2014 BNH 006 Note: This is an unreported opinion. Refer to LBR 1050-1 regarding

citation.

______________________________________________________________________________

UNITED STATES BANKRUPTCY COURT

DISTRICT OF NEW HAMPSHIRE

In re: Bk. No. 13-10366-JMD

Chapter 13

Kathleen Searle,

Debtor

State of New Hampshire,

Department of Employment Security,

Plaintiff

v. Adv. No. 13-01051-JMD

Kathleen Searle,

Defendant

Richard J. Lavers, Esq.

Concord, New Hampshire

Attorney for the Plaintiff

Mary F. Stewart, Esq.

Mary Stewart Law, PLLC 

Concord, New Hampshire

Attorney for Debtor

MEMORANDUM OPINION

I. INTRODUCTION

In this adversary proceeding, the plaintiff, the State of New Hampshire’s Department of

Employment Security (the “Department”) claims that the defendant, chapter 13 debtor Kathleen

Searle (the “Debtor”) was overpaid $14,666.71 of unemployment benefits in violation of New

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 Unless otherwise stated, all references to “§” or “section” refer to title 11 of the United States Code, 1

hereinafter the “Bankruptcy Code.”

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Hampshire RSA § 282-A:164 and that the Debtor’s conduct in receiving these overpayments

constitutes grounds for rendering that debt nondischargeable under 11 U.S.C. § 523(a)(2)(A). 1

The Debtor argues that the debt is dischargeable because she did not act with fraudulent intent

and because the Department did not justifiably rely on information that she provided during the

benefit application process. The Department and the Debtor presented evidence to support their

positions at trial. At the trial, the parties agreed that the only contested issues for the Court to

determine were whether (1) the Debtor acted with the requisite intent and (2) whether the

Department justifiably relied on the information provided by the Debtor. After consideration of

the evidence and the arguments of the parties, the Court finds in favor of the Department and

determines the debt to be nondischargeable under § 523(a)(2)(A).

The Court has jurisdiction over the subject matter and the parties pursuant to 28 U.S.C.

§§ 1334, 157(a), and U.S. District Court for the District of New Hampshire Local Rule 77.4(a).

This is a core proceeding in accordance with 28 U.S.C. § 157(b).

II. FACTS

The Court held a half-day bench trial on the Department’s complaint. Two witnesses

testified, the Debtor and Christina Cooper, an employee of the Department and a fraud

investigator who worked on the Debtor’s case. The following factual background comes from

the testimony of the witnesses and the documentary evidence admitted at trial. Where

appropriate, the Court takes judicial notice of the docket. During the period of time from

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October 2009 to October 2011, the Debtor received unemployment benefits from the

Department. The Debtor worked two part-time jobs during this period, one as a substitute

teacher at the Laconia School District and the other as a administrative assistant at the Laconia

Housing Authority. The Debtor also testified that she occasionally worked side jobs, such as

babysitting for friends. There is no evidence in the record to indicate how extensive these side

jobs were, or how much income the Debtor earned from them.

When the Debtor first applied to the Department for unemployment assistance, she

testified that she was asked a number of questions about how much she earned and the extent of

her employment. The Debtor testified that she truthfully conveyed the information about her

current jobs to the Department. An employee of the Department, whose name the Debtor did not

recall, explained the general process of applying for benefits to the Debtor. The Debtor learned

that she would need to apply for assistance on a weekly basis and that based on how much she

earned, the amount of benefits she received would go up or down, depending on her financial

need. The Debtor also testified that she did not receive a paper copy of the Department guide on

unemployment benefits that was supposed to be provided to each applicant.

The Debtor was required to fill out certifications (the “Certifications”) each week that she

wished to apply for financial assistance. These Certifications were completed online and asked a

number of questions of the Debtor, such as “During the week claimed, were you available for

work?” “Did you refuse work?” and “Did you work or perform any services, including selfemployment last week? Regardless of whether or not you have been paid for the work or

services.” Ex. 8. (Certifications filed by the Debtor for weeks ending October 13, 2009 through

May 21, 2011).

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If the Debtor indicated that she did perform work she was then asked to provide the

number of hours worked, the “gross earnings (before taxes and deductions) for the week

claimed” and whether the “earnings amount” provided included “the earnings from all employers

you worked for during the week claimed.” If the Debtor answered that she had not reported all

her earnings for the week claimed, the Certifications stated that the Department would not

provide benefits until the information was provided. Finally, the Certifications included a

follow-up question that enabled the debtor to report non-wage income: “During the week

claimed, did you receive any monies not previously reported to this department, other than wages

for hours actually worked?” Id. 

After all of the preceding questions had been answered the Debtor was required to certify

the accuracy of her answers by reading the following statement:

“CERTIFICATION: I understand the answers I give to the above questions may

affect my rights to benefit payments. I certify that these statements are true and

correct and I am not claiming any benefits from any other unemployment program

for the above week. I understand the law provides penalties for false statements.” 

Id.

After reading this statement the Debtor was required to click an “Agree” button to complete the

Certifications.

The parties do not dispute that the Debtor reported $2,473.65 in earnings—via the

Certifications—during the period in which she received unemployment benefits from the

Department. They also do not dispute that the Debtor’s gross earnings actually amounted to

$13,914.11 during this time. See Ex. 7 at 4. Throughout her testimony, the Debtor asserted that

at the time she was completing the Certifications, she thought she was filling them out correctly,

despite also knowing that she was not including all her earnings in the Certifications.

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The Debtor provided an explanation for this apparent inconsistency. She testified that

when she initially applied to the Department for aid she was told that she only needed to report

her gross earnings over $350 in the Certifications. The Debtor stated that during each week she

applied for benefits, she applied this $350 rule, rather than following the specific written

instructions in the Certifications. The Debtor admitted that after her initial meeting with the

Department where she learned about the $350 limit, she did not hear about it again. The Debtor

agreed that no such rule or limit appeared in the Certifications.

The Debtor did not consistently explain the $350 rule or limitation in her testimony. At

various times she referred to the process as “keeping the combined benefit and gross earnings

amount under $350,” reporting “gross earnings over $350,” reporting the “net over $350,” and

reporting enough income such that she received only what she “needed to live and still be within

the law.”

At trial, the Department presented a “Summary of Alleged Fraudulent Weeks” (Ex. 7)

(the “Summary”), listing for each week the amount of (1) earnings reported by the Debtor, (2)

payment received by the Debtor from the Department, (3) hours worked in a given week, and (4)

the actual amount of gross earnings received by the Debtor in a given week. The parties agreed

that the numbers in the Summary were an accurate representation of these amounts for each week

that the Debtor applied and received benefits from the Department. The Department was able to

obtain the Debtor’s actual earnings because it receives reports from employers in New

Hampshire containing this information, including the Debtor’s employers. 

The weeks contained in the Summary are not consecutive. The Debtor explained this by

stating that she did not apply for benefits every week, either because she was not working (the

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Debtor testified that she thought she had to work in a given week to receive benefits) or because

she earned enough not to have to apply for benefits. The Summary shows that for every week the

Debtor applied for benefits, she did not once report the actual amount of her gross earnings to the

Department. The Summary also does not reflect a consistent reporting methodology on the part

of the Debtor.

For example, in the week ending 10/10/2009 (the first week the Debtor received benefits),

the Debtor earned $65, reported no earnings, and received $231 in benefits. Whereas in the final

week she received benefits, the week ending 10/08/2011, the Debtor earned $259, reported $120

in earnings, and received $111 in benefits. Indeed, the inconsistency in reporting is even more

apparent in weeks where the Debtor earned the same amount, but reported different amounts to

the Department. For example, in the week ending 12/25/2010, the Debtor earned $195 and

reported no income, while in the week ending 01/08/2011 the Debtor earned the same amount

but reported $65 to the Department.

Some consistency is evident in the Debtor’s reporting methodology. For example, when

the Debtor earned $65 or less, she reported no income. See, e.g., Ex. 7, weeks ending

10/10/2009, 12/12/2009, 11/27/2010, and 01/15/2011.

However, there is more inconsistency than consistency in the way the debtor completed

the Certifications. In the weeks ending on 12/26/2009, 03/13/2010, and 06/05/2010 the Debtor

earned $130, but reported $120, $65, and nothing respectively. During her testimony the Debtor

was not able to explain these discrepancies and reiterated that she thought she was doing the right

thing at the time and only received enough in benefits so that she could get by.

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Similarly, the application of the Debtor’s $350 rule or limit is not apparent in looking at

the Summary. For example, in some weeks the Debtor earned more than $350 when the amount

of benefits received is added to the amount the Debtor actually earned. In the week ending

05/29/2010, the Debtor earned $260 and received $231 in benefits, which means at the end of the

day she took home $491 for that week, an amount greater than $350.

And, for some weeks, even if the reported earnings are subtracted from the sum of

benefits received and actual earnings, a number greater than $350 results. In the week ending

12/19/2009, the Debtor earned $325, received $228 in benefits, and reported $65 in

earnings—subtracting the amount reported from the sum of earnings and benefits, yields $488. 

The Debtor was not able to explain how the $350 rule applied when she filed these

Certifications.

The Debtor did present evidence showing that she was paid on a bi-weekly basis for her

job at the Laconia School District. The Debtor did not, however, present a coherent account of

how, if at all, this bi-weekly pay period affected the amounts reported in her certifications. 

During early Fall of 2010, the Debtor completed the process for obtaining extended

unemployment benefits. This process entailed the Debtor meeting with several employees of the

Department and answering a series of questions about her jobs and earnings. The Debtor

testified that the employees had “everything” in front of them at this meeting—no specific

evidence was presented as to what “everything” was—and none of these employees told the

Debtor that she was doing anything wrong in filing her Certifications. The Debtor claimed that

at this point the Department should have had sufficient information to be able to tell that she was

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under-reporting her earnings. Nevertheless, the Department did not discover the problem and

approved the Debtor for extended unemployment benefits.

Christina Cooper, the employee in charge of the Department’s fraud unit, testified about

the investigation that lead the Department to discover the Debtor’s false Certifications. Cooper

testified that the Department discovered discrepancies in the Debtor’s actual and reported

earnings in October of 2011 during an internal review—which means that an employee of the

department discovered the problem. 

Cooper also testified that there was no $350 limitation or rule (as the Debtor explained

that concept in her testimony) in the Department’s procedures or informational materials at any

time during which the Debtor was filing Certifications. To the contrary, each benefit check that

the Debtor received directed her to accurately report all of her income.

Once the investigation began, Cooper testified that she personally informed the Debtor

that she was being investigated for fraud relating to overpayment of unemployment benefits. 

Cooper described the Debtor’s reaction in detail, stating that she was very distraught, but was

still able to respond to Cooper’s inquires. Specifically, once Cooper asked the Debtor about the

discrepancies between actual earnings and earnings reported via the Certifications, the Debtor

responded by stating that she did not think she had to report “per diem” income, without

mentioning the $350 limitation. During her testimony, the Debtor did not recall saying anything

about per diem income to Cooper. Cooper also testified that the Debtor apologized for

incorrectly reporting her earnings and said that he had done “something stupid” and that she was

“barely able to support her family.”

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On October 18, 2011, the Department issued six determinations of fraudulent

unemployment compensation pursuant to New Hampshire RSA § 282-A:164. Exs. 1 - 6. These

determinations effectively required the Debtor to pay back all the benefits she had received, with

interest, in total an amount of $14,666.71.

At the conclusion of the trial, the Court directed the parties to submit post-trial briefs,

specifically on two issues: (1) how the Debtor’s $350 rule applied, including a specific

demonstration of the Debtor’s methodology and (2) whether the Department justifiably relied on

the Certifications, especially in light of the Debtor’s application for extended unemployment

benefits in early Fall of 2010. After the parties submitted their briefs, the Court took the matter

under advisement.

III. DISCUSSION

The issue before the Court is whether the $14,666.71 in overpaid unemployment

compensation is a nondischargeable debt within the meaning of § 523(a)(2)(A). This provision

provides:

 A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title

does not discharge an individual debtor from 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, other than a statement

respecting the debtor's or an insider's financial condition;

To establish that a debt is nondischargeable under § 523(a)(2)(A), a creditor must satisfy six

elements: the debtor (1) made a false representation, (2) with fraudulent intent or “scienter”, (3)

with the intent that the creditor rely on the misrepresentation, (4) actually inducing reliance, (5)

that such reliance was justifiable, (6) causing damages. Palmacci v. Umpierrez, 121 F.3d 781,

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786 (1st Cir. 1997). Here the parties only came to trial contesting elements (2) and (5), i.e., the

Debtor’s intent and the Department’s justifiable reliance. The Department bears the burden of

proof on these elements and must carry that burden by a preponderance of the evidence. Grogan

v. Garner, 498 U.S. 279, 286 (1991). The Court deems all other elements established per the

agreement of the parties.

In determining the issues here, the Court keeps in mind that the exception to the discharge

contained in § 523(a)(2)(A) must be narrowly construed, just as all other exceptions to the

discharge. In re Schifano, 378 F.3d 60, 66 (1st Cir. 2004) (citing Palmacci, 121 F.3d at 786).

A. Fraudulent Intent

In order to satisfy the element of fraudulent intent, the Department must show that the

Debtor actually intended to mislead it in filing the Certifications. “Fraudulent intent requires an

actual intent to mislead, which is more than mere negligence.” Palmacci, 121 F.3d at 788. “An

honest belief, however unreasonable, that the representation is true and that the speaker has

information to justify it is an insufficient basis for deceit . . . A dumb but honest defendant does

not satisfy the test of scienter.” Id. (citations omitted). The unreasonableness of a debtor’s stated

belief may, however, serve as evidence of fraudulent intent when supported by the totality of the

circumstances. Id. at 789. Here, the Court must determine whether the Debtor’s testimony that

she believed she was filling out the Certifications correctly was honest, or if that belief was so

reckless as to imply bad faith.

In her testimony, the Debtor relied entirely on the $350 rule to explain her belief that she

was filling out the Certifications correctly. Considering the totality of the circumstances, the

Court finds that explanation unreasonable and lacking credibility. The evidentiary record,

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primarily the Debtor’s own testimony, provides no credible explanation or consistent application

of the so-called $350 rule on which the Debtor claims she relied.

The Department has carried its burden to demonstrate that the Debtor acted with intent to

defraud. It presented evidence that the Debtor filled out 69 Certifications, each containing

several questions that directed the Debtor to include all of her actual earnings for the week in

question. There was no mention of $350 on any of these forms. The Department also presented

evidence that each benefit check the debtor received exhorted the Debtor to accurately report her

earnings. It is undisputed that the Debtor did not accurately report her earnings in any of the

Certifications and that the Debtor was aware the number she was reporting was not the entirety of

her earnings for any of the 69 weeks in question—it was necessary for the Debtor to make this

admission to advance her $350 theory.

Further, there are the Debtor’s inconsistent statements to the Department’s fraud

investigator. The Debtor told the investigator, when first confronted, that she thought she did not

have to report “per diem income”; there was no mention of the $350 limitation. It is reasonable

to believe that if the Debtor had actually been following such a rule for two years, it would be the

first explanation she provided to explain her conduct.

Finally, the Debtor was unable to demonstrate the alleged $350 rule or limitation in

practice, either in her testimony or in her post-trial brief. The Court was not able to discern any

pattern in the Debtor’s income-reporting strategy. Indeed, the Court cannot see how any

consistent explanation could be provided, given that the Debtor actually earned the same amount

for numerous weeks, but reported different amounts for many of those same periods. The Debtor

was unable to explain these specific discrepancies when confronted with them at trial. The

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necessary implication of the Debtor’s theory of the alleged $350 rule is that she alone determined

what earnings counted towards the rule, without disclosure to the Department. Nothing in the

evidentiary record beyond the Debtor’s allegations supports such a rule. 

Given the affirmative evidence presented by the Department, namely the Certifications

and the Debtor’s admission that she was aware of the difference between her actual and reported

income during the 69 weeks in question, and the lack of a plausible explanation to the contrary,

the Court finds the scienter requirement of § 523(a)(2)(A) satisfied by a preponderance of the

evidence.

B. Justifiable Reliance

In order to carry its burden, the Department must demonstrate that it justifiably relied on

the Certifications presented by the Debtor in providing her with unemployment benefits. In

proving justifiable reliance, a creditor must demonstrate that it did not rely on representations

which it knew to be false or which were obviously false at the time of the reliance. Sanford Inst.

for Sav. v. Gallo, 156 F.3d 71, 74-75 (1st Cir. 1998); In re Aoki, 323 B.R. 803, 815-16 (B.A.P.

1st Cir. 2005). This standard is best explained by stating what a creditor is not required to do. A

creditor is not required to carry out an investigation into whether the debtor’s representation is

true. “This rule applies whether the investigation would have been costly and required extensive

effort or could have been made without any considerable trouble or expense.” Sanford, 156 F.3d

at 75 (quotations omitted).

The Department has demonstrated that it justifiably relied on the representations of the

Debtor in the course of providing her with unemployment benefits. The Department presented

the Debtor’s Certifications for each of the weeks she received benefits. There is no evidence that

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the Department had any reason to disbelieve the information contained in the Certifications when

it received them. Cooper, the Department’s employee, testified that there was no system for

cross-checking the Certifications with the employer-reported, actual earnings until 2013. This

new system was established only with federal aid, and at considerable effort—and at any rate was

well outside the relevant time period. 

The Debtor has attempted to cast doubt on whether the Department justifiably relied on

the Certifications by testifying about an interview that occurred in the early Fall of 2010. This is

when the Debtor applied for an extension of unemployment benefits. The Debtor testified that

the Department employees with whom she interviewed “had everything in front of them” and in

her view should have been easily able to see that she was not correctly reporting her earnings. 

There is, however, no evidence of exactly what the Department employees had in front of them 

at this interview. The Court infers that the Debtor meant both the Certifications and employer

reports of actual income. Aside from the Debtor’s testimony, the Court knows nothing about the

information or the format it was presented in. If the Department employees did have

“everything” in front of them in Fall 2010, the Court finds that it would more likely than not have

required at least a “cursory investigation” to determine that the Debtor was not accurately

reporting her earnings, given the general nature of the documentary evidence filed in this case. 

The Court also relies on Cooper’s testimony that the Department did not conduct cross-checks of

Certifications and employer reports during 2010. The controlling case law in this Circuit does

not require the Department to have preformed even a cursory investigation when relying on the

Debtor’s statements. The Department was reasonable in its reliance on the Debtor’s periodic

certifications made substantially contemporaneously with its payment of benefits to the Debtor.

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IV. CONCLUSION

For the foregoing reasons the Court finds the $14,666.71 the Debtor owes to the

Department to be a nondischargeable debt within the meaning of 11 U.S.C. § 523(a)(2)(A). This

opinion constitutes the Court’s findings of fact and conclusions of law in accordance with

Federal Rule of Bankruptcy Procedure 7052. The Court will issue a separate judgment consistent

with this opinion.

ENTERED at Manchester, New Hampshire.

Date: April 10, 2014 /s/ J. Michael Deasy 

J. Michael Deasy

Bankruptcy Judge

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