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

> United States Bankruptcy Court, D. Colorado · November 1, 2019

URL: https://www.frixlaw.com/law-library/cases/10455327

## Case

- **Court:** United States Bankruptcy Court, D. Colorado
- **Decided:** November 1, 2019
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10455327

## How later opinions describe it (automated extraction)

- rejecting Section 523(a)(2)(A) claim because misrepresentation concerning income was made orally

## Opinion text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10455327. Public record. Not legal advice.