United States District Court, E.D. Michigan, Southern Division
J. Tucker, United States Bankruptcy Judge
OPINION AND ORDER DENYING APPELLANT KOZLOWSKI'S
APPEAL AND AFFIRMING THE ORDER OF THE BANKRUPTCY
D. BORMAN, UNITED STATES DISTRICT JUDGE
April 12, 2016, Appellant Debtor Stanley Kozlowski
("Kozlowski") filed his Notice of Appeal from the
Bankruptcy Court's Order Denying Debtor's Motion to
Dismiss. (ECF No. 1.) On June 3, 2016 Kozlowski filed his
appeal brief, and on June 23, 2016, Appellee Michigan
Unemployment Insurance Agency ("MUIA") filed its
response. (ECF Nos. 5 & 6.) Thereafter, on August 25,
2016, MUIA filed a Notice of Supplemental Authority. (ECF No.
hearing on this matter was held on Friday, October 21, 2016.
For the reasons set forth below, the Court will AFFIRM the
Bankruptcy Court's Order and DENY Kozlowski's appeal.
forth in the MUIA's Adversary Proceedings complaint,
Kozlowski received unemployment benefits for the weeks ending
January 8, 2011 through March 26, 2011. (Adv. Prod.
("AP") Case No. 15-5123, Dkt. 1, Complaint, at
¶ 8.) Thereafter, in Administrative Determinations dated
October 12, 2011 and October 13, 2011, MUIA found that at the
same time Kozlowski received those unemployment benefits, he
had been working full-time and receiving disqualifying wages.
(Id., at ¶ 9.) The MUIA also determined that
Kozlowski had "intentionally misled and/or concealed
information to obtain benefits Defendant was not entitled to
receive." (Id., at ¶ 10.) The
Administrative Redeterminations ordered restitution of $4,
344.00 in overpaid benefits and assessed a statutory fraud
penalty of $16, 669.00 under "Mich. Comp. Laws §
421.54 due to [Kozlowski's] false representations and
failure to disclose material facts." (Id., at
¶ 18.) Thereafter, MUIA collected $7, 666.00 from
Kozlowski. (Id., at ¶ 19.)
23, 2015, Kozlowski filed for Chapter 13 bankruptcy relief.
(See Bankr. Case No. 15-51057.) MUIA was a creditor
in that case and claimed that Kozlowski was improperly paid
unemployment benefits when he was not qualified for those
benefits. On November 16, 2015, MUIA filed an adversary
proceeding against Kozlowski to have the entire debt it was
owed, including the statutory fraud penalty, declared
nondischargeable pursuant to 11 U.S.C. § 523(a)(2) and
Cohen v. De La Cruz, 523 U.S. 213 (1998).
(See AP Case No. 15-5123, Dkt. 1, Compl.)
response to the adversary proceeding, Kozlowski filed a
motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), made
applicable to the adversary proceeding through Fed. R. Bank.
P. 7012, for failure to state a claim regarding the penalty
portion of the debt owed to MUIA. (AP Case No. 15-5123, Dkt.
No. 4, Motion to Dismiss.) Kozlowski argued that the penalty
portion of the debt was dischargeable because it fell within
the parameters of 11 U.S.C. § 523(a)(7), which is not
enumerated as a nondischargeable debt under 11 U.S.C. §
1328(a)(2). After briefing and a hearing, the Bankruptcy
Court denied Kozlowski's motion to dismiss and found that
the fraud penalty was a debt for fraud covered by 11 U.S.C.
§ 523(a)(2)(A) "even though the fraud penalty is
also a debt covered by [11 U.S.C.] § 523(a)(7), as a
noncompensatory penalty payable to and for the benefit of a
governmental unit." (AP Case No. 15-5123, Dkt. Nos. 23
& 24, Opinion and Order denying Defendant's Motion to
Dismiss; Michigan Unemployment Ins. Agency v. Kozlowski
(In re Kozlowski), 547 B.R. 222 (Bankr. E.D. Mich.
2016)). The Bankruptcy Court noted that Cohen v. De La
Cruz, 523 U.S. 213 (1998) compelled this result. In
re Kozlowski, 547 B.R. at 227.
April 7, 2016, the Bankruptcy Court entered a Consent
Judgment that provided that judgment was entered in favor of
MUIA and against Kozlowski in the amount of $15, 188.68 in
nondischargeable debt plus filing fees and specified that the
amount consisted of "$0.00 in restitution, $44.85 in
interest, $14, 793.83 in penalties, and $350.00 in filing
fee." (AP Case No. 15-05123, Dkt. Nos. 28 & 29,
Stipulated Settlement and Consent Judgment.) The Consent
Judgment preserved Kozlowski's right to appeal "the
unpaid penalties portion of the debt." (Id.)
Kozlowski then timely filed the present Notice of Appeal from
the Order Denying Defendant's Motion to Dismiss on April
12, 2016. (ECF No. 1.)
STANDARD OF REVIEW
to 28 U.S.C. § 158(a)(1) a district court has
jurisdiction to hear appeals from "final judgments,
orders, and decrees" of the bankruptcy court. "The
bankruptcy court's findings of fact are reviewed under
the clear-error standard, and its conclusions of law are
reviewed de novo" B-Line, LLC v. Wingerter and
Keller-Wingerter, 594 F.3d 931, 935-36 (6th Cir. 2010).
In the present case, the issue presented is a question of law
regarding whether a debt is dischargeable.
"Dischargeability determinations are conclusions of law
reviewed de novo." Lowry v. Nicodemus (In re
Nicodemus), 497 B.R. 852, 855 (6th Cir. 2013). Thus, the
Court must review the Bankruptcy Court's Order Denying
the Debtor's Motion to Dismiss de novo.
reviewing a motion to dismiss under Rule 12(b)(6), made
applicable to adversary proceedings pursuant to Fed. R. Bank.
P. 7012(b), a court must "construe the complaint in the
light most favorable to the plaintiff, accept its allegations
as true, and draw all reasonable inferences in favor of the
plaintiff." DirectTV, Inc. v. Treesh, 487 F.3d
471, 476 (6th Cir. 2007). To sufficiently state a claim, a
complaint must provide a "short and plain statement of
the claim showing that the pleader is entitled to
relief." Fed.R.Civ.P. 8(a)(2). "[T]he complaint
'does not need detailed factual allegations' but
should identify 'more than labels and
conclusions."' Castas v. Wal-Mart Stores,
Inc., 695 F.3d 428, 435 (6th Cir. 2012) (quoting Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
But the court "need not accept as true legal conclusions
or unwarranted factual inferences." Treesh, 487
F.3d at 476 (quoting Gregory v. Shelby County, 220
F.3d 433, 446 (6th Cir. 2000)). "[L]egal conclusions
masquerading as factual allegations will not suffice."
Eidson v. State of Term. Dep't of Children's
Servs., 510 F.3d 631, 634 (6th Cir. 2007).
plaintiff must provide more than "formulaic recitation
of the elements of a cause of action ... Factual allegations
must be enough to raise a right to relief above the
speculative level...." Twombly, 550 U.S. at 555
(internal citations omitted). To wit:
To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to "state a
claim to relief that is plausible on its face."
[Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556,
570 (2007)]. A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable
for the misconduct alleged. Id. at 556. The
plausibility standard is not akin to a "probability
requirement, " but it asks for more than a sheer
possibility that a defendant has acted unlawfully.
Ibid. Where a complaint pleads facts that are
"merely consistent with" a defendant's
liability, it "stops short of the line between
possibility and plausibility of 'entitlement to
relief.'" Id., at 557 (brackets omitted).
Id. at 678.
better understand this legal issue, the Court provides the
unchallenged statutory landscape. Kozlowski seeks bankruptcy
protection under Chapter 13, 11 U.S.C. § 1328(a).
Pursuant to Chapter 13, certain enumerated debts are excepted
from discharge, i.e. those certain debts are
"nondischargeable." See 11 U.S.C. §
1328(a). One category of debts enumerated in § 1328(a),
and excepted from discharge in Chapter 13 cases, are defined
in § 523(a)(2) as debts for "money, property, [or]
services ... to the extent obtained, by ... false pretenses,
a false representation, or actual fraud." See 11
U.S.C. § 1328(a)(2). However, a debt described in §
523(a)(7) as a "fine, penalty, or forfeiture payable to
and for the benefit of a governmental unit, [that is] not
compensation for actual pecuniary loss, " is
nondischargeable in a Chapter 7 case, but not
excepted from discharge in the usual Chapter 13 case
proceeding pursuant to 1328(a).
present case, Kozlowski argues that the $16, 669.00 penalty
he was assessed by MUIA for allegedly fraudulently receiving
unemployment benefits falls within the ambit of §
523(a)(7) because it is a noncompensatory penalty payable to
a governmental unit. Kozlowski reasons that because this debt
is encompassed by § 523(a)(7), that debt cannot
also fall under § 523(a)(2) as a
nondischargeable debt obtained by fraud or false pretenses.
Kozlowski further contends that the Supreme Court's
decision Cohen v. De La Cruz,523 U.S. 213 (1998)
and the legislative history of § 1328(a) support his