State of Colorado, Division of Finance & Procureme v. Martinez

FOR THE DISTRICT OF COLORADO

Bankruptcy Judge Thomas B. McNamara

In re:

Bankruptcy Case No. 18-18665 TBM

MARK A. MARTINEZ d/b/a MARK os

SON OF A BRISKET and MELISSA M. Chapter 7

MARTINEZ,

Debtors.

STATE OF COLORADO, DIVISION OF

FINANCE & PROCUREMENT, Adv. Pro. No. 19-1012 TBM

CENTRAL COLLECTION SERVICES, as

Agent for COLORADO DEPARTMENT

OF LABOR AND EMPLOYMENT, an

Agency of the State of Colorado,

Plaintiff,

v.

MARK A. MARTINEZ,

Defendant.

_______________________________________________________________________

MEMORANDUM OPINION AFTER TRIAL

_______________________________________________________________________

I. Introduction.

After the Great Depression, Colorado adopted an unemployment compensation

system as a safety net for “persons unemployed through no fault of their own.”1 Although

the system has been modified over the years,2 the foundation has remained the same.

Employers are required to make contributions to an unemployment compensation fund

administered by the Colorado Department of Labor and Employment (the “State”).3

Eligible workers who suffer total or partial unemployment may apply for benefits. The

benefits are paid from the unemployment compensation fund. The quid pro quo for

1 Unemployment Compensation Act, 1939 Colo. Ex. Sess. Laws (3rd Sess.) § 2.

2 The current version is the Colorado Employment Security Act, COLO. REV. STAT. § 8-70-101 et seq.

3 The Plaintiff in this adversary proceeding is the “State of Colorado, Division of Finance and

Procurement, Central Collection Services, as agent for the Colorado Department of Labor and

Employment.” For purposes of simplicity and ease of reference, the Court uses the term “State” to refer to

income and employment. A claimant who knowingly provides inaccurate income or

employment information to receive overpayment of benefits abuses the system. When

the State discovers that it has made an overpayment of benefits, it may seek recovery of

the overpayment, along with penalties and collection fees.

In 2016 and 2017, the Defendant-Debtor, Mark A. Martinez (the “Debtor”) claimed

unemployment benefits. The State paid unemployment benefits to him based upon the

information that the Debtor provided to the State during telephone calls. However, the

State later investigated the Debtor’s entitlement to such unemployment benefits and

reached the conclusion that the Debtor had lied about his income and employment. So,

the State sought recovery of allegedly overpaid unemployment compensation, as well as

penalties, and collection fees from the Debtor.

But, then, the Debtor filed for protection under Chapter 7 of the Bankruptcy Code.

He listed the State as a creditor holding an undisputed claim for $10,315.80 based upon

an “unemployment overpayment.” The goal of most bankruptcy debtors is a discharge of

scheduled debts. Toward that end, the Debtor sought to discharge his obligation to the

State. However, before the entry of discharge, the State initiated this lawsuit, alleging

that its claim for overpaid unemployment compensation, penalties, and collection fees is

nondischargeable under both Sections 523(a)(2)(A) and 523(a)(7) of the Bankruptcy

Code.4 The Debtor conceded that he received overpayments of unemployment

compensation and owes a debt to the State, but contested the nondischargeability of

such debt. The dispute proceeded to trial. Now, the Court must determine whether the

State’s claim for overpaid unemployment compensation, penalties, and collection fees is

nondischargeable under Sections 523(a)(2)(A) or 523(a)(7) such that it will survive the

bankruptcy.

II. Jurisdiction and Venue.

The Court has subject matter jurisdiction over this adversary proceeding

concerning dischargeability pursuant to 28 U.S.C. § 1334. Furthermore, this is a core

proceeding under 28 U.S.C. § 157(b)(2)(I) because it seeks a determination as to the

dischargeability of a particular debt. Both the State and the Debtor consented to the

Court’s jurisdiction to enter final judgment with respect to the claims and defenses

asserted in this Adversary Proceeding.5 Venue is proper in this Court under 28 U.S.C.

§§ 1408 and 1409.

4 Unless otherwise indicated, all references to “Section” are to Sections of the United States

Bankruptcy Code, 11 U.S.C. § 101 et seq.

5 Docket Nos. 9 and 16. The Court will use the convention “Docket No. ___” to refer to a document

filed in the CM/ECF file for this Adversary Proceeding. When referring to a document filed in the CM/ECF

file for the Debtor’s main bankruptcy case, In re Martinez, Case No. 18-18665 TBM (Bankr. D. Colo.) (the

“Main Case”), the Court will use the convention: “Docket No. ___ in the Main Case”).

A. The Bankruptcy Case.

The Debtor and his wife filed their joint petition for relief under Chapter 7 of the

Bankruptcy Code on October 3, 2018.6 They listed the State as a creditor holding an

undisputed claim for $10,315.80 based upon an “unemployment overpayment.”7 On

February 21, 2019, the Court issued its “Order of Discharge,” generally discharging the

Debtors from pre-petition debts.8 However, the Order of Discharge excepted from its

reach “debts that the bankruptcy court has decided or will decide are not discharged in

this bankruptcy case.”9

B. The Adversary Proceeding.

Prior to the entry of the Order of Discharge, the State timely filed its “Complaint to

Determine Dischargeability of Debt” (the “Complaint”).10 In the Complaint, the State

asserted that the Debtor is liable to the State in the following amounts relating to alleged

overpaid unemployment benefits for the period from January 1, 2017 to May 27, 2017:11

(1) $6,252.00 for “unemployment compensation”; (2) $4,063.80 for “a 65% monetary

penalty”; and (3) $2,578.95 for “a 25% collection fee.”12 Thus, the State alleged an

aggregate debt of $12,894.75.13

The State asserted that such debt is nondischargeable under Section 523(a)(2)(A)

because the debt is for money “obtained by false pretenses, a false representation, or

actual fraud.”14 More specifically, the State alleged that the Debtor made

“representations on the Defendant’s weekly claims [that] were false.”15 Further, the State

asserted that the overpaid unemployment benefits debt also is nondischargeable under

Section 523(a)(7) “to the extent that such debt is for a penalty payable to or for the benefit

of a governmental unit and is not compensation for actual pecuniary loss.”16 Thereafter,

6 Docket No. 1 in the Main Case.

7 Id. at 30.

8 Docket No. 22 in the Main Case.

9 Id. at 2.

10 Docket No. 1.

11 In the Complaint, the State refers to the relevant time period as: “the weeks ending January 7, 2017

through May 27, 2017” Compl. ¶¶ 5 and 11; and “the weeks from January 7, 2017 through May 27, 2017”

(Id. ¶¶ 6 and 10) (emphasis added). If the time period is for the “weeks ending January 7, 2017,” it

commences on January 1, 2017. If the time period is for the “weeks from January 7, 2017,” the time period

commences on January 7, 2017. In the parties’ “Stipulation of Facts” (Docket No. 16, the “Stipulation of

Facts”), the parties agreed that the relevant time period is from January 1, 2017 through May 27, 2017.

Stipulation of Facts ¶¶ 5, 6 and 8. Thus, the Court will utilize January 1, 2017 to May 27, 2017 as the

relevant time period.

12 Compl. ¶¶ 5-11 and 15.

13 Id. ¶¶ 15 and 18.

14 Id. ¶ 16.

15 Id. ¶ 14.

16 Id. ¶ 17.

nondischargeability and asserted a series of affirmative defenses.17

C. The Trial.

Consistent with the Court’s “Scheduling Order,”18 the dispute proceeded toward

trial. Shortly before trial, the State and the Debtor jointly submitted a “Stipulation of

Facts.”19 The Court conducted a trial on the issues framed by the Complaint and Answer

on August 27, 2019.20 After the presentation of opening statements, the Court received

evidence from three witnesses: Patrick Baker; Zao Vo; and the Debtor. Further, the Court

admitted into evidence Exhibit Nos. 1-15 offered by the State. At the conclusion of the

evidence, both the State and the Debtor presented their closing arguments to the Court.

The matter is fully submitted and ripe for decision by the Court as the trier of fact.

IV. Findings of Fact.

Based upon the evidence presented at the trial and the Stipulation of Facts, the

Court makes the following findings of fact under Fed. R. Civ. P. 52(a)(1), as incorporated

by Fed. R. Bankr. P. 7052.

A. The Debtor and His Recent Job History.

The Debtor is a 50-year-old resident of Trinidad, Colorado.21 In April 2015, he was

injured while driving a truck for work.22 As a result of the accident, he was unable to work

for about a year.23 During such period, he received workman’s compensation insurance

payments because of his on-the-job injury. Unfortunately, by the time he recovered from

his injuries, his employer had gone out of business; so, there was no job to which he

could return.24 Thus, he was unemployed during most of 2016. He began to look for

other work, but with only middling success.

In or around October 2016, the Primero Reorganized 2 School District (the “School

District”), near Trinidad, Colorado, hired the Debtor in a very part-time position as a girls’

basketball coach for the fall/winter season. The Debtor coached at practices and games.

His arrangement with the School District provided that he would only be paid at the end of

the girls’ basketball season during the spring of 2017. Having successfully completed the

athletic season, the School District paid the Debtor a single, lump-sum gross payment of

$2,597.94 on March 16, 2017.25 After deducting federal and state taxes (which were

17 Docket No. 6.

18 Docket No. 10.

19 Docket No. 16.

20 Docket No. 19.

21 Ex. 8.

22 Transcript of Trial 118:13-24, August 27, 2019, Docket No. 21, hereinafter referred to in abbreviated

form as “Tr. ____”).

23 Tr. 118:25-119:2.

24 Tr. 119:3-13.

25 Ex. 1 at 3.

during the 2016/2017 season.26

Since the School District coaching position did not provide regular income and did

not pay the Debtor anywhere near enough to pay his family’s bills, the Debtor continued

to search for other positions. Some months after receiving the coaching position, in early

January 2017, K&S Inc. d/b/a Kelly’s Towing and Automotive Repair (“K&S”) hired the

Debtor as a part-time dispatcher for the company’s tow trucks.27 The job paid $15.00 per

hour gross.28 During the first two months of his employment (January and February

2017), the Debtor worked about 20-29 hours per week and earned approximately $300.00

to $435.00 per week gross.29 During March, April, and May 2017, the Debtor’s role

expanded. He worked about 30 hours each week and earned about $450.00 gross. After

deductions for federal and state taxes and social security, the Debtor netted around

$340.00 to $410.00 each week during those months.30

B. The Debtor’s Initial Unemployment Benefits Claim.

As previously discussed, the Debtor was injured at work while driving a truck in

April 2015. When he recovered from his injuries, he was unemployed. After suffering

through many months of unemployment, the Debtor elected to apply for unemployment

benefits from the State. Neither the State nor the Debtor introduced the Debtor’s initial

unemployment benefits claim into evidence. However, it appears that the Debtor

submitted the application during October 2016, when he was unemployed.31 This was

just before the School District hired the Debtor for the coaching position. The State must

have approved the application, because it started to pay the Debtor weekly

unemployment benefits beginning on October 31, 2016.32 Around that time, the State

sent the Debtor a “Guide to Unemployment Benefits” explaining the State’s

unemployment benefits system, including the obligation of claimants to provide accurate

employment and income information.33

Throughout the balance of November and December 2016, the State paid the

Debtor weekly unemployment benefits starting at $108.00 per week and increasing to

$568.00 per week.34 The State has not alleged that the unemployment benefits

payments to the Debtor in 2016 are nondischargeable. Instead, the focus of the

Complaint is only on unemployment benefits payments made between January 1, 2017

and May 27, 2017.

26 Id.

27 Ex. 2.

28 Id.

29 Id.

30 Id.

31 Exs. 7 and 8.

32 Ex. 5 at 1.

33 Ex. 12, the “Guide.”

34 Ex. 5 at 1.

1. The “CUBLine” Telephone System.

Under the State’s unemployment benefits system, after a claimant’s initial

application for unemployment benefits is approved, the claimant “must request payment

every two weeks and meet all eligibility requirements.”35 The State offers two main

means for claimants to request bi-monthly payments: (1) online through the State’s

internet website; and (2) by telephone through the State’s telephone system.36 Although

the Debtor made his initial application for unemployment benefits online through the

State’s internet website during October 2016, he elected to make all subsequent bi-

monthly claims for unemployment benefits by telephone.37

The State’s telephone system for unemployment benefits is the CUBLine system

(“CUBLine”). According to the Guide, a claimant located outside the Denver metropolitan

area must call a dedicated telephone line. CUBLine is completely automated. Put

another way, the claimant must communicate with a “machine” rather than a person.

CUBLine follows a sort of patterned interaction. If a worker wants to make a bi-monthly

request for unemployment benefits pertaining to an initial claim that had already been

approved, then such claimant must persevere through some automated messages and a

series of prompts.

The State introduced into evidence a “script” for typical CUBLine calls.38 However,

notably, the State failed to provide recordings of any actual calls with the Debtor. During

closing argument, counsel for the State candidly acknowledged that “there are no

recordings of the CUBLine phone calls, which is why they were not provided.”39 The

Court does not know why the State decided not to record all calls requesting

unemployment benefits. But, regardless of the reason, the State’s failure to record any

CUBLine calls has created unnecessary evidentiary uncertainty and complexity.

In any event, according to the generic CUBLine script, a typical call starts with the

following automated message:

You’re about to request payment for a two week period . . . I’ll

ask you some questions to find out if you met the

requirements to receive payment for the weeks ending

_________ and ________. I’ll ask the questions for each

week separately. Please wait for verification that your request

for payment has been accepted at the end of this call;

otherwise, your answers won’t be saved. Make sure to report

all hours you worked, all money you earned, and if you

stopped working at any job during each week you request

35 Ex. 12 at 8; see also Tr. 13:2-5.

36 Tr. 19:9-12.

37 Tr. 19:13-15; Tr. 45:21-24.

38 Ex. 13.

39 Tr. 151:5-7.

could be considered fraud and could cause you to be

overpaid. If that happens, you will have to pay back benefits

already received and any additional penalties that may apply.

If you have questions about reporting hours and earning,

please call customer service . . . .40

After the foregoing, the CUBLine system asks a claimant to confirm that such claimant is

engaged in an active job search and has both the ability and availability to work.41 The

CUBLine script introduced by the State suggests that a claimant must press a telephone

key to respond “yes” or “no” to the foregoing inquiries.42 And, one of the State’s

witnesses testified that the CUBLine system required telephone key entries.43 The

Debtor denied any requirement to press telephone keys and instead insisted that he only

“talk[ed] to the computer” or “talk[ed] to the thing.”44 On direct examination, the Debtor

testified:

Q. When you call the CUBLine is it — you’re verbally

talking, is that correct?

A. Yes.

Q. So you’re having a conversation with a computer?

A. Yes.

Q. Do you think there’s a recording of that conversation

out there somewhere?

A. I would hope so.45

On cross-examination, the Debtor further testified about the CUBLine mechanics as

follows:

[Y]ou don’t enter [a number] — it’s not a push a button thing.

It’s all verbal.46

Counsel for the State appeared to accept or concede the point when she responded:

“Right, understood.”47

40 Ex. 13 at 1.

41 Id. at 1-2.

42 Ex. 13.

43 Tr. 38:13-41:17.

44 Tr. 126:7-12.

45 Tr. 128:8-15.

46 Tr. 135:21-22.

47 Tr. 135:23.

for the State, seemed to acknowledge that the CUBLine system accepts verbal responses.

In characterizing CUBLine system interaction, he repeatedly referred to claimant

communication in the following terms: “If they say yes . . . .”; “If they say no . . . .”; “If you

say yes . . . .”; “If you say no . . . .”48 However, there is some confusion because the same

witness also stated multiple times that the CUBLine system utilizes telephone key entries.

Another of the State’s witnesses, Zao Vo, also a Labor and Employment Specialist II for

the State, characterized the circumstances as the Debtor “repeatedly saying no” to one of

the questions.49 But, then she also referred to “key pad” entries.50 Based upon the

foregoing, and hampered by the State’s failure to produce any recordings of the telephone

calls, the Court finds that all of the Debtor’s interaction with the CUBLine telephone system

was verbal.51 This is consistent with the Regulations Concerning Employment Security

promulgated by the Colorado Department of Labor and Employment which characterize

the CUBLine system as “the division’s interactive voice response system.” 7 COLO. CODE.

REG. 1101-2.1.7.1.

In any event, after the various advisements and preliminary questions, the

CUBLine machine gets to the main point and asks a threshold question:

During this week, did you work at all or receive holiday pay?52

The Court refers to this question as the “Did You Work Question.” The State introduced

no definitive evidence as to how the Debtor responded to the “Did You Work Question”

during any of his calls with the CUBLine system. However, if a claimant responds “no” to

the “Did You Work Question,” then the CUBLine system questioning is mostly at an end,

except for a verification stage during which CUBLine asks a claimant to verify previous

answers.53 On the other hand, if a worker answers “yes” to the “Did You Work Question,”

then the CUBLine system channels such claimant to a series of other questions designed

to obtain additional information.54 Under such circumstances, a claimant “must report

[his] total earnings” as well as “the number of hours . . . worked.”55 The Court refers to

these questions as the “Earnings and Hours Questions.” And, then, after the “Earnings

and Hours Questions,” the CUBLine machine asks a claimant to verify such answers.56

The Court accepts that the foregoing summary of the script identifies the generic

CUBLine telephone system process. However, to reiterate, the State did not introduce

into evidence recordings of any actual calls with the Debtor.

48 Tr. 39:2-40:24 (using reference to verbal expression 11 times during testimony).

49 Tr. 87:13-15.

50 Tr. 98:14.

51 Notwithstanding some confusion in the evidence, ultimately, the difference between verbal

responses and telephone press-button responses does not appear particularly material or legally significant.

52 Ex. 13 at 2; see also Tr. 43:20-23; Tr. 44:10-13.

53 Ex. 13.

54 Id.

55 Id.

56 Id.

The State proved that the Debtor called the CUBLine system ten times during the

relevant period to make bi-monthly claims for unemployment benefits.57 Since the State

does not record unemployment benefits calls, the Debtor did not speak to a real person,

and the CUBLine system is a “machine” that cannot testify in court, the State’s evidence

of what actually happened during the Debtor’s calls to the CUBLine system is limited.

According to one of the State’s witnesses, Patrick Baker, the CUBLine “phone system []

translates the information that they [claimants] put into the system.”58 This “happens

behind the scenes.”59 The Court received no evidence concerning exactly how the

Debtor’s verbal answers were “translated.” Again, there are no recordings of any calls to

the CUBLine system; and there are not any written “translations.”

Instead, what the State relies on is a computer “screen-shot” of a “Payment

History” for the Debtor.60 According to Patrick Baker, the column titled “Original Earnings”

on the “Payment History” “will show what was originally reported by the claimant” for

weekly earnings.61 And, the column titled “Hours” is supposed to record what the

claimant stated for weekly hours worked.62 For the period from January 1, 2017 to May

27, 2017, the “Original Earnings” and the “Hours” columns on the Debtor’s “Payment

History” are completely blank — it is just some empty white space.63 The State seems to

assert that the blank space means that the Debtor reported (during ten separate calls)

that he had no income or hours. Later the State created an “Earnings Summary” for the

Debtor.64 On the “Earnings Summary,” the State wrote down that the Debtor had

reported “$0.00” “Gross Earnings” and “0” “Hours” for each week from January 1, 2017 to

May 27, 2017. To create the “Earnings Summary,” the State just relied on the blank

spaces from the “Payment History.”65

But, exactly what the Debtor stated during the ten calls remains somewhat of a

mystery based upon the State’s evidence. For example, returning to the CUBLine script,

perhaps the Debtor responded to the “Did You Work Question” by stating “no.” On the

other hand, maybe, the Debtor stated “yes” to the “Did You Work Question” and then was

channeled to the follow-up “Earnings and Hours Questions.” Perhaps the Debtor

answered the follow-up questions by reporting “$0.00” income earned and “0” hours

worked. The implication from the “Earnings Summary” created by the State is that the

Debtor somehow got channeled to the “Earnings and Hours Questions” and then he

stated “$0.00 and “0” for “Gross Earnings/Hours Reported by You.”66

57 Exhibits 3 and 5 show that the Debtor called the CUBLine system on January 9, January 22,

February 5, February 19, March 5, March 19, April 2, April 16, April 30, and May 14, 2017.

58 Tr. 16:6-7.

59 Tr. 62:20.

60 Ex. 3.

61 Tr. 15:24-16:1; Tr. 16:12-18.

62 Id.

63 Ex. 3.

64 Ex. 4 at 2.

65 Tr. 17:19-18:11.

66 Ex. 4.

In the end, the State’s evidence is unclear and equivocal. All that is certain is that

someway and somehow the relevant earnings and hours columns on the Debtor’s

“Payment History” are blank.

3. The Debtor’s Testimony Concerning the Debtor’s CUBLine Calls.

The Debtor provided a different story concerning his interaction with the CUBLine

system. He claimed repeatedly that he was “confused by the CUBLine.”67 Although his

testimony was not a model of clarity, it appears that the Debtor initially had questions

about how to report his work for the School District in 2016 since he did not anticipate

receiving any income until the end of the girls’ basketball season. The Debtor asserts

that he contacted the State by telephone. Apparently, the Debtor was referred to various

personnel at the State and finally was advised by someone that he should “enter zeros for

[School District] coaching in 2016 . . . .”68 The Debtor did not recall the full name of the

person he allegedly spoke with and had no records of the call. Further, the State has no

record of any such call.69 However, the Debtor claims that during October, November,

and December 2016, he followed the advice and “entered zeros” for School District

income and hours.70 In other words, he answered the “Did You Work Question” with a

“yes” and then reported zeros for the “Income and Hours Questions.”71 From the Debtor’s

perspective, although he was working, his answers were initially truthful because he was

not paid anything by the School District in 2016.

According to the Debtor, the situation became more convoluted and confusing in

2017 when the Debtor took a second job with K&S. The Debtor testified that he

“attempted to report” the K&S hours and income along with his unpaid work for the School

District through the CUBLine system.72 However, he states that the “CUBLine system

wouldn’t take it.”73 The Debtor testified that he was “stuck in a loop.”74 So, the Debtor

asserts that he called the State customer service line three times to obtain help.75 He

does not remember the full name of the person to whom he was eventually referred. He

has no record of any such calls.76 Further, the State has no record either.77 But, the

Debtor states that he was advised to enter the K&S income and hours first and then enter

the School District data as “zeros” (because he still had not been paid by the School

District).78 The Debtor claims that he followed the guidance.79

67 Tr. 113:25-114:1.

68 Tr. 132:13-15; Tr. 108:10-109:4.

69 Tr. 45:19-20; Tr. 88:14-18.

70 Tr. 121:10-14.

71 Tr. 136:10-13.

72 Tr. 107:13.

73 Tr. 107:14.

74 Tr. 124:18-22.

75 Tr. 107:21-23; Tr. 124:18-125:22.

76 Tr. 108:4-6.

77 Tr. 45:19-20; Tr. 88:14-18.

78 Tr. 124:18-125:19; Tr. 136:10-13.

79 Tr. 122:21-123:8; Tr. 125:8-19; Tr. 135:23-136:16.

The Debtor asserted repeatedly that he properly reported, or at least thought that

he had properly reported, his income and hours through the CUBLine system all along

consistent with the guidance he received from the State.80 For example, on cross

examination he testified as follows:

Q. So, it is your testimony today that you did enter

[in the CUBLine system] your hours worked and wages earned

from January 7, 2017 through May 27, 2017?

A. Yes.81

The Debtor claims that he honestly and truthfully disclosed all his earnings and, thus,

never made any false statements.82

The Court assesses the Debtor’s credibility as suspect. First, he repeatedly

seemed to contradict himself throughout the prosecution of the Adversary Proceeding.

For example, the Debtor’s responses to the State’s written interrogatories contradict his

story at trial. The Debtor responded to numerous interrogatories with the rote statement:

“Defendant was unable to successfully navigate the phone system required to submit

weekly claims and complete the process.”83 This response simply cannot be squared

with the Debtor’s testimony that he did figure out how to work the CUBLine system and

provided all his income and hours on a bi-weekly basis from January 1, 2017 to May 27,

2017.84 Second, even though there was no evidence concerning CUBLine system error

rates, the Court doubts that the CUBLine system improperly “translated” the Debtor’s

income and hours statements during all ten calls made by the Debtor to the CUBLine

system. That would mean that the CUBLine system had a 100% error rate. Third, the

Debtor seemed to indicate that he always put in “zeros” for income and hours for the

School District coaching job. But, it is uncontested that the Debtor received $2,597.94

gross on March 16, 2017 for that job. The Debtor never expressly stated that he

disclosed such income. Fourth, the CUBLine system script contains a verification stage

after a claimant enters income and hours information. The Debtor never satisfactorily

explained how he was able to complete the verification stage, which should have flagged

any discrepancies between what the Debtor thought he reported and what the CUBLine

system “translated.”

4. The Payments to the Debtor.

In any event, relying on the information from the “Payment History,” the State paid

the Debtor $568.00 in unemployment benefits for each week from January 1, 2017 to May

80 Tr. 107:9-11; Tr. 115:4-7; Tr. 122:23-123:8; Tr. 126:3-12; Tr. 132:17-22.

81 Tr. 135:7-10; see also Tr. 132:17-22; Tr. 134:13-16.

82 Tr. 133:3-15.

83 Ex. 15.

84 Tr. 109:8-111:18.

$11,928.00 during such time.86 During the period from January 1, 2017 to May 27, 2017,

when the Debtor was receiving unemployment benefits, he was coaching for the School

District (but not being paid regularly). Also, during such period, the Debtor was working

part-time for K&S and receiving weekly compensation.

D. The State’s Investigation.

From January 1, 2017 to May 27, 2017, the State relied on the “Payment History”

generated by the CUBLine system to determine that the Debtor was not working and not

making any income. Thus, the State paid the Debtor unemployment benefits. However,

the State has “a system that routinely checks to see if someone is working . . . .”87 The

cross-check system generated a red flag sometime in the summer of 2017 — presumably

based upon reporting from the School District and K&S.88 Thus, the State initiated an

investigation of the Debtor.

As a result, on August 17, 2017, the State sent a “Request to Employer for

Earnings Data Audit” to K&S, requesting that K&S provide information concerning the

total hours worked by the Debtor, as well as gross wages earned by the Debtor from

March 26, 2017 to June 24, 2017.89 K&S responded and provided its payroll records for

the expanded period from January 1, 2017 to August 23, 2017.90

Similarly, on September 21, 2017, the State sent a “Request to Employer for

Earnings Data Audit” to the School District requesting that the School District provide

information concerning the total hours worked by the Debtor as well as gross wages

earned by the Debtor for the period from April 9, 2017 to June 24, 2017.91 The School

District did not provide any details concerning hours worked by the Debtor but confirmed

that he received gross pay of $2,597.94 on March 16, 2017.92

E. The Administrative Process and Calculation of Debt.

Based upon the payroll data received from the School District and K&S, the State

prepared the “Earnings Summary” identifying the earnings data received from both

employers from January 1, 2017 to May 28, 2017.93 With respect to the School District,

even though the Debtor received only a single lump-sum payment on March 16, 2017, the

State applied such payment retrospectively and calculated that the Debtor had earned

85 Ex. 4; Ex. 5.

86 Id.

87 Tr. 13:9-17.

88 Tr. 81:12-15 (“his claim was randomly selected for a cross match audit because we have wages

reported in the system”).

89 Ex. 2.

90 Id.

91 Ex. 1.

92 Id.

93 Ex. 4 at 2.

income calculation was based on prorating the Debtor’s single lump sum payment over

the 18-week duration of the girls’ basketball season.95 The K&S records were somewhat

more straightforward. Even though the employer’s records were not broken down on a

week-by-week basis, the State calculated that K&S paid the Debtor somewhere between

$255.48 to $416.35 per week (depending on the varying number of hours the Debtor

worked).96

Bottom line: in the Earnings Summary, the State concluded that the Debtor had

earned an aggregate of $9,221.81 from both K&S and the School District from January 1,

2017 to May 27, 2017.97 Meanwhile, the State had paid the Debtor unemployment

benefits of $11,928.00 during the same time period.98

On October 23, 2017, the State mailed the Debtor (at his residential address) a

“Claimant Inquiry and Earnings Data Request” (the “Inquiry”) advising the Debtor that

“[a]n audit of your unemployment insurance claim shows you may have received benefits

to which you were not entitled.”99 The State provided the “Earnings Summary” prepared

by the State based upon data received from the Debtor’s employers and showing the

State’s calculations of “Earnings” and “Benefits Paid.” Through the Inquiry, the State

requested that the Debtor respond within one week with additional information and

corrections regarding the “discrepancies in wages reported by your employer(s) and the

amounts reported by you . . . .”100 The State warned that if the Debtor did not respond “a

determination will be made [by the State] upon the available information.”101

The Debtor did not respond to the Inquiry. So, the State used the data from the

Earnings Summary and made a calculation of alleged unemployment benefits

overpayments.102 Although the State did not explain the precise methodology for its

calculation, the State’s computer apparently decided that the Debtor had received an

overpayment of $6,252.00.103 Such amount was about half of the unemployment benefits

that the Debtor had received ($11,928.00) during the review period. So, the State was

not asking for a return of all unemployment benefits paid. Furthermore, the State’s

94 Id.

95 Tr. 81:25-83:8; Tr. 93:17-21.

96 Ex. 4.

97 Id. In Stipulated Fact No. 6, the parties stipulated that the Debtor received $10,705.12 on a

combined basis from K&S and the School District for the weeks ending January 7, 2017 to May 27, 2017.

However, Exhibit 4 unequivocally shows that the Parties inadvertently included $1,483.31 for later time

periods in the calculation. Thus, the correct total payment amount for the period from January 1, 2017 to

May 27, 2017 is $9,221.81. The difference is not material.

98 Id. In Stipulated Fact No. 5, the parties stipulated that the Debtor received “unemployment

insurance benefits in the total amount of $12,160.00 for the weeks ending January 7, 2017 to May 27,

2017.” However, Exhibit 4 unequivocally shows that the Parties inadvertently included $232.00 for the

week from May 28, 2017 to June 3, 2017 in the calculation. Thus, the correct total payment amount for the

period from January 1, 2017 to May 27, 2017 is $11,928.00. The difference is not material.

99 Ex. 4 at 1.

100 Id.

101 Id.

102 Ex. 7.

103 Id.

unemployment benefits and the penalty together, the State calculated that the Debtor

owed the State $10,315.80.

True to its warning in the Inquiry, on November 6, 2017, the State issued a

“Determination of Overpayment of Benefits and Demand for Repayment” (the

“Determination”) and mailed it to the Debtor (at his residential address).105 As set forth in

the Determination, the State advised: “It has been determined that you received benefits

to which you were not entitled.”106 The State specifically identified $6,252.00 of “Benefits

Overpaid” plus a “Monetary Penalty” of $4,063.80, thus yielding a “Total Amount Due” of

$10,315.80.107 The Determination asserted that the Debtor had made 25 “weekly claims

filed due to misrepresentation or false statements.”108 The State asked the Debtor to

promptly pay $10,315.80. Further, the State advised the Debtor of his administrative

appeal rights and noted that any “appeal must be received within 20 calendar days after

the . . . date mailed [i.e., by November 26, 2017].”109 The Determination contained

another copy of the Earnings Summary previously sent to the Debtor along with a further

“Explanation of Appeal Rights for a Claimant or Employer” explaining the State’s

procedures for late appeals.110

The Debtor did not respond to the Determination or appeal by the November 26,

2017 deadline.111 Accordingly, having received no reply, on June 1, 2018, the State

mailed the Debtor (at his residential address) a “Request for Balance of Overpayment”

(the “Request”), again requesting that the Debtor pay an “Amount Due” of $10,315.80 and

warning that the failure to pay would result in the transfer of the Debtor’s account for

collection.112

The next day (June 2, 2018), the Debtor responded for the first time to the

Determination.113 He submitted a very late appeal (the “Late Appeal”). In the Late

Appeal, the Debtor advised that “[t]here was a mixup in address 1045 Smith Trinidad Colo

81082”.114 With respect to the reason for the lateness of the appeal, the Debtor stated:

“Attached is a picture of address confusion and why I was not receiving all of my mail.

Please take that into consideration of delay for disagreement.”115 However, the Debtor

104 Id.

105 Ex. 6.

106 Id. at 1.

107 Id.

108 Id.

109 Id. at 2.

110 Id. at 4.

111 Tr. 20:24-21:1; and Tr. 23:9-10.

112 Ex. 9.

113 Ex. 10.

114 Id. Whether or not there was a “mixup in address” when the State sent mailings to the Debtor may

explain why the Debtor was late in responding; however, the issue has no real bearing on the

nondischargeability issues in dispute in this adversary proceeding. So, the Court need not make any

factual findings concerning the Debtor’s receipt of mail but notes that all of the mailings were addressed to

the Debtor at the address that he himself provided.

115 Id. at 2-3.

Debtor stated:

When I started employment at the beginning of the year of

2017 with Kelly’s Towing I . . . called the Department of Labor

and Employment after numerous attempts to input my

earnings on the automated line. I spoke with a Male

Representative I believe his name was Steve. And I verbally

reported employment to him (Steve) explained my concerns

and was advised nothing more needed to be done due to part

time and pay did not meet requirements to close the claim.

And it would be considered supplemental pay. I am not

denying I received (payments) claim benefits while employed,

I am not opposed to repayment of overpayment benefits minus

supplement, and ask with all due repect [sic] the mandatory

penalty be deferred or waved [sic].117

The State subsequently dismissed the Late Appeal.118 So the State’s Determination is

final.

The key part of the exchange is that the Debtor essentially confessed that he

received unemployment benefits overpayments. In other words, the Debtor does not

deny the amount of the debt owed to the State: $10,315.80. The Debtor even identified

such amount as an undisputed claim on his bankruptcy schedules. Accordingly, the

Court finds that the State overpaid the Debtor $6,252.00 in unemployment benefits and

that the State imposed a 65% penalty equal to $4,063.00.

V. Burden of Proof.

The State bears the burden of establishing nondischargeability under Section

523(a) by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286-87

(1991) (“Requiring the creditor to establish by a preponderance of the evidence that his

claim is not dischargeable reflects a fair balance between these conflicting interests.”);

Houston v. Munoz (In re Munoz), 536 B.R. 879, 884 (Bankr. D. Colo. 2015) (requiring

creditor to prove Section 523 claims by a preponderance of the evidence).

VI. Legal Conclusions.

In the Complaint, the State asserted that the Debtor is liable to the State for

overpaid unemployment compensation for the period from January 1, 2017 to May 27,

2017 in the amount of: (1) $6,252.00 for “unemployment compensation”; (2) $4,063.80

for “a 65% monetary penalty”; and (3) $2,578.95 for “a 25% collection fee.”119 Thus, the

116 Id.

117 Id. at 2.

118 Ex. 11.

119 Compl. ¶¶ 5-11 and 16.

contested the dollar amount of the Debt and has not contested that he owes such amount

to the State. Accordingly, the only legal issue is this adversary proceeding is whether the

Debt, or any portion of the Debt, is nondischargeable under the Bankruptcy Code.

The State asserts that the Debt is nondischargeable under Section 523(a)(2)(A)

because the debt is for money “obtained by false pretenses, a false representation, or

actual fraud.”121 More specifically, the State alleged that the Debtor made

“representations on the Defendant’s weekly claims [that] were false.”122 Further, the State

asserted that the Debt also is nondischargeable under Section 523(a)(7) “to the extent

that such debt is for a penalty payable to or for the benefit of a governmental unit and is

not compensation for actual pecuniary loss.”123

A. The Plaintiff Failed to Establish a Section 523(a)(2)(A) Claim.

The State bases its first claim on Section 523(a)(2)(A), which provides:

A discharge under section 727 . . . of this title does not

discharge an individual debtor from any debt — . . . (2) for

money, property, services, or an extension, renewal, or

refinancing of credit, to the extent obtained by — (A) false

pretenses, a false representation, or actual fraud, other than a

statement respecting the debtor’s or an insider’s financial

condition . . . .

11 U.S.C. § 523(a)(2)(A) (emphasis added).

In support of its Section 523(a)(2)(A) claim, the State contends that the Debtor’s

“representations” in the “weekly claims” on the CUBLine calls “were false.”124 According

to the State, the Debtor lied to the State (on all ten calls to the CUBLine system). The

State alleges that the Debtor “reported” no “hours worked” and no “earnings” on the

CUBLine telephone calls even though the Debtor was employed by both the School

District and K&S and earned income from both entities during the January 1, 2017 to May

27, 2017 time period.

1. The Alleged Misrepresentations Are Not Actionable Under Section

523(a)(2)(A) Because They Are Statements Respecting the Debtor’s

Financial Condition.

As set forth below, the Court determines that the State has not met its burden to

establish a viable claim under Section 523(a)(2)(A). Part of the problem is the nature and

quality of the State’s evidence. The State is unable to prove what the Debtor did or did

120 Id. ¶¶ 15 and 18.

121 Id. ¶ 16.

122 Id. ¶ 14.

123 Id. ¶ 17.

124 Id. ¶ 14.

CUBLine system. The State did not record any of the telephone calls and has no

transcripts of the content of such communications. Further, no State employees

participated in the telephone calls. That is because the CUBLine system is fully

automated. So, the Debtor was talking only “to the computer.” And, the computer is not a

witness capable and competent to testify at trial. So, the Court is left only with the data

the CUBLine system somehow transposed to the blank space on the “Payment History,”

which indicates that the Debtor reported no income and no hours worked from January 1,

2017 to May 27, 2017. In the circumstances of this case, the Court is reticent to rely on

such inconclusive evidence alone.

However, even if the State is entirely correct that the Debtor falsely reported his

income and hours worked, the State still cannot prevail under Section 523(a)(2)(A). Oral

statements about the Debtor’s income and hours, even if false, are not actionable under

Section 523(a)(2)(A), because such statements are statements “respecting the debtor’s

. . . financial condition.” Statements “respecting the debtor’s . . . financial condition” can be

pursued only if in writing and only if brought under a separate statute not pled by the State:

Section 523(a)(2)(B).

The United States Supreme Court’s recent unanimous decision,125 Lamar, Archer

& Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018), is dispositive in this Adversary

Proceeding. Writing “for the Court,” Justice Sotomayor started by succinctly identifying

the Section 523(a)(2)(A) issue: “This case is about what constitutes a ‘statement

respecting the debtor’s financial condition.’” Id. at 1757. In Lamar, the debtor falsely told

his law firm creditor that “he was expecting a tax refund of ‘approximately’ $100,000” and

that “he had not yet received the refund.” Id. In reality, the debtor in Lamar was a

scallywag: he received a tax refund of far less than $100,000 and then he spent it on his

own business without paying the law firm. Thus, it was undisputed that the debtor in the

Lamar case lied during his conversations with the creditor.

Parsing the Section 523(a)(2)(A) statutory language, the Supreme Court analyzed

the “ordinary meaning” of the words: “statement”; “financial condition”; and “respecting.”

Id. at 1759. The appellate court determined that “a statement” is “the act or process of

stating, reciting, or presenting orally or on paper; something stated as a report or

narrative; a single declaration or remark.” Id. at 1759 (quoting WEBSTER’S THIRD NEW

INTERNATIONAL DICTIONARY 2229 (1976)). And “financial condition” means “one’s overall

financial status.” Id. But the real linchpin to the statutory exercise is the word

“respecting.” According to the Supreme Court, the term “respecting” means “in view of;

considering; with regard or relation to; regarding; concerning.” Id. (quoting WEBSTER’S

THIRD NEW INTERNATIONAL DICTIONARY 1934 (1976)). The word “respecting” must be read

“expansively.” Id. at 1760.

125 The Lamar decision is unanimous in the sense that all Justices of the Supreme Court concurred in

the result that “a statement about a single asset can be ‘a statement respecting the debtor’s financial

condition’” and thus is not actionable under Section 523(a)(2)(A). However, three Justices declined to join

in a portion of the majority decision (Part III.B.).

statement about a single asset” (i.e., the expected tax refund) “can be a statement

respecting the debtor’s financial condition.” Id. at 1761. Ultimately, the Supreme Court

determined that the false oral statement about the debtor’s tax refund was a “statement

respecting the debtor’s financial condition” and so not actionable under Section

523(a)(2)(A). In reaching that holding, the Supreme Court observed that “the text of

Section 523(a)(2) plainly heightens the bar to discharge when the fraud at issue was

effectuated via a ‘statement respecting the debtor’s financial condition.’” Id. at 1763.126

Such statements are only actionable if in writing and according to Section 523(a)(2)(B) —

not Section 523(a)(2)(A). See Am. Nat’l Bank v. Dalcourt (In re Dalcourt), 354 B.R. 868,

874 (Bankr. N.D. Iowa 2006) (“subsections 523(a)(2)(A) and (B) are mutually exclusive”).

Applying Lamar to this Adversary Proceeding, the focus must be on the nature of

the alleged false statements. The State alleges that the Debtor made ten calls to the

CUBLine system during which he told the computer that he had no income and worked no

hours. The multiple representations that the Debtor had no income and no hours clearly

are “statements” within the scope of Section 523(a)(2)(A) and Lamar. So, then the key

question is whether such statements are “respecting the debtor’s . . . financial condition.”

The Court determines that oral reports about earnings and hours worked are

statements respecting the Debtor’s financial condition. The proposition is virtually self-

evident. In the context of bankruptcy, most consumer debtors (like the Debtor in this

Adversary Proceeding) lack significant assets. So, employment and income often are the

most important aspects of a debtor’s financial condition. In terms of “plain” or “ordinary”

meaning, when most people consider a debtor’s “financial condition,” the first thing that

comes to mind is employment and income. Does the person have a job and how much

does that person make? “Inherently, income is a critical aspect of a debtor’s financial

condition.” MBNA Consumer Servs., Inc. v. Jackson (In re Jackson), 252 B.R. 877, 878

(Bankr. W.D.N.Y. 2000) (rejecting Section 523(a)(2)(A) claim because misrepresentation

concerning income was made orally). Asking the question in reverse proves the point.

Do statements about income and employment have nothing to do with a person’s

financial condition? Of course not.

A series of bankruptcy statutes, rules, and forms reinforces the importance of

employment and income for analysis of financial condition. For example, to qualify for

bankruptcy under Chapter 13, a debtor must have “regular income.” 11 U.S.C. § 109(e).

To obtain a fee waiver for bankruptcy under Chapter 7, a debtor must disclose the

“person’s average monthly income (take home pay).” Official Form 103B. At the very

beginning of every individual bankruptcy case, a debtor must file a Statement of Financial

Affairs and Schedules. 11 U.S.C. § 521(a); Fed. R. Bankr. P. 1007(b). Part 2 of the

Statement of Financial Affairs requires a debtor to disclose “any income from

employment.” Official Form 107. Use of the term “financial affairs” in the Statement of

Financial Affairs seems quite analogous to the phrase “financial condition.” Schedule I

mandates that a debtor disclose “employment status,” the “employer’s name,” and

126 This holding is contained in Part III.B of the Lamar decision. Three Justices did not join that section

of the opinion.

also provide copies of “all payment advices [i.e., pay stubs] . . . received within 60 days

before [the petition date].” 11 U.S.C. § 521(a)(1)(B)(iv). The Chapter 7 “means test

calculation” (which may dictate whether a debtor should be in Chapter 7 liquidation or

Chapter 13 reorganization) starts with identification of a debtor’s “gross wages, salary,

tips, bonuses, overtime, and commissions.” Official Form 122A-1. In Chapter 13, the

entire reorganization process is based upon the commitment of “future earnings.”

11 U.S.C. § 1322(a)(1). The concept of “disposable income,” which includes “gross

wages, salary, tips, bonuses, overtime, and commissions,” is central in contested Chapter

13 confirmation proceedings. 11 U.S.C. § 1325(b); Official Form 122C-2. So, it is fair to

say, employment and income are central to the evaluation of a debtor’s financial condition

in the bankruptcy process.

Not surprisingly, most reported judicial decisions that have directly considered

whether statements (either orally or in writing) about a debtor’s employment and income

are statements “respecting a debtor’s . . . financial condition” within the meaning of

Section 523(a)(2)(A) have reached the conclusion that they are. For example, one such

decision, Iowa Dep’t of Human Servs. v. Brown (In re Brown), 1992 WL 12626473, at *2

(Bankr. S.D. Iowa Jan. 8, 1992), is right on point. That case, like this Adversary

Proceeding, involved government benefits. The debtor filed an application with the Iowa

Department of Human Services asking for aid. In the application, the debtor stated that

“she was not employed and derived no income from employment.” The statements about

employment and income were very similar to the statements the Debtor allegedly made in

this case. In Brown, the court held:

[A] statement regarding a debtor’s employment and level of

income is a statement respecting a debtor’s financial

condition. [W]here eligibility for a need-based governmental

program was dependent upon an individual’s earnings, a

statement regarding the defendant’s employment status and

level of income was clearly a statement respecting her

financial condition.

Id. at *2. Thus, the Brown court rejected the nondischargeability claim for overpaid

unemployment benefits under Section 523(a)(2)(A) but allowed the claim under Section

523(a)(2)(B) because the statements were in writing.

Other judicial decisions are similar. For example, in Swift Fin./M & I Bank, FSB v.

Sass (In re Sass), 2010 WL 5475708, at *4 (Bankr. N.D. Ill. Dec. 30, 2010), a debtor

applied for a loan from a bank through a telephonic application process. During one of

the calls, the debtor verbally overstated her personal income and obtained the loan on

the basis of that lie. Later, the debtor defaulted on the loan and filed for bankruptcy

protection. The bank sought a determination of nondischargeability under Section

523(a)(2)(A) based upon the verbal misrepresentation about income. The Sass court

determined that the misrepresentation about income was a statement about the debtor’s

financial condition; so it was not actionable under Section 523(a)(2)(A). Instead, the

Sass court recognized that “[d]ebts arising from false oral statements respecting financial

Sallie (In re Sallie), 2009 WL 1917959, at *5 (Bankr. E.D. Tenn. July 1, 2009)

(“statements regarding the amount of income earned by an individual are statements

respecting financial condition, even under a strict interpretation”).

And, written loan applications requiring disclosure of employment and income are

almost universally considered statements “respecting the debtor’s . . . financial condition”

actionable under Section 523(a)(2)(B) alone. See Kessler v. Longmire (In re Longmire),

2019 WL 1458927, at *8 (Bankr. N.D. Cal. Mar. 29, 2019) (“[A]n applicant’s income

constitutes a statement in writing respecting the applicant’s financial condition for

purposes of § 523(a)(2)(B).”); Park Nat’l Bank v. Shilling (In re Shilling), 2013 WL

4039417, at *2 (Bankr. N.D. Ohio Aug. 7, 2013) (“The credit application clearly respects

the Debtor’s financial condition. It contains information on her employment, including her

annual income.”); Midwest Comm. Fed. Cr. Union v. Sharp (In re Sharp), 357 B.R. 760,

765 (Bankr. N.D. Ohio. 2007) (written statement in loan application regarding monthly

income was a statement respecting debtor’s financial condition governed by Section

523(a)(2)(B)); Dalcourt, 354 B.R. at 874 (“[A] credit application . . . is a statement in

writing respecting the debtor’s financial condition. It is a statement of [debtor’s] ability to

generate income.”); Phillips v. Napier (In re Napier), 205 B.R. 900, 905 (Bankr. N.D. Ill.

1997) (“The application contained statements about the Debtor’s employment, weekly

gross earnings, and additional income. Thus, the application constitutes a statement []

concerning the Debtor’s financial condition.”).

In this Adversary Proceeding, the State’s central allegation is that the Debtor

stated he was unemployed and had zero income during each of the ten calls to the

CUBLine system. The statements were oral. Even if such statements were false

(because the Debtor was employed by the School District and K&S and earned income),

they simply are not actionable under Section 523(a)(2)(A). 127 Instead, to obtain a

127 In a case bearing some similarities to the facts in this Adversary Proceeding, this Court rejected a

legal challenge (under Fed. R. Civ. P. 12(b)(6)) to the sufficiency of the State’s complaint. Colorado v. Wine

(In re Wine), 558 B.R. 438 (Bankr. Colo. 2016). In Wine, the State alleged that the debtor lied to the State

about employment and earnings on the CUBLine. The State sought recovery from the debtor of alleged

overpaid unemployment benefits along with penalties and collection fees. The State issued a determination

which was upheld on appeal. Then, the debtor filed for bankruptcy protection. Thereafter, the State filed an

adversary proceeding claiming that the entire debt was nondischargeable under Section 523(a)(2)(A). The

debtor “concede[d] that he received overpayments of unemployment compensation and that such

overpayments are nondischargeable under Section 523(a)(2)(A).” Id. at 440. However, the debtor moved

to dismiss with respect to the statutory penalties and collection fees under Section 1328(a)(2) because of

the broad provisions governing discharge in Chapter 13 reorganizations. The Court denied the motion to

dismiss and ultimately held:

Based upon a plain reading of Section 523(a)(2)(A) and the CESA

[Colorado Employment Security Act, COLO. REV. STAT. § 8-70-101 et seq.],

and accepting the facts alleged in the Amended Complaint as true, the

State adequately alleges a claim for payment against the Debtor for

overpaid unemployment compensation, statutory penalties, and collections

fees . . . .

Id. at 445. So, the Court allowed the State to prosecute its Section 523(a)(2)(A) claim.

under Section 523(a)(2)(B). Lamar, 138 S. Ct. at 1764. And, the State is not pursuing a

Section 523(a)(2)(B) claim.

The Court’s decision might appear, at first blush, to be hyper-technical. But it is

not. The Court must follow the text of the Bankruptcy Code as enacted by Congress.

The Court simply has no authorization to depart from the statute and enter a

nondischargeability judgment under Section 523(a)(2)(A) for an oral statement

“respecting the debtor’s financial condition.” “[I]f Congress enacted into law something

different from what it intended, then it should amend the statute to conform it to its intent.”

Lamie v. U.S. Trustee, 540 U.S. 526, 542 (2004). Meanwhile, it is not the Court’s role to

announce its preferred result in place of Congress. Id. at 542; Baker Botts L.L.P. v.

Asarco LLC, 135 S. Ct. 2158, 2169 (2015) (the Supreme Court “lack[s] the authority to

rewrite the statute” even if it wishes for a different policy result).

The Court recognizes that the State is endeavoring to fulfill the mandate of the

Colorado Employment Security Act, Colo. Rev. Stat. § 8-70-101 et seq. (the “CESA”), to

provide claimants with prompt payment of unemployment benefits. Toward that end, it

implemented the CUBLine and online claim processing system. The Court also

acknowledges that the State is trying to protect the integrity of the Colorado

unemployment benefits system by prosecuting claimants who have lied about their

employment and income both inside and outside of the bankruptcy context. But, when

the State pursues nondischargeability claims in the Bankruptcy Court for false

statements, the State must provide evidence of a debtor’s lies in writing, and then,

proceed under Section 523(a)(2)(B). As the Supreme Court held:

They [creditors] can still benefit from the protection of

§ 523(a)(2)(B) so long as they insist that the representations

respecting the debtor’s financial condition on which they rely

in extending money, property, services, or credit are made in

Although the Wine result may appear, at first blush, somewhat contrary to the Court’s decision in

this Adversary Proceeding, the Court notes the following distinctions. First, unlike this Adversary

Proceeding, the debtor in Wine conceded the propriety of the State’s Section 523(a)(2)(A) claim for

overpaid unemployment compensation. Second, the focus of the dispute between the State and the debtor

in Wine was the dischargeability of penalties and collection fees in Chapter 13. This Adversary Proceeding

involves the discharge in a Chapter 7 liquidation, not in Chapter 13 reorganization. Third, the procedural

posture in the Wine case was different. The issues surfaced through a motion to dismiss under Fed. R. Civ.

P. 12(b)(6), as incorporated by Fed. R. Bankr. P. 7012. In this Adversary Proceeding, the parties presented

their evidence at trial. Finally, the Wine decision predated the Supreme Court’s Lamar decision by almost

two years. In 2016, the Court was obligated to follow binding precedent from the United States Court of

Appeals for the Tenth Circuit: Cadwell v. Joelson (In re Joelson), 427 F.3d 700 (10th Cir. 2005). In Joelson,

the Tenth Circuit had adopted a very narrow reading of the “statement respecting the debtor’s . . . financial

condition” exception in Section 523(a)(2)(A). It held that the phrase “statement respecting a debtor’s . . .

financial condition” must be construed “strict[ly]” and applies only to information “as to the debtor’s or

insider’s overall net worth or overall income flow”. Id. at 714. In 2018, through the Lamar decision, the

Supreme Court abrogated the Joelson precedent. Now, this Court is obligated to follow the Supreme

Court’s decision in Lamar and must broadly construe statements respecting a debtor’s financial condition.

writings can foster accuracy at the outset of a transaction,

reduce the incidence of fraud, and facilitate the more

predictable, fair, and efficient resolution of any subsequent

dispute.

Lamar, 138 S. Ct. at 1764.128 Justice Sotomayor’s words are especially prescient in

relation to this Adversary Proceeding. Given the nature and poor quality of the evidence

presented by State concerning what actually happened when the Debtor was talking “to

the computer” through the CUBLine system, forcing the Debtor to make his

representations in writing would better “reduce the incidence of fraud” and “facilitate the

more predictable, fair, and efficient resolution” of employment benefits nondischargeability

disputes.129

128 A footnote from Lamar deserves some attention. In responding to the argument that the petitioner’s

“construction gives Section 523(a)(2)(B) an implausibly broad reach,” the Supreme Court explained that:

“Section 523(a)(2)(A) has been applied when a debt arises from ‘forms of fraud, like fraudulent conveyance

schemes, that can be effected without a false representation.’” Lamar, 138 S. Ct. 1763 (quoting Husky Int’l

Elec., Inc. v. Ritz, 136 S. Ct. 1581, 1586 (2016)). After that passage, the Supreme Court added a footnote.

Footnote No. 4 states:

See also, e.g., In re Tucker, 539 B.R. 861, 868 (Bankr. D. Idaho 2015)

(holding nondischargeable under § 523(a)(2)(A) a debt arising from the

overpayment of social security disability benefits to an individual who failed

to report changes to his employment despite a legal duty to do so); In re

Drummond, 530 B.R. 707, 710, and n. 3 (Bankr. E.D. Ark. 2015) (same,

and concluding that “the requirement of the debtor to notify [the Social

Security Administration] if she returns to work is not a statement that

respects the debtor’s financial condition”).

Lamar, 138 S. Ct. 1763 n.4. Both the Tucker and Drummond decisions involved overpayment of

government benefits.

Subsequently, one bankruptcy court relied on the footnote and held that “based on Lamar, . . .

statements concerning employment status are not statements respecting the debtor’s financial condition.”

Md. Cent. Collection Unit v. Johnson (In re Johnson), 2019 WL 4164860, at *5 (Bankr. D. Md. Aug. 30,

2019). Respectfully, the Court believes that the Johnson holding is incorrect and misapplies the Tucker,

Drummond, and Lamar decisions. The main point is that neither the Tucker nor Drummond cases involved

any “statement respecting the debtor’s . . . financial condition.” Instead, in both cases, the conduct centered

on omissions (i.e., debtors had failed to report or notify government agencies concerning changes to

employment and income). See Tucker, 539 B.R. at 864 (“Debtor did not advise the SSA of changes in

employment or income”); Drummond, 530 B.R. at 709 (debtor “fail[ed] to report her work activity”). So,

there were no “statements” at all in Tucker or Drummond — only failures to submit reports. Because there

were no statements, the last clause of Section 523(a)(2)(A) never came into play. The Drummond court

clarified as much when it held that “the requirement of the debtor to notify [the Social Security

Administration] if she returns to work is not a statement that respects the debtor’s financial condition.”

Drummond, 530 B.R. at 710 n.3. This Adversary Proceeding involves multiple alleged statements

regarding employment and income. So, the Lamar precedent mandates dismissal of the State’s Section

523(a)(2)(A) claim.

129 In the past, before the widespread use of personal computers and interactive voice response

systems, claimants were required to submit written forms requesting unemployment benefits from the State.

Although perhaps less technologically advanced, the former system provided more definitive evidence for

nondischargeability purposes than an automated telephone system. Likely there are good policy reasons

2. The State Failed to Prove the Alleged Misrepresentations.

In the Complaint, the State appears to focus on the “false representation” prong of

Section 523(a)(2)(A). For that type of claim, the State must demonstrate the following

elements by a preponderance of the evidence:

(1) the debtor made a false representation; (2) the debtor

made the representation with the intent to deceive the creditor;

(3) the creditor relied on the false representation; (4) the

creditor's reliance was justifiable; and (5) the false

representation resulted in damages to the creditor.

Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir. 1996); see also

Johnson v. Riebesell (In re Riebesell), 586 F.3d 782 (10th Cir. 2009).

In this Adversary Proceeding, the State alleged that during each of the Debtor’s ten

calls to the CUBLine system, the Debtor reported that he was not employed and earned

no income. However, the State’s evidence is insufficient to prove what actually happened

during the telephone calls to the CUBLine system. The State did not record any of the

calls. There is no transcript. No employee of the State can testify accurately about what

happened on the calls because the CUBLine system is fully automated. On the State

side, there is no human participation. Instead, when the Debtor called the CUBLine

system, he only was able to talk “to the computer.”

The State has provided a script for CUBLine system calls. The key CUBLine

questions in this case are the “Did You Work Question” and the “Earnings and Hours

Questions.” However, the State’s evidence failed to establish exactly how the Debtor

answered the “Did You Work Question.” The Debtor may have answered “No,” in which

case the call would have mostly been at an end, except for verification. Or, the Debtor

may have answered “Yes,” in which case he would have been asked the “Earnings and

Hours Questions” as follow-up. And, then, perhaps the Debtor responded by stating

“zero” hours and “zero” earnings. The Court simply does not know specifically what

happened on the CUBLine system calls. It is true that the State provided a copy of a

Payment History. The Payment History is supposed to “translate” whatever the Debtor

stated during the CUBLine system calls. But the “translation” is only some empty white

space on the Payment History. From this, the State created an Earnings Summary

wherein the State contended that the Debtor reported “$0.00” in “Gross Earnings” and “0”

for “Hours.” The State, however, did not demonstrate a sufficient linkage between what

specifically occurred on the CUBLine system calls and the Payment History and Earnings

Summary. For example, none of the State’s documentary evidence purports to identify

how exactly the Debtor responded to the “Did You Work Question” and the “Earnings and

Hours Questions” (if the “Earnings and Hours Question” was actually posed by the

why the State switched to an automated telephone procedure. The CUBLine system probably is cheaper to

operate and facilitates quicker benefits for unemployed claimants. But, the Court cannot decide this

Adversary Proceeding by guessing what policy or procedure is best. The Court’s role is limited to

interpreting and applying the text of the bankruptcy nondischargeability statutes.

testimony concerning the design and function of the CUBLine system.

Although the Court would have had concerns with the quality of the State’s

evidence even if it had not been called into question, the Court’s concerns are heightened

because of the Debtor’s flat denial under oath. The Debtor testified that he honestly and

truthfully provided his “hours worked and wages earned” during every CUBLine call

between January 1, 2017 and May 27, 2017. The Court observes that the Debtor’s

testimony was confused and, sometimes, even contradictory. Also, the Debtor’s

credibility is suspect.

But, in the end, the Court does not know what exactly happened on the ten

CUBLine system calls. An accusation of false representation requires something more

than what the State has presented. Thus, the Court determines that the State failed to

prove, by a preponderance of the evidence, any false representations made by the

Debtor. Since no false representations have been proved, the Section 523(a)(2)(A) claim

fails.130

B. The State Partially Established its Section 523(a)(7) Claim.

In addition to the Section 523(a)(2)(A) cause of action, the State also asserted a

nondischargeability claim under Section 523(a)(7).131 Section 523(a)(7) provides:

A discharge under section 727 . . . of this title does not

discharge an individual debtor from any debt — . . . (7) 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 . . . .

Parsing the statute further, there are three distinct elements: “(1) [T]here must be a debt

for a fine, penalty, or forfeiture; (2) [the] debt must be payable to and for the benefit of a

governmental unit; and (3) [the] debt cannot constitute compensation for actual pecuniary

loss.” Colo. ex rel. Salazar v. Jensen (In re Jensen), 395 B.R. 472, 480 (Bankr. D. Colo.

2008). So, the statute requires the Court to determine the character of the underlying

Debt.

In the Complaint, the State asserted that the Debtor is liable to the State for

overpaid unemployment compensation for the period from January 1, 2017 to May 27,

2017 in the amounts of: (1) $6,252.00 for “unemployment compensation”; (2) $4,063.80

for “a 65% monetary penalty”; and (3) $2,578.95 for “a 25% collection fee.”132 Thus, the

State alleged an aggregate Debt of $12,894.133 The Debtor has not contested the dollar

130 The Debtor also contends that the State failed to demonstrate the Debtor’s “intent to deceive.”

Given the Court’s disposition of the Section 523(a)(2)(A) claim in favor of the Debtor on other grounds, the

Court need not decide the intent issue.

131 Compl. ¶ 17.

132 Compl. ¶¶ 5-11 and 16.

133 Id. ¶¶ 15 and 18.

the State has established the validity of the Debt. Section 523(a)(7) requires the Court to

consider the character of each of the components of the Debt.

1. The Overpaid Unemployment Benefits Are Dischargeable.

The first component of the Debt owed to the State is $6,252.00 for “unemployment

compensation.”134 The State also has referred to such amount as “Benefits Overpaid”

and “Overpaid Amount.” The underlying State statutory basis for the claim is the CESA.

The CESA provides for “the compulsory setting aside of unemployment reserves to

be used for the benefit of persons unemployed through no fault of their own.” COLO. REV.

STAT. § 8-70-102. In general terms, Colorado employers must pay premiums to an

unemployment compensation fund administered by the State. COLO. REV. STAT. §§ 8-76-

101 to 8-79-108. Eligible unemployed persons may request payment of benefits from the

unemployment compensation fund. COLO. REV. STAT. §§ 8-73-101 to 8-74-109. Eligibility

and benefits amounts are determined weekly, but benefits are paid bi-monthly. COLO.

REV. STAT. § 8-73-101. It is fair to say that eligibility and benefits determinations involve a

complex process requiring the application of a myriad of statutes and regulations. In any

event, as set forth above, the Debtor requested unemployment benefits and received

payments of $11,928.00 during the period from January 1, 2017 to May 27, 2017.

Subsequently, the State determined that it overpaid the Debtor by $6,252.00 since

it had not taken into account the Debtor’s employment and earnings from the School

District and K&S during the period. The amount of overpayment was calculated by the

State’s computer system based upon the Earnings Summary. Overpayments are not

uncommon in the unemployment benefits system. But, the CESA provides a mechanism

for recovery of overpaid unemployment benefits. COLO. REV. STAT. § 8-74-109(2) states:

If by reason of fraud, mistake, or clerical error a claimant

receives moneys in excess of benefits to which he is entitled

. . . , the division shall recoup such moneys . . . .

See also COLO. REV. STAT. § 8-79-102 (governing the collection of overpaid

unemployment benefits).

The $6,252.00 in overpaid unemployment benefits sought by the State is an

attempt to “recoup such moneys.” Even the Debtor acknowledges that he owes the State

that amount. However, nondischargeability under Section 523(a)(7) is limited to debt “for

a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit.” The

“fine, penalty, or forfeiture” “may be either criminal or civil in nature.” Jensen, 395 B.R. at

480. Further, Section 523(a)(7) nondischargeability is not available for “compensation for

actual pecuniary loss.”

134 Id. ¶¶ 14-15.

nondischargeability for the $6,252.00 in overpaid unemployment benefits because such

amount is “compensation for actual pecuniary loss.” In other words, the State suffered

pecuniary loss when it paid the Debtor even though the Debtor was not entitled to the

$6,252.00 in unemployment benefits. The State seeks repayment and its attempt to

recover such amount is an attempt to obtain compensation for the loss. See COLO. REV.

STAT. § 8-81-101(4)(a)(I) (“Any person who has received any sum as benefits . . . to which

he is not entitled shall be required to repay such amount to the division for the fund.”).

Furthermore, Section 523(a)(7) nondischargeability also is not available because

the $6,252.00 in overpaid unemployment benefits is not a “fine, penalty, or forfeiture.”

Again, it is only an actual pecuniary loss that bears none of the hallmarks required for

penal recovery. Further, the State failed to identify any legal sources suggesting that

such amount is a “fine, penalty, or forfeiture.”

2. The 65% Monetary Penalty Is Nondischargeable.

The second component of the Debt owed to the State is $4,063.80 which the State

characterizes as a “65% monetary penalty.”135 Mathematically, the $4,063.80 is indeed

65% of the $6,252.00 in overpaid unemployment benefits. The State relies on COLO. REV.

STAT. § 8-81-101(4)(a)(II) as the statutory basis for the imposition of such penalty. That

statute states:

If any person receives an overpayment because of his or her

false representation or willful failure to disclose a material fact

. . . the person shall pay to the division [the State] the total

amount of the overpayment plus a sixty-five percent monetary

penalty.

To determine whether the “65% monetary penalty” is nondischargeable under

Section 523(a)(7), the Court must first decide whether it is a “fine, penalty, or forfeiture.”

Although that inquiry is a matter of federal bankruptcy law, the Court “looks to State law to

determine whether the debt at issue possesses these attributes . . . .”, especially if the

debt arises under State law. Jensen, 395 B.R. at 481.

The relevant State statute, COLO. REV. STAT. § 8-81-101(4)(a)(II), expressly uses

the term “monetary penalty.” And, the Court must give fealty to the text of the statute

when determining meaning. See Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 69

(2011) (the inquiry must begin with “the language of the statute itself.”); U.S. v. Ron Pair

Enters., Inc., 489 U.S. 235, 241 (1989) (same); see also ANTONIN SCALIA & BRYAN A.

GARNER, READING LAW: THE INTERPRETATION OF LEGAL TEXTS 56 (2012) (“The words of a

governing text are of paramount concern, and what they convey, in their context, is what

the text means.”) So, the text of the statute supports the characterization of the “65%

monetary penalty” as a true “penalty.”

135 Id. ¶ 15.

101(4)(a)(II) is located within Title 8, Article 81 which bears the general heading:

“Penalties and Enforcement.” And the specific statute is titled: “Penalties.” Although

headings and titles should never override statutory text, they “are permissible indicators of

meaning.” ANTONIN SCALIA & BRYAN A. GARNER, READING LAW: THE INTERPRETATION OF

LEGAL TEXTS 221 (2012).

Delving into the substance, COLO. REV. STAT. § 8-81-101(4)(a)(II) provides for

recovery of a “monetary penalty” that is calculated as a percentage of the actual

pecuniary loss (i.e., the overpaid unemployment benefits). The nature of such calculation

is indicative of a penalty. Gerald H. Phipps, Inc. v. Travelers Prop. Cas. Co. of Amer.,

2015 WL 5047640 (D. Colo. Aug. 27, 2015) (remedy of “two times the covered benefit . . .

reflects the imposition of a penalty rather than compensation for actual damages.”);

Jensen, 395 B.R. at 482 (“The penal nature is also reflected in the structure . . . insofar as

the statute calculates the amount of the penalty based on the number of [violations].”)

Finally, case law construing the imposition of penalties under COLO. REV. STAT. § 8-81-

101(4)(a)(II) confirms that the statute “is punitive in nature” and “serves primarily to punish

the unlawful act of failing to disclose material information regarding eligibility for

unemployment benefits.” In re Towler, 493 B.R. 239, 243 (Bankr. D. Colo. 2013).

Adding it all together, and in the absence of any contrary argument by the Debtor,

the Court finds that the “65% monetary penalty” is in fact a “penalty” within the meaning of

Section 523(a)(7). With respect to the other elements of Section 523(a)(7), the Court also

finds that the penalty is “payable to and for the benefit of a governmental unit” and does

not “constitute compensation for actual pecuniary loss.” Thus, the State has proved all

the affirmative elements of a nondischargeability claim under Section 523(a)(7) for the

$4,063.80 “monetary penalty.”

Nevertheless, the Court notes a seeming anomaly. Is it possible that the

underlying pecuniary loss (i.e., the $6,252.00 of overpaid unemployment benefits) is

dischargeable whilst the penalty based on a percentage of such loss is nondischargeable

under Section 523(a)(7)? It would seem like a strange result. However, the Court does

not decide cases in a results-driven fashion. Instead, the Court follows the applicable

statutes and law. And, Section 523(a)(7) has no requirement that the underlying

pecuniary loss must be nondischargeable in order for the associated penalty to also be

nondischargeable. Congress could have easily added that requirement but did not do so.

One recent appellate decision substantively and squarely addresses this unusual

topic. Ind. ex rel. Ind. Dep’t of Workforce Dev. v. Brown, 2019 WL 1746279 (N.D. Ind.

Apr. 17, 2019). In that case, the governmental agency asserted two nondischargeability

claims against a debtor: (1) a Section 523(a)(2)(A) claim for pecuniary loss (i.e., alleged

overpaid unemployment benefits of $30,752.00); and (2) a Section 523(a)(7) claim for civil

penalties of $17,765.00. The bankruptcy court denied the Section 523(a)(2)(A) claim.

Then, without any legal analysis, it decided that “a debt for a penalty is automatically

discharged if the underlying debt is also discharged.” Id. at *3. The governmental unit

appealed only the nondischargeability ruling for the civil penalties. On appeal, the district

status of the underlying debt.” Id. The appellate court answered the question this way:

Nothing in the statute [Section 523(a)(7)] says that a penalty is

automatically discharged if a related underlying debt is

discharged. Section 523(a)(7) identifies three elements that,

when met, make a debt non-dischargeable, and those

elements do not refer to the status of an underlying debt. In

addition, § 523(a)(7) often applies to penalties imposed on

criminal convictions, where there is no underlying debt at all.

Id. Thus, the district court reversed the bankruptcy court and determined that a civil

penalty may be nondischargeable under Section 523(a)(7) even if the underlying debt is

dischargeable. See also Ind. ex rel. Ind. Dep’t of Workforce Dev. v. Holmes (In re

Holmes), 2018 WL 4719097, at *6 (Bankr. S.D. Ind. Sept. 28, 2018) (holding, without

analysis, that the penalty portion of a debt was nondischargeable even though underlying

overpaid unemployment benefits portion of debt was dischargeable).

The Court concurs with the analysis and result in the Brown decision even though

it may seem strange. Under Section 523(a)(7), penalties may be nondischargeable even

if there is no other underlying nondischargeable debt. See e.g. Kelly v. Robinson, 479

U.S. 36 (1986) (restitution obligations imposed on a criminal defendant are

nondischargeable as “a fine, penalty, or forfeiture” under Section 523(a)(7)). Thus, even

though the $6,252.00 in overpaid unemployment benefits in this Adversary Proceeding is

dischargeable under Section 523(a)(7), the $4,063.80 “monetary penalty” is not

dischargeable.

3. The 25% Collection Fee Is Dischargeable.

The third and final component of the Debt owed to the State is the $2,578.95 which

the State characterized as a “25% collection fee.”136 Mathematically, the $2,578.95 is

25% of the aggregate of the $6,252.00 in overpaid unemployment benefits plus the

$4,063.80 monetary penalty expressed as follows: ($6,252.00 + $4,063.80) X .25 =

$2,578.95. The State justifies the imposition of a 25% collection fee by referencing COLO.

REV. STAT. § 8-79-102. However, that statute does not expressly provide for a 25%

collection fee. Instead, COLO. REV. STAT. § 8-79-102(2) states only:

If the division [the State] determines an account to be

uncollectible, such account may be referred to the controller

for collection. Reasonable fees for collection, as determined

by the director of the division and the controller, shall be

added to the amount of the debt. The debtor shall be liable for

repayment of the total amount outstanding plus the collection

fee.

136 Compl. ¶ 15.

25% collection fee. The statute only speaks to “reasonable fees for collection;” but, the

State has not introduced any evidence to establish whether the imposition of a 25%

collection fee is “reasonable.” Moreover, the State has not established that the proposed

percentage collection fee should be calculated based upon the total of the actual

pecuniary loss plus the 65% monetary penalty.

Regardless, for purposes of nondischargeability analysis under Section 523(a)(7),

the Court assumes that the 25% collection fee is valid and properly assessed. But, to be

nondischargeable, the State must meet its burden to prove that the collection fee is “a

fine, penalty, or forfeiture” that is “payable to and for the benefit of a governmental unit”

and does not “constitute compensation for actual pecuniary loss.” One part of the

equation is easy. The collection fee is payable to the State. But the other requirements

(“a fine, penalty, or forfeiture” that does not “constitute compensation for actual pecuniary

loss”) are not so clear.

The State has not provided the Court with any legal authority suggesting that the

collection fee is “a fine, penalty, or forfeiture.” So, the Court is left to its own devices.

Again, the Court starts with the statutory text. Ransom, 562 U.S. at 68; Ron Pair Enter.,

489 U.S. at 241. The CESA makes a distinction between “penalties” and “collection

fees.” For example, as already discussed, COLO. REV. STAT. § 8-81-101(4)(a)(II) provides

for a “sixty-five percent monetary penalty.” But, the “reasonable fees for collection” in

COLO. REV. STAT. § 8-79-102(2) is something else. Since the Colorado Legislature knew

how to identify penalties in the CESA, it only stands to reason (by negative implication)

that collection fees are not penalties. The structure of the CESA also supports this

conclusion. The CESA contains an entire article (Article 81) governing “Penalties and

Enforcement.” The enumerated penalties include: various criminal penalties (such as

fines and imprisonment); ineligibility to receive future unemployment benefits; and

account charges. COLO. REV. STAT. § 8-81-101. The list of penalties is extensive and

comprehensive. The collection fee is not amongst them. Thus, the structure of the CESA

indicates that the collection fee is not “a fine, penalty, or forfeiture.”

The manner in which the collection fee is assessed also suggests that it is not a

penalty. As already discussed, the CESA provides that if the State “determines an

account to be uncollectible, such account may be referred to the controller for collection.”

COLO. REV. STAT. § 8-79-102(2). Then, once referred for collection, “reasonable fees for

collection” may be added to the amount of the debt. Id. So, unlike most penalties, the

amount of the collection fee is not statutorily set based on a fixed amount, multiple, or

percentage of the underlying debt or number of violations.137 Compare Gerald H. Phipps,

2015 WL 5047650 (remedy of “two times the covered benefit . . . reflects the imposition of

a penalty rather than compensation for actual damages.”), and Jensen, 395 B.R. at 482

(“The penal nature is also reflected in the structure . . . insofar as the statute calculates

the amount of the penalty based on the number of [violations].”) The requirement that the

collection fee be “reasonable” also suggests that the collection fee is not a penalty.

137 The Court observes that the State set a 25% collection fee in relation to the Debtor. But, that is not

mandated by statute. And, the Court has received no evidence concerning the derivation of the percentage

utilized by the State.

Put another way, “reasonable” also implies some sort of analysis measuring the amount

of the proposed collection fee against something else: for example, the amount of the

overpaid unemployment benefits and the amount of time and effort required for the State

to collect the overpaid benefits. The requirement for additional reasoned analysis cuts

against the collection fee’s being considered a penalty. Further, the phrase “collection

fee” itself suggests that the fee is being imposed to compensate the State for the

expenses of collection, including attorney’s fees and costs. Again, that is not indicative of

a penalty.

Stepping away from the statutory text and structure, the State has not directed the

Court to any legal authority suggesting that the collection fee under the CESA is a non-

compensatory “fine, penalty, or forfeiture.” The Court’s own research reveals a mixed

bag at both the federal and state levels. The Jensen decision is somewhat analogous.

Jensen, 395 B.R. 472. One of the issues presented in Jensen was whether attorney’s

fees awarded under the Colorado Consumer Protection Act (“CCPA”) (COLO. REV. STAT. §

6-1-101 et seq.) and the Colorado Credit Services Organization Act (COLO. REV. STAT. §

12-14.5-101 et seq.138) were nondischargeable under Section 523(a)(7). The bankruptcy

court relied on Colorado Supreme Court precedent which held that “[t]he availability of

attorney fees serves the CCPA’s punitive and deterrent purposes.” Id. at 487 (quoting

Hall v. Walter, 969 P.2d 224, 231 (Colo. 1998)). Based on that holding, the bankruptcy

court ruled: “Although it is a close call, this Court concludes that the award of fees and

costs in this case is sufficiently penal so that it amounts to a ‘fine, penalty, or forfeiture’

. . . . and is nondischargeable under Section 523(a)(7).” Id. at 487-88. The Jensen result

was later endorsed by the Colorado Court of Appeals in another CCPA case. Colo. ex

rel. Coffman v. Robert J. Hopp & Assoc., LLC, 422 P.3d 617, 622 (Colo. App. 2018).

While the Jensen and Hopp decisions are analogous, they are also distinguishable from

this Adversary Proceeding in at least two important respects. First, both decisions relied

on Colorado Supreme Court precedent interpreting the attorney’s fees provisions of the

CCPA; but there is no such Colorado precedent construing the CESA. Second, the text

and structure of the CCPA and the CESA are entirely different.

Other recent Colorado precedent seems to point a different direction. Part of the

dispute in Guarantee Tr. Life Ins. Co. v. Estate of Casper, 418 P.3d 1163 (Colo. 2018)

was the characterization of attorney’s fees and costs under a Colorado statute governing

unreasonable delay or denial of insurance benefits. The appellate court decided that “the

text and structure of the statutory scheme” dictated that “the legislature did not intend the

[the attorney’s fee statute] to operate as a penal statute.” Id. at 1171-72. The Colorado

Supreme Court issued a similar decision the same day: Rooftop Restoration, Inc. v. Am.

Family Mut. Ins. Co., 418 P.3d 1173 (Colo. 2018). In Rooftop Restoration, the appellate

court again emphasized the primacy of statutory interpretation and observed that a

penalty “is usually in the form of imprisonment or fine.” Id. at 1177. The collection fee in

this case is not imprisonment or a fine.

138 As of August 9, 2017, approximately nine years after the Jensen decision issued, COLO. REV. STAT.

§ 12-14.5-101 et seq. was relocated to COLO. REV. STAT. § 5-19-101 et seq.

Colorado Supreme Court suggested that courts evaluating whether a statute is penal

could resort to using the test articulated in an earlier decision, Kruse v. McKenna, 178

P.3d 1198 (Colo. 2008), if “the intent of the legislature is not clear from the plain meaning

of the relevant statutory text when viewed in the context of the statutory scheme as a

whole.” Rooftop Restoration, 418 P.3d at 1176.

In Kruse, the Colorado Supreme Court “distilled a three part-test to determine

whether a statute is penal . . . .” Id. at 1175. Under the Kruse test, a statute is deemed

penal if: (1) the statute asserted a new and distinct cause of action; (2) the claim would

allow recovery without proof of actual damages; and (3) the claim would allow an award in

excess of actual damages. Kruse, 178 P.3d at 1201.

Even assuming that the statutory text and structure of the CESA were unclear

concerning the characterization of the collection fee, application of the Kruse test would

still confirm that the collection fee is not penal. The most salient element is whether the

claim would allow recovery without proof of actual damages. The Court determines that

for an overpaid unemployment benefits claim under the CESA, the State must establish

an overpayment (i.e., actual damages). COLO. REV. STAT. § 8-81-101(4)(a)(II). Further,

the monetary penalty can only be assessed as 65% of the “total amount of the

overpayment.” COLO. REV. STAT. § 8-81-101(4)(a)(II). If there is no overpayment and no

monetary penalty, then there is nothing for the State to collect through the collection fee

under COLO. REV. STAT. § 8-79-102(2). And, any attempt to collect would not be

“reasonable.” Id. So, Colorado precedent construing the CESA dictates that the

collection fee under the CESA is not “a fine, penalty, or forfeiture.”

In the final analysis, the Court determines that the State did not meet its burden to

prove that the 25% collection fee is “a fine, penalty, or forfeiture.” Further, the State failed

to establish that the 25% collection fee “is not compensation for actual pecuniary loss.”

Accordingly, the States’ Section 523(a)(7) nondischargeability claim for the collection fee

fails. The 25% collection fee component of the Debt is dischargeable.

VII. Conclusion and Order.

The Court appreciates the important but difficult role that the State plays in

ensuring a functioning unemployment compensation system for the people of the State of

Colorado. Scofflaws must be discouraged for the system to work. And, maybe the

Debtor was a scofflaw — it is all a bit unclear. Given the poor nature and quality of the

evidence, it is almost impossible for the Court to ascertain what really happened in the

CUBLine netherworld. But even accepting the State’s allegations that the Debtor made

false statements concerning his employment and income, such false statements simply

are not an actionable basis for nondischargeability under Section 523(a)(2)(A). With

respect to its claim for nondischargeability under Section 523(a)(7), the State fares

slightly better. The 65% monetary penalty (totaling $4,063.80) sought by the State is

nondischargeable since it is “a fine, penalty, or forfeiture” under Section 523(a)(7). But all

the other components of the State’s Debt fail the statutory test.

ORDERS that Judgment shall enter in favor of the Debtor and against the State on

the First Claim for Relief under Section 523(a)(2)(A); and

FURTHER ORDERS that Judgment shall enter in favor of the State and against

the Debtor on the Second Claim for Relief under Section 523(a)(7) but only to the extent

of the monetary penalty of $4,063.80. In all other respects, Judgment shall enter in favor

of the Debtor and against the State.

DATED this 1st day of November, 2019.

BY THE COURT:

Thomas B. McNamara,

United States Bankruptcy Judge