Flynn v. Internal Revenue Service (In re Flynn)

Flynn (debtor) divorced her ex-husband. Thereafter, on April 17, 1992, Flynn filed for bankruptcy. On August 26, 1992, the Internal Revenue Service (IRS) (creditor) filed two proofs of claim in Flynn’s bankruptcy case, which largely related to tax liabilities from tax returns filed jointly during Flynn’s marriage listing her ex-husband as the primary taxpayer. According to Flynn, her ex-husband underreported his income without her knowledge. Notwithstanding, the IRS sent a notice of levy to NationsBank of Georgia, N.A. (NationsBank) against Flynn’s checking account due within 21 days. On January 12, 1993, NationsBank sent Flynn a letter indicating that her account was frozen until NationsBank either received a release from the IRS or the 21-day period ended. Flynn claimed that NationsBank’s letter caused her extreme distress. On January 15, 1993, Flynn called the number for the IRS’s Jacksonville office listed on the notice of levy to request a release. The Jacksonville office recognized that the IRS improperly filed a levy after Flynn filed for bankruptcy and agreed to fax a release to NationsBank. The error purportedly occurred because the IRS did not routinely notify its collection offices of bankruptcy filings and the IRS’s computer system was organized by the primary taxpayer. However, NationsBank did not receive the release until the following week due to issues with the IRS’s fax. Meanwhile, Flynn’s account remained frozen, causing her to cancel her son’s birthday party, issue various dishonored checks, and suffer public embarrassment while attempting to purchase groceries. Flynn sued the IRS and alleged that its levy upon her account constituted a willful violation of the automatic stay under the Bankruptcy Code. In addition to actual damages incurred for the dishonored checks, lost wages, and travel and meal expenses for attending the court hearing, Flynn sought $25,000 in compensatory damages for emotional distress, attorney’s fees, and $100,000 in punitive damages.