SANCTIONS OR CONTEMPT AGAINST A GOVERNMENTAL AUTHORITY FOR VIOLATION OF THE AUTOMATIC STAY

(COMMISSION TRACK NUMBER 219)

Present Law

Section 362(a) of the Bankruptcy Code provides for an automatic stay against certain actions by creditors once a bankruptcy petition is filed. The purpose of the automatic stay is to bring all enforcement and collection activities before the bankruptcy court and make them subject to the processes of the Bankruptcy Code. Section 362(b) contains an enumeration of actions by creditors that will not constitute a violation of the automatic stay. Section 362(d) of the Bankruptcy Code permits a creditor to make a motion in the Bankruptcy Court to lift the automatic stay. After notice and a hearing, the court may grant such a motion if certain conditions are met. Section 362(h) of the Bankruptcy Code provides that "[a]n individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages." In addition, the district court (but not the bankruptcy court) may use its contempt powers to sanction parties who violate the automatic stay. Taxing authorities, like other creditors, are subject to the 362(h) damage awards and the contempt powers of the court in cases of a willful violation. Proposals Before the Commission

Commission Track Number 219. Commissioner Shepard recommends that the law be amended to "statutorily provide that as a condition of an application for sanctions or contempt against a governmental authority for a violation of the stay that the debtor and/or counsel must have made a meaningful attempt to resolve the problem in a nonlitigious manner before filing such action and that the debtor shall bear the burden of proof of such attempt." See Santa Fe Discussion Issues, p. 18, item IIG1. See also Government Working Group Proposal Number 15, considering a rules change to the same effect. The Advisory Committee has recommended that this proposal be withdrawn as unimportant.

Task Force Position

The Task Force opposes a statutory amendment to deal with this issue. If there is a problem, it should be taken up by the Rules Committee, without a recommendation by the Commission.

Reasons for Position

A party engaging in a willful violation of the automatic stay is subject to the damages provisions of section 362(h) of the Bankruptcy Code as well the general contempt powers of the court. This can apply to a governmental authority, including a taxing authority, as well as to a private party.

In our view, the case that any statutory amendment is required has not been made. In fact, the cases cited by Commissioner Shepard do not suggest that any statutory relief is needed. Price v. Pediatric Academic Assn, Inc., 175 B.R. 219 (S.D. Ohio 1994) did not involve a taxing authority at all and involved a situation in which the court found a willful violation of the automatic stay, for which it imposed sanctions. The court stated by way of dictum that it would not have imposed sanctions if the violation was merely technical and was not willful. In re Jove Engineering, Inc., 171 B.R. 387 (D.C. N.D. Ala. 1994) did involve a situation in which the IRS was handed a small monetary sanction for a technical violation. However, a reading of the opinion indicates that the court did not impose that sanction lightly and did so only after an extensive review of the facts in which it attempted to evaluate the seriousness of the IRS's violation. The Task Force is not aware that bankruptcy judges are lightly imposing sanctions on the IRS or other taxing authorities. There is no empirical evidence that this is a real problem. Based on experience, if there is any problem, it may be the opposite one. Tax laws generally give taxing authorities far-reaching enforcement powers that are not enjoyed by private creditors. Such taxing authorities do not often do a good job of educating their agents that an automatic stay against collection activities arises when a petition is filed. Counsel often has a difficult time communicating with the tax bureaucracy to slow down the collection engine. See the description of counsel's efforts in In re Jove Engineering, supra. Counsel in that case surely made good faith efforts to deal with the IRS.

Amending the statute does not seem like an appropriate cure for any practical problem, if such a practical problem exists. On the contrary, taxing authorities are likely to seize on such statutory amendments, including the gratuitous assignment of the burden of proof, to defend themselves against contempt or section 382(h) applications when there are real grievances that should be redressed.

Questions, comments or suggestions? kbercik@taxcounsellor.com

Last updated June 1, 1997