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A Michigan Court of Appeals panel is set to hear arguments Friday in a slow-moving lawsuit alleging the state Unemployment Insurance Agency violated due process rights of claimants by imposing steep penalties for false fraud accusations.

The state is seeking to dismiss the 2015 suit on governmental immunity grounds and reverse a May 2016 ruling by a Court of Claims judge that allowed the case to move forward.

The potential class-action suit stems from erroneous fraud determinations made by an automated computer system with little to no human review, largely between October 2013 and August 2015. As of May, the state had reversed more than 27,800 determinations from that period and paid out roughly $5.5 million in refunds.

The class-action lawsuit contends residents who were wrongly accused of fraud, like lead plaintiff Grant Bauserman of Chelsea, deserve compensation for economic damages and additional “equitable” relief, as determined by the court.

As many as 46,000 claimants may have been affected, said attorney Jennifer Lord. Plaintiffs who have received refunds got only partial payback, and some have been forced to file for bankruptcy or suffer hits to their credit ratings, she said.

The state agency made “boatloads of money off these seizures,” Lord said, noting legislators have shifted excess unemployment penalty and interest funds to other areas of the state budget in recent years.

As The Detroit News has reported, Michigan’s 400 percent financial penalty for unemployment fraud is the harshest in the nation, adding insult to injury for out-of-work residents who were falsely flagged by the computer system. Bauserman was fined $15,928 in 2015, according to court records. His state and federal income tax refunds were later seized.

The suit alleges Gov. Rick Snyder’s administration denied UIA claimants due process and just treatment guaranteed by the Michigan Constitution by using the automated fraud detection system to determine guilt without proper proof, notice or an appropriate opportunity for the accused to be heard before penalties were imposed.

Attorney General Bill Schuette’s office, representing the UIA in the case, is seeking to dismiss the suit on the grounds that Bauserman and other plaintiffs did not file, as required, a notice of intent to sue within six months of when they were allegedly deprived of due process rights. Instead, they filed notice within six months of having their tax refunds intercepted.

The state contends plaintiffs have not provided sufficient evidence to “avoid application of government immunity,” which typically applies except in cases involving the pursuit of damages for violations of constitutional rights, as alleged.

The case is built on “vague allegations,” according to state attorneys. They are disputing claims that appropriate notices were not provided to claimants, arguing “due process is judged from the perspective of the sender, not the recipient.”

The Unemployment Insurance Agency declined to comment on the case Thursday, with a spokesman saying it would be inappropriate to discuss pending litigation.

Wanda Stokes, director of the state Talent Investment Agency that oversees the unemployment agency, said in a statement that staff is continuing to review automated cases from 2013 to 2015 and is on track to complete the work by the end of this month.

“The focus remains on the state’s residents and making sure they are treated fairly,” she said in a statement. “These reviews are an important step in restoring trust.”

The state settled a separate federal lawsuit in February, agreeing to a series of broad policy reforms and changes to the way the unemployment agency handles fraud cases.

joosting@detroitnews.com

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