Section 106's Waiver of Sovereign Immunity in the Bankruptcy Code: Does It Extend to Damages for Emotional Distress?

• Author: Tetreault, Marc P., Jr.

"It is arguable that such a narrow temporal approach is not appropriate. There is little reason to doubt that Congress could give to another governmental actor some degree offlexibility to interpret types of relief subject to Congressional waivers of immunity and to change those interpretations over time." (1)

1. INTRODUCTION

   The United States Constitution specifically delegates to Congress the authority to establish "uniform [l]aws on the subject of [b]ankruptcies." (2) Congress has duly exercised this power, enacting bankruptcy legislation in 1800, 1841, and 1867. (3) Bankruptcy arose as a necessary tool in a capitalist economy to protect creditors and encourage the free investment of capital, especially as America moved away from an agrarian economy. (4) As time progressed, however, the system has increasingly become concerned with providing distressed debtors the opportunity for a fresh start. (5)

   To further these goals, among others, Congress enacted the Bankruptcy Reform Act of 1994, which edited multiple provisions of the 11 U.S.C. (Bankruptcy Code), including [section] 106. (6) Section 106 now provides an express waiver of sovereign immunity and allows for "money recovery" against the federal government. (7) The question that remains unanswered, nearly twenty-six years after the initial amendment, is whether allowing for money recovery permits a debtor to recover for emotional distress damages against the United States. (8)

   Absent legislative consent, sovereign immunity prevents lawsuits against a governmental body. (9) Even if the government does consent, the suit is only authorized to the extent the legislature expressly consented to suit. (10) Further, the scope of sovereign immunity is generally construed narrowly. (11)

   The United States Court of Appeals for the First Circuit first considered the issue of whether the sovereign immunity waiver covers damages for emotional distress suffered by a party in In re Rivera Torres (12) Although the bankruptcy court and the Bankruptcy Appellate Panel (BAP) both held that the waiver of sovereign immunity in [section] 106 also waives immunity for emotional distress claims, the First Circuit held that the waiver was more limited. (13) The First Circuit utilized what it called a temporal approach in determining the breadth of [section] 106's sovereign immunity waiver, arguing that the Supreme Court has endorsed such a construction. (14)

   This decision was unchallenged for thirteen years before the Ninth Circuit readdressed the same issue. (15) In Hunsaker v. United States, with similar underlying facts, the Internal Revenue Service (IRS) was alleged to have willfully violated the Bankruptcy Code's automatic stay provision, and as a result, the debtor sought damages for emotional distress caused by the collection notices. (16) The Ninth Circuit specifically held that the temporal approach the First Circuit utilized was inappropriate given the lack of ambiguity in the sovereign immunity waiver. (17)

   Although the circuit split deals with the waiver of sovereign immunity, it implicates how circuit courts read and understand the Bankruptcy Code. (18) Recently, the First Circuit expressly affirmed the temporal approach in IRS v. Murphy (19) Adopting a uniform interpretive method will help avoid further circuit splits and will assist in guaranteeing equal enforcement of federal law. (20)

   This Note begins by examining the history of bankruptcy law, the purpose behind it, and the forces that shaped the law into where it is today. (21) Then, this Note examines the interpretative frameworks utilized by the First and Ninth Circuits in determining whether the government waived sovereign immunity, as well as the breadth of that waiver. (22) The final Part of this Note argues that the "temporal approach" the First Circuit uses is unnecessary considering the unambiguity of the waiver in [section] 106, and therefore, the Bankruptcy Code allows for recovery of emotional distress damages. (23)

2. HISTORY

   1. Bankruptcy's Historically Punitive Treatment of Debtors

      1. The English Common Law Treatment of Bankrupt Debtors

         Historically, the primary goal of bankruptcy legislation was not to protect the debtors' interests, but rather to provide a process for the creditors' benefit. (24) Indeed, bankruptcy primarily emerged as a useful tool in a capitalist society for encouraging the distribution of wealth and protecting creditors who made risky loans. (25) Prior to England's first bankruptcy law, Parliament's primary concern was protecting creditors, because debtors often attempted to evade collection efforts by making fraudulent conveyances or by hiding themselves. (26) Accompanying these concerns, creditors were often frustrated by prebankruptcy law as well, because the early laws helped protect individual creditors, not the class as a whole. (27)

         These developments led to Parliament enacting the first bankruptcy law in England in 1542. (28) Although Parliament amended the law several times over the next 150 years, its core principles and tenets remained in effect. (29) In 1705, Parliament passed the Statute of 4 Anne. (30) The statute was again made primarily with creditors' interests in mind, but the provisions indicate the first time that Parliament was also concerned with the treatment of debtors under bankruptcy law. (31) Despite the many revisions to English bankruptcy law since the Statute of 4 Anne's initial enactment, the statute was a turning point for bankruptcy and introduced all the elements of modern English bankruptcy law. (32)

      2. American Adoption of English Bankruptcy Law

         By the time the states ratified the United States Constitution, bankruptcies in England had become so common that the Constitution expressly granted Congress the ability to enact legislation concerning bankruptcies. (33) Congress waited eleven years before passing the first federal bankruptcy law, the short-lived Bankruptcy Act of 1800. (34) Congress enacted two more short-lived bankruptcy laws in the nineteenth century, one in force from 1841 to 1843 and the other in effect from 1867 to 1878. (35) In 1898, however, Congress finally enacted the first long-standing bankruptcy law in U.S. history. (36)

   2. Bankruptcy Since 1898 and Debtors' Protections

      1. The 1898 Bankruptcy Act

         The 1898 Bankruptcy Act (1898 Act) was the first time in U.S. history that Congress took power away from creditors and let statutory directives guide the bankruptcy process. (37) The 1898 Act took away the requirement that creditors consent or that debtors pay a minor dividend, and it made discharge much easier, recognizing the overwhelming public interest in providing relief to unfortunate debtors. (38) Nevertheless, the new law made life harder for debtors in some ways, namely by increasing the types of debts that could be excepted from discharge. (39)

         Perhaps predictably, creditors began to push back against the 1898 Act after its implementation. (40) Congress's first amendments to bankruptcy law came in the early 1930s as it attempted to allow for more reorganizations, increasing the pool of assets available to pay creditors as opposed to simply liquidating a debtor's assets. (41) This flurry of bankruptcy legislation peaked in 1938 with the passage of the Chandler Act, which essentially reformed all substantive and procedural elements of bankruptcy law. (42) One of the most important goals of the Chandler Act was the policy decision to prefer reorganizations over strict liquidations. (43) For the next forty years, Congress amended bankruptcy law dozens of times, but only a few of these amendments were significant. (44)

      2. The Bankruptcy Reform Act of 1978

         Eighty years after its enactment, the 1898 Act was replaced with the Bankruptcy Code. (45) Overall, commentators thought the Bankruptcy Reform Act of 1978 (1978 Act) struck a fairly even balance between creditors' and debtors' interests. (46) Despite its relative ambivalence in favoring either creditors or debtors, the 1978 Act still made important steps towards protecting debtors, such as making it more difficult for the affirmation of existing debts to be legally binding. (47) The 1978 Act overhauled the existing statutory scheme and was the first bankruptcy legislation Congress enacted without the motivation of a severe economic downturn. (48)

      3. Amendments Since the 1978 Act

         Congress enacted a set of amendments in 1986 designed primarily to help protect farmers during bankruptcy. (49) One of the important provisions of the 1986 amendments was the creation of Chapter 12--an entire chapter devoted to protecting the family farmer during bankruptcy. (50) Less than ten years later, Congress again amended the Bankruptcy Code by enacting the Bankruptcy Reform Act of 1994 (1994 Act). (51) The 1994 Act established the National Bankruptcy Review Commission and introduced substantive as well as procedural and administrative changes to the Bankruptcy Code. (52)

         Congress last amended the Bankruptcy Code in 2005 when it enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). (53) The BAPCPA primarily addressed the growing concern among legislators and creditors that debtors were using bankruptcy as a forum to avoid paying debts they were entirely capable of paying. (54) As some scholars predicted at the time Congress enacted it, the BAPCPA seems to merely disincentivize debtors from filing relief under Chapter 13 and instead encourages more liquidations, which leaves unsecured creditors and debtors in a worse position overall. (55)

   3. The Sovereign Immunity Doctrine

      1. The Implicit Adoption of Sovereign Immunity in the United States

         When the states ratified and adopted the Constitution, its ratification carried an assumption that the newly-formed government would be immune from suit, as was the English standard. (56) The Supreme Court first tackled the sovereign immunity issue in Chisholm v. Georgia. (57) Although the Court debated whether Article III...