State attorneys on Friday urged a Michigan Court of Appeals panel to dismiss a major lawsuit seeking financial damages for tens of thousands of residents slapped with huge fines for false unemployment fraud determinations made by an automated computer system.

The penalties were a form of “state-sponsored injustice,” said plaintiff attorney Jennifer Lord, who argued the Michigan Unemployment Insurance Agency “stole hundreds of millions of dollars” from claimants.

The potential class-action lawsuit alleges the state agency violated constitutional due process rights of claimants by seizing their property without proper notice, but Friday’s court arguments in Detroit focused on the state’s assertion the case should be tossed because it was not filed within a prescribed statute of limitations.

At issue is whether named plaintiffs in the case filed their complaint within six months of the alleged “harm” done to them, as required in suits seeking monetary damages from the state for purported constitutional violations.

Assistant Attorney General Debbie Taylor argued any harm would have occurred when the agency notified claimants they had been fined for alleged unemployment fraud. But Lord argued the harm occurred when plaintiffs had their income taxes seized or wages garnished.

Lead plaintiff Grant Bauserman of Chelsea received notice in February 2015 that he owed the state $15,928 in penalties and $40.59 in interest after he received a deferred bonus payment from a previous job, which the agency later redetermined was not fraud. His federal income tax refund was seized in June, then he lost his state refund. He filed suit in September, roughly seven months after the initial penalty and interest notice.

“We didn’t get into the substance of the underlying claims, but that doesn’t mean we don’t care about them,” said Appeals Court Judge Michael Gadola, former legal counsel to Republican Gov. Rick Snyder, apologizing to observers for Friday’s focus on technical details.

“We’re sympathetic, but these are sometimes things we have to do as lawyers and judges.”

The conservative-leaning appeals court panel includes Judge Patrick Meter, who was appointed by GOP former Gov. John Engler, and Judge Karen Fort Hood, who was elected directly to the bench and tends to align more with Democrats.

The suit stems from erroneous unemployment 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, but plaintiffs contend they were not fully repaid.

The Snyder administration has faced criticism over the false fraud scandal and automated computer system. New Talent Investment Agency Director Wanda Stokes, tasked with fixing the unemployment agency, has apologized to claimants falsely accused of fraud and made several internal changes.

Gadola said the three-judge panel hopes to issue a ruling on the technical arguments “in fairly short order,” and decide whether the slow-moving case can proceed nearly two years after it was filed and more than a year after a Court of Claims rejected an initial motion for dismissal by the state.

That was welcome news to Karl Williams of Lansing, a named plaintiff in the case, who was accused of fraud in 2012. Williams contends he was wrongly accused but, unlike Bauserman, has not had his determination overturned and continues to have his wages garnished now that he’s back at work. An administrative law judge said in 2014 he had not filed his protest on time.

Waiting for action two years after the lawsuit was filed “is not fun,” Williams told reporters after the hearing. “You literally get about 50 percent of your income. I’ve paid the state over $50,000. It’s kind of frustrating, and you just wait for it to be over.”

In addition to refunds, plaintiff attorneys are seeking additional monetary damages for claimants who were forced to file for bankruptcy, had their credits rating negatively impacted or suffered in other ways.

Arguing for the state, Taylor said recent decisions by the Michigan Supreme Court make clear that the six-month statute of limitations in monetary suits against the state begins ticking when a person is harmed, not when he or she discovers the harm.

“It’s the agency’s position this is when the fraud redetermination is issued,” she said, telling judges the case should be dismissed because plaintiffs received notice of their penalties more than six months before they filed suit.

“That is because at that point, the claimant is determined to have committed fraud,” Taylor said. “They are assessed four times penalty. Benefits are canceled, and that collection activity can only flow from the fraud determination or redetermination.”

Gadola asked plaintiff attorneys a series of pointed questions, including whether claimants were harmed when they received notice they had been accused of fraud and had been assessed penalties.

“Our lawsuit is based on the very clear allegation that the agency violated the Michigan Constitution when it seized this property,” Lord responded, referencing tax refunds intercepted by the state. “That’s the constitutional hook.”

Speaking with reporters after the hearing, Lord said she suspects the three-judge panel will allow the suit to proceed. But either way, she agreed, the case is likely to head to the Michigan Supreme Court.

“Judge Gadola is a fairly conservative judge, but I do think in the end he grasped the distinction that is important here,” Lord said. “... Constitutional torts are rare, that’s true. This is a rare example of where a government basically committed theft against its own citizens and won’t own up for it.”

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