Opinion
Case No. 16-31993 HCD Adv. Proc. No. 16-3056
09-13-2017
In the Matter of: MARIA ANTOINETTE WILLIAMS Debtor STATE OF INDIANA ex rel. INDIANA DEPARTMENT OF WORKFORCE DEVELOPMENT Plaintiff v. MARIA ANTOINETTE WILLIAMS Defendant
Appearances: Melinda Hoover MacAnally, Esq., and Megan Bender, Esq., and IGCS, Fifth Floor, 302 West Washington Street, Indianapolis, Indiana 46204, for the plaintiff. Maria Antoinette Williams, 1509 Liberty Drive, Apartment 16, Mishawaka, Indiana 46545, pro se defendant.
Chapter 7 Appearances:
Melinda Hoover MacAnally, Esq., and Megan Bender, Esq., and IGCS, Fifth Floor, 302 West Washington Street, Indianapolis, Indiana 46204, for the plaintiff. Maria Antoinette Williams, 1509 Liberty Drive, Apartment 16, Mishawaka, Indiana 46545, pro se defendant.
MEMORANDUM OF DECISION and ORDER
At South Bend, Indiana, September 13, 2017.
The State of Indiana ex rel. Indiana Department of Workforce Development (IDWD), the plaintiff in this adversary proceeding, has filed a motion for default judgment. In its underlying complaint, the IDWD asks this court to find that 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(7) excepts the debt owed to it by the defendant, Maria Antoinette Williams (Williams) from her bankruptcy discharge. For the reasons discussed in this memorandum of decision the court will grant the IDWD's 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. Pursuant to 28 U.S.C. § 1409(a) the court finds that venue is proper. The court has determined that this matter is a core proceeding pursuant to 28 U.S.C. §157(b)(2)(I). As required by Federal Rule of Bankruptcy Procedure 7008 the plaintiff has acknowledged the authority of this court to hear and determine this adversary proceeding.
Relevant Facts
Assisted by legal counsel, Williams filed a voluntary petition for relief under chapter 7 in September 2016. The IDWD filed the only proof of claim in Williams' case. Williams' chapter 7 case trustee filed a report of no distribution, the court issued her a discharge in December 2016, and closed her bankruptcy case in January 2017.
Within the deadline established by the court, the IDWD filed this adversary proceeding in December 2016. The complaint asks the court to except Williams' debt to the IDWD from discharge. The IDWD properly served both Williams and her bankruptcy attorney with a summons and copy of the complaint. When Williams did not answer the complaint within the permitted time, the IDWD sought an entry of default by the clerk. In the affidavit in support of its motion for entry of default, the IDWD has affirmed that Williams "is not now, and was not at the time of filing this cause an infant, incompetent person or a person engaged in any branch of the military or naval service of the United States." The clerk entered Williams' default in March 2017. The IDWD filed the motion for default judgment now before the court in July 2017.
Both the IDWD Motion for Entry of Default by Clerk, at ¶ 4, and its accompanying Affidavit in Support of Motion for Entry of Default, at ¶ 6, both incorrectly state the time period specified in the summons for filing the answer to the complaint in this adversary proceeding. Rather than the 35 days stated, Fed. R. Bankr. P. 7012(a) requires an answer within 30 days after the clerk issues the summons. The court notes the IDWD has repeatedly misstated the time to answer a complaint in other adversary proceedings it has filed in this court.
The IDWD complaint alleges that Williams received regular and emergency unemployment compensation benefit payments during weeks when she was employed and received wages. According to the complaint, under Indiana law Williams was not entitled to receive unemployment benefits during weeks when she had earnings. The IDWD contends that Williams knowingly misstated her employment and earnings so that she could receive unemployment benefits. Consequently it wants this court to except Williams' debt for benefit overpayments from discharge.
In the exhibits to its complaint, the IDWD documents Williams' income from employment at Adecco USA, Inc. and Diversified Machine. The exhibits also include Williams' benefit claims for the same weeks that she received wages. When submitting her benefit claims, Williams had to answer questions about her work and earnings for the week. Williams responded that she did not work and had no income. Each weekly benefit claim also included a certification that the answers to questions were true and accurate. Williams had to affirmatively agree to the certification when she submitted her claims.
As part of its internal investigation to determine her benefit eligibility, the IDWD invited Williams to an interview with an IDWD investigator. Williams appeared for the interview, but declined to make a statement. Williams did appeal the investigator's finding that she knowingly failed to disclose, or falsified material facts and received benefits she was not entitled to receive. An administrative law judge reviewed and affirmed the investigator's determination of eligibility. Williams did not further appeal the decision of the administrative law judge.
Discussion
The issue now before the court is whether it should limit Williams' fresh start by granting the IDWD's motion for a judgment by default. Granting a default judgment falls within the court's discretion. Federal Rule of Bankruptcy Procedure 7055 addresses default. Rule 7055 makes Federal Rule of Civil Procedure 55 applicable in adversary proceedings. The court notes that entry of a default judgment "is appropriate where defendants fail to timely answer and offer no justifiable excuse for their conduct." In considering the IDWD motion, the court also notes that Fed. R. Bankr. P. 7008 makes Civil Rule 8 applicable in adversary proceedings. Civil Rule 8(b)(6) provides that when an allegation requires a responsive pleading, the allegation is admitted if not denied. Here, the summons required Williams to respond to the IDWD complaint within a set time. Because Williams has not responded, under Rule 8 this court will deem all the factual allegations in the IDWD's complaint as admitted by Williams. Legal conclusions, however, are another matter.
A fresh financial start is the goal of a debtor in bankruptcy. See Marrama v. Citizens Bank, 549 U.S. 365, 367 (2007). This is a long-standing fundamental principle of the bankruptcy laws in this country. See e.g., Williams v. United States Fidelity & Guaranty Co., 236 U.S. 549, 554-55 (1915) ("It is the purpose of the Bankrupt Act to convert the assets of the bankrupt into cash for distribution among creditors, and then to relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.").
See Domanus v. Lewicki, 742 F.3d 290, 301 (7th Cir. 2014).
In re Klarchek, 509 B.R. 175, 186 (Bankr. N.D. Ill. 2014) (citations omitted).
Even given Williams' deemed admission of the factual allegations in the IDWD complaint, before the court can enter a default judgment, it requires that a plaintiff establish a prima facie showing on the merits of its claim. This requirement is in place because, where a debtor such as Williams has a presumptive right to a discharge, the court cannot grant such a serious sanction as a default judgment unless the movant shows that the debt is nondischargeable as a matter of law. Here, the IDWD must establish a prima facie case that it is entitled to relief under § 523(a)(2)(A) and § 523(a)(7).
See, e.g., In re Taylor, 289 B.R. 379, 383 (Bankr. N.D. Ind. 2003) (The court needs to satisfy itself that the facts before it demonstrate a prima face entitlement to the relief sought.).
See Fed. R. Bankr. P. 4004(c)(1), "In a chapter 7 case, on expiration of the times fixed for objecting to discharge ... the court shall forthwith grant the discharge ... ."
See, e.g., Valley Oak Credit Union v. Villegas, 132 B.R. 742, 746 (B.A.P. 9th Cir. 1991) ("Entry of default does not automatically entitle the non-defaulting party to entry of a default judgment regardless of the fact that the effect of entry of a default is to deem allegations admitted.").
See, e.g., In re Catt, 368 F.3d 789, 793 (7th Cir. 2004); Huegel v. Wal-Mart Stores, Inc., 2016 WL 5929257 (N.D. Ind. Oct. 11, 2016).
Section 523(a)(2)(A)
To succeed under § 523(a)(2)(A), the IDWD has the burden of proving by a preponderance of the evidence that (1) Williams obtained funds from the IDWD through representations that she knew either to be false, or made with such reckless disregard for the truth as to constitute willful misrepresentation; (2) Williams acted with an intent to deceive the IDWD; and (3) the IDWD justifiably relied on Williams' false representations to its detriment. To meet its burden of proof, the IDWD must establish that Williams intended to deceive the IDWD at the time she submitted her unemployment benefit claims.
In re Bero, 110 F.3d 462, 465 (7th Cir. 1997) (setting forth burden of proof).
See, e.g., Reeves v. Davis (In re Davis), 638 F.3d 549, 553 (7th Cir. 2011).
See In re Wolf, 519 B.R. 228, 248 (Bankr. N.D. Ill. 2014) (The debtor's intent concerning the representation is determined at the time the representation was made. Later actions do not show a debtor had the requisite intent when the representation was made.).
The court finds that the complaint's documentary exhibits amply support the admitted allegations in the IDWD complaint. The record shows that Williams applied for benefits while Adecco USA, Inc. and Diversified Machine employed her and had paid her wages. The court must charge Williams with knowledge that the statements in her benefit claims were false because she cannot deny that she received wages during the relevant times. This knowledge, coupled with the fact that Williams declined the opportunity to make a statement to an IDWD investigator, leads the court to the inescapable conclusion that she intentionally misstated facts regarding her employment and income. Logically the most plausible rationale for such misstatements was to entice the IDWD into paying her benefits she was not entitled to receive. Williams had the opportunity when speaking with the IDWD investigator, as well as in any response to the complaint in this adversary proceeding and the default judgment motion now before the court, to suggest an alternative interpretation of her actions. She has failed to do so. Taken as a whole, Williams' course of conduct in applying for benefits while she was working, in declining to make a statement to the IDWD investigator, and in failing to participate in this adversary proceeding support the court's finding that she had the requisite actual intent to deceive when submitting benefit claims to the IDWD. The court concludes that the IDWD has met its burden under § 523(a)(2)(A), and it has established a prima facie case that the court should except Williams' debt to it from discharge.
Section 523(a)(7)
The IDWD has also asked the court to find that Williams' debt for statutory civil penalties is not dischargeable under § 523(a)(7). Debts excepted from discharge under § 523(a)(7) must be penal in nature. Indiana, under I.C. § 22-4-13-1.1(b), imposes civil penalties for improper unemployment benefit claims. The penalty is based on the knowing failure to disclose or to falsify any fact that would disqualify a claimant from eligibility for benefits. Id. Beyond the repayment of untitled benefits, the civil penalty serves to punish individuals who try to game the Indiana unemployment compensation system to receive benefits they are not entitled to receive. The court finds that statutory civil penalty imposed by I.C. § 22-4-13-1.1 constitutes the kind of debt that § 523(a)(7) excepts from discharge. The unchallenged facts presented in this adversary proceeding support the court's assessment that Williams knew what she was doing when she failed to accurately report her employment situation. The court views Williams' knowing failure to report her work and earnings when making benefit claims as the type of conduct that Indiana wants to punish by means of the extraordinary, draconian civil penalty rates set by I.C. § 22-4-13-1.1(b).
County of Dakota v. Milan (In re Milan), 556 B.R. 922, 924 (B.A.P. 8th Cir. 2016).
Twenty-five percent of the overpayment amount for the first instance of a knowing failure to report information that would disqualify an individual from receiving benefits, 50% of the overpayment amount for the second instance of a failure to report, and 100% of the overpayment amount for the third and each subsequent instance.
The discharge exception found in § 523(a)(2)(A) does not apply to adversarial filing costs, as litigation costs are not debts obtained by false pretenses, false representations, or actual fraud. The plain wording of § 523(a)(7) does not authorize the recovery of "adversarial filing costs" as part of an exception to discharge. Such costs are a litigation expense of the IDWD, not a penalty imposed on Williams. Section 523(a)(7) only excepts debts to governmental units that are "not compensation for actual pecuniary loss." Requesting reimbursement of court filing fees is no different from requesting reimbursement of photocopy costs, attorney fees, or the recovery of other litigation expenses. Nothing in § 523(a)(7) authorizes excepting these actual pecuniary outlays from discharge.
In re Fogerty, 204 B.R. 956, 962 (Bankr. N.D. Ill. 1996) ("The award of attorneys fees and costs, however, is dischargeable. ... costs awarded in conjunction with civil penalties are not dischargeable."); see also South Bend Community School Corp. v. Eggleston, 215 B.R. 1012, 1016 (N.D. Ind. 1997) (same).
Bankruptcy Rule 9037
The record here shows the IDWD pleadings and exhibits include personally identifiable information protected by Bankruptcy Rule 9037(a). Rule 9037 generally requires that documents filed with the court may include only: (1) the last four digits of a social security or taxpayer identification number; (2) the year of an individual's birth; (3) the initials of a minor; and (4) the last four digits of a financial account number. The court notes this is not the first adversary proceeding where IDWD filings have transgressed the Rule 9037 privacy protections. The IDWD is responsible to insure that all its submissions to the court comply with Rule 9037. As a governmental agency, the court finds it disconcerting that the IDWD and its attorneys are not more sensitive to privacy protection concerns.
"Personally identifiable information" is a term of art specifically defined by the Code. See 11 U.S.C. § 101(41A).
The Advisory Committee Note to Rule 9037 provides in relevant part:
The rule is adopted in compliance with section 205(c)(3) of the E-Government Act of 2002, Public Law No. 107-347. Section 205(c)(3) requires the Supreme Court to prescribe rules "to protect privacy and security concerns relating to electronic filing of documents and the public availability of ... documents filed electronically." The rule goes further than the E-Government Act in regulating paper filings even when they are not converted to electronic form ... It is the electronic availability, not the form of the initial filing, that raises the privacy and security concerns addressed in the E-Government Act.
In re Rivera, 524 B.R. 438, 444 (Bankr. D. P.R. 2015).
Courts have acknowledged the repeated failure to comply with Rule 9037 could potentially give rise to sanctions under § 105(a). In re Biegler, 2017 Bankr. LEXIS 2234, n.3 (Bankr. N.D. N.Y. Aug. 8, 2017) ("The court notes that documents submitted for the court's consideration contained personal identifiers in violation of Fed. R. Bankr, P. 9037. Counsel are advised to follow the letter of Rule 9037 for all future submissions or risk the imposition of sanctions."). See also In re Branch, 2016 WL 4543770, *11 (Bankr. E.D. N.C. Aug. 31, 2016) (sanctions are appropriate where a party flouts the law with knowledge of its restrictions); In re Maple, 434 B.R. 363, 374 (Bankr. E.D. Va. 2010) (noncompliance with Rule 9037 can give rise to a contempt action under § 105(a)); Matthys v. GreenTree Servicing, LLC (In re Matthys), 2010 WL 2176086, *5 (Bankr. S.D. Ind. May 26, 2010) (the court may enforce court rules by finding a party in contempt for noncompliance with those rules). --------
Conclusion
Based on the foregoing, the court GRANTS the State of Indiana ex rel. Indiana Department of Workforce Development's motion for default judgment [ECF no. 9]. The court ORDERS that Maria Antoinette Williams' debt to the Plaintiff, $8,217.61, is not dischargeable. The court DENIES the IDWD motion for recovery of adversarial filing costs.
SO ORDERED.
/s/ HARRY C. DEES, JR.
HARRY C. DEES, JR., JUDGE
UNITED STATES BANKRUPTCY COURT