Commercial Litigation and Arbitration

Inherent Power Limited by Statute Providing Exclusive Remedy for Violation of Injunction

From Kovacs v. United States, 2010 U.S. App. LEXIS 15615 (7th Cir. July 29, 2010):

Kovacs, a taxpayer, filed suit against Defendant-Appellee United States of America seeking to recover damages resulting from the Internal Revenue Service's ("IRS") alleged violation of the discharge injunction provided by Section 524 of the Bankruptcy Code, 11 U.S.C. §§ 101, et seq. Kovacs' suit arises from an Offer and Compromise ("OIC") that she entered into with the IRS in 1996 to resolve her tax liabilities for tax years 1990 through 1995. The OIC required Kovacs to timely pay her taxes for the five years subsequent to the date that the IRS accepted the OIC. Due to health problems, Kovacs was unable to pay her 1999 taxes. As a result, the IRS informed Kovacs in a January 29, 2001 letter that it was terminating her OIC and reinstating her outstanding taxes.

On July 3, 2001, Kovacs filed for Chapter 7 bankruptcy. On October 10, 2001, Kovacs received a bankruptcy discharge which included her tax liabilities for tax years 1990 through 1995. Notwithstanding the discharge, the IRS informed Kovacs in a November 5, 2001 notice that it had applied her overpaid taxes for tax year 2000 to her taxes from tax year 1991. ***

In the adversary proceeding underlying this appeal, Kovacs sought to recover her attorneys' fees and costs arising out of the IRS's willful violation of 11 U.S.C. § 524(a)(2), which provides that a bankruptcy discharge operates as an injunction against any act to collect a discharged debt as a personal liability of the debtor. Because 26 U.S.C. § 7433 of the Internal Revenue Code contains a two-year statute of limitations and 11 U.S.C. § 105(a) does not contain a limitation period, we first address Kovacs' contention that the bankruptcy court had jurisdiction to issue a ruling against the IRS pursuant to 26 U.S.C. § 7433 or, alternatively, 11 U.S.C. §§ 105 and 106 for its alleged violation of the discharge injunction.

A. 26 U.S.C. § 7433(e) is the Exclusive Remedy for a Willful Violation of the 11 U.S.C. § 524 Discharge Injunction

To avoid application of the two-year statute of limitations under 26 U.S.C. § 7433(e), Kovacs argues that the bankruptcy court could have proceeded under 11 U.S.C. § 105, which provides that a bankruptcy court may issue "any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title," and § 106, which waives sovereign immunity to allow a court to exercise its § 105 powers against the IRS. 11 U.S.C. §§ 105, 106. As noted above, § 105 does not have a statute of limitations. Despite these broad powers, however, the plain language of 26 U.S.C. § 7433(e) is clear and controls in this instance.

In 1998, Congress amended § 7433 of the Internal Revenue Code by adding subsection (e) which states 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 . . . 524 (relating to effect of discharge) of title 11, United States Code . . . such taxpayer may petition the bankruptcy court to recover damages against the United States." 11 U.S.C. § 7433(e). Section 7433(e)(2)(A) provides that "notwithstanding [11 U.S.C. § 105], such petition shall be the exclusive remedy for recovering damages resulting from such actions." Section 7433 also contains a two-year statute of limitations. 26 U.S.C. § 7433(d)(3). ***

Despite the plain language of 26 U.S.C. § 7433, Kovacs argues that the bankruptcy court independently had jurisdiction to sanction the IRS pursuant to its inherent powers under 11 U.S.C. § 105. To support her argument, Kovacs first relies on Jove Eng'g, Inc. v. I.R.S., 92 F.3d 1539, 1553 (9th Cir. 1996), in which the Ninth Circuit held that § 105 "creates a statutory contempt power in bankruptcy proceedings, distinct from the court's inherent contempt powers, for which Congress unequivocally waives sovereign immunity." Jove Eng'g and the other cases relied by Kovacs, however, were decided prior to the 1998 amendments to § 7433(e) of the Internal Revenue Code or do not address the exclusivity provision of § 7433. *** These cases are therefore not instructive.

Due to the unequivocal exclusivity provision of 26 U.S.C. § 7433, the district court did not err in determining that Kovacs must comply with the jurisdictional provisions of § 7433 prior to recovery for a willful violation of the discharge injunction.

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