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In re Brown

United States District Court, N.D. Indiana, South Bend Division

April 17, 2019

In the Matter of ARNETTA LYNN BROWN Debtor.



         Arnetta 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.


         Arnetta 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.

         Ms. 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.

         The 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.

         The 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.

         In 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.

         Based 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.


         In 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.


         The 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).

         There 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 ...

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