In re Adamic

• Decision Date: 26 March 2003
• Docket Number: No. 99-25928 SBB.,99-25928 SBB.
• Parties: In re Bruce ADAMIC f/k/a Eagle Bear Holdings, LLC, Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

291 B.R. 175

In re Bruce ADAMIC f/k/a Eagle Bear Holdings, LLC, Debtor.

No. 99-25928 SBB.

United States Bankruptcy Court, D. Colorado.

March 26, 2003.

COPYRIGHT MATERIAL OMITTED

Deanna L. Westfall, Denver, CO, for Debtor.

Stephen G. Smith, Assistant Attorney General, State Services Section, Denver, CO, for Colorado Department of Labor.

MEMORANDUM OPINION AND ORDER REGARDING MOTION FOR ENTRY OF ORDER TO SHOW CAUSE WHY SANCTIONS SHOULD NOT ENTER

SIDNEY B. BROOKS, Chief Judge.

THIS MATTER is before the Court after a hearing on February 19, 2003, concerning the Debtor's Motion for Entry of Order to Show Cause Why Sanctions Should Not Enter Pursuant to 11 U.S.C. § 362(h).

The Debtor, Bruce Adamic, requests that the Court enter an order to show cause, directed to the Colorado Department of Labor and Employment, Division of Employment and Training ("Department"), requiring it to demonstrate why sanctions should not be imposed for its alleged violation of the automatic stay in collecting pre-petition unemployment compensation overpayments. The Department filed a written response to the Debtor's motion, but did not appear at the hearing.¹ The Court took the matter under advisement and the following constitutes the Court's findings of fact and conclusions of law. Fed. R. Bankr.P. 9014(c); Fed.R.Civ.P. 52(a).²

I. Background

For a period of weeks in the fall of 1993, the Debtor collected state unemployment benefits under the Colorado Employment Security Act. See Colo.Rev.Stat. §§ 8-70-101 to 8-82-105; 7 Colo.Code Regs. 1101-2. The following year, the Department audited the Debtor's claims and determined that he had worked at a company called Sygma Network in Westminster, Colorado while receiving unemployment compensation. The Debtor never disclosed to the Department that he had obtained another job while he was receiving payments for unemployment.

After its initial audit, the Department sent a letter to the Debtor requesting more information and the Debtor conceded in a written response that he had worked temporarily while receiving unemployment payments. (Department's Response Ex. A through C)

In November, 1994, the Department issued a formal "Determination of Overpayment of Benefits," in which it calculated that the Debtor had received $2,370.00 in overpayments. (Department's Response Ex. E) The Department concluded that the Debtor had received those payments "by reason of false representation or willful failure to disclose a material fact," and it assessed a fifty percent monetary penalty in the amount of $1,185.00 in accordance with Colo.Rev.Stat. § 8-81-101(4)(a)(II).³ The Department also imposed a non-monetary penalty of forty weeks under the statute.⁴ The penalties were effective under the Department's formal determination on November 14, 1994.

The Debtor did not appeal the Department's determination as to the amount of the overpayment or the penalties assessed. Colo.Rev.Stat. § 8-74-106 (governing time limits and procedures for appeal). The monetary obligation remained unsatisfied when the Debtor filed for Chapter 13 relief five years later.

The Debtor filed a voluntary Chapter 13 petition on December 27, 1999.⁵ In Schedule F, he listed the debt to the Department in the amount of $3,555.00 as an unsecured, non-priority claim. In Schedule I, the Debtor disclosed that was employed in Fort Collins, Colorado as a regional manager at "DalTile," with $4,900.00 of gross monthly income. See generally 11 U.S.C. §§ 101(30); 109(e).⁶

The Department filed a proof of claim on January 31, 2000, asserting a $3,094.32 unsecured claim for "overpayment of unemployment insurance benefits due to fraud/misrepresentation." The Debtor's Third Amended Chapter 13 Plan, which proposed no special treatment for the Department's general unsecured claim, was confirmed without objections on October 24, 2000, and it requires plan payments of $632.00 each month for a period of fifty-four months.⁷

The Debtor lost his job in August, 2002, and again applied to the Department for unemployment benefits. The Department issued a "Monetary Determination of Unemployment Insurance Benefits" on August 29, 2002, indicating that the Debtor was eligible to receive weekly unemployment benefits of $398.00 for twenty-six weeks (or total benefits of $10,348.00). (Debtor's Motion Ex. A) The Department also sent a form "Overpayment Reminder" indicating that the remaining balance of the 1993 overpayments owed by the Debtor was $2,972.50.⁸ (Docket Entry No. 92, filed Nov. 4, 2002, Ex. 1) The "reminder" also indicated that, although the debt for the overpayments was "pending bankruptcy," all of the Debtor's weekly unemployment benefits "will be used to pay off the [1993] overpayment" because he had "caused the overpayment by willfully giving false information or consciously holding back information." (Id.)

According to a handwritten notation on the "reminder," the forty-week penalty assessed under Colo.Rev.Stat. § 8-81-101(4)(a)(II) is "not dischargeable by [sic] bankruptcy." (Docket Entry No. 92, filed Nov. 4, 2002, Ex. 1) A subsequent letter from the Department to the Debtor in October, 2002, confirmed that, in its opinion, the Debtor is required to "serve" the penalty weeks. (Debtor's Motion Ex. B)

In November, 2002, the Debtor filed a pro se letter with the Court, complaining that the Department was "not following the rules," by penalizing him and withholding his current unemployment benefits to recover the 1993 overpayments. The Debtor retained counsel (after a letter from the Court's staff advised that it could not accept his ex parte communication), and on January 24, 2003, the Debtor filed the present Motion for Entry of Order to Show Cause Why Sanctions Should Not Enter Pursuant to 11 U.S.C. § 362(h).

In his motion, the Debtor claims that the Department is bound by the terms of the confirmed Chapter 13 plan, and that its efforts to collect the 1993 overpayments by withholding his current unemployment benefits and exacting the forty penalty weeks is a "clear violation" of the automatic stay. See 11 U.S.C. § 362(a)(6) (precluding "any act to collect, assess or recover a claim against the debtor that arose before the commencement of the case").

The Department filed a responsive pleading on January 24, 2003, arguing that the automatic stay does not preclude it from recouping the 1993 overpayments or from denying the Debtor's claim for current unemployment benefits. Following the hearing in this matter, the Debtor filed a reply brief, refuting the Department's arguments concerning recoupment and its denial of benefits and requesting an order: (1) requiring the Department to pay the Debtor all post-petition unemployment compensation due and owing from August, 2002 to the present; and (2) imposing sanctions on the Department for violating the automatic stay, including reasonable attorney fees.

As the parties recognize, courts addressing whether a governmental unit may satisfy a debtor's pre-petition obligation for receiving overpayments of unemployment benefits by offsetting or applying post-petition benefits to the outstanding debt have reached different conclusions. Compare In re Malinowski, 156 F.3d 131, 135 (2d Cir.1998) (concluding that New York state labor department could not recoup pre-petition overpayments from Chapter 13 debtor post-petition) with In re Ross, 104 B.R. 171, 174 (E.D.Mo.1989) (concluding that state of Missouri could recover overpayments from Chapter 13 debtor's post-petition claim for unemployment benefits without violating automatic stay); In re Gaither, 200 B.R. 847, 853 (Bankr.S.D.Ohio 1996) (same under Ohio law).

Insofar as this case arises "[u]nder the unique statutory scheme of the Colorado Employment Security Act"; Velo v. Employment Solutions Personnel, 988 P.2d 1139, 1141 (Colo.App.1998); opinions from other jurisdictions offer little substantive guidance. Although debts for overpayment of unemployment compensation benefits in Colorado may be excepted from a Chapter 7 discharge under 11 U.S.C. § 523(a)(2)(A), and monetary penalties may be excepted under 11 U.S.C. § 523(a)(7); see State ex rel. Central Collection Service v. O'Brien (In re O'Brien), 110 B.R. 27, 31 (Bankr.D.Colo.1990); this case presents an issue of first impression concerning whether the Department violated the automatic stay by: (1) applying the Debtor's post-petition weekly benefits to the outstanding debt due for the overpayments; and (2) enforcing a penalty for the Debtor's pre-petition receipt of unemployment benefit overpayments, precluding him from receiving post-petition unemployment compensation.

II. Discussion

Section 362(a) of the Bankruptcy Code provides that the filing of a bankruptcy petition operates as a stay, applicable to all entities, of acts "to collect, assess or recover a claim against the debtor that arose before the commencement of the case." 11 U.S.C. § 362(a)(6). The stay also precludes "the enforcement, against the debtor or against property of the estate, of a judgment obtained before commencement of the case." 11 U.S.C. § 362(a)(2). Actions taken in violation of the automatic stay are void and have no effect; Franklin Sav. Ass'n v. Office of Thrift Supervision, 31 F.3d 1020, 1022 (10th Cir.1994); and "an individual injured by any willful violation" of the automatic stay "shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages." 11 U.S.C. § 362(h).

A. Recoupment/Setoff

The Debtor argues that the Department may not recoup the 1993 overpayments from his current unemployment compensation benefits without violating the automatic stay, because it is attempting to collect on its pre-petition claim and/or enforce its own judgment as to the 1993 overpayments.

The Debtor relies on the general proposition that the Department is bound by the terms of his confirmed Chapter 13 plan as to the amount and character of its pre-petition claim for 1993 ov...