United States District Court, N.D. Indiana, South Bend Division
In the Matter of ARNETTA LYNN BROWN Debtor.
ARNETTA LYNN BROWN, Defendant. STATE OF INDIANA ex rel. INDIANA DEPARTMENT OF WORKFORCE DEVELOPMENT Plaintiff, Adv. Proc. No. 17-3016
OPINION AND ORDER
Brown collected unemployment benefits while falsely
certifying that she was not working. After discovering her
earnings, the State of Indiana required her to repay those
benefits. It also imposed a penalty for her false statements.
Ms. Brown then filed bankruptcy, prompting the State to seek
a declaration that those debts are not dischargeable. The
bankruptcy court disagreed and held that both debts were
discharged. The State appeals in part, arguing that the
penalty is non-dischargeable under § 523(a)(7). (It does
not appeal as to the overpayment of benefits.) Section
523(a)(7) applies to penalties that are payable to and for
the benefit of the government and that are not compensatory.
The Court concludes that the penalty here meets those
elements, so the Court reverses.
Brown applied for unemployment benefits from the Indiana
Department of Workforce Development beginning in April 2010.
To apply for benefits, Ms. Brown had to affirm that she
understood that she “must report all earnings from
employment or self-employment regardless of source.”
Ms. Brown thereafter had to submit a voucher for each week
that she sought benefits. To submit each voucher, Ms. Brown
had to certify that she “reported any and all work,
earnings, and self-employment activity” for that week
and that “all answers and information given in this
application for benefits are true and accurate.” The
vouchers further required her to certify that she was aware
she could be penalized if she knowingly failed to disclose
information or gave false information.
Brown submitted vouchers each week from April 17, 2010
through June 16, 2012. Each voucher asked Ms. Brown whether
she worked that week. Until April 2012, Ms. Brown answered
“no” every week. For the next 7 weeks, Ms. Brown
reported that she had worked, and she reported her gross
earnings for the week. Every one of those vouchers contained
false information, though. In truth, Ms. Brown had worked
part-time for Bob Evans throughout that entire period, and
she had earnings in every week. And her actual earnings in
the last 7 weeks were greater than the earnings she reported
in her vouchers for those weeks.
Indiana Department of Workforce Development later learned of
Ms. Brown's earnings during that period. It asked her to
come for an interview, at which she signed a sworn statement.
In that statement, Ms. Brown wrote that when she first
applied for benefits, an employee told her that her weekly
earnings of $35.00 were not enough to report. Thus, she never
reported any of her earnings in the subsequent weeks either.
department initiated an administrative proceeding to recover
the overpayments. An investigator concluded that Ms. Brown
received benefits to which she was not entitled, which she
would have to pay back. The investigator further concluded
that Ms. Brown knowingly failed to disclose or falsified
material facts, making her liable for statutory penalties as
well. Ms. Brown appealed that decision. After holding a
hearing, an administrative law judge affirmed the
investigator's findings. In particular, the judge
concluded that Ms. Brown had received benefits to which she
was not entitled, and that she had to return those
overpayments. The judge also concluded that Ms. Brown
“knowingly failed to disclose wages” during each
week, justifying civil penalties as well. In all, the judge
found Ms. Brown liable for overpayments in the amount of $30,
572 and civil penalties in the amount of $17, 765. On an
appeal by Ms. Brown, the Unemployment Insurance Review Board
affirmed that decision in March 2015. Ms. Brown had the right
to appeal that decision to the Indiana Court of Appeals, but
she did not do so.
November 2016, Ms. Brown filed a petition for bankruptcy
under Chapter 7. The State of Indiana then filed an adversary
proceeding seeking a declaration that Ms. Brown's debts
to the Department of Workforce Development were
non-dischargeable. Ms. Brown did not respond to the complaint
or take any other action in the adversary proceeding, so the
State moved for entry of default, which the clerk entered.
The State then moved for default judgment. Again, Ms. Brown
did not respond. The bankruptcy court not only denied the
motion for default judgment, though, it entered judgment
against the State. The bankruptcy court noted that the record
included Ms. Brown's statement that she never reported
her work or her earnings because she was told when she first
applied that her earnings weren't enough to report. The
court accepted that statement as true and found that it
excused the false statements in her vouchers.
on those findings, the bankruptcy court held that none of the
exceptions to discharge applied. It found that Ms. Brown did
not have an intent to deceive, so § 523(a)(2)(A) (which
applies to property obtained by fraud) did not apply and the
debt for the overpayment of benefits was dischargeable. It
also found that Ms. Brown's conduct was not blameworthy,
so § 523(a)(7) (which applies to punitive sanctions) did
not apply either, making the penalty portion of her debt
dischargeable too. The State filed a motion for
reconsideration 14 days later, which the bankruptcy court
denied, so the State filed a notice of appeal to a district
court. Though she did not participate in the bankruptcy
court, Ms. Brown has now appeared and filed a response in
defense of the judgment.
STANDARD OF REVIEW
reviewing the bankruptcy court's judgment,
“[q]uestions of law are considered de novo,
and factual findings receive clear-error scrutiny.”
Kovacs v. United States, 739 F.3d 1020, 1023 (7th
Cir. 2014); In re Trentadue, 837 F.3d 743, 748 (7th
Cir. 2016). Brown argues that review is only for abuse of
discretion because the State filed a post-judgment motion for
reconsideration. Review of an order on a Rule 59(e) or Rule
60(b) motion would be for abuse of discretion. Obriecht
v. Raemisch, 517 F.3d 489, 492 (7th Cir. 2008). However,
when a party timely files certain post-judgment motions in
the bankruptcy court, the time to appeal the underlying
judgment runs from the date of the order resolving the
post-judgment motion. Fed.R.Bankr.P. 8002(b)(1). A notice of
appeal after the entry of such an order “brings up the
underlying judgment for review.” Tango Music, LLC
v. DeadQuick Music, Inc., 348 F.3d 244, 247 (7th Cir.
2003); Borrero v. City of Chi., 456 F.3d 698, 700
(7th Cir. 2006) (holding that when a party appeals from the
denial of a timely post-judgment motion for reconsideration,
courts treat an appeal from the denial of the post-judgment
motion as an appeal from the judgment). Here, the State filed
a post-judgment motion 14 days after the entry of judgment,
and it timely filed its notice of appeal 14 days after the
court denied that motion. Fed.R.Bankr.P. 8002(b)(1)(B), (D).
The State's appeal thus brings up the underlying judgment
for review, and as just noted, that judgment is reviewed
de novo for questions of law and for clear error for
factual findings. Kovacs, 739 F.3d at 1023.
State appeals the bankruptcy court's judgment only as to
the penalty. A discharge under Chapter 7 discharges any debt
unless the debt meets one of the statutory exceptions to
dischargeability. 11 U.S.C. § 727(b).
“[E]xceptions to discharge are to be construed strictly
against a creditor and liberally in favor of the
debtor.” Trentadue, 837 F.3d at 749. The State
argues that the penalty is non-dischargeable under §
523(a)(7). That provision says that a debt is not discharged
“to the extent such debt is for a fine, penalty, or
forfeiture payable to and for the benefit of a governmental
unit, and is not compensation for actual pecuniary
loss[.]” 11 U.S.C. § 523(a)(7). This exception
thus has three elements: (1) the debt must be a fine,
penalty, or forfeiture; (2) it must be “payable to and
for the benefit of a governmental unit”; and (3) it
must not be compensation for a pecuniary loss. Id.;
In re Towers, 162 F.3d 952, 954-55 (7th Cir. 1998).
is no dispute that the debt meets the third element-it is not
compensatory. The bankruptcy court offered three reasons for
concluding that the debt in question is dischargeable,
though. First, it held that a debt for a penalty is
automatically discharged if the underlying debt is also
discharged. Second, it held that the debt here is not a
penalty because Ms. Brown did not knowingly fail to disclose
her earnings. And third, it ...