Opinion
Case No. 01-27782-jes, Adversary No. 05-2462.
October 31, 2011
DECISION AND ORDER DETERMINING ACTUAL DAMAGE AWARD UNDER 26 U.S.C. SEC. 7430
Some cases are resolved quickly after legal proceedings have been commenced, and other cases can drag on for years. Unfortunately, this case falls into the latter category. The plaintiff, Nancy E. Kovacs ("Kovacs"), filed this adversary proceeding against the United States of America (hereafter referred to as "United States," "IRS," or "government") on August 11, 2005. After more than six years, this case is still not fully resolved and is once again before this court on a third remand.
A detailed chronological history of events leading up to this third remand is set forth in Judge Randa's September 30, 2011 decision and order dismissing Kovacs' appeal and reversing this court's September 15, 2010 award of actual damages under 26 U.S.C. § 7433 and remanding this case for further determination under 26 U.S.C. § 7430 of the relevant criteria. More specifically, this court was directed by the district court to address the following issues within the meaning of § 7430:
1. Who was the prevailing party?
2. Was the United States substantially justified in its litigation position?
Judge Randa, in his remand, did not direct this court to revisit the issue of damages. He found that this court's findings of damages were sufficiently specific and did not constitute an abuse of this court's discretion.
WHO WAS THE PREVAILING PARTY ?
Sec. 7430(c)(4)(A) states the following:
The term "prevailing party" means any party in any proceeding . . . (i) which — (I) has substantially prevailed with respect to the amount in controversy, or (II) has substantially prevailed with respect to the most significant issue or set of issues presented[.]
It was not until the February 21, 2007 trial in this court that the United States for the first time conceded that the IRS had willfully violated the discharge injunction under § 524. This concession by the IRS, however, did not remove this issue from its status as the most significant issue in this case. As Judge Randa observed "the contours of this case have changed substantially since the 2007 bankruptcy court's decision." The Court of Appeals, in its July 29, 2010 decision, determined that it was the two September, 2003, collection letters which the IRS sent to Kovacs that violated § 524 of the Bankruptcy Code, not the six IRS notices of intent to levy sent to Kovacs in July of 2002, which had become time-barred by the time this adversary proceeding was commenced. Although the contours of this case have changed, the main issue — namely, whether there was a violation of the § 524 discharge injunction — remains unchanged.
This court fully recognizes that Kovacs was not satisfied with the damages award of $25,000 made by this court in its September 11, 2007 decision following the trial. During this trial, Kovacs' request for damages totaled nearly $115,000. Following that decision, Kovacs, in her notice of appeal, sought an order altering and amending the final judgment requesting that her litigation fees be increased to approximately $155,000. The Court of Appeals did not grant Kovacs' request and instead remanded this case which eventually was returned to this court for determination of damages under § 524 resulting solely from the two September, 2003 collection letters sent to Kovacs. In response, this court made a finding of damages totaling $3,750, which determination Kovacs again appealed.
Kovacs' dissatisfaction, however, does not mean that she was not the prevailing party. 10 Moore's Federal Practice § 54.101(3) states in part that the term "prevailing party" has been held to mean "the party in whose favor judgment was entered, even if that judgment does not fully vindicate the litigant's position in the case." See also Republic Tobacco Co. v. North Atlantic Trading Co., 481 F.3d 442 (7th Cir. 2007) (defendant's success in obtaining reduction of plaintiff's damages award does not make the defendant the prevailing party, if the end result is still a judgment in favor of the plaintiff). Although the discussion of the meaning of "prevailing party" in Moore's Federal Practice and in the Republic Tobacco Co. decision involved Federal Rule 54(d)(1) and not § 7430, the underlying rationale is the same.
A key word in § 7430(c)(4)(A) is "or." Kovacs may not have substantially prevailed with respect to the amount of damages she was seeking but damages is only one alternative under this section. Kovacs, however, did substantially prevail with respect to the most significant issue or set of issues presented in this adversary proceeding — namely, whether the IRS had willfully violated the discharge injunction under § 524.
This court therefore concludes that Kovacs was the prevailing party in this adversary proceeding within the meaning of § 7430.
WAS THE UNITED STATES SUBSTANTIALLY JUSTIFIED IN ITS LITIGATION POSITION ?
In order to be "substantially justified" within the meaning of § 7430, the IRS's position must have been reasonable in both law and fact. Pierce v. Underwood, 487 U.S. 552 (1988). In In re Abernathy, 150 B.R. 688 at 695 (Bankr. N.D. Ill. 1993), the court stated:
". . . it is well established in this circuit that, in ruling on substantial justification, the court can consider not only the United States' in-court litigating position, but also the United States' out-of-court position both before and after the civil action was commenced."
The determination of whether or not the government's position was substantially justified is made on a case-by-case basis under the particular facts and circumstances involved. In re Seay, 369 B.R. 423 (Bankr. E.D. Ark. 2007).
The facts of this case were that the IRS mistakenly concluded that some of Kovacs' tax liabilities owing to the IRS were nondischargeable and then proceeded to initiate collection against Kovacs. Approximately 1 year and 9 months later, it was discovered that those tax obligations were, in fact, discharged and the appropriate officials were so alerted. The IRS then took steps to change the status of these taxes from nondischargeable to dischargeable but failed to respond to Kovacs' administrative claim for attorney's fees. That prompted Kovacs to commence this adversary proceeding.
At the time the IRS served its two September, 2003 collection notices upon Kovacs, it knew that she had filed bankruptcy but mistakenly assumed the taxes were nondischargeable. During the February 21, 2007 trial before this court, Frank Cox, a retired revenue officer who testified on behalf of the IRS, stated on cross-examination that the IRS Insolvency Unit made a mistake in its determination of Kovacs' tax liabilities. He further confirmed that it is the Insolvency Unit which is the party responsible for this mistake and acknowledged that the IRS had numerous opportunities between November, 2001, and August, 2003, to discover its mistake. (February 21, 2007 tr. p. 191, lines 17-24) The IRS should have been more diligent in its investigation regarding the dischargeability of these taxes before initiating its collection efforts. See In re Kreidle, 145 B.R. 1007 (Bankr. D. Colo. 1992); Kenagy v. U.S., 942 F.2d 459 (8th Cir. 1991) (the government's position may not be reasonable if it failed to adequately investigate its case); see also Ferguson v. U.S., 343 F. Supp. 2d. 787 (S.D. Iowa 2004).
It is well established that a violation of the § 524 injunction does not require a finding of deliberate intent. In re Hardy, 97 F.3d 1384 (11th Cir. 1996), involved a debtor who brought an adversary proceeding against the federal government for allegedly violating the permanent injunction under § 524, much like the case at bar. The court in Hardy concluded that § 524 involves a 2-prong test to determine willfulness, which consists of the following:
1. Did the violator know the injunction had been invoked?
2. Did the violator intend the actions which violated the stay?
Both prongs are satisfied in the instant case. A party's negligence or absence of intent to violate the discharge injunction is no defense. In re Jarvar, 422 B.R. 242, 250 (Bankr. D. Mont. 2009). The United States' litigation position in sending the two September, 2003 collection notices to Kovacs, while done in good faith, was not justified by established law.
Finally, as previously noted in this decision, the IRS waited until the commencement of this trial on February 21, 2007, approximately 1½ years after this adversary proceeding was initiated, before conceding that it had violated § 524. In light of the well-settled law on the subject of willful violation under § 524, such action was not excusable. The IRS is charged with knowledge of relevant legal authorities. Estate of Baird v. C.I.R., 416 F.3d 442, 452 (5th Cir. 2005). The United States' position in refusing to accept full responsibility for the mistake of the IRS leads this court to conclude that the United States' actions were not substantially justified in its litigation position within the meaning of § 7430.
CONCLUSION
For the reasons set forth in this decision, this court concludes that (1) Kovacs is the prevailing party and (2) the United States was not substantially justified in its litigation position, within the meaning of 26 U.S.C. § 7430. Kovacs has met all of the requirements under § 7430 for recovery and is entitled to the sum of $3,750 as her total damages.
This decision constitutes the court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052 of the Federal Rules of Bankruptcy Procedure.