Justice: For victims, false fraud scandal 'worse than going to the Secretary of State'

Jonathan Oosting
The Detroit News
Michigan Supreme Court Justice Richard Bernstein.

Lansing — For tens of thousands of Michigan residents hit with stiff penalties for false accusations of unemployment insurance fraud, trying to sort out the error was “worse than going to the Secretary of State,” Michigan Supreme Court Justice Richard Bernstein said Wednesday.

Bernstein riffed on dreaded visits to the motor vehicle department as he questioned the assertion by the Michigan Attorney General’s Office that residents accused of unemployment fraud should have sued shortly after the state informed them of determinations made by an error-prone computer system.

Most citizens would attempt to sort the matter out before thinking about a lawsuit, Bernstein argued, comparing the effort to a trip to the Secretary of State. He suggested they would only have thought about legal recourse when the government seized their income tax refunds or garnished their wages.

“It’s the finality, the sense that you actually lost your money, that your money has been taken away from you, that’s when this actually becomes real to people,” he said.

Bernstein’s comments, which came in the form of lengthy questions, cut to the heart of the debate over the fate over a lawsuit that could become a class-action case but was rejected last year by the Michigan Court of Appeals.  

State law usually requires individuals to sue the state, or give notice of intention to do so, within six months of being harmed. Attorney General Bill Schuette’s office, representing the Unemployment Insurance Agency in the case, argues that clock began ticking when the state first accused claimants of fraud.

But attorneys for claimants, who contend their client's property was unconstitutionally seized without due process, argue the clock started ticking when the state actually intercepted tax refunds and garnished wages for repayment.

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.

Bernstein and fellow Justice Bridget McCormack, the lone Democratic Party nominees on the court, appeared sympathetic to the plaintiffs' position, which would allow the case to proceed. But Republican-nominated or appointed justices, a 5-2 majority on the court, will likely decide whether to revive the lawsuit.

The Unemployment Insurance Agency reversed more than 40,000 fraud determinations made by the automated computer system between October 2013 and August 2015. The state has acknowledged errors, publicly apologized, provided some refunds and changed policies as a result, but it is fighting what could be an expensive lawsuit.

Solicitor General Aaron Lindstrom, arguing for Schuette’s office, said the six-month window is clearly prescribed in state law and argued the initial letter of determination the state electronically mailed to claimants was the “event that gave rise to the claim.”

The law doesn’t require filing an actual lawsuit, it just requires filing a notice, Lindstrom reminded Bernstein.

“I think there is a good reason for this rule,” he continued. “It’s to give the state a chance to fix a problem. It’s kind of like the highway exception. We require people, if there’s a bad problem with the road, to provide notice about where the injury is so that we can do something about it.”

McCormack suggested the state’s position could be shortsighted and open it to lawsuits from any resident who receives a bill for something they don’t owe.

McCormack noted her identity was stolen several years ago by someone in China. While she is able to resolve the issue each time, she still occasionally gets government letters saying she owes money for something she did not do.

“Now I can file a lawsuit every time I get that letter?” McCormack said, noting she thought she could only do so if she was actually deprived of “liberty or property.”

“When I get the letter, I’m mad. It’s a big pain in my — it’s not fun,” she said. “I didn’t know I had the right to sue. I thought I had to go get some process.”

The U.S. Supreme Court has held that people can sue over mental injury or emotional stress even if there is no actual injury in the end, Lindstrom said. “It’s still the same event," he said.

Chief Justice Stephen Markman, originally appointed to the bench by Republican Gov. John Engler, asked Lindstrom why it would be wrong to assume claimants were only harmed at the point they were deprived of their property.

Lindstrom argued the event that gave rise to the lawsuit, in this case the notice of a fraud determination, is a distinct legal concept from any harm that accrued because of that event.

“Exposure to asbestos might mean your claim starts to arise, but it doesn’t actually accrue until you contract asbestosis,” he said.

While three plaintiffs are named in the suit, the case has major implication for tens of thousands of Michigan residents who were wrongly flagged for fraud during a nearly two-year span beginning in 2013.

Attorneys hope to make it a class-action case and seek actual and consequential damages for claimants who were hit with hefty fees and penalties that took a toll on their lives, damaging credit ratings and leading some to file for bankruptcy.  

“Anywhere between 20,000 and 40,000 people who were actually harmed” could become part of the case, attorney Jennifer Lord told reporters after the hearing.

More than a dozen residents who were falsely accused of fraud or had other issues with the unemployment insurance agency huddled with attorney Michael Pitt after the hearing.

He told them he was pleased by the tone of the justices during the hearing, but Lord told reporters it can be a mistake to make assumptions based on questions justices pose during oral arguments.

“They definitely were more active with respect to their questioning of the UIA, but I just can’t read anything into that,” she said.

The hearing on the case, which will be decided at a future date, comes less than four weeks out from the Nov. 6 general election and could have political implications.

While Schuette’s office is litigating the case, the Republican gubernatorial candidate this week attempted to distance himself from the false fraud scandal that unfolded under term-limited GOP Gov. Rick Snyder.

“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.

The automated computer system that wrongly accused people “failed Michigan and all of its citizens,” Schuette added.

But Democratic groups and Michigan AFL-CIO President Ron Bieber criticized Schuette’s role, suggesting “his action speak louder than his words.”

“In court, he is doing everything he can to have the case dismissed and deny those who were wrongfully accused from receiving the compensation they rightfully deserve,” Bieber said in a statement. “Schuette has shown his willingness to pick and choose which laws he defends and how vigorously he defends them.”