John Broos v. United States ( 2015 )

United States Bankruptcy Appellate Panel
For the Eighth Circuit
___________________________
No. 15-6013
___________________________
In re: John Lloyd Broos; Carol Jean Broos
lllllllllllllllllllllDebtors
------------------------------
John Lloyd Broos; Carol Jean Broos
lllllllllllllllllllll Plaintiffs - Appellants
v.
United States of America
lllllllllllllllllllll Defendant - Appellee
____________
Appeal from United States Bankruptcy Court
for the District of Minnesota - St. Paul
____________
Submitted: July 6, 2015
Filed: July 16, 2015
____________
Before SCHERMER, NAIL, and SHODEEN, Bankruptcy Judges.
____________
SCHERMER, Bankruptcy Judge
John Lloyd Broos and Carol Jean Broos (Debtors) appeal from the Bankruptcy
Court’s1 order substituting the named defendants, several employees of the Internal
Revenue Service (IRS), for the United States, and dismissing their complaint. The
Debtors’ complaint alleged violations of 26 U.S.C. § 7433 and 11 U.S.C. § 524. We
have jurisdiction over this appeal. 28 U.S.C. § 158(b). We affirm.
ISSUES
1. Was it proper to substitute the United States as the defendant?
2. Was it proper to deny the Debtors’ request for entry of default judgment?
3. Did the Debtors have standing to bring an action for damages without first
following the remedies under 26 U.S.C. § 7433?
BACKGROUND
On July 21, 2009, the Debtors filed a petition for Chapter 7 relief. On their
schedules, the Debtors listed the IRS as an unsecured creditor holding a claim in the
amount of $249,085. They received a discharge on October 21, 2009.
Following the close of their Chapter 7 case, several IRS employees including,
Tim Sherrill, Bart Brellenthin, G.J. Carter-Louis, V.A. Ris, and Michael W. Cox (IRS
employees), issued IRS levies and filed Notices of Federal Tax Liens with respect to
the Debtors’ federal tax debt.
1
The Honorable Gregory F. Kishel, Chief Judge, United States Bankruptcy
Court for the District of Minnesota.
2
The Debtors filed their adversary proceeding, naming each IRS employee as
a defendant. The complaint alleges that the IRS employees violated 26 U.S.C. § 7433
by issuing levies and filing the Notices of Federal Tax Liens. As a result, the Debtors
seek actual and punitive damages.
The United States, believing itself to be the proper party defendant, filed a
motion to dismiss. The Bankruptcy Court subsequently entered an order substituting
the United States as the sole defendant, denying the Debtors’ request for default
judgment, and dismissing the Debtors’ complaint. The Debtors timely appealed.
STANDARD OF REVIEW
We review the Bankruptcy Court’s findings of fact for clear error and its
conclusions of law de novo. Wilson v. Walker (In re Walker), 528 B.R. 418, 427
(B.A.P. 8th Cir. 2015) (citing Heide v. Juve (In re Juve), 761 F.3d 847, 851 (8th
Cir.2014)). All three issues before us involve purely legal questions. Therefore, we
exercise de novo review with respect to all three.
DISCUSSION
1. Substitution of the United States was Proper because the United States is
the Proper Party Defendant
In general, a private litigant may not sue the United States or any of its officers
and employees without a waiver of sovereign immunity. United States v. Nordic Vill.
Inc., 503 U.S. 30, 33-34(1992). Section 7433 of the Internal Revenue Code provides
such a waiver. It permits suits against the United States only:
If, in connection with any collection of Federal tax with respect to a
taxpayer, any officer or employee of the Internal Revenue Service
3
recklessly or intentionally, or by reason of negligence, disregards any
provision of this title, or any regulation promulgated under this title,
such taxpayer may bring a civil action for damages against the United
States ... (emphasis added).
26 U.S.C. § 7433(a).
Individual federal employees may not be sued for actions taken in the
performance of their official duties. See Searcy v. Donelson, 204 F.3d 797, 798 (8th
Cir. 2000) (collecting cases). Sovereign immunity still applies in such cases. Id. As
a result, the Debtors may not bring suit against the IRS employees under § 7433
because the actions that the Debtors allege violated § 7433–the issuance of levies and
filing of notices of federal tax liens–were performed in the IRS employees’ official
capacities as tax collectors.
The issuance of levies and the filing of notices of federal tax liens are actions
to collect federal tax debt. “Official-capacity suits typically involve either allegedly
unconstitutional state policies or unconstitutional actions taken by state agents
possessing final authority over a particular decision.” Nix v. Norman, 879 F.2d 429,
431 (8th Cir. 1989). Actions to collect federal tax debt do not fit either description.
Indeed, it is difficult to imagine what actions would be included in the IRS
employees’ official duties if not the ones at issue here. We conclude that the claims
brought against the IRS employees are barred by sovereign immunity because the
employees were acting in their official capacities. As a result, the United States is the
proper party defendant and substitution of the United States for the IRS employees
as the party defendant was proper.
2. The Debtors were not Entitled to Default Judgment
The Debtors argue that they are entitled to default judgment against either the
IRS employees or the United States. Default judgment is appropriate “[w]hen a party
4
against whom a judgment for affirmative relief is sought has failed to plead or
otherwise defend, and that failure is shown by affidavit or otherwise...” Fed. R. Civ.
P. 55(a); Fed. R. Bankr. P. 7055. Default judgment may only be entered against the
United States, its officers, or its agencies “if the claimant establishes a claim or right
to relief by evidence that satisfies the court.” Fed. R. Civ. P. 55(d); Fed. R. Bankr. P.
7055.
The Debtors are not entitled to default judgment against the IRS employees or
the United States. Since the IRS employees were not the proper party defendants, an
entry of default judgment against the IRS employees would be inappropriate under
Rule 7055 because they are not parties to this proceeding and the Debtors have no
right to relief. An entry of default judgment against the United States is improper as
well. The United States did not fail “to plead or otherwise defend” its position
because it timely entered its appearance before the Bankruptcy Court. Under the
circumstances, therefore, denial of default judgment against the IRS employees and
the United States was appropriate.
3. Dismissal was Proper because the Debtors Lack Standing to Bring an
Action Under 26 U.S.C. § 7433 and 11 U.S.C. § 524
The Debtors may not bring an action for damages under § 7433 because they
have failed to exhaust their administrative remedies. 26 U.S.C. § 7433(d). Section
7433(b)(1) permits recovery of actual damages and costs when a violation occurs. A
bankruptcy court may also award damages for willful violations of the automatic stay
under 11 U.S.C. § 362 and the discharge injunction under 11 U.S.C. § 524 committed
by employees of the IRS. 26 U.S.C. § 7433(e)(1). However, a bankruptcy court may
not award punitive damages. 11 U.S.C. § 106(a)(3). Importantly, actual damages may
not be awarded unless “the court determines that the plaintiff has exhausted the
administrative remedies available to such plaintiff within the Internal Revenue
Service.” 26 U.S.C. § 7433(d).
5
The procedure a litigant must follow in order to exhaust their remedies under
§ 7433(d) for violations of the bankruptcy discharge under 11 U.S.C. § 524 is
enumerated in 26 CFR 301.7430-1 and 301.7433-2(e). A litigant must file a written
administrative claim for damages or for relief with the Chief, Local Insolvency Unit
for the corresponding judicial district in which the bankruptcy petition was filed. Id.
Such claim must contain the taxpayer's name, taxpayer identification number, current
address, current home and work telephone numbers, the location of the bankruptcy
court in which the underlying bankruptcy case was filed, the case number of the
bankruptcy case in which the violation occurred, a description of the violation and
injuries, the dollar amount of the injuries, and the signature of the taxpayer or the
taxpayer’s representative. 26 CFR 301.7433-2(e). The taxpayer must then wait until
the earlier of six months or the date on which the IRS has rendered a decision on the
claim.
The Debtors have failed to do so. The Bankruptcy Court determined that the
Debtors had not filed an administrative claim for damages with the IRS. Therefore,
they may not bring an action for damages under § 7433. And, even if the Debtors did
have standing to bring a claim for actual damages under § 7433(b), their request for
punitive damages would be denied as such damages are unavailable as a matter of
law. 11 U.S.C. § 106(a)(3). Consequently, we must affirm the dismissal of the
Debtors’ complaint. If the Debtors wish to sue the government for violations of the
bankruptcy discharge under 11 U.S.C. § 524, they must first exhaust their
administrative remedies.
CONCLUSION
For the reasons stated, we affirm the Bankruptcy Court’s order dismissing the
Debtors’ complaint and substituting the United States as the sole defendant.
6