Zynda v. Arwood

Decision Date29 March 2016
Docket NumberCase No. 15-11449
Citation175 F.Supp.3d 791
Parties Jennifer Zynda, et al., Plaintiffs, v. Steve Arwood, et al., Defendants.
CourtU.S. District Court — Eastern District of Michigan

Joseph Xavier Michaels, Nacht, Roumel & Salvatore, PC, David M. Blanchard, Blanchard & Walker, PLLC, Ann Arbor, MI, Edward A. Macey, International Union, UAW, Detroit, MI, for Plaintiffs.

Kimberly Pendrick, Shannon W. Husband, Michigan Department of Attorney General, Detroit, MI, for Defendants.

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS

ROBERT H. CLELAND, UNITED STATES DISTRICT JUDGE

Plaintiffs, who are various individual unemployment-benefit claimants along with an association and a union (Sugar Law Center, and the International Union, United Automobile, Aerospace, and Agricultural Implement Workers of America (“UAW”)), filed suit alleging various Constitutional and statutory violations arising from Michigan's administration of its unemployment benefits program. (Dkt. # 1, Pg. ID 2.) Before the court is Defendants' Motion to Dismiss Plaintiffs' Complaint Pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). (Dkt. # 10.) In response, Plaintiffs timely amended their Complaint as a matter of course (Dkt. # 13) and filed a response (Dkt. # 17). Defendants have filed their reply. (Dkt. # 20.) The matter has been fully briefed and the court concludes a hearing on the motion is unnecessary. See E.D. LR7.1(f)(2). For the reasons stated below, the court will grant in part and deny in part Defendants' Motion to Dismiss.

I. BACKGROUND

Michigan's Unemployment Insurance Agency (“UIA”) incorporates a fraud detection system. Plaintiffs comprise three groups: 1) seven individual unemployment-benefit claimants who have had varying levels of interaction with the fraud detection system, either while receiving benefits or at some point after they returned to employment; 2) the Sugar Law Center, a legal-aid organization that provides legal services to low-wage and unemployed workers, including assistance with unemployment-benefit programs; and 3) UAW, a labor organization with members who claim to have been affected by UIA's fraud detection system. (Dkt. # 13, Pg. ID 155-64.) Defendants, sued in their official capacity, are the Acting Director of the Michigan Department of Talent and Economic Development (Steve Arwood), and the Director of UIA (Sharon Moffett-Massey). (Id. at Pg. ID 154-55.)

UIA has implemented fraud-detection software that scans past and present claimants' records and searches for inconsistencies in the data that might indicate fraud. (Dkt. # 13, Pg. ID 150, 165). In part, the data originate from a claimant's application for benefits and also bi-weekly updates on earnings that unemployment-benefit recipients must submit to UIA in order to continue receiving payments. (Defs.' Mot. 7-8.) Employers also independently submit information about employees, for example, describing why an employee was discharged. (Dkt. # 13, Pg. ID 156.) To obtain benefits, a claimant must meet certain wage and work eligibility requirements and show that he was neither fired for misconduct nor voluntarily left employment without good cause. (Id. at Pg. ID 165)

If the fraud-detection software finds a discrepancy, either between the claimant-and employer-submitted information or potentially in a claimant's bi-weekly reports, UIA's system generates and sends a questionnaire to the claimant. (Id. at Pg. ID 166.) This questionnaire helps the Agency detect incidents of fraud by asking the following two questions: 1) “Did you intentionally provide false information to obtain benefits you were not entitled to receive?”; and 2) “Why did you believe you were entitled to benefits?” (Id. at Pg. ID 167.) Claimants are required to respond to the fraud questionnaire quickly, as UIA must receive the completed form in ten days. (Id. at Pg. ID 168.) Additionally, the questionnaire form contains no specific information about the claimant or any alleged or possible misrepresentation. (Id. at Pg. ID 167.)

Plaintiffs aver that if UIA does not receive a response or the software deems the response unsatisfactory, then “the Agency's computer system robo-adjudicates the fraud issue and automatically determines that the claimant has knowingly and intentionally misrepresented or concealed information to unlawfully receive benefits.” (Id. ) A number of consequences flow from this result. Upon an accusation of fraud, a claimant is no longer allowed to receive assistance from the Agency-administered Advocacy Assistance Program that otherwise would aid the claimant. (Id. ) The claimant also receives a “Notice of Determination” terminating benefits and stating, [y]our actions indicate you intentionally misled and/or concealed information to obtain benefits you were not entitled to receive.” (Id. ) Enclosed with the notice is a “Restitution (List of Overpayment) that informs the claimant of the amount he now owes UIA. (Id. at Pg. ID 169) That amount is the value of the benefit received or sought by the claimant plus a fourfold penalty (Plaintiffs refer to it as “quintuple”) (Id. ). The notice does not contain any specific information about the alleged misrepresentation, or any particularized explanation for the termination of benefits. (Id. at Pg. ID 168-169.) Claimants have thirty days to appeal the determination to an ALJ. (Id. at Pg. ID 169.) If no appeal is taken, the determination becomes final and UIA, in some cases, initiates wage garnishment and tax return seizures in order to satisfy the claimant's debt. (Id. at Pg. ID 153.)

Plaintiffs allege that the agency, at times, fails to send fraud questionnaires and, upon receiving no response, issues automatic fraud determinations without any basis for believing the claimant received the questionnaire. (Id. at Pg. ID 151.) They also allege that flaws in UIA's system cause returned questionnaires to be ignored or result in tabulation errors that cause the software to make erroneous fraud determinations. (Id. at 152.) When such errors occur, Plaintiffs assert, there is no attempt by UIA to determine, before benefits are terminated, whether the identified discrepancy was a result of administrative error, good faith dispute, or misrepresentation by the employer. (Id. )

Plaintiffs have now filed the instant federal action under 42 U.S.C. § 1983, arguing that the UIA's fraud determination system violates various constitutional and federal statutory rights.

II. STANDARD
A. Federal Rule of Civil Procedure 12(b)(1)

Federal Rule of Civil Procedure 12(b)(1) allows for dismissal for “lack of jurisdiction over the subject matter.” When a defendant challenges subject matter jurisdiction pursuant to this Rule, the plaintiff has the burden of proving jurisdiction in order to survive the motion. Mich. S. R. R. Co. v. Branch & St. Joseph Ctys. Rail Users Ass'n Inc. , 287 F.3d 568, 573 (6th Cir.2002). In determining whether the court has subject-matter jurisdiction, the court must assume that the complaint's allegations are true, as construed in the light most favorable to plaintiff. 3D Systems, Inc. v. Envisiontec, Inc. , 575 F.Supp.2d 799, 802–03 (E.D.Mich.2008).

A Rule 12(b)(1) motion may challenge the sufficiency of the pleadings (a facial attack) or the factual existence of subject matter jurisdiction (a factual attack). “In the case of a factual attack, a court has broad discretion with respect to the evidence to consider in deciding whether subject matter jurisdiction exists, including evidence outside the pleadings, and has the power to weigh the evidence and determine the effect of that evidence on the court's authority to hear the case.” Cartwright v. Garner , 751 F.3d 752, 759–60 (6th Cir.2014) (citing United States v. Ritchie , 15 F.3d 592, 598 (6th Cir.1994) )

B. Federal Rule of Civil Procedure 12(b)(6)

A complaint is dismissed for “failure to state a claim upon which relief can be granted” only when, construing the complaint in the light most favorable to the plaintiff and accepting all factual allegations as true, “it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.” Sistrunk v. City of Strongsville , 99 F.3d 194, 197 (6th Cir.1996).

III. DISCUSSION

Plaintiffs' claims are based on a number of alleged violations, Constitutional and statutory, arising from UIA's practice of sending fraud questionnaires and the administration of their fraud detection system. Plaintiffs contend that these practices (1) deprive claimants of their right to due process under the Fifth and Fourteenth Amendments to the Constitution because the fraud questionnaires and determination notices provide no notice of the allegations brought against them, and that this lack of notice, among other systemic problems, deprives claimants of a fair hearing; (2) deprive claimants of their due process rights because the punitive, quintuple penalties imposed by this administrative system are actually criminal penalties requiring the full panoply of due process rights; (3) deprive claimants of the privilege against self-incrimination under the Fifth Amendment because the fraud questionnaires ask claimants to admit to fraud and threaten the termination of benefits for failure to respond and waive the right; (4) violate the Eighth Amendment's prohibition on excessive fines because large fines are assessed without consideration of individual claimants' conduct; (5) violate the Fourteenth Amendment right to equal protection because there is no rational basis for the UIA system's presumption that claimants, not employers, have made the alleged misrepresentation; (6) violate the Fourth Amendment prohibition of unreasonable seizures because the State's practice of garnishing wages and intercepting tax returns constitutes a seizure “without a warrant and without due process of law,” (Pls.' Compl. ¶ 111); (7) violate the Social Security Act, 42 U.S.C. § 300 et seq....

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