United States District Court, D. Maine
DECISION AND ORDER ON BANKRUPTCY APPEAL
Brock Hornby, United States District Judge.
bankruptcy appeal presents two primary questions: (1) how to
interpret the term "willfully" in a federal
statute; (2) whether a lawyer's unrecognized cognitive
impairment that comes to light only later can be used to
upset an interlocutory ruling that may have resulted from the
lawyer's inadequate representation during the cognitive
appellant Internal Revenue Service
("IRS") argues that it should not be held liable
for damages to a debtor-taxpayer under an Internal Revenue
Code provision that allows a taxpayer to recover damages if
the IRS "willfully violates" a bankruptcy
court's discharge injunction under section 524 of the
Bankruptcy Code. The IRS challenges the bankruptcy
court's definition of "willfully" and the
bankruptcy court's decision to use offensive collateral
estoppel to establish the IRS violation. The IRS argues that
the predicate judgment against the IRS confirming that the
bankruptcy discharge wiped out the tax debts (thus generating
the estoppel) resulted from an Assistant United States
Attorney's (AUSA) then unknown cognitive impairment.
oral argument on August 22, 2016, I conclude that the
bankruptcy court applied the proper definition of
"willfully, " but that it acted contrary to law and
abused its discretion in failing to consider the IRS's
two motions for reconsideration under the
interests-of-justice test that Federal Rule of Civil
Procedure 54(b) requires.
and Procedural Background
debtor-taxpayer William C. Murphy ("Murphy") filed
for Chapter 7 bankruptcy protection in October 2005.
Voluntary Pet., In re Murphy, Ch. 7 Case No.
05-22363 (Oct. 13, 2005) (Bankr. ECF No. 1). The majority of
the debts Murphy listed on his Petition were for outstanding
federal income taxes for various years. Id. at
11-14. The bankruptcy court granted his discharge on February
14, 2006. Order Discharging Debtor, In re Murphy,
Ch. 7 Case No. 05-22363 (Feb. 14, 2006) (Bankr. ECF No. 5).
the IRS informed Murphy that it considered his tax
liabilities excepted from the 2006 discharge on the basis
that Murphy had filed fraudulent returns or attempted to
evade taxes. See 11 U.S.C.A. § 523(a)(1)(C). The IRS
issued notices of levies to Murphy's bank and various
clients. See Debtor's Statement of
Material Facts at 2-3, Murphy v. I.R.S., Adv. No.
09-2042 (May 4, 2010) (Bankr. ECF No. 41-1); Obj. and Resp.
by IRS at 9-10, Murphy v. I.R.S., Adv. No. 09-2042
(May 25, 2010) (Bankr. ECF No. 44).
August 2009, Murphy reopened his bankruptcy case and began
the first adversary proceeding in bankruptcy court seeking a
declaration that his 2006 discharge covered taxes owing for
1993-1998, 2000, and 2001; challenging the IRS's attempts
to collect taxes for the years covered by his bankruptcy
discharge; and asking that the IRS be enjoined from all
collection activities concerning the discharged tax
liabilities. Compl., Murphy v. I.R.S.. Adv. No.
09-2042 (Aug. 14, 2009) (Bankr. ECF No. 1). Because the AUSA
who handled bankruptcy proceedings in this District accepted
service of the Complaint, Murphy's counsel did not mail a
copy of the Complaint to the Attorney General, as Federal
Rule of Bankruptcy Procedure 7004(b)(5) would otherwise
require. Therefore, the Tax Division of the Department of
Justice and the Boston IRS Office of Chief Counsel were
unaware of the adversary proceeding until long after an
adverse judgment.U.S. Renewed Mot. to Recons. Order Granting
Partial Summ. J. at 8-9, Murphy v. I.R.S., Adv. No.
11-2020 (Nov. 16, 2015) (Bankr. ECF No. 265).
first adversary proceeding, Murphy bore the burden of proving
that a bankruptcy discharge issued, but the IRS bore the
burden of proving that Murphy's tax obligations were
excepted from the 2006 discharge under Bankruptcy Code
section 523 and therefore that the 2006 discharge did not
prevent IRS collection efforts. See Pretrial Order
at 6, Murphy v. I.R.S., Adv. No. 09-2042 (Oct. 20,
2009) (Bankr. ECF No. 19).
moved for summary judgment in this adversary proceeding on
May 4, 2010, seeking a final determination that his 2006
discharge embraced his tax debts. PL's Mot. for Summ. J.
at 5, Murphy v. I.R.S., Adv. No. 09-2042 (May 4,
2010) (Bankr. ECF No. 41). The AUSA who had been handling
bankruptcy proceedings in this District on behalf of the
government for many years took only limited discovery to
support the IRS's position; he served requests for
production of documents but did not take Murphy's
deposition. See Notice of Service of Disc,
Murphy v. I.R.S., Adv. No. 09-2042 (Dec. 3, 2009)
(Bankr. ECF No. 26). In opposing the motion on May 25, 2010,
the AUSA failed to present evidence that would raise a
triable issue of fact as to whether Murphy's tax
liabilities were excepted-an opposition that presiding
Bankruptcy Judge Haines described as falling "far short
of applicable substantive and procedural standards"
under Federal Rule of Civil Procedure 56. Order Granting
Summ. J. at 5, Murphy v. I.R.S., Adv. No. 11-2020
(Dec. 20, 2013) (Bankr. ECF No. 94). In June 2010, Judge
Haines granted Murphy's motion for summary judgment from
the bench, stating:
I've looked at the summary judgment record very carefully
and frankly, somewhat surprisingly, I'm not-I'm not
of the view that the IRS has put forth qualified,
evidentiary-quality, by affidavit or otherwise, materials
that create disputed issues of material fact. And therefore
I'm going to enter summary judgment for the plaintiff.
Bench Ruling at 4-5, Murphy v. I.R.S., Adv. No.
09-2042 (June 22, 2010)(Bankr. ECF No. 99).
ensuing order, Judge Haines declared Murphy's tax
obligations for the years 1993-1998, 2000, and 2001
discharged by the 2006 bankruptcy discharge. Order Granting
Mot. for Summ. J., Murphy v. I.R.S., Adv. No.
09-2042 (June 22, 2010) (Bankr. ECF No. 48). The IRS did not
February 2011, Murphy filed a second adversary Complaint
against the IRS under Internal Revenue Code section 7433(e),
which permits a taxpayer to recover damages if the IRS
"willfully violates" a bankruptcy discharge under
section 524 of the Bankruptcy Code. Compl., Murphy v.
I.R.S., Adv. No. 11-2020 (Feb. 28, 2011) (Bankr. ECF No.
1); see 26 U.S.C.A. § 7433(e). Murphy alleged that the
IRS was liable under section 7433(e) of the Internal Revenue
Code because the IRS had violated Bankruptcy Code section 524
by levying on his discharged tax liabilities. Compl.,
Murphy v. I.R.S., Adv. No. 11-2020 (Feb. 28, 2011)
(Bankr. ECF No. 1). The period for discovery in the second
adversary proceeding expired without the AUSA taking any
discovery. U.S. Request for a Status or Pretrial Conference
in Chambers at 1, 3, Murphy v. I.R.S., Adv. No.
11-2020 (Dec. 11, 2012) (Bankr. ECF No. 52).
2012, the AUSA who had been handling this and other
bankruptcy matters in this District stated his intention to
retire by year's end. See Id. at 1.
Around the same time, colleagues of the AUSA stated concerns
about his physical demeanor and possible health problems.
See R. Murphy Decl. at 2, Murphy v. I.R.S.,
Adv. No. 11-2020 (Feb. 28, 2014) (Bankr. ECF No. 142-1)
(sealed document). In October 2012, the United States
Attorney's Office disclosed to the Department of
Justice's Tax Division that the AUSA had been potentially
diagnosed with amyotrophic lateral sclerosis (ALS) and
dementia. Id. at 6. Thereafter, the Tax Division
informed the bankruptcy court that the AUSA was no longer
assigned to Murphy's case due "to his imminent
retirement and for personal reasons" and that the Tax
Division would take over the defense of the second adversary
proceeding. U.S. Request for a Status or Pretrial Conference
in Chambers at 1, Murphy v. I.R.S., Adv. No. 11-2020
(Dec. 11, 2012) (Bankr. ECF No. 52). In this same filing, Tax
Division counsel said that the IRS planned to file a motion
to reopen discovery on damages in the second adversary
proceeding based on excusable neglect under Bankruptcy Rule
9006 and/or good cause under Federal Rule of Civil Procedure
16(b)(4). Id. at 3.
time, the parties agreed that the IRS would defer moving to
reopen discovery pending cross motions for summary judgment
on liability. See Parties' Am. Joint Pretrial
Order at 5-6, Murphy v. I.R.S., Adv. No. 11-2020
(Mar. 27, 2013) (Bankr. ECF No. 63). The principal argument
that the IRS made in its motion for summary judgment was that
the IRS should be able to escape liability under section
7433(e) for "willfully violating]" the discharge
injunction because it relied on a good faith belief that the
statutory discharge injunction was inapplicable to the tax
debts at issue. Br. in Support of Mot. for Summ. J. at 1-19,
Murphy v. I.R.S., Adv. No. 11-2020 (May 1, 2013)
(Bankr. ECF No. 69). Murphy argued, in turn, that the IRS
"willfully violate[d]" the discharge injunction
under section 7433(e) because the tax debt was discharged,
the IRS had notice of the discharge, and the IRS intended the
acts that violated the discharge injunction. Murphy Opp'n
to Summ. J. & Cross-Motion for Summ. J. at 4-8,
Murphy v. I.R.S., Adv. No. 11-2020 (June 28, 2013)
(Bankr. ECF No. 80).
December 20, 2013, Bankruptcy Judge Haines granted partial
summary judgment on liability to taxpayer Murphy in the
second adversary proceeding. Order Granting Summ. J.,
Murphy v. I.R.S., Adv. No. 11-2020 (Dec. 20, 2013)
(Bankr. ECF Nos. 94-95). Using the doctrine of offensive
collateral estoppel, Judge Haines ruled that the preclusive
effect of the June 2010 summary judgment order in the first
adversary proceeding (determining that Murphy's tax debt
was discharged) estopped the IRS from asserting that
Murphy's tax debt was excepted from discharge for the
purpose of escaping liability under 26 U.S.C.A. §
7433(e). Id. As a result, liability (not damages)
was established. Id. At the time Judge Haines issued
his ruling, he knew of the by-then-retired AUSA's
impairment (it was brought to his attention in a 2013 status
conference), but nothing in the record suggested that the
AUSA's impairment had affected his competency during the
first adversary proceeding in 2010. Although the IRS sought
an interlocutory appeal from the partial summary judgment, I
denied the request, Murphy v. I.R.S., No.
2:14-mc-24-DBH, ___ B.R. ___, 2014 WL 840255 (D. Me. Mar. 4,
2014), ruling that the appeal should await final judgment
after a determination of damages.
the IRS acquired the AUSA's medical records and learned
that he had in fact been diagnosed with frontotemporal
dementia in late 2011, coupled with ALS, and that three
physicians all agreed that the AUSA's condition predated
the May 2010 summary judgment proceedings in the first
adversary proceeding. See U.S. Mot. to Revise
Interlocutory Order Granting Partial Summ. J. on Issue of
Liability at 6-10, Murphy v. I.R.S., Adv. No.
11-2020 (Apr. 11, 2014) (Bankr. ECF No. 155); Mem. in Support
of Def.'s Mot. to Reopen Damages Disc, at 6-9, Murphy
v. I.R.S., Adv. No. 11-2020 (Feb. 7, 2014) (Bankr. ECF
No. 132) (sealed document); Exs. Medical R., Murphy v.
I.R.S., Adv. No. 11-2020 (Apr. 1, 2014) (Bankr. ECF No.
152-2) (sealed documents). The IRS then filed three motions
first adversary proceeding, the IRS moved the bankruptcy
court under Federal Rule of Civil Procedure 60(b)(6) and
60(b)(4) to vacate its 2010 final discharge order.
Def.'s Rule 60(b) Mot. for Relief from the Final Order of
June 22, 2010, Murphy v. I.R.S., Adv. No. 09-2042
(May 1, 2014) (Bankr. ECF No. 52). Judge Haines having
retired, Bankruptcy Judge Kornreich denied the motion in June
2014,  see Order on Def.'s Rule
60(b) Mot. for Relief from Final Order, Murphy v.
I.R.S., Adv. No. 09-2042 (June 26, 2014) (Bankr. ECF No.
78). The IRS appealed to this court, and I affirmed the
bankruptcy court's denial of Rule 60(b) relief on
February 24, 2015. See I.R.S. v. Murphy, No.
2:14-cv-340-DBH, ___ B.R. ___, 2015 WL 790075 (D. Me. Feb.
also filed two motions in the second adversary proceeding:
(1) the IRS moved to reopen discovery on damages based on its
contention of excusable neglect and/or good cause because of
the former AUSA's cognitive impairment during the second
adversary proceeding, Def.'s Mot. to Reopen Damages Disc,
Murphy v. I.R.S., Adv. No. 11-2020 (Jan. 27, 2014)
(Bankr. ECF No. 114); and (2) the IRS moved to reconsider or
revise the interlocutory order granting summary judgment on
the issue of liability, U.S. Mot. to Revise Interlocutory
Order Granting Partial Summ. J. on Issue of Liability,
Murphy v. I.R.S., Adv. No. 11-2020 (Apr. 11, 2014)
(Bankr. ECF No. 155). Again, Judge Haines having retired,
Judge Kornreich denied both motions from the bench on May 8,
2014. Tr. of Bench Ruling at 8, 10, Murphy v.
I.R.S., Adv. No. 09-2042 (May 8, 2014) (Bankr. ECF No.
65); see Order on Def.'s Mot.
to Revise Interlocutory Order, Murphy v. I.R.S.,
Adv. No. 11-2020 (May 13, 2014) (Bankr. ECF No. 165); Order
on Def.'s Mot. to Reopen Damages Disc, Murphy v.
I.R.S., Adv. No. 11-2020 (May 13, 2014) (Bankr. ECF No.
regard to the IRS's Rule 54(b) motion to reconsider or
revise Judge Haines's interlocutory order granting
partial summary judgment on liability, Judge Kornreich stated
that he was "uncertain as to the applicability of that
rule, " did not apply it, and instead applied Federal
Rule of Civil Procedure 60(b)-which is applicable only to
final judgments. Tr. of Bench Ruling at 9, Murphy v.
I.R.S., Adv. No. 09-2042 (May 8, 2014) (Bankr. ECF No.
65). In applying Rule 60(b), Judge Kornreich denied the
IRS's motion to reconsider, stating:
My denial of the motion has two prongs. First, that the
disability was not the problem; that if there was a failure
to adequately prosecute-that was attributable to a failure to
supervise and as I have been told by the United States
Attorney, supervision is not part of the game
plan. Second, I have reviewed the written
decision and have determined, according to my own likes, that
there was no error of law which would permit me as a trial
judge of this court to set aside or reconsider the decision
of [Judge Haines].
Id. at 9-10 (footnote added by this court).
the parties entered into and submitted to the bankruptcy
court a stipulation as to damages, with certain rights
reserved, whereby they stipulated to $225, 000 in damages
caused by the IRS's levies after the discharge.
Settlement Agreement as to Damages (with Certain Rights
Reserved), Murphy v. I.R.S., Adv. No. 11-2020 (Oct.
2, 2015) (Bankr. ECF No. 259-2). The parties also agreed that
the damages were contingent upon the IRS being able to file a
renewed motion to reconsider in the bankruptcy court and to
appeal any final judgment including the liability decision of
December 20, 2013, and the denials of any motions to
reconsider that determination. Id. at 1-3, 5;
see U.S. Renewed Mot. to Recons. Order Granting
Partial Summ. J. on Issue of Liability, Murphy v.
I.R.S., Adv. No. 11-2020 (Nov. 16, 2015) (Bankr. ECF No.
December 14, 2015, Judge Kornreich also having retired and
the two successor bankruptcy judges in this District being
recused, Bankruptcy Judge Hoffman of the District of
Massachusetts denied the renewed motion to reconsider the
liability decision, determining on the willfulness issue that
"[i]t is settled law in the First Circuit that damages
are available for violation of the discharge injunction if a
creditor had knowledge of the discharge and intended the
actions which constituted the violation." Mem. &
Order on Renewed Mot. of U.S. to Recons. at 3-4, Murphy
v. I.R.S., Adv. No. 11-2020 (Dec. 14, 2015) (Bankr. ECF
No. 266) (citing Pratt v. GMAC, 462 F.3d 14, 21 (1st
Cir. 2006); Fleet Mortg. Grp., Inc. v. Kaneb, 196
F.3d 265, 268 (1st Cir. 1999)). As to the IRS's objection
to the use of offensive collateral estoppel to determine
liability, Judge Hoffman stated: "Applying the IRS's
motion to the flexible standards of Fed.R.Bankr.P. 7054
[incorporating Federal Rule of Civil Procedure 54(b)], I find
no basis to reconsider Judge Haines'[s] partial summary
judgment ruling [on liability]." Id. at 5
accordance with the settlement agreement, final judgment
entered in favor of Murphy in the amount of $225, 000 on
December 23, 2015. Final Judgment, Murphy v. I.R.S.,
Adv. No. 11-2020 (Dec. 23, 2015) (Bankr. ECF No. 268). This
timely appeal followed.
district court has jurisdiction over Murphy's Chapter 7
case under 28 U.S.C.A. § 1334. The bankruptcy court had
jurisdiction by reference from this court under 28 U.S.C.A.
§ 157. See Local Rule 83.6. If the adversary
proceeding seeking damages was a core bankruptcy proceeding
(I conclude that it was, see infra), the reference
was under section 157(b). If the adversary proceeding was a
noncore bankruptcy proceeding, the reference was under
section 157(c)(1). Because the IRS elected to have this
appeal from the bankruptcy court heard by the District Court
instead of the Bankruptcy Appellate Panel, this court now has
jurisdiction under 28 U.S.C.A. § 158(a)(1), (c)(1)(A).
proceedings, conclusions of law reached by the bankruptcy
court are subject to de novo review, and underlying factual
findings are reviewed only for clear error. Monarch Life
Ins. Co. v. Ropes & Gray, 65 F.3d 973, 978 (1st Cir.
1995). Discretionary decisions are reviewed for abuse of
discretion. In re Gonic Realty Tr., 909
F.2d 624, 626 (1st Cir. 1990). In noncore proceedings the
bankruptcy judge's findings of fact, conclusions of law,
and discretionary decisions are reviewed de novo.
See 28 U.S.C.A. § 157(c)(1); In re
Sheridan, 362 F.3d 96, 99-100 (1st Cir. 2004).
has raised two issues on appeal: (1) what kind of intent
determines whether an IRS employee "willfully
violates" the bankruptcy discharge injunction under
section 7433(e); and (2) in refusing to reconsider or revise
its order determining that the IRS was liable under section
7433(e) based upon offensive collateral estoppel, did the
bankruptcy court improperly apply Federal Rule of Civil
Procedure 54(b) when presented with evidence of the
AUSA's previously unknown cognitive impairment.
The Section 7433(e) Standard for When an Employee of the IRS
"Willfully Violates" the Discharge
Revenue Code section 7433(e) provides:
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 362 (relating to automatic stay) or 524 (relating to
effect of discharge) of Title 11, United States Code (or any
successor provision), or any regulation promulgated under
such provision, such taxpayer may petition the bankruptcy
court to recover damages against the United States.
Restructuring and Reform Act of 1998 added subsection (e) as
part of a significant bipartisan effort to address
"abuses inflicted on taxpayers by unsupportable activity
within the IRS" after a series of investigative hearings
examining both the internal and public conduct of the agency.
144 Cong. Rec. S4251-01 (daily ed. May 5, 1998); S. Rep. No.
105-174, at 7-9 (1998); Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. No. 105-206,
112 Stat. 685 (1998). The Act added new "taxpayer
protection and rights, " including the ability to
collect civil damages if an IRS employee "willfully
violates" sections 362 or 524 of the Bankruptcy
Code, Pub. L. No. 105-206, § 3102(c), and expanded
taxpayers' rights to collect damages for an IRS
employee's reckless, intentional, or negligent disregard
of any provision of the Internal Revenue Code, id.
§ 3102(a). Although the legislative history of the
entire Act is voluminous, it does not explain why Congress
used "reckless, intentional, or negligent" in one
subsection (7433(a) remedy for violations of the Internal
Revenue Code), and used "willfully violates" in a
different subsection (7433(e) remedy for violations of
sections 362 and 524 of the Bankruptcy Code). It is a general
principle, however, that Congress "legislated against a
background of law already in place and the historical
development of that law." Exxon Mobile Corp. v.
Allapattah Servs., Inc., 545 U.S. 546, 587 (2005). I
therefore address the interpretations of those terms at the
time section 7433(e) was enacted.
appears a number of times in the Internal Revenue Code and is
an element of several tax crimes in Title 26. See,
e.g., 26 U.S.C.A. §§ 7201-07. In that context,
the Supreme Court has defined the term as "requir[ing]
the Government to prove that the law imposed a duty on the
defendant, that the defendant knew of this duty, and that
he voluntarily and intentionally violated that duty."
Cheek v. United States, 498 U.S. 192, 201 (1991)
(emphasis added). As a result, a taxpayer defendant may raise
as a defense that he held a good faith belief that he was not
violating any provision of the tax laws. Id. at 202;
see United States v. Aitken, 755 F.2d 188, 191-93
(1st Cir. 1985); cf. Ratzlaf v. United States, 510
U.S. 135, 137 (1994) ("To establish that a defendant
'willfully violat[ed]' the antistructuring law, the
Government must prove that the defendant acted with knowledge
that his conduct was unlawful.").
contrast to these Internal Revenue Code provisions and
interpretations, only one provision of the Bankruptcy Code
contains the term "willful violation, " and that is
the provision prohibiting any violation of the section 362
automatic stay, 11 U.S.C.A. § 362(k)(l). However,
courts have used "willful violation" as the
standard for assessing violations of the discharge injunction
as well, relying on the statutory contempt powers in section
105.See, e.g., Crvsen/Montenay
Energy Co. v. Esselen Assocs., Inc. (In re Crysen/Montenay
Energy Co.), 902 F.2d 1098, 1105 (2d Cir. 1990);
Cuffee v. Atl. Bus. & Cmty., Dev. Corp. (In re Atl.
Bus. & Cmty. Corp.), 901 F.2d 325, 329 (3d Cir.
1990); Goichman v. Bloom (In re Bloom), 875 F.2d
224, 227 (9th Cir. 1989); David M. Holliday, Annotation,
Willful Violation of Discharge Injunction Provisions of
Bankruptcy Code § 524(a)(2) and (3), 9 A.L.R. Fed.
2d 431 (2016) (collecting cases). The term "willful
violation" is not defined in the Bankruptcy Code. But
courts have stated that a willful violation occurs if the
defendant "(1) knew that the automatic stay was invoked
and (2) intended the actions which ...