JANICE MILLER KARLIN, Bankruptcy Judge.
Plaintiff Kansas Department of Labor ("KDoL") filed a proof of claim in the Chapter 13 bankruptcy case of Debtor/Defendant Dan Henry Oliver, Jr. ("Debtor") arising out of Debtor's receipt of unemployment benefits—some of which benefits KDoL asserts he received fraudulently. KDoL claimed all but $26.67 of its $24,592 claim was secured. Debtor objected to that claim, but only on the basis that no part of it was secured; he admitted the entire claim should instead be allowed as unsecured. Also at issue is KDoL's adversary complaint, which it filed under 11 U.S.C. § 523(a)(2)(A); it seeks a determination that part of the debt Debtor owes will not be discharged if Debtor receives his Chapter 13 discharge.
KDoL has filed two summary judgment motions, one on each issue.
KDoL is the state agency responsible for receiving and reviewing all requests for unemployment benefits in Kansas. Before benefits are paid, an applicant must establish s/he is qualified to receive them by supplying certain information; this includes a means-testing of benefits to be made available upon the establishment of eligibility.
Applicants must make a specific request for each employment week, as KDoL makes a benefit calculation for each claimant on a weekly basis. KDoL calculates a recipient's benefits based on a weekly benefit amount, which is the maximum weekly unemployment benefit a single person can receive. It can be reduced to zero depending upon what wages, if any, the claimant actually earned for the applicable week. KDoL will not process a claim for benefits without an affirmative request by the claimant and an affirmative response to the question of whether the claimant is employed and, if so, the amount of wages claimant actually earned for that week.
Between August 9, 2008, and May 16, 2009, Debtor submitted weekly requests to KDoL for unemployment benefits. For that time period, KDoL paid total benefits of $13,246. In requesting these benefits, Debtor represented to KDoL that, for the entire period in question, he received no wages from any source. Several months after the benefits had been paid, however, Debtor's former employer, Shawnee County, informed KDoL that it had actually paid Debtor wages for almost one-third of the weeks Debtor had claimed he was unemployed (specifically, for the weeks ending August 9 through November 8, 2008). A KDoL examiner compared Debtor's submissions with those from Shawnee County and determined that Debtor was not entitled to receive this portion of the benefits paid.
The KDoL examiner made two written determinations regarding Debtor's unemployment claims. The first, mailed to Debtor on June 26, 2009, states that Debtor was ineligible for unemployment insurance benefits under the Kansas unemployment benefit statute for the weeks ending November 8, 2008 through May 16, 2009 because he failed to file the initial claim in the manner KDoL had requested. KDoL determined that Debtor was responsible for $8,234 in overpayments for those weeks.
KDoL mailed its second determination four days later, on June 30, 2009. This determination informed Debtor that the examiner found Debtor had "willfully and knowingly made false representations to receive benefits not due" for the weeks ending August 9 through November 8, 2008. KDoL's second determination resulted in an additional overpayment liability of $5,012. Both determinations advised Debtor he had the right to appeal; Debtor elected not to exercise that right.
In May, 2015, KDoL mailed Debtor a notice that it intended to record a lien against Debtor's real property in Leavenworth County if Debtor did not pay the full balance due— then $24,566.06—within ten days. When Debtor failed to respond, KDoL recorded a notice of lien and notice of intent to levy in June, 2015.
Debtor filed his Chapter 13 bankruptcy on September 1, 2015—about six weeks after KDoL recorded its lien. He listed KDoL on Schedule F as an unsecured creditor. Although KDoL had just advised him the total he owed now exceeded $24,000, he listed KDoL's claim at only $12,926 for "overpayment of UE (unemployment) benefits." KDoL timely filed an adversary complaint alleging that a portion of its claim is nondischargeable under § 523(a)(2)(A) because Debtor received that portion fraudulently.
KDoL has now filed two motions for summary judgment—one on its nondischargeability complaint and one on the objection to its claim—both supported by an affidavit from Teresa Morris, an employee of KDoL. Although KDoL seems to request, on the one hand, that the Court find it is secured up to $24,566.06, it also essentially admits it is only secured to the value of Debtor's non-exempt property, which it agrees is only $200.
An adversary proceeding to determine the dischargeability of a debt is a core proceeding under 28 U.S.C. § 157(b)(2)(I), over which this Court may exercise subject matter jurisdiction.
Federal Rule of Civil Procedure 56 requires a court to grant summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."
The moving party bears the initial burden of demonstrating—by reference to pleadings, depositions, answers to interrogatories, admissions, or affidavits—the absence of genuine issues of material fact.
In his responses, Debtor gives blanket denials to KDoL's allegations, but fails to allege any specific facts or produce any evidence contradicting KDoL's allegations. Simple denials, without "specific facts" or "probative evidence,"
Debtor first argues that KDoL relies—in bad faith, no less—on a faulty affidavit to support its motions for summary judgment.
First he argues she lacks the requisite personal knowledge of the facts and therefore the exhibits attached to the affidavit are inadmissible as hearsay. He also argues that because Ms. Morris would be unable to testify at trial, as KDoL did not list her as a witness in the Pretrial Order, the Court somehow cannot consider her affidavit in support of the summary judgment motion.
Both arguments are unsupported by law (or logic). Ms. Morris's affidavit explicitly states that the attached exhibits were made as KDoL's customary and usual business records, proximal to the dates indicated.
Debtor's second argument—which he labels his most persuasive—fares no better. Debtor contends that Ms. Morris's affidavit cannot be used to support KDoL's motion because she was not listed as a witness in the Pretrial Order. Debtor cites conclusively to American Securit Co. v. Hamilton Glass Co.
Furthermore, in an agency such as KDoL, the Court suspects that, at any point in time, there could be numerous persons competent to testify about the agency's records. KDoL is not required to list in the Pretrial Order every records custodian then employed by the agency competent to testify about its records. Even more importantly, Ms. Morris's affidavit tracks exactly with KDoL's summary of witness testimony attributed to other in-house witnesses KDoL identified.
KDoL bears the burden of proof to establish each element of its claim under § 523(a)(2)(A) by a preponderance of the evidence.
As to the first element, the uncontroverted facts show that Debtor represented to KDoL that he did not make any wages for the weeks ending August 9 through November 8, 2008. In fact, he was then employed by Shawnee County and received wages above his weekly benefit amount. Debtor's representations were false, and the first element of the § 523(a)(2)(A) test is satisfied.
The second element of the § 523(a)(2)(A) test requires a showing of Debtor's intent to deceive, which "`may be inferred from the totality of the circumstances.'"
Debtor also argues that KDoL fails to meet its burden to prove intent because it "presents no facts as to the intent of debtor, only argument and allegations."
KDoL's June 30, 2009 determination explicitly states: "It is determined that you (Debtor) willfully and knowingly made false representations to receive benefits not due."
Regarding the third factor—KDoL's reliance—KDoL paid Debtor a total of $5,012 between August 9 and November 8, 2008 based solely upon Debtor's misrepresented wages. In other words, KDoL relied on Debtor's misrepresentations in calculating and extending unemployment benefits. This satisfies the reliance requirement of the § 523(a)(2)(A) test.
The Court next turns to element four of the § 523(a)(2)(A) analysis—whether KDoL's reliance on Debtor's misrepresentations was justifiable "from a subjective standpoint."
The Court is well aware that an unemployed worker's prompt receipt of unemployment compensation can mean the difference between having food on the table and going without for many families. As a result, KDoL must have efficient procedures for processing claims and making benefit determinations in order for claimants to receive the help they need in a timely, consistent fashion. In so doing, KDoL upholds the Kansas legislature's intent in creating the Employment Security Law.
In order to successfully carry out its mission, KDoL accepts unemployment benefit claims in weekly increments and processes each claim on a person-by-person basis. KDoL then pays benefits based on a claimant's weekly, self-reported wages. Only after KDoL later receives information from an employer itemizing what wages or earnings a claimant actually earned can KDoL compare and determine whether the initial benefit calculation was accurate.
Were KDoL required to wait to pay out benefits until after comparing the wages the employer submitted with those submitted by the claimant, claimants would be forced to wait additional time for benefits the legislature has deemed appropriate. KDoL argues, and the Court agrees, that this potential wait time undermines the purpose and function of the Employment Security Law. The requirements of economic security compel an efficient distribution of the social benefits provided by the state for those most in need and certainly justify the procedures used by KDoL.
A second, and similarly compelling, justification for KDoL's processes, which require it to initially rely on the information the claimant provides, is that a claimant is in the best position to know when, where, and for how much s/he is working in a given week. While it is obvious a claimant could abuse this process, it is not unreasonable to expect claimants to report their earnings truthfully—especially given the significant penalty for failing to do so. Under this assumption, KDoL's reliance on a claimant's initial statement of wages is justified. Thus, KDoL justifiably relied on Debtor's reported wages to initially determine his benefit amount. The fourth element of the § 523(a)(2)(A) test is met.
Finally, in reliance on Debtor's misrepresentation of his wages, KDoL paid Debtor unemployment benefits to which he was not entitled. Debtor does not argue that KDoL would have paid $5,012 to him had he not made the false representation. Thus, the overpayment, which was proximately caused by the false representation, constitutes the damages required by § 523(a)(2)(A).
Because the Court finds that there are no genuine issues of material fact and KDoL has met its burden of proof establishing facts supporting each of the five elements required by § 523(a)(2)(A), KDoL is entitled to judgment as a matter of law. KDoL's motion for summary judgment seeking a determination that its claim (totaling $10,534.72 as of the petition date) is excepted from discharge is, therefore, granted.
The Court now addresses Debtor's limited objection to KDoL's proof of claim. Under § 502, a claim is allowed pursuant to a creditor's proof of claim unless "a party in interest" objects. When a party objects to a claim, the creditor carries the ultimate burden of proof as to the validity and amount of the claim.
The parties agree that KDoL's claim is allowable under § 502, but dispute whether the debt is "secured by a lien" as defined under § 506 (which determines the secured status of an allowed claim). KDoL argues its debt is secured by virtue of a statutory lien, which the Code defines as a "lien arising solely by force of a statute on specified circumstances or conditions."
While § 44-717 was initially written to only apply to past due employer contributions, the law changed in 2013 to apply to individuals.
Debtor argues the language in § 44-717(e)(1) and (2) does not apply to individuals, but only to employers who fail to pay their contributions. This argument wholly ignores the specific intent of the legislature expressed through the 2013 amendment to § 44-717. With the change in the law, the legislature opened the door for KDoL to collect from individuals in all the ways they previously collected from employers—including through statutory liens and levies.
Debtor misrepresented his employment status to KDoL and incurred liability for benefit overpayments under § 44-719. KDoL requested repayment from Debtor at least four times, but Debtor elected to ignore those requests.
Based on the above undisputed facts, the Court finds that KDoL's claim is a statutory lien under the Code
Given the Court's analysis and for the reasons stated above, $10,534.72 of KDoL's claim (and any accruing interest) will be excepted from discharge under § 523(a)(2)(A) if and when Debtor receives his discharge in this case. Additionally, KDoL's claim is secured only in the sum of $200; the rest of the claim is unsecured.