APPEAL
FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MAINE [Hon. D. Brock Hornby, U.S. District 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.
Before
Lynch, Circuit Judge, Souter, Associate Justice,
[*]
and Stahl, Circuit Judge.
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 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.
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 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 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 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"].
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).
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 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 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 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.
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 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) ยง 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 ...