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Kozlowski v. Michigan Unemployment Insurance Agency

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

October 28, 2016

MICHIGAN UNEMPLOYMENT INSURANCE AGENCY, Appellee. Bankr. No. 15-51057 Adversary Proceeding No. 15-05123

          Thomas J. Tucker, United States Bankruptcy Judge



         On 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. 8.)

         A 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.

         I. BACKGROUND

         As set 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.)

         On July 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.)

         In 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.

         On 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.)


         Pursuant 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.

         When 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).

         A 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.

         III. ANALYSIS

         To 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."[1] 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).[2]

         In the 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 ยง 1328(a) support his ...

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