to his actual damages.6
6In this case, the IRS has stipulated to the amount of damages
as a part of the settlement agreement.
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For the foregoing reasons, we find that "willful
violation" had an established meaning in 1998 and that Congress
used that established meaning in § 7433(e) to set the standard for
evaluating violations of both automatic stays and discharge
orders.
IV.
Although we rely primarily on Congress's contemporary
understanding of the phrase "willful violation" in construing
§ 7433(e), post-1998 decisions from this circuit and
administrative materials from the IRS confirm that the generally
accepted definition of willful violation should control.
Since 1998, this circuit has adopted the same definition
of "willful violation" for violations of both automatic stays and
discharge orders. In Fleet Mortgage Group, Inc. v. Kaneb, issued
only one year after § 7433(e) was enacted, we explicitly adopted
the generally accepted definition for violations of automatic
stays. 196 F.3d at 268-69. Subsequently, in In re Pratt, we used
the same standard to evaluate whether a violation of a discharge
order was willful. 462 F.3d at 21. We stressed that Kaneb had
"rejected the proposition that a stay violation could not be
actionable (viz., 'willful') if the creditor had made a good faith
mistake." Id. We then held that the creditor in Pratt willfully
violated the discharge order because the creditor:
- 22 -
ha[d] not suggested -- nor could it plausibly
do so on these record facts -- that it did not
know of the existence of the [debtors']
chapter 7 discharge, or that it did not intend
to communicate to the [debtors] its refusal to
release its lien in the automobile so that it
could be junked.
Id.
In addition, the current version of the Internal Revenue
Manual appears to adopt the same generally accepted definition for
violations of automatic stays and discharge orders. The Manual
defines "willful" as "an act that was committed intentionally or
knowingly" and states that "[a] willful violation occurs when the
Service has received notice of a voluntary bankruptcy filing or of
the court's granting of a discharge, and the Service does not
respond timely to stop its collection activities." I.R.M.
1.4.51.2.7.1 (Aug. 11, 2015). Although the Manual does not have
the force and effect of law, we may rely on it to the extent we
find it persuasive. See Heinz v. Cent. Laborers' Pension Fund,
303 F.3d 802, 812 n.17 (7th Cir. 2002) (citing United States v.
Mead Corp., 533 U.S. 218 (2001)).
V.
We turn then to the IRS's alternative argument: that
even if there was a generally accepted definition of "willful
violation," such a definition is too broad to be applied against
the United States because § 7433(e) is a waiver of sovereign
immunity and such waivers must be narrowly construed.
- 23 -
It is true that courts "construe any ambiguities in the
scope of a waiver in favor of the sovereign." FAA v. Cooper, 566
U.S. 284, 291 (2012). At the same time, "the sovereign immunity
canon 'is a tool for interpreting the law' and . . . it does not
'displac[e] the other traditional tools of statutory
construction.'" Id. (quoting Richlin Sec. Serv. Co. v. Chertoff,
553 U.S. 571, 589 (2008)). We thus must "be careful not to be
more stinting in the interpretation of the provision than its
language requires," for "just as the courts should not construe a
waiver of sovereign immunity more broadly than Congress intended,
'[n]either, however, should we assume the authority to narrow the
waiver that Congress intended.'" Rakes v. United States, 442 F.3d
7, 19 n. 6 (1st Cir. 2006) (quoting United States v. Kubrick, 444
U.S. 111, 118 (1979)).
As discussed above, traditional interpretive tools lead
us to conclude that the generally accepted definition of "willful
violation" should apply to § 7433(e). By 1998, "willful violation"
had an established meaning in the context of violations of
automatic stays, and this established meaning had been applied to
violations of discharge orders. And, by 1998, the Tax Code already
allowed the IRS to raise its good faith belief, not as a defense
to liability, but as a means of limiting the taxpayer's recovery
to the actual damages incurred. Moreover, several of the decisions
adopting the generally accepted definition of "willful violation"
- 24 -
before 1998 applied that definition against the government,
despite the government's invocation of sovereign immunity. See In
re Hardy, 97 F.3d at 1390; In re Jove Eng'g, Inc., 92 F.3d at 1555-
56; In re Price, 42 F.3d at 1071; In re Pinkstaff, 974 F.2d at
115.
When considering the scope of a waiver of sovereign
immunity, a "narrower temporal approach -- looking at
congressional understanding of the enumerated sections at the time
of the [enactment] -- is preferable," in part because "the approach
adheres to the general principle that Congress is presumed to know
the content of background law." United States v. Torres (In re
Rivera Torres), 432 F.3d 20, 25 (1st Cir. 2005). By directly
linking the phrase "willfully violates" in § 7433(e) to sections
362 and 524, Congress sought to use the generally accepted
definition of the phrase "willful violation" in this context as
the limit to its waiver of sovereign immunity. And, when we look
past 1998, our subsequent caselaw and the administrative materials
from the IRS itself both confirm that the generally accepted
standard should control. For these reasons, we do not believe
sovereign immunity requires us to adopt a more narrow definition
of "willfully violates."
The IRS claims that if we apply the generally accepted
definition of "willful violation" to § 7433(e), we are effectively
forcing it to "seek a pre-enforcement determination from the
- 25 -
bankruptcy court about whether a tax debt has been discharged prior
to initiating any post-discharge collection efforts," which would
be both impractical and inconsistent with other provisions of the
Bankruptcy Code.
We agree that "the IRS need not appear and object in the
bankruptcy court to be excepted from [a] discharge under
§ 523(a)(1)(C)." Console v. Comm'r, 291 Fed. App'x 234, 237 (11th
Cir. 2008). Nothing in our decision today forces the IRS to obtain
a pre-enforcement determination before seeking to collect on tax
obligations like Murphy's. The IRS remains free to "wait until
the bankruptcy discharge is invoked as a defense to its collection
efforts, and then prove a factual basis for the tax fraud exception
in the collection proceedings." Id.
But, to the extent we find policy considerations
relevant, we believe compelling policy justifications, embodied in
§ 7433(e), weigh against allowing the IRS to attempt to collect
purportedly discharged debts without facing potential
consequences. Discharge orders "ensure that debtors receive a
'fresh start' and are not unfairly coerced into repaying discharged
prepetition debts." In re Pratt, 462 F.3d at 19. Congress enacted
§ 7433(e) to protect taxpayers who invoked the bankruptcy process,
providing them with a means of recovering damages if an employee
of the IRS willfully violates either the automatic stay or the
- 26 -
discharge order, the two foundational orders of the bankruptcy
process.
If the IRS found the February 14, 2006 discharge order
ambiguous, there was a variety of processes available to it to
determine whether Murphy's tax obligations had been discharged.
First, although not obligated to, the IRS could have forestalled
any possible question about dischargeability by filing an
objection in the bankruptcy court after it received notice of
Murphy's petition but before Murphy received his discharge. See
Console, 291 Fed. App'x at 237; see also Korte v. United States
(In re Korte), 262 B.R. 464, 471 (B.A.P. 8th Cir. 2001). Second,
the IRS could have filed an adversary proceeding before it began
its collection efforts to obtain a determination of whether the
tax obligations were covered by the discharge order. See Hassell
v. Comm'r, 92 T.C.M. (CCH) 273, 2006 WL 2602032, at *3 (2006);
United States v. Acker (In re Acker), No. 09-41961, 2010 WL
3547221, at *1 (Bankr. E.D. Tex. Sept. 7, 2010).
Alternatively, the IRS could, as it did, attempt to
collect from Murphy and thereby force him to return to the
bankruptcy court to obtain a determination that the debts had been
discharged. And, of course, if AUSA Emery had adequately supported
the opposition for summary judgment on dischargeability with
admissible evidence back in 2010, the bankruptcy court may well
- 27 -
have ruled in the IRS's favor and brought this case to an end years
ago, with the IRS facing no penalty for its collection efforts.
Because of the parties' settlement agreement, the
factual issues surrounding Murphy's alleged tax evasion and AUSA
Emery's cognitive disability are no longer relevant to this case.
We agree with the dissent that no judge has found that Murphy did
not evade taxes, and we take seriously the allegations against
Murphy that the IRS continues to make in its filings.7
If we were to adopt the IRS's definition, we would render
§ 7433(e) a near nullity. As the bankruptcy court ably described
it below:
[t]he IRS's position is that, as far as tax
collection and § 523(a)(1)(C) goes, it retains
the authority to make up its mind whether tax
obligations are discharged, that it may act
unilaterally on the basis of its conclusions,
and that it encounters no risk for doing so,
as long as it has a "good faith" or "reasonable
belief" for its conclusion.
7 Based on the odd procedural history of this case, no
factfinder has yet resolved whether AUSA Emery's disability caused
him to file the deficient opposition to summary judgment. The
district court's 2016 order remanded the case back to the
bankruptcy court in part so the bankruptcy court could resolve
these issues and thereby determine whether application of
offensive collateral estoppel against the IRS was proper. Murphy,
564 B.R. at 111-12. Ultimately, the parties left the issue open
in their settlement, in part because of "the desire to avoid not
only their respective risk of loss on the determination of whether
offensive collateral estoppel should apply, but also the potential
for the determination to entail substantial litigating expenses
(including possible expert medical testimony) and substantial
delay."
- 28 -
In re Murphy, 2013 WL 6799251, at *6.
Under this view, it is hard to imagine a case where a taxpayer
could ever collect against the government for a violation of the
automatic stay or discharge order. Although the dissent forcefully
argues that the sovereign immunity canon compels this narrow
definition of "willfully violates," we ultimately find that the
dissent's position "presents an unduly restrictiv[e] reading of
the congressional waiver of sovereign immunity, rather than a
realistic assessment of legislative intent." Franconia Assocs. v.
United States, 536 U.S. 129, 145 (2002) (alteration in original)
(internal quotation marks and citations omitted).
VI.
The IRS had several opportunities to obtain a judicial
determination that Murphy's tax obligations were excepted from
discharge. The bankruptcy court determined, based on the evidence
presented to it, that Murphy's tax obligations were not excepted
from discharge. In such cases where a taxpayer's debt is found to
be discharged, Congress has allowed the taxpayer to pursue an
action against the United States under § 7433(e) if an employee of
the IRS knew of the discharge order and took an intentional action
that violated the order.
For the foregoing reasons, we affirm.
-Dissenting Opinion Follows-
- 29 -
LYNCH, Circuit Judge, dissenting. With the greatest
respect for my esteemed colleagues, I think the majority gets this
one wrong. To the best of my knowledge, this is the first opinion
by a circuit court of appeals construing the phrase "willfully
violates" in 26 U.S.C. § 7433(e), enacted in 1998, and,
importantly, the first to deprive the United States, through the
IRS, of its sovereign immunity under that statute even where the
United States acted on a reasonable and good faith belief that a
discharge injunction did not apply to its collection efforts
against a tax debtor.
To be clear, there is no explicit waiver by Congress of
sovereign immunity under these circumstances. The majority
attempts to infer such a waiver. To the contrary, the Bankruptcy
Code itself provides that a discharge injunction does not apply to
a tax debt "with respect to which the debtor made a fraudulent
return or willfully attempted in any manner to evade or defeat
such tax." 11 U.S.C. § 523(a)(1)(C). And the IRS here says it
believed in good faith that the tax debts it attempted to collect
fell into this exception.
Further, the plain meaning of the phrase "willfully
violates," Supreme Court precedent interpreting the term "willful"
and the phrase "willful violation," the structure of the statutory
scheme, and the sovereign immunity canon all point toward § 7433(e)
not stripping the IRS of a reasonable good faith defense. Because
- 30 -
the majority opinion deprives the United States of sovereign
immunity and does so for reasons which I conclude are inconsistent
with Congressional intent, Supreme Court precedent, and with rules
of construction, I lay out the basis for my dissent.
A. Sovereign Immunity
Sovereign immunity is waived only if Congress clearly
intended as much. See F.A.A. v. Cooper, 566 U.S. 284, 290 (2012).
"A waiver of sovereign immunity 'cannot be implied but must be
unequivocally expressed.'" Irwin v. Dep't of Veterans Affairs,
498 U.S. 89, 95 (1990) (quoting United States v. Mitchell, 445
U.S. 535, 538 (1980)).
"[A]ny ambiguities in the scope of a waiver" are to be
construed "in favor of the sovereign." Cooper, 566 U.S. at 291.
"Ambiguity exists if there is a plausible interpretation of the
statute that would not authorize money damages against the
Government." Id. at 290-91. Consequently, we must determine
whether § 7433(e) can be plausibly interpreted not to authorize
money damages against the United States where the IRS acted
reasonably and in good faith to collect a tax debt. The statute
can and should be so interpreted. In my view, such an
interpretation is far more than plausible.
There is no expression by Congress here of a waiver of
sovereign immunity where the IRS acts reasonably and in good faith
to collect tax debts it reasonably believes do not fall within the
- 31 -
scope of a discharge injunction. When Congress intends to waive
sovereign immunity, it knows how to do so explicitly. See, e.g.,
11 U.S.C. § 106(a) ("Notwithstanding an assertion of sovereign
immunity, sovereign immunity is abrogated as to a governmental
unit to the extent set forth in this section with respect to the
following [enumerated provisions of the Bankruptcy Code].");
26 U.S.C. 7433(a) (creating a cause of action for damages against
the United States "[i]f, in connection with any collection of
Federal tax with respect to a taxpayer, any officer or employee of
the Internal Revenue Service recklessly or intentionally, or by
reason of negligence, disregards any provision of this title, or
any regulation promulgated under this title"). Congress did not
do so here and it easily could have.8
8 Franconia Assocs. v. United States, 536 U.S. 129 (2002),
is cited by the majority, but it has nothing to do with the issues
presented here. The limitation principle referred to there was
not about sovereign immunity at all, but about whether a special
accrual rule from a statute of limitations should be carved out
for the government when there is a repudiation of a Farmer's Home
Administration loan contract. See id. at 145. It is true that
Franconia cites to language about sovereign immunity in two other
cases, but once again those cases assist the dissent. Irwin
involved an explicit statutory waiver of immunity and the question
presented was whether the doctrine of equitable tolling fell within
that exception. 498 U.S. at 95. The same is true of the question
presented in Bowen v. City of New York, 476 U.S. 467 (1986), where
Congress had explicitly waived sovereign immunity as to certain
social security suits and the issue was whether the waiver included
recognition of the equitable tolling doctrine. See id. at 479-
80.
- 32 -
B. Text of 26 U.S.C. § 7433(e)
As a matter of statutory construction, we must first
look the text of § 7433(e). See SAS Inst., Inc. v. Iancu, 138
S. Ct. 1348, 1354 (2018); Mississippi ex rel. Hood v. AU Optronics
Corp., 571 U.S. 161, 168 (2014). Section 7433(e) states that,
"[i]f, in connection with any collection of Federal tax with
respect to a taxpayer, any officer or employee of the [IRS]
willfully violates any provision of section 362 . . . or 524 . . .
of title 11 . . . [,] such taxpayer may petition the bankruptcy
court to recover damages against the United States." (emphasis
added).
This case turns on how we interpret the phrase "willfully
violates." "Willfully" modifies "violates," and the ordinary
meaning of "willful," which controls where the term is not defined
in the statute, see Octane Fitness, LLC v. ICON Health & Fitness,
Inc., 134 S. Ct. 1749, 1756 (2014), is "deliberate" or "on
purpose." E.g., Wilful, Oxford English Dictionary Online,
http://www.oed.com/view/Entry/229028 (last visited May 25, 2018)
("Done on purpose or wittingly; purposed, deliberate, intentional;
not accidental or casual. Chiefly, now always, in bad sense, of an
action either evil in itself or blameworthy in the particular case"
(emphasis added)); Willful, Merriam-Webster's Dictionary Online,
https://www.merriam-webster.com/dictionary/willful (last visited
May 25, 2018) ("done deliberately"). So the IRS has to
- 33 -
deliberately violate a discharge injunction to be liable under
§ 7433(e).
Applying these definitions of "willful" here, the
statute should (and certainly can plausibly) be read to provide
the United States with a good faith defense. "Willfully" requires
that the violation be done "deliberately" or "knowingly." In this
case, that would mean an IRS employee must have violated the
discharge injunction deliberately, with knowledge that he was
violating the injunction.9
Under other provisions of the Bankruptcy Code, no
creditor, whether the IRS or another, necessarily violates a
discharge injunction merely by trying to collect a debt while aware
of the injunction. See, e.g., United States v. Ellsworth (In re
Ellsworth), 158 B.R. 856, 858 (Bankr. M.D. Fl. 1993). Rather, a
discharge injunction is violated only if the particular debt that
the creditor is trying to collect was actually discharged as a
result of the injunction. But IRS debts receive special treatment.
Section 523(a) lists several types of debts that are not
dischargeable, and that list includes tax debts "with respect to
which the debtor . . . willfully attempted . . . to evade or defeat
such tax." When the IRS, knowing of a discharge injunction, makes
tax debt collection efforts, and it has reasonably and in good
9 There is no claim the IRS acted recklessly.
- 34 -
faith, even if erroneously, determined that the tax debt was not
dischargeable and thus was not covered by the discharge injunction,
the IRS's "violation" was not done deliberately merely because its
assessment of the effect of the injunction was incorrect.
No judge in this case has even held that the debtor did
not in fact make "a fraudulent return or willfully attempt in any
manner to evade or defeat such tax." Id. § 523(a)(1)(C). At most,
the initial bankruptcy judge held that the IRS attorney (who the
IRS maintains had been made incompetent by the onset of dementia)
did not "present [the] evidentiary quality material" required to
prove tax fraud. The IRS also maintains that the disabled attorney
also did not give notice to the IRS of his actions in the case,
leaving the IRS unaware of his incapacity and his failure to
provide adequate evidence. The extent and timing of the attorney's
disability is relevant to whether an IRS employee "willfully
violate[d]" the discharge injunction under the plain meaning of
that phrase. Yet the majority's holding would render these factors
irrelevant.
C. Pre-Section-7433(e) Case Law
1. Supreme Court Precedent
The majority reasons that the key to this case is found
in the premise that Congress is presumed to know how the law has
been interpreted by the courts, and then to legislate against that
- 35 -
backdrop. See Hood, 571 U.S. at 169; Bragdon v. Abbott, 524 U.S.
624, 644-45 (1998).
The majority, though, in my view, misapplies the
premise. I disagree that we should interpret § 7433(e) based on
how some circuit courts had interpreted the phrase "willful
violation" in the context of a different and older statute, 11
U.S.C. § 362(h). We cannot ignore the decades of Supreme Court
case law interpreting the term "willful" and the phrase "willful
violation." Congress, after all, did not simply say "violates";
§ 7433(e) modifies and restricts the word "violates" with the word
"willful."
If we are to "presume that Congress is knowledgeable
about existing law pertinent to the legislation it enacts,"
Goodyear Atomic Corp. v. Miller, 486 U.S. 174, 185 (1988), then we
should presume here that Congress knew about clearly established
Supreme Court precedent. I would have thought that Supreme Court
law would be far more relevant than the general and not uniform
pronouncement of some circuits.
Congress would have been particularly aware of how the
Supreme Court interpreted the term "willful" in Kawaauhau v.
Geiger, 523 U.S. 57 (1998), which was decided just months before
§ 7433(e) was passed. Kawaauhau was a natural place to look: it
pertained to 11 U.S.C. § 523, a part of the Bankruptcy Code that
lists the types of debts that cannot be discharged. See Kawaauhau,
- 36 -
523 U.S. at 59. Section 523 is a statute of intrinsic importance
when determining whether a discharge injunction was willfully
violated. In Kawaauhau, the Court determined that "willful . . .
injury" included only acts that were specifically intended to cause
injury, not all intentional acts that resulted in injury. 523
U.S. at 61. The Court explained its holding as follows:
The word "willful" . . . modifies the word
"injury," indicating that nondischargeability
takes a deliberate or intentional injury, not
merely a deliberate or intentional act that
leads to injury. Had Congress meant to exempt
debts resulting from unintentionally
inflicted injuries, it might have described
instead "willful acts that cause injury." Or,
Congress might have selected an additional
word or words, i.e., "reckless" or
"negligent," to modify "injury."
Id. That logic maps directly onto the language of § 7433(e).
"Willfully" modifies "violates," so liability requires a
deliberate or intentional "violation." Had Congress intended
otherwise, it would have said so clearly. We should assume
Congress knew about this latest Supreme Court interpretation of
similar language in the bankruptcy context when it was drafting
§ 7433(e).
Moreover, the Supreme Court, consistent with Kawaauhau,
had long held that "willful violation" requires that the violator
"knew or showed reckless disregard for the matter of whether its
conduct was prohibited." Trans World Airlines, Inc. v. Thurston,
469 U.S. 111, 128-29 (1985). The Supreme Court, before § 7433(e)
- 37 -
was enacted, also had repeatedly held that the term "willful"
requires more than negligence. See Bryan v. United States, 524
U.S. 184, 196 (1998) (holding that a criminal statute's use of
"willful" required "knowledge that the conduct is unlawful");
McLaughlin v. Richland Shoe Co., 486 U.S. 128, 133 (1988) ("The
word 'willful' is widely used in the law, and . . . is generally
understood to refer to conduct that is not merely negligent.");
United States v. Ill. Cent. R. Co., 303 U.S. 239, 243 (1938)
(holding that "[w]illfully . . . means purposely or obstinately
and is designed to describe the attitude of a carrier, who, having
a free will or choice, either intentionally disregards the statute
or is plainly indifferent to its requirements." (quoting St. Louis
& S.F.R. Co. v. United States, 169 F. 69, 71 (8th Cir. 1909)));
United States v. Murdock, 290 U.S. 389, 395 (1933) ("The word
["willfully"] is . . . employed to characterize a thing done
without ground for believing it is lawful, or conduct marked by
careless disregard whether or not one has the right so to act."
(citations omitted)). These cases10 mean that the phrase
"willfully violates" in § 7433(e) certainly requires more than
mere knowledge of a discharge injunction in order to have a
10 The Supreme Court in Safeco Ins. Co. of Am. v. Burr, 551
U.S. 47 (2007), stated that "where willfulness is a statutory
condition of civil liability," that term typically covers
"knowing" and "reckless" violations. Id. at 57.
- 38 -
violation of that injunction, especially when the IRS has a
reasonable good faith belief that the injunction does not apply.
2. Circuit Precedent Was Neither Clear nor Unanimous
Even if we could look at circuit and bankruptcy court
interpretations of other statutes, 11 U.S.C. §§ 362(h) and 524, to
interpret the phrase "willfully violates," the definition of that
phrase must have been clearly established and "settled" at the
time § 7433(e) was enacted in order for the majority's argument to
succeed. Armstrong v. Exceptional Child Ctr., Inc., 135 S. Ct.
1378, 1386 (2015) (declining to apply the prior-construction canon
because, inter alia, the courts' interpretation of the pre-
existing statutory provision was not "settled" (quoting Bragdon,
524 U.S. at 645)); see also United States v. Torres (In re Rivera
Torres), 432 F.3d 20, 26 (1st Cir. 2005).
The Supreme Court has only applied a judicial
interpretation of a pre-existing statute to a new statute where
that interpretation was unanimous or very close to it. See
Bragdon, 524 U.S. at 644-45 (holding that, because "[e]very court"
that had interpreted the preexisting statute was in agreement,
"the new statute should be construed in light of this unwavering
line of administrative and judicial interpretation" (emphasis
added)); Lorillard v. Pons, 434 U.S. 575, 580 (1978) (applying the
prior-construction canon where "every court" to interpret the pre-
existing statute had been in agreement).
- 39 -
I do not see the pre-§ 7433(e) consensus among those
courts that the majority does. Before the enactment of § 7433(e),
seven circuits had stated that the phrase "willful violation" in
§ 362(h), which concerns stays of collection activity once a debtor
files for bankruptcy, applied whenever a creditor knew of an
automatic stay and violated it.11 However, three circuits had held
that more was required in order for the violation of the stay to
be "willful." Seven out of ten is a circuit split, not a clear
consensus.12 And a stay is not a discharge injunction, and
"creditor" encompasses far more than the IRS.
11 The majority also references Hardy v. IRS, (In re Hardy),
97 F.3d 1384 (11th Cir. 1996), which interpreted the phrase
"willful violation" in the § 524 context. That case is of little
help because it was the only circuit case addressing that
definition in the § 524 context when § 7433(e) was passed, meaning
the § 524 case law was not "clearly established." In re Rivera
Torres, 432 F.3d at 26.
12 In order to support its argument that Congress would
have understood "willfully violates" to cover situations where the
IRS acted reasonably and in good faith, the majority looks to
circuit case law post-dating the enactment of § 7433(e). Cases
from the 2000s do not help us determine how Congress would have
understood a phrase in 1998. Even so, there is no consensus on
the definition of "willful" in the § 524 discharge injunction
context. The Ninth Circuit has held that a good faith belief that
one is not violating a discharge injunction is sufficient to show
that there was no "willful violation" of the discharge injunction.
See Lorenzen v. Taggert (In re Taggert), 888 F.3d 438, 444 (9th
Cir. 2018). Indeed, the Ninth Circuit does not even impose a
reasonableness requirement. Id. ("the creditor's good faith
belief that the discharge injunction does not apply to the
creditor's claim precludes a finding of contempt, even if the
creditor's belief is unreasonable" (emphasis added) (citing
Corning v. Corning (In re Zilog, Inc.), 450 F.3d 996, 1009 n.14
(9th Cir. 2006))).
- 40 -
As I read the law of the First Circuit, it specifically
allowed for reasonable good faith as a defense to a claimed willful
violation of a stay. See Nelson v. Taglienti (In re Nelson), 994
F.2d 42, 45 (1st Cir. 1993); see also Vahlsing v. Commercial Union
Ins. Co., 928 F.2d 486, 490 (1st Cir. 1991). In Vahlsing, this
court noted that "[v]iolation of [a] stay . . . is not a strict
liability tort." 928 F.2d at 490. In In re Nelson, this court
went further, holding that a bankruptcy stay was not willfully
violated because, inter alia, "it was reasonable for [the creditor]
to believe that the property was not part of the bankruptcy
estate." 994 F.2d at 45. In re Nelson was still controlling law
when § 7433(e) was enacted in 1998.
Other circuits had also held that a colorable legal
argument of no violation was sufficient to show that a violation
of an automatic stay was not willful. The Fifth Circuit had held
that a creditor did not "willfully violate[] the automatic stay"
because her legal position that the stay did not apply was
"arguable." Sherk v. Tex. Bankers Life & Loan Ins. Co. (In re
Sherk), 918 F.2d 1170, 1178 (5th Cir. 1990) abrogated on other
grounds by Taylor v. Freeland & Kronz, 503 U.S. 638, 643 (1992).
The same is true of the majority's reference to the
Internal Revenue Manual. A citation to the current Manual does
not tell us how Congress would have interpreted "willfully
violates" in 1998. As the majority concedes, the Manual does not
even have the force of law.
- 41 -
The Sixth Circuit took a similar position in Andrews University v.
Merchant (In re Merchant), 958 F.2d 738 (6th Cir. 1992), finding
that a university's violation of an automatic stay "was not
willful" without holding that the university did not know of the
stay. Id. at 740, 742.
The majority posits that Congress would have ignored
these three circuit court opinions when drafting § 7433(e), but
provides no credible reason why.13 The majority dismisses these
cases as "limited resolutions of idiosyncratic fact patterns," but
the holdings on these fact patterns establish the very point that
proves the majority wrong. When § 7433(e) was passed in 1998,
three circuits had held that a colorable legal position was
13The majority attempts to deny the existence of this
circuit split by pointing to a handful of lower and Article I court
cases that are not in accordance with the precedent of their
respective circuits. These cannot minimize the circuit split.
The First, Fifth, and Sixth Circuits had held that mere knowledge
of a stay was insufficient to show a "willful violation."
The majority similarly argues that Congress would have
ignored these cases when drafting § 7433(e) because they lack "a
broader analysis of the meaning of 'willful violation.'" First,
many of the circuit cases adopting the majority's favored
definition of "willful violation" also provide little analysis.
See, e.g., Price v. United States (In re Price), 42 F.3d 1068,
1071 (7th Cir. 1994); Goichman v. Bloom (In re Bloom), 875 F.2d
224, 227 (9th Cir. 1989). Second, that the analysis may have been
limited in these three cases is irrelevant. Three circuits had
held that a colorable legal argument was sufficient to show that
a violation was not "willful" under § 362(h). That is enough to
find that the meaning of "willful violation" was not clearly
established, regardless of how much analysis the three circuits
provided.
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sufficient to show that a violation of a stay was not willful.
These decisions never said that their interpretation of "willful
violation" in § 362(h) was affected by the unusual nature of the
facts presented. Bankruptcy cases -- including this one -- often
involve unusual facts; the peculiarity of the facts in a couple of
the cases involved in the pre-1998 circuit split does not mean
that Congress would have interpreted those cases differently or
seen a consensus where there was none. The majority argues that
In re Nelson was limited to its facts but, even if that were true,
its holding that a reasonable legal argument was sufficient to
render a violation not willful is irreconcilable with the
majority's holding in this case.
D. Congress's Tax Collection Scheme Is Inconsistent with the
Majority View
The statutory context for the IRS tax collection scheme,
which we are required to consider, see SAS Inst., 138 S. Ct. at
1355, is also inconsistent with the majority view. I am concerned
that that majority holding will cause damage to the tax collection
scheme. The practical effect of the decision is to impose damages
on the IRS when it initiates collection efforts in the face of a
discharge injunction that the IRS reasonably and in good faith
determines does not apply. The opinion effectively requires the
IRS to first go to court and prove its case that the taxes are
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owed before instituting any collection efforts. But Congress has
decided to the contrary.
Congress specifically chose not to require the IRS to
first obtain a judicial determination that an exception to
discharge applies before engaging in tax debt collection efforts.
Section 523(a) holds that certain types of debts, including tax
debts "with respect to which the debtor made a fraudulent return
or willfully attempted in any manner to evade or defeat such tax,"14
are excepted from a discharge injunction. Id. § 523(a)(1)(C). By
contrast, § 523(c)(1) specifies that three particular types of
debts are automatically deemed included in a discharge injunction
unless or until the creditor initiates a post-injunction
adversarial proceeding that yields a judicial determination that
the debt is excepted from discharge. Significantly, tax debts are
not listed in § 523(c)(1). This means that Congress chose not to
require that the IRS seek a pre-collection determination from the
bankruptcy court that tax debts are excepted from a discharge
injunction. Given that Congress created this exception to
14The issue of dischargeability of debts resulting from a
debtor's dishonesty is important, as evidenced by the grant of
certiorari in Appling v. Lamar, Archer & Cofrin, LLP (In re
Appling), 848 F.3d 953 (11th Cir. 2017), cert. granted, 138 S. Ct.
743 (Jan. 12, 2018) (No. 16-1215). See id. at 955 (holding that
a debt was not excepted from discharge under § 523(a)(2) because
the debtor's misrepresentation about a future cash flow amounted
to a misrepresentation about his financial condition and was not
made in writing).
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discharge and did not require the IRS to seek a pre-collection
determination that tax debts are not dischargeable, there is no
reason to say that the IRS should incur the risk of having damages
found against it even if it acted on a reasonable and good faith
belief that the tax debts were excepted from discharge.15
If Congress had intended to require the IRS to seek a
pre-collection determination from the bankruptcy court or had
intended for the IRS to incur a risk of damages under these
circumstances even when it acts reasonably, it would have said so
directly. Epic Sys. Corp. v. Lewis, Nos. 16-285, 16-300, 16-307,
slip op. at 15 (U.S. May 21, 2018) ("Congress 'does not alter the
fundamental details of a regulatory scheme in vague terms or
ancillary provisions -- it does not, one might say, hide elephants
in mouseholes.'" (quoting Whitman v. Am. Trucking Ass'ns, Inc.,
531 U.S. 457, 468 (2001))). Yet the majority has, in effect,
imposed such a requirement. In doing so, the majority reaches a
result that Congress contemplated and explicitly rejected.
15 The majority argues that Congress clearly used the
phrase "willfully violates" in order to "directly link" § 7433(e)
to the "willful violation" standard used in § 362(h). But the
phrase "willfully violates" relates just as directly to Supreme
Court precedent interpreting similar phrases. In any case, a
"direct link" to the standard used for § 362(h) is only helpful to
the majority to the extent there was a consensus around that
standard when § 7433(e) was passed, and there was none.
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I also disagree with the majority's argument that the
existence of 26 U.S.C. § 7430(c)(4)(B) in 1998 shows that Congress
intended for § 7433(e) to waive sovereign immunity even where the
IRS has a reasonable and good faith belief that the debt was not
discharged. Section 7430 is concerned with an altogether different
topic. It allows a "prevailing party" in litigation against the
IRS to recover "reasonable litigation costs incurred in connection
with such court proceeding," under certain circumstances. Id. at
§ 7430(a)(2). And even under § 7430, a victorious taxpayer is not
treated as a "prevailing party," and so is unable to recover
litigation costs against the IRS, if the IRS's litigation position
was "substantially justified." Id. at § 7430(c)(4)(B).
Contrary to the majority's assertion, the IRS cannot
mitigate the damages it is forced to pay to the taxpayer under the
majority's interpretation of § 7433(e) by showing a substantial
justification for its position under § 7430(c)(4)(B). Section
7430 only covers "litigation and administrative costs," so having
a substantially justified position does not allow the IRS to
mitigate the § 7433(e) damages the majority would force it to pay.
Parties are routinely required to cover their own costs; § 7430's
cost-shifting provision has no bearing on § 7433(e) damages.
It is not true, as the majority posits, that adopting
the IRS's definition of "willfully violates" "would render
§ 7433(e) a near nullity." Adopting the IRS's definition would
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only free it to collect tax debts that it reasonably believes are
not covered by a discharge injunction or automatic stay. If the
IRS were to collect other types of tax debts not exempted from
discharge by § 523, that would present a different issue under
§ 7433(e), which is not before us.
The majority appears skeptical that courts would ever
find that the IRS has violated the reasonableness requirement.
Several bodies of law instruct courts to inquire into the
reasonableness of an actor's behavior, including torts, see, e.g.,
Restatement (Second) of Torts § 282 (1965), and administrative
law, see, e.g., Chevron, U.S.A., Inc. v. Nat. Res. Def. Council,
Inc., 467 U.S. 837, 844 (1984). The use of a reasonableness
standard in those areas does not render the relevant statutes near
nullities.
In my view, the intent of Congress is clearly not to
waive sovereign immunity in these circumstances. But even if there
were ambiguity, that ambiguity itself would require that we find
no waiver of sovereign immunity. I respectfully dissent.
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Internal Revenue Service v. Murphy
Court: Court of Appeals for the First Circuit
Date filed: 2018-06-07
Citations: 892 F.3d 29
Copy CitationsCombined Opinion