891 F.3d 245
6th Cir.2018Background
- Two consolidated Chapter 13 appeals (Andrews and Kozlowski) involve debtors who received Michigan unemployment benefits while also earning wages they did not report, leading the Michigan Unemployment Insurance Agency to order restitution and assess statutory penalties.
- Andrews: restitution $6,897; penalties $27,588. Kozlowski: restitution $4,334; penalties $16,669. Each debtor sought bankruptcy relief under Chapter 13 and argued the penalty portion was dischargeable.
- The Agency filed adversary complaints seeking nondischargeability under 11 U.S.C. § 523(a)(2)(A) (fraud). Debtors argued penalties fell under § 523(a)(7) (government fines/penalties) and so were dischargeable in Chapter 13 because § 523(a)(7) is not incorporated into § 1328(a).
- Bankruptcy courts reached different outcomes: Andrews bankruptcy court held penalties dischargeable; district court reversed. Kozlowski bankruptcy court and district court held penalties nondischargeable under § 523(a)(2).
- Sixth Circuit reviewed de novo legal issues and affirmed: penalties are nondischargeable because they are debts "arising from" fraud under § 523(a)(2), so the Agency may seek a nondischargeability determination despite any overlap with § 523(a)(7).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether statutory penalties assessed by a state for fraudulently obtained unemployment benefits are dischargeable in Chapter 13 | Debtors: penalties are covered by § 523(a)(7) (government fines) and thus dischargeable in Chapter 13 because § 523(a)(7) is not in § 1328(a) | Agency: penalties arise from fraud and therefore fall under § 523(a)(2)(A), which § 1328(a) incorporates, making them nondischargeable | The Sixth Circuit held penalties are nondischargeable under § 523(a)(2)(A) because they are debts "arising from" fraud |
| Whether a single debt may fall under more than one § 523(a) subsection and be pursued under the subsection incorporated in § 1328(a) | Debtors: the more specific § 523(a)(7) should control; debt should be treated under § 523(a)(7) only | Agency: overlapping coverage is permitted; if debt fits § 523(a)(2) creditor may seek nondischargeability under that subsection | Held: subsections can overlap (citing Husky); because the debt fits § 523(a)(2) the Agency may seek nondischargeability under that provision |
Key Cases Cited
- Cohen v. de la Cruz, 523 U.S. 213 (1998) (treble damages and other fraud-based awards are liabilities "arising from" fraud and nondischargeable under § 523(a)(2))
- Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (2016) (different § 523(a) provisions may overlap and cover the same conduct)
- Kelly v. Robinson, 479 U.S. 36 (1986) (restitution for wrongful receipt of welfare benefits nondischargeable under § 523(a)(7); overlap with fraud/larceny discussed)
- Davenport v. Pennsylvania Dep’t of Pub. Welfare, 495 U.S. 552 (1990) (discusses restitution in bankruptcy contexts; not dispositive here because decided before Cohen)
- Grogan v. Garner, 498 U.S. 279 (1991) (describes the "honest but unfortunate debtor" principle and the strict-construction rule for exceptions to discharge)