Bankruptcy Judge: IRS Immune From Defunct Law Firm’s Collection Suit

Bankruptcy Lawyer Bryan W. Stone answers the question: “What are the pros and cons of bankruptcy?”


A federal judge in New Jersey just reminded us of the power the Internal Revenue Service can retain over us all, even in bankruptcy. The judge recently threw out a defunct law firm’s lawsuit that accused the IRS and Treasury Department of illegally trying to collect taxes during a bankruptcy proceeding. Although the person bringing the lawsuit was an attorney, he apparently lacked the sufficient bankruptcy law experience to successfully protest the IRS’s oversteps, highlighting the dense and difficult nature of the bankruptcy process.

Accounting calculator Charlotte Bankruptcy Law Firm Mecklenburg Chapter 7 LawyerThe scenario is thus: The Connelly Firm PC, a single-shareholder Philadelphia firm operated by Thomas P. Connelly Jr., dissolved in December 2012 after a series of financial losses, including embezzlement by a former employee. The closed firm filed for bankruptcy in early 2013 and alleges that after the filing, the IRS sent no less than 16 collection letters over the next 6 months via mail and fax. Some of them threatened Connelly with personal liability for the firm’s debts.

After Connelly Firm filed for bankruptcy protection, an IRS agent also allegedly showed up at Connelly’s new place of employment where he was working as in-house counsel and tried to serve him a subpoena. Connelly claimed in his lawsuit that this compromised his job prospects.

Under the name of his former firm, Connelly sued the U.S. Department of Treasury, the IRS and the IRS agent under state law claims including the Racketeer Influenced and Corrupt Organizations (RICO) Act and tortious interference with prospective economic advantage. He also sued them for violating the automatic stay bankruptcy is supposed to enact against creditors under federal bankruptcy law.


Automatic stay

Generally, this type of behavior is indeed illegal. As soon as a person or entity files for bankruptcy (here, it was an out-of-business law firm filing for Chapter 7 liquidation), an automatic stay goes into effect that immediately bars creditors and debt collectors from harassing and contacting you. It is one of the major appeals of bankruptcy: commit to the process, and there will be no more phone calls from creditors, no more letters and voicemails from debt collectors. It is designed to provide the debtor with breathing room from creditors and the opportunity to regroup.

There are exceptions to the automatic stay rule. Secured creditors, for example, are allowed to petition the bankruptcy court to be exempt from the automatic stay if they can show cause. However, the IRS is not a secured creditor generally subject to such an exemption.

The judge ruled that the bankruptcy trustee (the third party the court appoints to oversee a bankruptcy), was the proper party to bring such a claim, not the plaintiff. The judge also noted that there were administrative remedies the plaintiff could have pursued but did not against the IRS for violating the automatic stay, and so dismissed this part of the claim without prejudice, meaning the trustee can re-bring this part of the suit later if the plaintiff exhausts these remedies.


Sovereign immunity

The judge also dismissed with prejudice Connelly’s RICO and economic interference claims. Federal agencies have what is called sovereign immunity that protects them from being sued under state law unless Congress has waived it in a specific instance. In this case, Congress has never waived sovereign immunity for such claims.

Connelly, who is representing himself pro se in the proceedings, has given notice of his intent to appeal the decision for a reversal and remand for a jury trial on all counts of his claims. Although he has been practicing personal injury and employment law for years, Connelly does not seem to have ever practiced bankruptcy law in any substantive setting.

Connelly’s case demonstrates how crucial it can be to have the help of an attorney with specific experience in bankruptcy in order for your case to succeed.


If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.


About the Author

Kyle Frost Bankruptcy Lawyer Student loan attorneyKyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.

Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology.  He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.

Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.

In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.






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