In re McCarthy

577 B.R. 436
CourtUnited States Bankruptcy Court, D. Massachusetts
DecidedOctober 3, 2017
DocketCase No. 13-30959-FJB
StatusPublished

This text of 577 B.R. 436 (In re McCarthy) is published on Counsel Stack Legal Research, covering United States Bankruptcy Court, D. Massachusetts primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
In re McCarthy, 577 B.R. 436 (Mass. 2017).

Opinion

MEMORANDUM OF DECISION

Frank J. Bailey, United States Bankruptcy Judge

Before the Court for a determination of damages only is the “Debtors’ Motion for Contempt Sanctions (Discharge Violation): Massachusetts Department of Revenue” (the “Contempt Motion”) filed by Steven and Debra McCarthy, the debtors in this Chapter 7 bankruptcy case. The Massachusetts Department of Revenue (the “MDOR”) has previously been found liable for having violated the injunction against collection of discharged debts codified in § 524 of the United States Bankruptcy Code1 (the “discharge injunction”), see In re McCarthy, 553 B.R. 459 (Bankr. D. Mass. 2016), leaving only the question of appropriate damages on account of that violation before this Court for determination.

I. FACTS AND TRAVEL OF THE CASE

On August 30, 2013, the Debtors filed a voluntary petition under Chapter 13 of the Bankruptcy Code, largely in an effort to stop the MDOR from attaching their wages on account of outstanding tax debts. The case was subsequently converted to one under Chapter 7 of the Code at the Debtors’ request. Ultimately, the Chapter 7 trustee determined that there were no assets to administer, the Debtors received a discharge, and the case closed on May 1, 2014.

The tax debts owed to the MDOR on account of late-filed tax returns for the years 2001 through 2006, however, were not subject to the Debtors’ discharge, and the MDOR recommenced its efforts to collect those taxes. The MDOR sent its first post-discharge bill to the Debtors on April 1, 2014, a month prior to the case closing. It sent a second, revised, tax bill on June 12, 2015, containing a recalculation and reduction in the amount of penalties sought in connection with the unpaid taxes.

In response to the MDOR’s collection activities, the Debtors moved to reopen their bankruptcy case and filed the Contempt Motion, alleging that the MDOR was violating the discharge injunction through its collection efforts. Although the First Circuit had recently issued a decision holding that taxes owed on account of late-filed state tax returns (such as the Debtors’ 2001 through 2006 tax debts) were not discharged in bankruptcy, see Fahey v. Mass. Dep’t of Revenue (In re Fahey), 779 F.3d 1 (1st Cir. 2015), the Debtors believed that the ruling applied only to principal and interest, and not to penalties. Accordingly, the Debtors argued that the MDOR’s continued efforts to collect the penalties related to the nondischarged tax [438]*438debt violated the discharge injunction. In connection with the alleged discharge injunction violation, the Debtors also sought an award of attorney fees, emotional distress damages, and punitive damages against the MDOR.

In response, the MDOR first noted that, in the July 12, 2015 tax bill, it had revised and reduced the amount of penalties claimed to be owed. And as to the remaining penalties demanded, the MDOR believed they were not discharged based on the Fahey decision because they were assessed with regard to the nondischarged 2001-2006 taxes. The MDOR further argued that, under extant case-law, neither emotional nor punitive damages could be assessed' against it as a governmental unit, as its sovereign immunity was not waived with regard to those particular types of recovery. See, e.g. United States v. Torres (In re Torres), 432 F.3d 20 (1st Cir. 2005); Duby v. United States (In re Duby), 451 B.R. 664, 671 (1st Cir. BAP 2011).

Although the question of whether the assessed penalties were or were not subject to the Debtors’ discharge was purely a legal issue, at the initial hearing on the Contempt Motion, held July 22, 2015, Debtors’ counsel, L. Jed. Berliner (“Attorney Berliner”), requested discovery with regard to whether there was “sufficient numerosity to establish a class action,” 7/22/15 Hr’g Transcript, at 3:2-3, ECF No, 68, and to whether emotional distress and/or punitive damages were--warranted. The presiding bankruptcy judge, Judge Henry J. Boroff, set a discovery deadline of November 20, 2015 and continued the matter for a nonevidentiary hearing in December 2015.

Shortly thereafter, in August 2015, the Debtors moved to amend the Contempt Motion to add Mark E. Nunnelly, Commissioner of the MDOR, as an additional respondent. In the face of stringent opposition from the MDOR, the Debtors ultimately withdrew that motion.

The day before the continued hearing on the Contempt Motion, and nearly a month after the expiration of the discovery deadline, Attorney Berliner filed a “Motion to Suspend Discovery and Set Deadlines for Summary Judgment Motions” (the “Discovery Motion”). In the Discovery Motion, the Debtors again raised the prospect of seeking class relief, but abandoned their contention that emotional distress damages or punitive damages were recoverable against the MDOR. See Discovery Motion, at 2 ¶ 3, Dec. 15, 2015, ECF No. 79. But the Debtors also admitted that they had, so far, failed to promulgate any discovery on the MDOR and had not responded to MDOR’s discovery. The Discovery Motion urged the Court to suspend discovery ■pending a ruling on the pure legal issue related to liability (i,e., the dischargeability of the penalties) and requested that the Court set a deadline for filing summary judgment motions on that issue.

At the conclusion of the hearing on the Discovery Motion, Judge Boroff set a deadline for filing summary judgment motions on the issue of liability and further ruled:

THE REQUEST TO SUSPEND DISCOVERY IS DENIED INSOFAR AS THE DEBTORS ARE ORDERED TO RESPOND TO, AND COMPLY WITH, DISCOVERY REQUESTS PREVIOUSLY MADE BY THE COMMONWEALTH OF MASSACHUSETTS, ON OR BEFORE JANUARY 15, 2016.

Dec. 16, 2015, ECF No. 84. The parties subsequently filed cross-motions for summary judgment. On July 11, 2016, Judge Boroff issued a decision on liability, granting summary judgment in favor of the Debtors, ruling that the penalties were [439]*439dischargeable, even if the underlying taxes were not. See In re McCarthy, 553 B.R. 459.

A further status conference in the case was set for September 2016. Judge Boroff having retired in the interim, the case was reassigned to this Court. At the status conference, Attorney Berliner changed course from his earlier statement that punitive damages were not available and requested a new discovery deadline to allow him to explore whether the MDOR had a pattern and practice of demanding discharged penalties in other cases, which, according to Attorney Berliner, could establish that punitive damages were warranted. Attorney Berliner read Judge Bo-roffs ruling on the Discovery Motion as requiring him to respond immediately to the MDOR’s pending discovery requests, but suspending further discovery on damages pending a determination of liability. He bolstered his argument by noting that, in the summary judgment ruling, Judge Boroff had specifically stated that “the determination of punitive damages ... has been reserved pending the outcome of the question of liability.” McCarthy, 553 B.R. at 467 fn. 9.

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Bluebook (online)
577 B.R. 436, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-mccarthy-mab-2017.