Penalties Associated With Fraudulently Obtained Unemployment Benefits Are Not Dischargeable in Chapter 13 Bankruptcy; Sixth Circuit

 

Andrews, et al. v. Michigan Unemployment Ins. Agency, (6th Circuit, May 29, 2018.)

 

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These two cases, consolidated for oral argument, present the same question regarding whether a penalty assessed by a governmental unit against the debtor due to fraud is dischargeable in a Chapter 13 bankruptcy proceeding. In both cases, the debtors fraudulently obtained unemployment benefits from the state of Michigan, and after determining these benefits were wrongfully paid, Michigan assessed a penalty. The debtors argue that the penalties assessed are dischargeable in a Chapter 13 bankruptcy. In each case, the district court disagreed, finding the penalties to be nondischargeable. The Sixth Circuit Court of Appeals affirmed the decisions below because the penalties are nondischargeable under 11 U.S.C. § 523(a)(2).

Priscilla Andrews obtained unemployment benefits from the Michigan Unemployment Insurance Agency (“Agency”) in 2010–11. While she was receiving unemployment benefits, Andrews was also receiving wages from the Department of Community Health and from Family Dollar Stores of MI, Inc. As Andrews failed to report these wages to the Agency, she received unemployment benefits to which she was not entitled. The Agency found that Andrews committed fraud by failing to disclose the receipt of wages to obtain or increase her benefits and ordered restitution of $6,897.00 and penalties of $27,588.00.

Stanley Kozlowski obtained unemployment benefits from the Michigan Unemployment Insurance Agency for several weeks in 2011. However, during that time, Kozlowski also received wages from Triam Schroth LLC. Because he failed to report these wages, Kozlowski received unemployment benefits to which he was not entitled. The Agency found that Kozlowski committed fraud by failing to disclose the receipt of wages and ordered restitution of $4,334.00 and penalties of $16,669.00.

On this consolidated appeal, the debtors argued that their debts fell under section 523(a)(7) which is not among the subsections of section 523(a) which are excepted from discharge under section 1328(a)(2). The Sixth Circuit began by looking at the impact of the Supreme Court case of Cohen v. de la Cruz, 523 U.S. 213 (1998), finding that Cohen stood for the proposition that “the penalties associated with fraud should be regarded as essentially the same as the fraud itself and are to be included under the § 523(a)(2) exception from discharge, as debt arising from fraud.” The court rejected the debtors’ argument that Cohen was inapplicable here because Cohen involved a dispute between private parties rather than a governmental agency. It found that distinction irrelevant and the other cases cited by the debtors unpersuasive as they pre-dated Cohen.

Citing Husky International Electronics, Inc. v. Ritz, 136 S. Ct. 1581 (2016), the circuit court went on to find that the various subsections in section 523(a) are not mutually exclusive and therefore a debt may fall under more than one.

 

http://www.ncbrc.org/wp-content/uploads/AndrewsKozlowski-6th-Cir-opinion-May-2018.pdf

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