Colo., Div. of Fin. & Procurement, Cent. Collection Servs. v. Wine (In re Wine)

• Decision Date: 27 September 2016
• Docket Number: Bankruptcy Case No. 15-13483 TBM,Adv. Pro. No. 15-01366 TBM
• Citation: 558 B.R. 438
• Court: U.S. Bankruptcy Court — District of Colorado
• Parties: In re: Christopher B. Wine a/k/a Christopher Brent WINE a/k/a Christopher Wine, Debtor. State of Colorado, Division of Finance & Procurement, Central Collection Services, as Agent for Colorado Department of Labor and Employment, an Agency of the State of Colorado, Plaintiff, v. Christopher B. Wine a/k/a Christopher Brent Wine a/k/a Christopher Wine a/k/a Chris B. Wine a/k/a Chris Wine, Defendant.

558 B.R. 438

In re: Christopher B. Wine a/k/a Christopher Brent WINE a/k/a Christopher Wine, Debtor.

State of Colorado, Division of Finance & Procurement, Central Collection Services, as Agent for Colorado Department of Labor and Employment, an Agency of the State of Colorado, Plaintiff,

v.Christopher B. Wine a/k/a Christopher Brent Wine a/k/a Christopher Wine a/k/a Chris B. Wine a/k/a Chris Wine, Defendant.

Bankruptcy Case No. 15-13483 TBM

Adv. Pro. No. 15-01366 TBM

United States Bankruptcy Court, D. Colorado.

Signed September 27, 2016

Entered September 30, 2016

James A. Kaplan, Denver, CO, for Plaintiff.

Stephen H. Swift, Colorado Springs, CO, for Defendant.

ORDER DENYING MOTION TO DISMISS

Thomas B. McNamara

, United States Bankruptcy Judge

I. Introduction.

During the Great Depression, Colorado adopted an unemployment compensation system as a safety net for “persons unemployed through no fault of their own.”¹ Although the system has been modified over the years,² the foundation has remained the same. Employers are required to make contributions to an unemployment compensation fund administered by the State of Colorado (the “State”). Eligible workers who suffer total or partial unemployment may apply for benefits. The benefits are paid from the unemployment compensation fund. The quid pro quo for receiving benefits is that the eligible worker must provide accurate information concerning income and employment. Abuse of the system can occur when a worker wrongfully claims an unemployment benefit for a period during which a worker actually was employed or when a worker otherwise provides inaccurate income or employment information. Such circumstances can result in an overpayment of benefits. When an overpayment is discovered, the State may seek recovery of the overpayment, along with a penalty and collection fees. That is what happened in this case—the State sought recovery of overpaid unemployment compensation, statutory penalties, and collection fees from Christopher B. Wine (the “Debtor”).

But, then, the Debtor filed for protection under Chapter 13 of the Bankruptcy Code. The goal of most bankruptcy debtors is a discharge. If the Debtor successfully completes the terms of his confirmed Chapter 13 Plan, the Debtor ordinarily would be entitled to a discharge of debts under Section 1328(a)

³of the Bankruptcy Code. All of which brings us to the current contested matter. The State filed a proof of claim against the Debtor for alleged overpaid unemployment benefits (during various periods in 2013 and 2014), statutory penalties, and collection fees. The State asserts that the overpayments occurred because the Debtor fraudulently misrepresented his employment income.

In addition to filing the proof of claim, the State initiated this lawsuit alleging that the Debtor's debt to the State for the overpaid unemployment compensation, penalties, and collection fees is nondischargeable under Section 523(a)(2)(A) because the overpayments were obtained by “false pretenses, a false representation, or actual fraud.” The Debtor answered and also submitted a “Motion to Dismiss.” (Docket No. 13, the “Motion to Dismiss”). The Debtor concedes that he received overpayments of unemployment compensation and that such overpayments are nondischargeable under Section 523(a)(2)(A). But, the Debtor argues that the portions of the debt owed to the State for statutory penalties and collection fees are dischargeable as a matter of law under the broad Chapter 13 discharge.

So, the core legal question presented by the Motion to Dismiss is: Can a debt owed to a governmental unit for statutory penalties and collection fees arising from overpaid unemployment compensation obtained by fraud be excepted from the Chapter 13 discharge under Section 523(a)(2)(A)?

II. Jurisdiction and Venue.

The Court has subject matter jurisdiction over this adversary proceeding concerning dischargeability pursuant to 28 U.S.C. § 1334

. Furthermore, this is a core proceeding under 28 U.S.C. § 157(b)(2)(I) because it seeks a determination as to the dischargeability of a particular debt. Venue is proper in this Court under 28 U.S.C. §§ 1408 and 1409.

III. Standard Governing Motion to Dismiss.

The Debtor presented the Motion to Dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure

, which is made applicable to adversary proceedings by Rule 7012 of the Federal Rules of Bankruptcy Procedure. A motion under Rule 12(b)(6) tests the legal sufficiency of a complaint. See

Ashcroft v. Iqbal , 556 U.S. 662, 677–78, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ; Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

The court must accept all of the well-pleaded factual allegations in the complaint as true. Iqbal , 556 U.S. at 678, 129 S.Ct. 1937

(factual allegations are “accepted as true”); Wasatch Equality v. Alta Ski Lifts Co. , 820 F.3d 381, 386 (10th Cir. 2016) (quoting Colony Ins. Co. v. Burke , 698 F.3d 1222, 1228 (10th Cir. 2012) ) (“we ‘accept all facts pleaded by the non-moving party as true and grant all reasonable inferences from the pleadings in favor of the same’ ”). Then, the court must decide whether the complaint contains sufficient “facts to state a claim to relief that is plausible on its face.” Twombly , 550 U.S. at 570, 127 S.Ct. 1955.

There is a strong presumption against the dismissal of claims under Rule 12(b)(6)

. See

Cottrell, Ltd. v. Biotrol Intern., Inc. , 191 F.3d 1248, 1251 (10th Cir. 1999). Dismissal of a complaint is appropriate only if it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. The issue is not whether the plaintiff will prevail, but whether the plaintiff is entitled to offer evidence to support his claims.

While a complaint attacked by a Rule 12(b)(6)

motion to dismiss does not need detailed factual allegations, ... a plaintiff's obligation to provide the “grounds” of his “entitle[ment] to relief” requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do .... Factual allegations must be enough to raise a right to relief above the speculative level ... on the assumption that all the allegations in the complaint are true ....

Twombly , 550 U.S. at 555, 127 S.Ct. 1955

(internal citations omitted).

IV. Procedural and Factual Background.

The Debtor filed his petition for relief under Chapter 13 of the Bankruptcy Code on April 4, 2015. (Docket No. 1, Case No. 15–13483.) Four months later, the Court confirmed the Debtor's Chapter 13 Plan. (Docket No. 63, Case No. 15–13483.)

A. The Amended Complaint and Alleged Facts.

The State initiated this adversary proceeding by filing a “Complaint to Determine Dischargeability of Debt.” (Docket No. 1.) Thereafter, the State amended its claim. The State's operative pleading is the “Amended Complaint to Determine Dischargeability of Debt.” (Docket No. 7, the “Amended Complaint” or “Am. Compl.”)

In the Amended Complaint, the State alleges that the Debtor “received unemployment insurance benefits in the total amount of $10,123.00 for the weeks ending January 12, 2013 through March 2, 2013, March 9, 2013 through April 6, 2013, July 27, 2013 through September 14, 2013, October 26, 2013, November 2, 2013 through December 7, 2013 and January 25, 2014 through August 9, 2014 [.]” Am. Compl. ¶ 5. Further, the State asserts that the Debtor “failed to disclose all of his hours worked and earnings” for the periods during which he received unemployment compensation benefits. Am. Compl. ¶¶ 6 and 8. The State itemizes the alleged “unreported and underreported earnings and overpayments of unemployment benefits” in exhibits attached to the Complaint. Am. Compl. ¶ 10.

The State claims that it sent the Debtor three “Determinations of Overpayment of Benefits and Demands for Payment”:

• the “July 22, 2014 Determination,” which related to the weeks ending January 12, 2013, through March 2, 2013; March 9, 2013 through April 6, 2013, July 27, 2013 through September 14, 2013, and October 26, 2013;• the “September 3, 2014 Determination,” which related to the weeks ending November 2, 2013 through November 23, 2013, and December 7, 2013; and

• the “September 11, 2015 Determination,” which related to the weeks ending January 25, 2014 through August 9, 2014.

Am. Compl. ¶ 11 and Exs. E, F, and G.

On August 10, 2014, the Debtor filed an appeal of the July 22, 2014 Determination. Am. Compl. ¶ 12. The State asserts that the Appeals Section of the Colorado Department of Labor and Employment, Division of Unemployment Insurance held a hearing on the appeal and that a Hearing Officer made the following findings of fact:

Findings of Fact: The claimant applied for benefits on October 30, 2012. His weekly benefit amount was $230 a week, and then was $359 a week starting the week of March 9, 2014. He received a handbook and read it. He knew the Division expected him to report his hours and wages accurately. He knew he would get more benefits if he reported less income. He knew when he reported on CUBLine he had to report whether he was working, how many hours he worked and the wages he earned. The claimant has applied for and received unemployment benefits five times prior to this recent application. The claimant has had no prior problems in the past reporting his income on CUBLine.

Despite knowing this, the claimant chose not to report his work at Il Postino at all on CUBLine from March 9, 2013, until April 6, 2013. From July 27, 2013, until September 14, 2013, he greatly underreported his earnings. Even thought [sic] he knew he had to report he was working, he chose to input that he was not working at all from January 12-April 9, 2013.

Am. Compl. ¶ 15, Ex. I.

In addition, the State alleges that the Hearing Officer made a specific determination of fraud. The Hearing Officer concluded that:

[T]he claimant received an overpayment due to false representations. The claimant failed to report or underreported her

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