892 F.3d 29
1st Cir.2018Background
- Murphy filed Chapter 7 in 2005 and received a discharge on February 14, 2006; the IRS received notice of the discharge on February 16, 2006.
- The IRS believed Murphy's tax liabilities for several years were excepted from discharge under 11 U.S.C. § 523(a)(1)(C) (alleged tax fraud) and did not object before discharge.
- In February 2009 the IRS (through a revenue officer) issued levies against insurers to collect the disputed taxes.
- Murphy sued under 26 U.S.C. § 7433(e), alleging an IRS employee willfully violated the bankruptcy discharge by attempting to collect discharged taxes; the bankruptcy court granted summary judgment to Murphy; the district court vacated and remanded on collateral‑estoppel/competency issues of the IRS attorney, and the parties later settled, preserving only the IRS’s right to appeal the statutory construction of "willfully violates."
- The First Circuit considered only the legal question preserved by the settlement: the meaning of "willfully violates" in § 7433(e) and whether a good‑faith belief that a tax debt is excepted from discharge is a defense to willfulness.
Issues
| Issue | Plaintiff's Argument (Murphy) | Defendant's Argument (IRS / United States) | Held |
|---|---|---|---|
| What standard governs "willfully violates" in 26 U.S.C. § 7433(e)? | "Willfully violates" means knowledge of the discharge plus intentional act that violates it. | Same statutory text but IRS contends good‑faith belief that debt is excepted negates willfulness. | Adopted the established pre‑1998 standard: knowing of the order and intentionally committing the violating act suffices; good‑faith belief is irrelevant to willfulness. |
| Does IRS/United States retain a good‑faith (reasonable belief) defense because § 7433(e) waives sovereign immunity and waivers must be narrow? | N/A (Murphy argues waiver covers such conduct). | Sovereign immunity requires a narrow reading; where IRS reasonably and in good faith believes debt is excepted, no waiver of immunity. | Rejected: Congress incorporated the preexisting meaning of "willful violation" (from §§ 362/524); waiver covers knowing, intentional breaches even by government; good faith affects damages, not liability. |
| Should discharge‑violation standard differ between automatic stay (§ 362) and discharge injunction (§ 524)? | The same standard should apply to both. | IRS urged a narrower standard for discharge injunctions involving tax collection. | The court held the standard is the same for both contexts; § 7433(e) ties to both provisions and uses the same language. |
| Are IRS administrative remedies / alternative procedures required before collection to avoid liability? | Murphy contends IRS violated discharge and is liable. | IRS argues it need not seek pre‑enforcement court determination and doing so would be impractical; good faith collection should avoid liability. | Court: IRS need not seek pre‑enforcement determination, but attempts to collect on discharged debts while knowing the discharge can create § 7433(e) liability; policy and statutory structure support exposure to damages. |
Key Cases Cited
- Bryan v. United States, 524 U.S. 184 (1998) (discusses that "willful" often connotes deliberate or knowing conduct)
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) ("willful" modifies the resulting harm; interpretive guidance on "willful" in bankruptcy context)
- Trans World Airlines, Inc. v. Thurston, 469 U.S. 111 (1985) ("willful" requires knowledge or reckless disregard in § 362/related contexts)
- Safeco Ins. Co. v. Burr, 551 U.S. 47 (2007) (where civil liability requires "willfulness", term may include knowing or reckless violations)
- Fleet Mortgage Group, Inc. v. Kaneb, 196 F.3d 265 (1st Cir. 1999) (First Circuit adopted the prevailing definition: knowledge of stay and intentional act suffice for willfulness)
- In re Hardy (Hardy v. United States), 97 F.3d 1384 (11th Cir. 1996) (applied the willfulness standard to a discharge injunction in tax collection context)