Government Penalty Not Dischargeable

Posted by NCBRC - June 12, 2018

A penalty owed to a governmental agency based on fraud falls under section 523(a)(2) and is therefore nondischargeable under section 1328(a) even though the debt also falls under section 523(a)(7) which is not listed in the debts excepted from discharge. Andrews v. Mich. Unemployment Ins. Agency, No. 16-2383, Kozlowski v. Mich. Unemployment Ins. Agency, No. 16-2680 (6th Cir. May 29, 2018).

In two separate cases, chapter 13 debtors, Priscilla Andrews and Richard Kozlowski, sought to discharge penalties imposed upon them for fraudulent collection of unemployment insurance benefits. The bankruptcy courts denied discharge under section 1328(a). The district courts affirmed in both cases.

On this consolidated appeal, the debtors argued that their debts fell under section 523(a)(7) which is not among the subsections of section 523(a) which are excepted from discharge under section 1328(a)(2). The Sixth Circuit began by looking at the impact of the Supreme Court case of Cohen v. de la Cruz, 523 U.S. 213 (1998), finding that Cohen stood for the proposition that “the penalties associated with fraud should be regarded as essentially the same as the fraud itself and are to be included under the § 523(a)(2) exception from discharge, as debt arising from fraud.” The court rejected the debtors’ argument that Cohen was inapplicable here because Cohen involved a dispute between private parties rather than a governmental agency. It  found that distinction irrelevant and the other cases cited by the debtors unpersuasive as they pre-dated Cohen.

It further found that the general principle that exceptions to discharge should be narrowly construed in favor of debtors was intended for the protection of the “honest but unfortunate debtor,” not the debtor whose fraudulent conduct was the cause of his or her troubles.

Citing Husky International Electronics, Inc. v. Ritz, 136 S. Ct. 1581 (2016), the circuit court went on to find that the various subsections in section 523(a) are not mutually exclusive and therefore a debt may fall under more than one. Such was the case here where the penalties imposed by the governmental agency fit within the meaning of both section 523(a)(2) and section 523(a)(7) and the subsections were tailored toward slightly different types of debts, with neither being more specific than—and therefore exclusive of—the other.

The circuit court affirmed.

AndrewsKozlowski 6th Cir opinion May 2018


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