Business Law e-Newsletter
January 31, 2017

Judy B. Calton

From the Desk of Chair Judy B. Calton

The Honorable Walter Shapero, recently retired from the bankruptcy bench for the Eastern District of Michigan, spoke at a January 17 joint meeting of the Debtor/Creditor Rights Committee of the Business Law Section of the State Bar of Michigan and the Debtor/Creditor Committee of the Oakland County Bar Association.

In particular, he spoke about the hardship caused debtors who were facing an adversary proceeding for non-dischargeability or had already received a judgment of non-dischargeability of a claim by the Michigan Unemployment Insurance Agency for the return of wrongfully paid benefits plus penalties, based on computer error and not actual fraud by the debtor. The topic of Judge Shapero’s talk was also the topic of the front page story in the Sunday Detroit Free Press, Paul Egan, Did Claims of Fraud Make Jobless Bankrupt? Lawyers Asking Staff to Reopen Cases. Pages 1A & 9A (January 29, 2017). Judge Shapero graciously agreed to allow us to publish his remarks (slightly edited), below:

    “I recently retired from my position as a bankruptcy judge for the Eastern District of Michigan. I am speaking to you about my concerns relative to the bankruptcy aspects and ramifications of Judge Cleland’s Stipulated Order for Preliminary Injunctive Relief dated January 11, 2017, and the press and other notoriety that those cases, and the state Court of Claims case on the same subject, have received.

    I believe there have been many cases, filed in the bankruptcy courts in Michigan, by debtors who have listed among their debts, the obligations to the State involved in these cases. It is also likely that in such cases the State has filed adversary proceedings seeking a determination that under sections of the bankruptcy code stating these debts based on fraud and/or constituting a fine or penalty are not dischargeable in a bankruptcy proceeding. The likely scenarios are either (1) the debtor, who may be in pro per or be represented by an attorney who does not fully appreciate the problem, and defaults, and a non-dischargeability judgment is entered; or (2) the State moves for summary judgment based on the principle of collateral estoppel which would preclude a separate proceeding in the bankruptcy court to determine the existence of fraud, also

    thus resulting in a non-dischargeability judgment, if the motion is not contested, or is granted over objection. Also possibly such a motion was contested, but the judge refused to apply collateral estoppel to the situation, and the matter proceeded to trial.

    It is not clear to me to what extent, if any, the indicated injunctive order itself covers these bankruptcy court non-dischargeability judgments and attempts to collect the debts they evidence. More than that, however, to the extent a case seeks to afford a complete and effective remedy to the debtors, these concerns ought to be dealt with, together with the fact that these fraud-based judgments may have found their way to the credit r

    eports of all of these vulnerable individuals, who are often non- or under-represented persons whose thusly adversely affected credit reports will dog them for many years, unless part of any remedy requires appropriate correction of that aspect of the fallout in this situation.

    I have brought this to the attention of my former colleagues on the bench as well as the Debtor/Creditor Committee of the Oakland County Bar Association. There are, of course, limitations on what a court itself can do in such situations, as a legal and practical matter, and in considering its role in an adversary system, or on a sua sponte basis, or indeed, being even able to identify the bankruptcy cases involved, even if the court or an individual judge concludes some action is required in these cases and justifies action even on sua sponte basis.

    I urge that in the course of the proceedings in such cases and the fashioning of an ultimate appropriate remedy you consider requiring the onus be on the State to do what is necessary to correct my concerns as are thought appropriate, if for no other reason than only the State that can, in the first instance, identify all the persons and cases involved. It should also be noted there are not only past and existing bankruptcies that may be involved, but future ones. It may also be that the implementation required of the State under Judge Cleland’s order may arguably be construed to include dealing appropriately with concerns I have expressed.”

The Eastern District of Michigan Bankruptcy Court bench believes these issues should be addressed on a case-by-case basis, instead of by court imposed procedures. Even if there is a settlement with Michigan’s Unemployment Insurance Agency with respect to future and pending cases, the problems will persist for debtors in closed cases. If our Section members can think of innovative ways to assist indigents with such adversary proceedings or obtain relief from previously entered judgments based on false information, I would appreciate hearing from you with suggestions and as volunteers.

Judy B. Calton
Chair, Business Law Section
jcalton@honigman.com
(313) 465-7344

Council Meeting
March 2; Lansing

Debtor-Creditor Rights Committee Meeting
March 7; Southfield

Regulation of Securities Committee Meeting
April 25; Bloomfield Hills

Council Meeting
June 6; Bloomfield Hills

Regulation of Securities Committee Meeting
October 10; Troy