Mich. Unemployment Ins. Agency v. Kozlowski (In re Kozlowki)

• Citation: 547 B.R. 222
• Decision Date: 25 March 2016
• Docket Number: Case No. 15–51057,Adv. No. 15–5123
• Parties: In re: Stanley R. Kozlowki, III, Debtor. Michigan Unemployment Insurance Agency, Plaintiff, v. Stanley R. Kozlowski, III, Defendant.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

547 B.R. 222

In re: Stanley R. Kozlowki, III, Debtor.Michigan Unemployment Insurance Agency, Plaintiff,

v.Stanley R. Kozlowski, III, Defendant.

Case No. 15–51057

Adv. No. 15–5123

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed March 25, 2016

Daniel P. Gunderson, Zachary A. Risk, Michigan Attorney General, Detroit, MI, Attorneys for Plaintiff.

Brian A. Rookard, Gudeman & Associates, P.C., Royal Oak, MI, Attorney for Defendant.

OPINION REGARDING DEFENDANT'S MOTION TO DISMISS

Thomas J. Tucker

, United States Bankruptcy Judge

I. Introduction

Defendant, Stanley R. Kozlowski, III, is a debtor in a Chapter 13 bankruptcy case who allegedly owes a debt to the Plaintiff, the State of Michigan Unemployment Insurance Agency (the "Agency"). The debt includes a statutory penalty for fraud. The alleged fraud was in Defendant knowingly making false statements to the Agency in order to obtain unemployment benefits for which he was not eligible.

Plaintiff alleges that Defendant owes a total of $14,838.68 for unemployment benefit overpayments, interest on the overpayments, and the statutory penalty. The Agency alleges that the entire debt is nondischargeable in Defendant's pending Chapter 13 bankruptcy case, under 11 U.S.C. § 523(a)(2)(A)

, as a debt for "false pretenses, a false representation, or actual fraud."

Currently before the Court is Defendant's motion to dismiss (Docket # 4, the "Motion"). In the Motion, Defendant argues that § 523(a)(2)(A)

does not apply to the statutory penalty portion of the debt, because the penalty constitutes a noncompensatory debt payable to a governmental unit that is covered by 11 U.S.C. § 523(a)(7). Defendant's theory is that if the penalty is covered by § 523(a)(7), it cannot also be covered by § 523(a)(2), even if the penalty is based on fraud. This theory matters because in a chapter 13 case, § 523(a)(2)

debts are excepted from a discharge obtained under 11 U.S.C. § 1328(a), while § 523(a)(7) debts are not.

Recently, in a case decided by Bankruptcy Judge Randon in this district, a Chapter 13 debtor prevailed on this theory. Mich. Unemployment Ins. Agency v. Andrews (In re Andrews), No., Adv. Pro. No. 15–04724 (Docket # 11), 2015 WL 5813418 (Bankr.E.D.Mich. Oct. 2, 2015)

. That case is presently on appeal to the district court.

The Court held a hearing on Defendant's Motion, and took it under advisement. For the reasons stated below, the Court respectfully disagrees with the decision in Andrews,

and rejects Defendant's argument.

II. Jurisdiction

The Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(b)

, 157(a), and 157(b)(1), and Local Rule 83.50 (E.D.Mich.). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I), because it seeks a "determination[ ] as to the dischargeability of particular debts." This adversary proceeding also is a core proceeding because it falls within the definition of a proceeding "arising under title 11," and of a proceeding "arising in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b). Matters falling within either of these categories are deemed to be core proceedings. See Allard v. Coenen (In re Trans–Indus., Inc. ), 419 B.R. 21, 27 (Bankr.E.D.Mich.2009) (citing Mich. Emp. Sec. Comm'n v. Wolverine Radio Co., Inc., 930 F.2d 1132, 1144 (6th Cir.1991) ).

This is a proceeding "arising under title 11," because it is created or determined by statutory provisions of title 11, including 11 U.S.C. § 523(a)(2)(A)

. This is a proceeding "arising in" a case under title 11, because it is a proceeding that "by [its] very nature, could arise only in bankruptcy cases." See Allard, 419 B.R. at 27 (internal quotation marks and citation omitted).

III. Standards governing Defendant's motion to dismiss

Defendant brings the Motion under Rule 12(b)(6) of the Federal Rules of Civil Procedure

, arguing that the Agency's complaint fails to state a claim upon which relief can be granted. Rule 12(b)(6) applies in this adversary proceeding under Federal Rule of Bankruptcy Procedure 7012.

A motion under Rule 12(b)(6)

tests the "sufficiency of [a] complaint." Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). A court must examine the plaintiff's allegations and determine whether, as a matter of law, "the plaintiff is entitled to legal relief even if everything alleged in the complaint is true." Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir.1993). "[A] court considering a motion to dismiss under Rule 12(b)(6) ‘must accept all well-pleaded factual allegations of the complaint as true and construe the complaint in the light most favorable to the plaintiff.’ " Benzon v. Morgan Stanley Distribs., Inc., 420 F.3d 598, 605 (6th Cir.2005) (quoting Inge v. Rock Fin. Corp., 281 F.3d 613, 619 (6th Cir.2002) ).

A plaintiff must provide "more than labels and conclusions.... Factual allegations must be enough to raise a right to relief above the speculative level." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555–56, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)

(citations omitted). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice."

Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)

. "[O]nly a complaint that states a plausible claim for relief survives a motion to dismiss." Id. at 679, 129 S.Ct. 1937.

In short, "a complaint must contain (1) ‘enough facts to state a claim to relief that is plausible,’ (2) more than ‘a formulaic recitation of a cause of action's elements,’ and (3) allegations that suggest a ‘right to relief above a speculative level.’ " Tackett v. M & G Polymers, USA, LLC, 561 F.3d 478, 488 (6th Cir.2009)

(quoting Twombly, 550 U.S. at 545, 127 S.Ct. 1955 ).

IV. Background

Defendant filed his Chapter 13 bankruptcy petition on July 23, 2015. On November 16, 2015, the Agency filed this adversary proceeding. In the Complaint, the Agency alleges that for the weeks ending between January 8, 2011 through March 26, 2011, Defendant falsely and fraudulently certified that he was not employed, and thereby collected $4,344.00 in unemployment benefits for which he was not eligible under Michigan law.

Under Michigan law, when a claimant seeking unemployment benefits "makes a false statement or representation knowing it to be false, or knowingly and willfully with intent to defraud fails to disclose a material fact, to obtain or increase a benefit," the Agency is entitled to collect restitution for any overpayment, plus what the Agency refers to as a "fraud penalty." See Mich. Comp. Laws § 421.54(b)

. In cases where a claimant fraudulently obtains benefits of $500 or more, the fraud penalty is equal to four times the amount of the overpayment. Mich. Comp. Laws § 421.54(b)(ii). In this case, after the Agency discovered Defendant's alleged fraud in October 2011, it assessed a penalty of $16,669.00. Before filing bankruptcy, Defendant repaid $7,666.00 to the Agency. The Agency alleges that:

Defendant is ... indebted to the Agency in a non-dischargeable debt in the amount of: $4,344.00 in fraudulent overpaid benefits, $16,669.00 in statutory penalties, and $1,491.68 in interest, but less $7,666.00 already collected, for a total debt of $14,838.68.¹

Defendant alleged in his Motion that the Agency applied the $7,666.00 collected from him first to the restitution principal and interest, so that the debt remaining is "unpaid interest and penalties, or just the penalties."² During the hearing on the Motion, Defendant's attorney stated that the unpaid debt amount may include unpaid interest in addition to the penalty. In any event, it is undisputed that the unpaid debt includes at least some part of the fraud penalty.

V. Discussion

The Agency's position is that the entire debt, including the fraud penalty, is nondischargeable under 11 U.S.C. § 523(a)(2)(A)

. Defendant contends that § 523(a)(2) does not apply to the fraud penalty, because it is covered by § 523(a)(7).

A. Section 523(a)(2)

and the Cohen case

In relevant part, § 523(a)(2)

applies to debts for "money, property, [or] services ... to the extent obtained, by ... false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A). Such debts are nondischargeable not only in Chapter 7 cases, but also in Chapter 13 cases. See 11 U.S.C. § 1328(a)(2) (listing specific debts described in § 523(a) that are nondischargeable in Chapter 13, including § 523(a)(2) debts); see also D & M Props., LLP v. Rosser (In re Rosser), No. 08–11146, Adv. P. No. 08–1075, 2008 WL 3992780 (Bankr.E.D.Tenn. Aug. 25, 2008)

("Since BAPCPA, ... § 1328 additionally excepts from discharge those debts of the kind specified in § 523(a)... (2).").

The United States Supreme Court held in Cohen v. de la Cruz, 523 U.S. 213, 219, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998)

that the debts covered by § 523(a)(2) are not limited to the "value of the money, property, or services received by the debtor" through fraud. Instead, the provision renders nondischargeable "any liability arising from money, property, etc., that is fraudulently obtained, including treble damages, attorney's fees, and other relief that may exceed the value obtained by the debtor." Id. at 223, 118 S.Ct. 1212 (emphasis added) (citations omitted). Under Cohen, all debts arising from fraud, whether they are "restitutionary," "compensatory," or "punitive" in nature, are nondischargeable under § 523(a)(2). See 523 U.S. at 222, 118 S.Ct. 1212 (quoted in section V.C.1 of this opinion, below); see also Lowry v. Nicodemus (In re Nicodemus), 497 B.R. 852, 858, 859 (6th Cir. BAP 2013) ("A critical point made by the Supreme Court in Cohen is that § 523(A)(2)(A) prevents discharge of ‘any debt’ as long as the debt sought to be discharged is assessed ‘on account of the fraud.’ " And such debts include "even compensatory, punitive, or statutory liability.").

Cohen

involved a landlord-debtor who had overcharged his tenants in violation of a rent control ordinance in Hoboken, New Jersey....