Opinion
Case No. 16-32385 HCD Adv. Proc. No. 17-3016
09-18-2017
In the Matter of: ARNETTA LYNN BROWN Debtor STATE OF INDIANA ex rel. INDIANA DEPARTMENT OF WORKFORCE DEVELOPMENT Plaintiff v. ARNETTA LYNN BROWN Defendant
Appearances: Megan Binder, Esq., and Melinda Hoover MacAnally, Esq., IGCS 5th Floor, 302 West Washington Street, Indianapolis, Indiana 46204 attorneys for plaintiff. Arnetta Lynn Brown, 524 Jefferson Estate Lane, Apt. H, Mishawaka, Indiana 46545, pro se defendant.
Chapter 7
Appearances:
Megan Binder, Esq., and Melinda Hoover MacAnally, Esq., IGCS 5th Floor, 302 West Washington Street, Indianapolis, Indiana 46204 attorneys for plaintiff. Arnetta Lynn Brown, 524 Jefferson Estate Lane, Apt. H, Mishawaka, Indiana 46545, pro se defendant.
MEMORANDUM OF DECISION and ORDER
At South Bend, Indiana, September 18, 2017.
The plaintiff in this adversary proceeding, State of Indiana ex rel. Indiana Department of Workforce Development (IDWD), has filed a Motion for Default Judgment. This motion asks the court to enter a default judgment holding nondischargeable, under §§ 523(a)(2)(A) and 523(a)(7), the defendant Arnetta Lynn Brown's (Brown) debt to it for overpaid unemployment compensation benefits, penalties, and costs. For the reasons discussed below the court denies the motion.
Jurisdiction
This court has jurisdiction pursuant to 28 U.S.C. §§ 151, 157, and 1334, and Northern District of Indiana Local Rule 200-1. The court has determined that this matter is a core proceeding pursuant to 28 U.S.C. §157(b)(2)(I). Plaintiff IDWD has expressly acknowledged the authority of this court to hear and decide this adversary proceeding.
Findings of Fact
With assistance of legal counsel, Brown filed a voluntary petition for relief under chapter 7 in November 2016. She listed the IDWD as an unsecured creditor on her Schedule E/F. The chapter 7 trustee filed a report of no distribution. The court issued Brown's discharge in April 2017, and closed her bankruptcy case in May 2017.
The IDWD has timely filed this adversary proceeding, and properly served Brown and her bankruptcy attorney. In its complaint the IDWD alleges that Brown applied for unemployment compensation benefits, which the IDWD paid, during weeks when she was employed and not entitled to receive those benefit payments. The IDWD states it routinely relies on benefit applications, and alleges it was justified in relying on Brown's benefit application in issuing payments without an investigation of her eligibility. It seeks, pursuant to § 523(a)(2)(A), to except Brown's debt for overpaid benefits from her bankruptcy discharge. The IDWD also asserts, citing § 523(a)(7), that the court should also except Brown's debt for statutory civil penalties, interest, and adversarial costs from her discharge.
When Brown did not file an answer or other response within the time specified on the summons, the IDWD sought the clerk's entry of default. In an affidavit supporting entry of default an IDWD employee has sworn that Brown is not now on active duty in any of the armed services of the United States and attested to the proper service of process on Brown and her bankruptcy attorney. The IDWD motion and affidavit also state that Brown failed to submit a motion or an answer to the complaint within 35 days of the issuance of the summons. The clerk has entered Brown's default in this adversary proceeding. Next the IDWD filed the motion for default judgment now before the court. The court will note additional facts below.
See Motion for Entry of Default by Clerk at ¶ 4 and Affidavit in Support of Motion for Entry of Default at ¶ 6, ECF no. 5. The operative wording of the summons in this adversary proceeding, ECF no. 3, requires a defendant to answer the complaint "within 30 days after the date of issuance of this summons, except that the United States and its offices and agencies shall file a motion or answer to the complaint within 35 days." The national bankruptcy rules establish this difference in the time to respond to a summons. See Federal Rule of Bankruptcy Procedure 7012(a). While presuming the IDWD's misstatement of the time period was a typographical error or an editorial oversight, the court notes that this adversary proceeding is not the first one where the IDWD has misstated the period for answering a complaint.
Discussion
The IDWD brings its complaint under § 523(a)(2)(A) and § 523(a)(7). The IDWD asserts that Brown made intentional false statements in applying for unemployment benefits that warrant excepting her debt from discharge under § 523(a)(2)(A). It alleges that the unentitled benefit payments Brown received are subject to statutory civil penalties and interest that the court should except from discharge under § 523(a)(7). The IDWD also asks for an award of its costs in filing this adversary proceeding.
I. Procedural deficiencies
Initially, the court notes IDWD procedural deficiencies concerning the local rules of this court. The record here shows the IDWD has failed to provide a separate supporting brief as called for in the local rules of this court. Northern District of Indiana Local Bankruptcy Rule B-7007-1(a) reads, in part as relevant to this adversary proceeding, as follows.
(a) Any motion filed within a contested matter or an adversary proceeding ... shall be accompanied by a separate supporting brief. ... (emphasis supplied)
Although the IDWD motion for default judgment references Title 11, sections of the Indiana Code, and includes a solitary case reference, these references completely ignore the mandate of local rule B-7007-1 for a separate supporting brief. The absence of a supporting brief leaves the court "to speculate concerning the basis for the motion, the legal standards which might govern it, and whether the circumstances of this case satisfy the requirements for granting the relief requested." In re King, 66 Fed.R.Serv.3d 744 (Bankr. N.D. Ind. 2006). The court declines to guess the applicable legal standards, and how the provisions referenced by the IDWD might fit the facts and circumstances of this adversary proceeding to support a prima facie case that it is entitled to a default judgment. The IDWD has a history of filings in this court under many circumstances and could have learned of the court's local rules and national procedural rules in the process. The court is unwilling to continue to overlook repeated deficiency in the IDWD's pleadings.
The court is cognizant that the IDWD has filed many complaints in this court seeking to recover overpaid unemployment benefits. In doing so, the IDWD reuses format and wording in its complaints to address common issues. While the court generally has no position on the document drafting practices of litigants, it is concerned that use of standardized language may lead to inaccuracies in the pleadings. For example, both feminine and masculine pronouns reference the female defendant Brown showing the failure of the IDWD to properly customize the standard language of its complaint form. The court has reason to question whether other, less obvious deficiencies, omissions, or misstatements may be present in the IDWD filings. This situation raises general doubts about the credibility of IDWD assertions.
This court has previously addressed problems with the IDWD's use of standard form pleadings and the failure to particularize the complaint to accurately apply to the defendant. See, e.g., Indiana Department of Workforce Development vs. Quaglio (In re Quaglio), 2013 Bankr. LEXIS 5581 (Bankr. N.D. Ind. Nov. 20, 2013). The court finds the continuing nature of such errors in IDWD submissions troublesome. Footnote 1, supra, points out another example of careless drafting in this proceeding. --------
II. Privacy Protection Failure
Beyond the procedural deficiencies discussed above, the IDWD's blatant failure to adhere to the privacy protection mandate in Bankruptcy Rule 9037 disturbs the court. The exhibits to the IDWD's complaint contain multiple instances mentioning personal data identifiers prohibited by Rule 9037(a). The court is generally aware that the IDWD has included protected information as part of its submissions in other adversary proceedings filed in this court. Such personal data identifiers do not present information relevant in any way to the dischargeability of a debt owed to the IDWD. As the filer of these documents, IDWD is responsible for insuring that its submissions to the court comply with all requirements of the rules of procedure. This includes the privacy protection requirements found in Rule 9037. See Fed. R. Bankr. P. 9037 Advisory Committee Note (2007) ("Trial exhibits are subject to the redaction requirements of Rule 9037 to the extent they are filed with the court."). Section 105(a) expressly authorizes the court
to enforce and implement court orders and rules, which includes, unquestionably, the Federal Rules of Bankruptcy Procedure. Rule 9037 directs that, in any filing containing a debtor's social security number and birth date, only the last four digits of the social security number and the birth year, respectively, are to be disclosed, see Fed. R. Bankr. P. 9037(a)(1), (2), and noncompliance with this Rule could potentially give rise to a contempt action.In re French, 401 B.R. 295, 315 (Bankr. E.D. Tenn. 2009); see also In re Downs, 103 F.3d 472, 477 (6th Cir. 1996) ("Bankruptcy courts, like Article III courts, enjoy inherent power to sanction parties for improper conduct.").
III. Default judgment standard
Granting a default judgment is discretionary with the court. See Domanus v. Lewicki, 742 F.3d 290, 301 (7th Cir. 2014). Fed. R. Civ. P. 55 (made applicable here by Fed. R. Bankr. P. 7055) governs default judgments. Entry of a default judgment "is appropriate where defendants fail to timely answer and offer no justifiable excuse for their conduct." Mason v. RJK Investors (In re Klarchek), 509 B.R. 175, 186 (Bankr. N.D. Ill. 2014) (citing Merrill Lynch Mortgage Corp. v. Narayan, 908 F.2d 246, 252 (7th Cir. 1990)). Before entering a default judgment, however, the court requires that a plaintiff establish a prima facie showing on the merits of its claim. See, e.g., In re Taylor, 289 B.R. 379, 383 (Bankr. N.D. Ind. 2003) ("[B]efore a litigant is awarded the relief it seeks when the opposing party fails to respond, the court needs to satisfy itself that the facts before it demonstrate a prima facie entitlement to that relief."); Nishimatsu Construction Co., Ltd. v. Houston National Bank, 515 F.2d 1200, 1206 (5th Cir. 1975) ("[A] defendant's default does not in itself warrant the court in entering a default judgment. There must be a sufficient basis in the pleadings for the judgment entered."). As discussed below, the facts and pleadings in this adversary proceeding do not furnish a sufficient prima facie basis for a judgment excepting Brown's debt from discharge.
IV. Section 523(a)(2)(A)
Precedent binds the court concerning exceptions to discharge in reviewing the IDWD motion. The Supreme Court instructs that "exceptions to discharge should be confined to those plainly expressed." Kawaauhau v. Geiger, 523 U.S. 57, 62 (1988) (citation omitted). When applying this guidance, the Seventh Circuit teaches that "exceptions to discharge are to be [construed] strictly against a creditor and liberally in favor of the debtor." In re Trentadue, 837 F.3d 743, 749 (7th Cir. 2016) (citation omitted). In order for the court to except Brown's debt from discharge under § 523(a)(2)(A) the IDWD must establish three elements. First, that Brown made a false representation or omission of fact. Second, that Brown knew the representation or omission was false or she made the representation with reckless disregard for its truth, and she made it with the intent to deceive the IDWD. Third, the IDWD justifiably relied on Brown's false representation. The IDWD must establish all three elements to support a finding of false pretense or false representation under § 523(a)(2)(A). Its failure to establish any single element is outcome determinative. Attorneys' Title Guaranty Fund, Inc. v. Wolf (In re Wolf), 519 B.R. 228, 246 (Bankr. N.D. Ill. 2014) (citing cases).
As noted by Bankruptcy Judge Barnes of the Northern District of Illinois,
a factor of nondischargeability under section 523(a)(2) is intent to deceive. As the Seventh Circuit in [In re Hudgens, 149 Fed.Appx. 480, 487 (7th Cir. 2005)] made clear, absence of such an intent to deceive is a bar to finding a debt nondischargeable.Sullivan v. Glenn (In re Glenn), 502 B.R. 516, 532 (Bankr. N.D. Ill. 2013), aff'd 526 B.R. 731 (N.D. Ill. 2014), aff'd 782 F.3d 378 (7th Cir. 2015), cert. denied 136 S.Ct. 584 (2015). "The creditor must establish each of these elements to support a finding of a false pretense or misrepresentation; failure to establish any one element is determinative of the outcome." Rae v. Scarpello (In re Scarpello), 272 B.R. 691, 700 (Bankr. N.D. Ill. 2002) (internal citation omitted). The crucial element here is Brown's intention to deceive the IDWD.
Upon reviewing the IDWD complaint and the more than 200 pages of exhibits attached to that complaint, the court finds the record does not, and cannot, support a finding that Brown applied for unemployment benefits with the intention to deceive the IDWD. A discharge exception under § 523(a)(2)(A) requires scienter by a debtor. In re Sheridan, 57 F.3d 627, 635 (7th Cir. 1995). This demands a creditor show the debtor is guilty of a positive fraud, one involving moral turpitude or intentional wrong, and not merely an implication of fraud. In re Blackburn, 68 B.R. 870, 876 (Bankr. N.D. Ind. 1987); see also Gabellini v. Rega, 724 F.2d 579, 581 (7th Cir. 1984) ("The debtor must also have scienter, i.e., an intent to deceive."). Intent to deceive is measured by the debtor's subjective intention at the time of the representations or other purportedly fraudulent conduct. Scarpello, 272 B.R. at 700 ("Proof of intent to deceive is measured by a debtor's subjective intention at the time the representation was made."); see also CFC Wireforms, Inc. v. Monroe (In re Monroe), 304 B.R. 349, 356 (Bankr. N.D. Ill. 2004) (same).
The IDWD attached Exhibit F to its complaint. This exhibit is Brown's sworn statement given at an interview with IDWD staff. In her statement Brown responded to a question from the IDWD about failing to report work and earnings as follows.
14. Q: Why did you fail to report your work and earnings from Bob Evans Farms LLC, McCollouth-Sholten Construction Inc., and
Poch Staffing Inc., when claiming and receiving unemployment benefits in 2010, 2011 and 2012?
A: The first day I came in to Workone to file unemployment I needed understanding [sic] regarding filing my first claim [sic] There was a gentleman named (Mike) that was assisting people on the computers. I asked him about Bob Evans and what did I need to do regarding that employer. I told him I was a server and roughly how much my weekly checks were. ($35.00 roughly) he said that's not enough to claim/report so I never claimed any monies until towards the end of my claim [sic] they called me in for a scheduled apt. and asked me why I hadn't reported Bob Evans monies. I told them what (Mike) told me and they at that time told me to report all monies.
- Never had to stop in to ask questions assuming that this was the same for every claim.
Brown's sworn statement shows her lack of intention to deceive the IDWD at the time she filed claims for unemployment benefits. She was simply doing what an IDWD employee told her to do. The court considers that Brown's reliance on directions from an employee of the IDWD was reasonable. The court is unable to equate the way Brown completed benefit applications with an intent to deceive, as she was only behaving in conformity with IDWD instructions. By following the direction of an IDWD employee when submitting benefit applications, the court finds the record before it cannot support any inference or finding that Brown intended to deceive the IDWD when she submitted those applications. Since the IDWD cannot establish Brown had an intention to deceive when she submitted benefit claims, it has failed to present an essential part of a prima facie case under § 523(a)(2)(A) - an intent to deceive. Lacking this element, the court need not consider the other elements under this section. Scarpello, 272 B.R. at 700.
V. Section 523(a)(7)
The IDWD has asked the court to find that Brown's debt for statutory civil penalties is not dischargeable under § 523(a)(7). The key under § 523(a)(7) is whether the debt serves to punish, or simply represents a recovery of monies that recoup the IDWD's costs. Indiana imposes civil penalties for improper unemployment benefit claims under I.C. § 22-4-13-1.1(b). As relevant here, this section states:
an individual is subject to the following civil penalties for each instance in which the individual knowingly fails to disclose or falsifies any fact that if accurately reported to the department would disqualify the individual for benefits, reduce the individual's benefits, or render the individual ineligible for benefits or extended benefits ... (emphasis supplied).
The punishment aspect of the debt is essential for a discharge exception under § 523(a)(7).
To be excepted from discharge such a debt [under § 523(a)(7)] must be penal in nature, and must serve some punitive or rehabilitative governmental aim which may be shown directly through statutory or regulatory language that indicates an intent to punish a debtor. Nebraska ex rel. Linder v. Strong (In re Strong), 305 B.R. 292, 296 (B.A.P. 8th Cir. 2004); In re Miller, 511 B.R. 621, 631 (Bankr. W.D. Mo. 2014).County of Dakota v. Milan (In re Milan), 556 B.R. 922, 924 (B.A.P. 8th Cir. 2016). The escalating nature of the penalties in I.C. § 22-4-13-1.1(b), from 25% to 50% to 100% of the benefit overpayment amount, shows a legislative design to penalize individuals who knowingly fail to disclose earnings when seeking unemployment benefits. Indiana expressly makes the knowing failure to disclose the triggering factor for the imposition of civil penalties under § 22-4-13-1.1(b). Under the facts of this case, however, the court finds it is too much of a stretch to equate Brown's non reporting of earnings with a knowing failure to report when an IDWD employee informed her she did not have to do so. Under the facts of this adversary proceeding the IDWD cannot present a prima facie case of a knowing failure to disclose, and thus § 523(a)(7) is not satisfied.
VI. Adversarial costs
The IDWD also asks the court for a judgment that includes "adversarial filing costs incurred in filing this action" and interest on the overpayment amount. Having found the IDWD has not presented a prima facie case for entitlement to a judgment, it is not entitled to recover as adversarial costs the court filing fee it paid to commence this adversary proceeding. Apart from this failure, the court finds that § 523(a)(7) does not authorize the recovery of "adversarial filing costs." The Indiana law referenced by the IDWD as the basis of its demand imposes only a civil penalty and interest assessment. Adversarial filing costs are a litigation expense of the IDWD. Section 523(a)(7) only excepts debts to governmental units that are "not compensation for actual pecuniary loss." In re Tapper, 123 B.R. 594, 605 (Bankr. N.D. Ill. 1991) (Recovery of costs for an action do not constitute a fine, penalty or forfeiture under § 523(a)(7)). Requesting reimbursement of court filing fees is no different from requesting reimbursement of photocopy costs, attorney fees, or the recovery of other out of pocket litigation expenses. Nothing in § 523(a)(7) authorizes excepting these actual pecuniary outlays from discharge. As the court noted above "exceptions to discharge should be confined to those plainly expressed." Kawaauhau, 523 U.S. at 62.
Conclusion
The record in the adversary proceeding shows that Brown had no intent to deceive the IDWD when she submitted benefit applications that did not report work and income. The record also does not support a finding that Brown knowingly failed to report earnings. Any deficiencies in Brown's submissions to the IDWD were the direct result of instructions she received from the IDWD. In short, the IDWD has failed to present a prima facie case under both § 523(a)(2)(A) and § 523(a)(7) that the court should except Brown's indebtedness to it from her discharge. The court DENIES the IDWD motion for default judgment and dismisses this adversary proceeding with prejudice.
SO ORDERED.
/s/ HARRY C. DEES, JR.
HARRY C. DEES, JR., JUDGE
UNITED STATES BANKRUPTCY COURT