Wisconsin v. Hansen

624 B.R. 204

State of WISCONSIN, Appellant,

v.Brian A HANSEN, Amie R Hansen, Appellees.

Case No. 17-cv-1635-bhl

United States District Court, E.D. Wisconsin.

Signed January 8, 2021

Charlotte Gibson, Sean Michael Murphy, Wisconsin Department of Justice Office of the Attorney General, Madison, WI, for Appellant.

Jerome R. Kerkman, Gregory M. Schrieber, Kerkman Wagner & Dunn, Milwaukee, WI, for Appellees.

DECISION AND ORDER

BRETT H. LUDWIG, United States District Judge

This is an appeal of a bankruptcy court decision concluding that a penalty imposed by the State of Wisconsin Department of Workforce Development (DWD) against Brian Hansen for his company's failure to maintain workers' compensation insurance was dischargeable in Hansen's bankruptcy case, notwithstanding Bankruptcy Code sections 523(a)(1)(A) and 523(a)(7). Having considered the issues raised in this appeal, the parties' arguments, and the record, the Court concludes there is no need for oral argument. The Court further concludes that the bankruptcy court was wrong in determining that Hansen's debt for the DWD penalty fell outside the exception to discharge in section 523(a)(7). Because the Court finds the debt nondischargeable under section 523(a)(7), it need not decide whether the debt is also nondischargeable under section 523(a)(1)(A). The bankruptcy court's order is reversed.

BACKGROUND

Brian Hansen failed to make sure that his company, H&S Landscape Products, Inc. (H&S), maintained workers' compensation insurance to protect its employees from workplace injuries, as required by Wisconsin law. As a result, the DWD assessed a $128,361.98 penalty against H&S, and, as the sole stockholder, president, and operating officer of H&S, Hansen was a "responsible person" under Wis. Stat. § 102.83(8) and personally liable for the assessment.

Just before the DWD issued notice of the assessment, Hansen and his spouse filed a joint Chapter 11 bankruptcy petition. In their bankruptcy case, the Hansens proposed, and the bankruptcy court confirmed, a reorganization plan under which general unsecured creditors would receive annual installments equal to the Hansens' annual future disposable income. The DWD did not filed a proof of claim for the workers' compensation assessment and no portion of the assessment was paid through the plan. The bankruptcy court entered a Final Decree on October 7, 2016 and the case was closed.

On May 12, 2017, the DWD filed a motion in the bankruptcy court, asking the court to confirm that the state could proceed with collection of the worker's compensation assessment from Hansen, notwithstanding his bankruptcy. The DWD argued that Hansen's confirmed plan did not bar collection because the assessment was excluded from the debtors' discharge under sections 523(a)(1)(A) and 523(a)(7).

After briefing and a hearing, the bankruptcy court denied DWD's motion. The bankruptcy court first observed that its confirmation order bound all creditors, including the DWD, to the terms of the debtors' confirmed plan. The court also recognized that, under section 1141(d)(2), if Hansen's debt to the DWD for the worker's compensation penalty was nondischargeable under section 523(a)(1)(A) or (a)(7), the DWD would not be bound by the plan and could continue with its collection efforts. The bankruptcy court then concluded, however, that the DWD assessment was not excluded from the debtors' discharge under either section. As a result, it held the DWD was bound by the terms of the confirmed plan and was barred from pursuing collection of the workers' compensation assessment from Hansen.

DISCUSSION

This Court has jurisdiction over the appeal of the bankruptcy court's order under 28 U.S.C. § 158(a). The bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo. See Stamat v. Neary , 635 F.3d 974, 979 (7th Cir. 2011). No facts are in dispute.

On appeal, the DWD argues that the bankruptcy court's decision should be reversed because the bankruptcy court committed error in failing to conclude that Hansen's debt was a nondischargeable excise tax under section 523(a)(1)(A) or, in the alternative, a nondischargeable penalty under section 523(a)(7). As explained below, the Court agrees that Hansen's debt is nondischargeable under section 523(a)(7) and does not reach the issue of whether the debt might also be excepted from discharge under section 523(a)(1)(A).

A. Under Section 523(a)(7), Bankrupt Debtors Are Not Entitled to Discharge Certain Governmental Penalties.

Section 523(a)(7) of the Bankruptcy Code excepts from discharge any debt "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, other than a [specified type of] tax penalty." To qualify under this subsection, a debt must be (1) a fine, penalty, or forfeiture; (2) payable to and for the benefit of a governmental unit; (3) not compensation for actual pecuniary loss; and (4) not a specified type of tax penalty. 11 U.S.C. § 523(a)(7).

The bankruptcy court concluded, and both the DWD and Hansen agree on appeal, that the DWD assessment at issue satisfies the first, third, and fourth elements. There is no dispute that the assessment is a penalty; it is not compensation for actual pecuniary loss; and it is not a tax penalty of the kind specified in the statute. But DWD insists the bankruptcy court was wrong in concluding that the assessment does not satisfy the second element, whether the assessment is "for the benefit of a governmental unit."

The Supreme Court interpreted this phrase in section 523(a)(7) twenty-five years ago in Kelly v. Robinson , 479 U.S. 36, 50, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986). Kelly concerned a debtor who had previously been ordered to pay restitution to the state of Connecticut in connection with pleading guilty to second-degree larceny charges stemming from her wrongful receipt of welfare benefit payments. In holding that the debtor's criminal restitution obligation was nondischargeable under section 523(a)(7), the Supreme Court rejected the debtor's argument that the restitution order was not payable for the benefit of a government unit because the funds would be used to reimburse the victim – the state of Connecticut – for the fraudulently received benefit payments. The Supreme Court explained that the award was part of a state court criminal judgment and the "criminal justice system is not operated primarily for the benefit of victims, but for the benefit of society as a whole." Id. at 52, 107 S.Ct. 353. It further emphasized that a criminal restitution judgment is not necessarily tied to reimbursement in the amount of the harm caused but could be entered in a different amount to be repaid in a flexible way "tailored to the defendant's situation." Id.

The Seventh Circuit discussed section 523(a)(7), and distinguished Kelly , in the context of a state court civil restitution order in In re Towers , 162 F.3d 952 (7th Cir. 1998). The debtor in Towers had engaged in a fraudulent home mortgage scheme, which led the state to pursue a civil proceeding against him under a state law consumer protection statute. The debtor defaulted and the state court entered a civil restitution order in favor of the state. When the debtor later declared bankruptcy, the bankruptcy court held the restitution debt was dischargeable because section 523(a)(7) did not apply to civil restitution awards. That ruling was reversed on appeal to the district court, but then reinstated (albeit on different grounds) on further appeal to the Seventh Circuit.

In Towers , the Seventh Circuit concluded the civil restitution award at issue was not payable to and for the benefit of a governmental unit because the state did not keep the restitution but was merely a collection agent for the victims of the debtor's fraudulent scheme. Id. at 955-56. In arriving at this conclusion, the Court of Appeals first recognized that when a state agency collects money and deposits it into the state's treasury, the collection is "for the benefit" of the government even if the government has a policy of compensating victims of crimes or civil wrongs. Id. at 955. It then explained, however, that because Illinois law required the state to pay out all amounts collected under the restitution judgment to victims of the debtor's fraud, the state retained no pecuniary benefit from the judgment. Id. at 955-56. The Seventh Circuit also noted that the debt could have been challenged as a nondischargeable debt attributable to fraud under section 523(a)(2), but that neither the state nor the debtor's victims timely availed themselves of that approach, which requires that such claims be brought prior to discharge. The creditors having snoozed on the most direct avenue to make the debt nondischargeable, the Court of Appeals explained it was not inclined to torture the language in section 523(a)(7) to help them. Id. at 956.

B. The DWD's Assessment for Failure to Maintain Workers' Compensation Insurance is a Nondischargeable Penalty under Section 523(a)(7).

On appeal, the DWD argues that the bankruptcy court committed error in concluding that the assessment for failure to maintain workers' compensation insurance was not payable "to and for the benefit of a governmental unit" under section 523(a)(7). The bankruptcy court reached this conclusion based on its reading of both Kelly and Towers and two New Jersey bankruptcy cases, In re Moran-Hernandez , 544 B.R. 796 (Bankr. D.N.J. 2016), and In re Hurtado , No. 10-48668, 2015 WL 395217 (Bankr. D.N.J. Jan. 29, 2015). The bankruptcy court focused on the disposition of funds collected under the assessment, emphasizing that any funds the DWD recovered could not be used to pay the DWD's "general operational expenses." The court reasoned that because Wisconsin law, specifically Wis. Stat. § 102.80(1)(a), (1m), requires that penalties collected for failing to maintain...