False fraud scandal goes to Michigan Supreme Court

Jonathan Oosting
The Detroit News
Michigan's Unemployment Insurance Agency (UIA) website

Lansing — Out-of-work residents who were falsely accused of unemployment insurance fraud continue to suffer financial and personal consequences, say attorneys and advocates urging the Michigan Supreme Court to revive a class-action lawsuit.

Justices will hear oral arguments Wednesday afternoon in a case that has major implications for tens of thousands of claimants who were wrongly flagged for fraud and penalized by the Michigan Unemployment Insurance Agency. The state relied on an error-prone automated computer system over a nearly two-year span beginning in 2013.

“Five years later, we’re still seeing people who are filing for bankruptcy, losing homes or can’t pass credit checks,” said Jennifer Lord, an attorney representing the named plaintiffs in the suit.

The agency reversed more than 40,000 determinations made by the computer system between October 2013 and August 2015. The state has acknowledged errors and changed various policies and protocols as a result, but it is fighting the suit.

The case boils down to a technical argument: Were plaintiffs harmed when the state accused them of fraud, or when it seized their income tax refunds and garnished their wages?

A Michigan Court of Appeals panel sided with the state last year, ruling that plaintiffs failed to file their case within six months “following the happening of the event giving rise to the cause of action,” as required in suits seeking financial damages against the state.

Michigan Attorney General Bill Schuette’s office, which is representing the unemployment insurance agency in the case, is asking the Supreme Court to uphold the dismissal. Plaintiffs did not sue, or file a notice of intent to sue, within six months of receiving notice of the fraud determination, the state argues.

“The agency does not mean to suggest the consequence of having their claim dismissed are not real or important to plaintiffs,” state attorneys wrote in a brief asking justices to deny appeal.

“They no doubt are, and the agency has taken many actions to address the issues raised by plaintiffs and other claimants. But those consequences do not change the fact that the Court of Appeals correctly applied the law to the facts presented.”

Claimants who say the state violated their due process rights argue the six-month clock should have started ticking when the state seized their property. Lead plaintiff Grant Bauserman, who was accused of fraud after receiving a delayed bonus from a previous job, had his federal income taxes seized in June 2015 and sued in September of the same year.

Plaintiffs who sued early in the process would have been kicked out of court “so fast” for premature claims, Lord said, calling the seizures a form of “state-approved and state-sponsored theft from tens of thousands of innocent victims.”

Rebecca Williams, a former Michigan resident now living in North Carolina, said she did not realize she'd been accused of fraud in 2014 until her $3,850 federal income tax refund was seized in early 2017. Because of penalties and interest, she owed $100,600, she said, and had to hire an attorney to fight related criminal charges that have been dismissed but continue to make it difficult for her to find steady work. 

“I put myself through college going to school day and night, raising three kids and working full time, and for all of this to just be taken away from me because of some computer system is simply amazing,” Williams said in a conference call organized Tuesday by the Michigan AFL-CIO ahead of the Supreme Court arguments. “I’m still suffering from it.”

Michigan settled a federal lawsuit over the unemployment insurance scandal in 2017, agreeing to a series of reforms designed to prevent a similar situation from happening in the future. Gov. Rick Snyder last year also signed a bipartisan reform package into law.

Schuette, a Republican who is running for governor, on Tuesday sought to distance himself from the case that his office is fighting to dismiss. As attorney general," it is my responsibility to defend all of Michigan’s laws, whether I personally agree or not, and regardless of whether the law is a good one," he said in a statement.

"Tomorrow’s hearing at the Michigan Supreme Court is one that is difficult for all involved," Schuette continued. "The MiDAS computer system was flawed. The result of this flaw was 44,000 people being wrongly accused of fraud and 186 people wrongly charged by local prosecutors’ offices, all of whom are terrified of the long-term consequences. The MiDAS system failed Michigan and all of its citizens.”

Schuette has chosen to remove his office from some state cases in the past. In 2016, the attorney general declined to join Gov. Rick Snyder in appealing a court ruling that directed the state to reimburse public school employees for “unconstitutional” paycheck deductions. The Michigan Supreme Court last year rejected the appeal and ordered refunds. 

While the Unemployment Insurance Agency has touted reforms, "we will not discuss the case prior to the arguments before the Supreme Court tomorrow," said spokesman Chris DeWitt.

The agency announced in August 2017 it was in the process of refunding affected residents more than $20.8 million. But Lord questioned the claim, pointing to an audited financial statement showing the agency listed $5.7 million in claimant reimbursement through September 2017.

The state has refunded the nearly $21 million, DeWitt said Tuesday. "Ninety-eight percent of the individuals have been contacted," he said in an email, "There are a few individuals that we have been unable to contact, but are still attempting to find." 

Anecdotally, Lord said many claimants calling her law firm say they received a partial refund with no explanation why they did not get the full amount that was initially been seized from them.  Williams said that in her case, the state seized $3,800 from her and refunded her roughly $1,700.

“This was after I had to come back to Michigan and go before a judge,” Williams said. “I was scared as hell to cash the check because I didn’t know if it was accurate.”

State reforms and refunds to not fully address the harms that have been done to residents who suffered from false fraud accusations, said Steve Gray, director of the University of Michigan’s Unemployment Insurance Clinic that provides services to claimants.

Beyond financial penalties, many claimants suffered reputational or relationship damage because of the stress that was put on then, their marriages and their families, Gray said. “Even if (the lawsuit) is successful, state leadership is going to have to do more work to make sure everyone is whole.”