BRUCE A. HARWOOD, Chief Bankruptcy Judge.
The matter before the Court is the Complaint filed by the plaintiff State of New Hampshire Department of Employment Security (the "Department") against the defendant Cynthia J. Hudson (the "Debtor") seeking a determination that her debt for the overpayment of unemployment compensation benefits is excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A) in light of the Debtor's alleged fraud in seeking these payments.
This Court has authority to exercise jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 157(a), 1334, and U.S. District Court for the District of New Hampshire Local Rule 77.4(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
The present case concerns unemployment compensation benefits that the Debtor sought and received from the Department in 2004, and again in 2010. During these time periods, requests for financial assistance were made to the Department online using certified claim forms.
Under New Hampshire law, "[a]ny individual who willfully makes a false statement or representation or knowingly fails to disclose a material fact . . . to obtain or increase any benefit or other payment under this chapter . . . may, in the discretion of the commissioner or his or her authorized representative, be determined to be disqualified for benefits for each week directly affected by the false statement or representation or failure to disclose a material fact." N.H. R.S.A. § 282-A:164. Moreover, if an "individual left work voluntarily without good cause," the "individual shall be disqualified for benefits . . . [u]ntil [subsequent to certain dates] the individual has earned in each of 5 weeks wages in employment . . . of at least 20 percent more than such individual's weekly benefit amount." N.H. R.S.A. § 282-A:32(I);
From July 3, 2004, through July 24, 2004, the Debtor submitted four consecutive weekly claims to the Department. Each time, she certified that she did not work during the week or have gross earnings.
On September 23, 2004, the Department issued a decision finding that the Debtor knowingly failed to report her work and earnings in violation of N.H. RSA § 282-A:164, and as such, was disqualified from receiving benefits during the weeks claimed (the "2004 Decision").
Between January 30, 2010 and October 2, 2010, the Debtor submitted thirty-seven consecutive weekly claims to the Department. As previously mentioned, the claim form used in 2010 varies from the one in use in 2004, but calls for substantially similar information. The most notable difference is that many of the questions in the 2010 form are now followed by parenthetical comments that appear intended to provide clarification or instruction. The form that the Debtor repeatedly completed is as follows:
Each weekly claim form also contained the following certification (the "Certification") that the Debtor was required to check off prior to submitting the application:
Although the certification appears incomplete in the record, the Department states, and the Debtor does not contest, that the language cutoff from the printed document reads "I understand the law provides penalties for false statements."
As was the case in 2004, the Department subsequently discovered the Debtor's weekly claim certifications were inconsistent with the information supplied by her employers. As part of her fraud investigation, Sousa reviewed payment records from three companies: Innseason Management, Inc. ("Innseason"), Serif, Inc. ("Serif"), and VP Resales LLC ("VP Resales"). The documentation reflected that the Debtor was employed at various hourly rates with bonuses and commissions at both Innseason and Serif, and on a straight commission basis with VP Resales.
The following table is a condensed reproduction of the "Summary of Alleged Fraudulent Weeks"
As is apparent from the above table, the Debtor's actual wages are consistently inconsistent with her weekly claim certifications. The Court notes, however, that in each case the wages were paid after the weekly claim certification was submitted.
On October 6, 2010, Sousa conducted a telephonic interview of the Debtor, the substance of which was contemporaneously recorded in the narrative summary of her investigation.
For her part, the Debtor does not dispute that her weekly claim certifications are, at least in hindsight, inaccurate. Nevertheless, she disputes that she informed Sousa that her reported gross earnings came from Mystique, which she says never made any money, and maintains that she was properly reporting gross earnings from Innseason, Serif, and VP Resales. To the extent that she failed to appeal the 2010 Determinations that found otherwise, the Debtor testified that she never received these documents and was unaware of her right to appeal.
By way of explanation, the Debtor testified that the inconsistencies in question arose as a result of her attempts to estimate her wages, which were subject to bonuses and paid on a biweekly basis, on a weekly claim certification. The Debtor insisted that she was instructed by the Department to provide an estimate in response to question 5 due to her uncertainty, and to stay consistent each week. Notably, Sousa testified that a biweekly employee could either estimate their hours or leave the hour and gross earnings questions blank, but noted the Department would not pay a benefit until it received from the claimant the requisite information. The Debtor explained that each week she provided an estimate, which was sometimes more or less than her actual wages, with the expectation that everything would balance out. She further testified that, despite clicking on it repeatedly, she probably never read the Certification. Similarly, the Debtor testified that she never read question 6 before answering "no," indicating that she did not "[d]uring the week claimed . . . receive any monies not previously reported to this department, other than wages for hours actually worked."
At trial, the Debtor testified that she was unaware that there was a question in her weekly claim certifications asking whether she quit any employment. Nevertheless, she testified that she believed she informed the Department that she voluntarily left employment at Innseason, insisting that she spoke to someone at the Department on the phone almost every other week. Her testimony did not address quitting Serif or Innseason a second time.
The Debtor filed a voluntary chapter 7 case on July 5, 2016. The Department timely commenced the present adversary proceeding on September 30, 2016. The Court conducted a trial on the merits on May 9, 2017, at the conclusion of which, it took the matter under advisement. Given the complexity of the allegations, the Court ordered the parties to filed post-trial memoranda, which the Department and the Debtor did on May 30, 2017, and June 20, 2017, respectively. The matter is now ripe for determination.
The Department's position is straightforward. The Department asserts that the Debtor repeatedly and consistently reported less gross earnings on her weekly claim certifications than she actually earned, and failed to report voluntarily terminating her employment on three occasions. It contends that these misrepresentations were knowing, and made with the intent to induce the Department to pay her unemployment benefits to which she was not entitled. The Department's reliance on the Debtor's weekly claim certifications was justified because the system functions, at least initially, by honest and accurate self-reporting.
The Department denies that the Debtor was instructed to estimate her gross earnings, arguing that her testimony on this point is wholly incredible. The Department asserts that her contention relies on an unidentified Department representative providing instructions contrary to the claim certification form and in a manner that would never result in her earnings being reported accurately. Moreover, the Department further contends that had the Debtor been estimating her gross earnings, she would have been required to report the undisclosed amount from the prior week in response to question 6 the following week.
The Debtor argues that the Department has failed to prove: (1) that the Debtor made any false representations to the Department knowingly or in reckless disregard for the truth; and (2) that the Debtor intended to deceive the Department. With respect to the alleged 2004 overpayment, she contends that the only evidence of her failing to report wages was the 2004 Decision, which is conclusory and does not establish her intent. In fact, the Debtor maintains that she has no recollection of what she did or did not do to obtain unemployment benefits during this period.
With respect to the 2010 overpayment, the Debtor posits that the evidence shows nothing more than a careless or sloppy approach to completing her weekly claim certifications. She argues that it is obvious that her reported hours and earnings are estimates for her outside work and not self-employment. Indeed, the Debtor contends that question 5(b) creates an incentive to estimate because it states that the claim will not be paid until the information is reported. As such, she maintains that any errors in her weekly claim certifications are simply the result of uncertainty as to how to report her biweekly earnings and bonuses on a weekly form. To the extent that her estimates were not reconciled by her subsequent answers to question 6, the Debtor asserts that question 5 is confusing, and that the Department has not demonstrated that she knowingly answered it falsely. She further maintains that other misstatements on the weekly claim certifications, such as her failure to report quitting on three separate occasions, were simple mistakes arising from not having read the questions and were otherwise disclosed to the Department during regular telephone discussions.
Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge any debt "for money, property, services or an extension, renewal, or refinancing of credit, to the extent obtained by— false pretenses, a false representation, or actual fraud. . . ." 11 U.S.C. § 523(a)(2)(A). To establish that a debt is nondischargeable under this subsection, a creditor must show that:
"The first two elements of the test describe the conduct and scienter required to show fraudulent conduct, while the last four elements embody the requirement the creditor's claim must arise directly from the debtor's fraud."
Here, many of the elements of the Department's claim are not in dispute. The Debtor made representations to the Department in the form of her weekly claim certifications regarding the number of hours she worked, her gross earnings, and that she had not voluntarily terminated her employment. Without question, her clear intent in submitting these weekly claim certifications was to induce the Department to pay her an unemployment benefit. The Department, in turn, actually and justifiably relied on the Debtor's weekly claim certifications in determining and paying her unemployment benefits. Thus, the remaining questions are whether the Debtor's statements were knowingly false or at least in reckless disregard for the truth, made with the intent to deceive, and the degree to which the Department was injured.
There is no dispute that that many of the Debtor's representations were inaccurate. First, in each of her 2004 weekly claim certifications, the Debtor indicated that she had not worked for the week claimed even though she had worked twenty hours each week for Winco Identification. Similarly, in her weekly claim certification dated January 30, 2010, she answered "no" to question 5(a) which asked if she performed any services during the week when she had worked approximately twenty-three hours at Innseason that week. On her weekly claim certifications dated April 10, 2010, April 17, 2010, and May 22, 2010, the Debtor answered "no" in response to question 3(b), indicating that she had not quit employment during the week claimed, when she had in fact voluntarily left Innseason, Serif, and Innseason again in those weeks, respectively. Curiously, in her nine weekly claim certifications submitted between May 29, 2010, and July 24, 2010, the Debtor reported that she had worked between ten and sixteen hours each week, with gross earnings between $99.00 and $130.00 per week, when it appears she did not work at all. The Court finds that each and every one of these misrepresentations was knowingly false, or in reckless disregard for the truth, because the Debtor knew what actually occurred—whether she worked or quit—and either knew or should have known that the answer she supplied the Department in her weekly claim certification was incorrect.
It is also apparent that the hours worked and gross earnings reported in every weekly claim certification were inaccurate.
On its face, question 5(b) requires claimants to provide their weekly gross earnings, which is not information a biweekly employee, particularly one who may earn bonuses or commissions, is likely to be able to supply readily. Nevertheless, the form provides the answer—leave that question blank and report the gross earnings later. Admittedly, the claim will not be paid until the Department receives the omitted information, which is consistent with the fact that the Department relies on these answers when calculating the appropriate benefit.
The Court also finds that the Debtor's consistent misrepresentations regarding her gross earnings were made knowingly or with reckless indifference for the truth. From the outset, the fact that the Court has already concluded that she was untruthful about receiving such instructions from the Department substantially undermines her credibility with respect to her claim that she was estimating her gross earnings at all. Moreover, on its face, the Debtor's testimony is contradictory in light of her insistence that she was estimating "consistently," apparently meaning that she was mostly reporting gross earnings ranging between $130.00 to $150.00, with the expectation that it would "all balance out." Ultimately, the Debtor knew or should have known that, on an ongoing basis, her actual earnings were not the same as her reported gross earnings, and her testimony does not suggest any plan to reconcile the disparity.
The import of this problem is striking when the magnitude of the imbalance is considered at various points in time. Prior to the Debtor's undisclosed period of not working that began after her weekly claim certification dated May 22, 2010, she had already underreported her gross earnings by $1,254.17.
As previously stated, scienter can be established by showing that a debtor knows the facts are not as represented or otherwise knows that she lacks a factual basis for the representation.
In sum, the Court finds that the Debtor made a series of knowingly false statements on each of her weekly claim certifications that would have disqualified her from receiving any unemployment benefits.
For the reasons articulated above, the Court will enter judgment in favor of the Department with respect to Count I of the complaint. This opinion constitutes the Court's findings of fact and conclusions of law in accordance with Fed. R. Bankr. P. 7052. The Court will issue a separate judgment consistent with this opinion.
