In re Chen

227 B.R. 614 (1998)

In re Yeutseun CHEN, Debtor STATE OF NEW JERSEY, Plaintiff/Appellant, v. Yeutseun CHEN, Defendant/Appellee.

Civ.A. No. 98-1783(SMO), Bankruptcy No. 96-19633(JHW), Adversary No. 97-1049(JHW).

United States District Court, D. New Jersey.

December 18, 1998.

Peter Verniero, Attorney General of New Jersey, Marc Krefetz, Deputy Attorney General, Department of Law and Public Safety, Law Division, Trenton, NJ, for State of New Jersey.

Trinna L. Rodgers, Cape-Atlantic Legal Services, Atlantic City, NJ, for Yeutseun Chen.

OPINION

ORLOFSKY, District Judge.

Plaintiff/Appellant, the State of New Jersey ("New Jersey" or the "State"), has filed an appeal from the decision of United States Bankruptcy Court Judge, Judith H. Wizmur, denying the State's motion for reconsideration.¹ For the first time on appeal, New Jersey argues that its Eleventh Amendment sovereign immunity bars the United States Bankruptcy Court from exercising jurisdiction over the State to discharge the debt owed to it by the Debtor, Yeutseun Chen. This argument presents this Court with a novel and difficult issue for resolution, that is, does a state waive its Eleventh Amendment sovereign immunity by filing an adversary complaint in the Bankruptcy Court and then litigating the merits of its claim. For the reasons set forth below, I conclude that the State has waived its Eleventh Amendment immunity.

This Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a),² which confers appellate jurisdiction on District Courts to hear appeals from decisions of Bankruptcy Judges. This Court sits as an appellate Court, reviewing the determinations of the Bankruptcy Court de novo on issues of law, and for clear error as to its factual findings. See In re Trans World Airlines, Inc., 145 F.3d 124, 130 (3d Cir.1998) ("`In reviewing the bankruptcy court's determinations, we exercise the same standard of review as the district court,' Fellheimer, Eichen & Braverman, P.C. v. Charter Technologies, Inc., 57 F.3d 1215, 1223 (3d Cir.1995), that is, we review the bankruptcy court's legal determinations de novo, its factual findings for clear error and its exercise of discretion for abuse thereof."); Family Kingdom, Inc. v. EMIF New Jersey Ltd. Partnership (In re Family Kingdom, Inc.), 225 B.R. 65, 69 (D.N.J. 1998) (Orlofsky, J.). This case, however, involves only issues of law.

New Jersey filed its adversary complaint in the Bankruptcy Court on February 19, 1997, claiming that Debtor/Defendant/Appellee, Yeutseun Chen ("Chen"), owed New Jersey $4,537.50 for unemployment compensation that he fraudulently received while he was still employed. New Jersey had previously obtained a judgment in the state court, which found that Chen had "made a false statement or representation, knowing it to be false, or knowingly failed to disclose a material fact, to obtain" his unemployment insurance payments. See N.J. Stat. Ann. § 43:21-16. After New Jersey obtained a judgment in its favor from the New Jersey Superior Court in the amount of $4,537.50 for Chen's violation of N.J. Stat. Ann. § 43:21-16, Chen paid the State $919.00, and then declared bankruptcy on December 16, 1996. New Jersey filed an adversary complaint in the Bankruptcy Court to prevent the discharge of its judgment lien.

In the Bankruptcy Court, the State argued that, pursuant to 11 U.S.C. § 523(a)(2)(A),³ the debt was not dischargeable, because it resulted from the commission of fraudulent acts. The State further contended that since it had previously obtained a judgment in state court, which found that Chen had committed fraud, the Bankruptcy Court was precluded from finding otherwise. Therefore, according to the State, the Bankruptcy Court, as a matter of law, was required to apply collateral estoppel and find the debt nondischargeable, under § 523(a)(2)(A). Judge Wizmur, however, concluded that the state court judgment did not have preclusive effect on the issue of dischargeability, because N.J. Stat. Ann. § 43:21-16 did not require the court to find an intent to deceive, whereas § 523(a)(2)(A) of the Bankruptcy Code did impose such a requirement. As a result, Judge Wizmur conducted an evidentiary hearing and found that the State could not prove by a preponderance of the evidence that Chen had acted with the requisite intent to deceive when he obtained unemployment insurance while employed. Based on this finding, Judge Wizmur entered judgment in favor of Chen in the adversary proceeding discharging the debt Chen owed to the State.

New Jersey filed a motion for reconsideration, arguing that the Appellate Division's decision in Malady v. Board of Review, 166 N.J.Super. 523, 529, 400 A.2d 119 (N.J.Super.A.D.1979) held that § 43:21-16 requires proof of the same intent to deceive as is required by § 523(a)(2)(A).⁴ Judge Wizmur denied the motion on the ground that the one sentence in Malady about intent was mere dicta. See Transcript of Hearing Before Judge Wizmur, on Dec. 8, 1997, at 2.

New Jersey then appealed the denial of its motion for reconsideration, arguing, for the first time on appeal, that the Bankruptcy Court did not have jurisdiction to hear the adversary proceeding, because New Jersey had not waived its Eleventh Amendment sovereign immunity. In response, Chen argued that New Jersey had consented to suit by filing the adversary complaint in the Bankruptcy Court, and, thus, the Eleventh Amendment did not apply since New Jersey had initiated the proceedings.

For the reasons set forth below, I find that New Jersey voluntarily entered a general appearance in the United States Bankruptcy Court, and, therefore, has waived its sovereign immunity under the Eleventh Amendment. I also find that Judge Wizmur correctly determined that § 43:21-16 does not require proof of an intent to deceive and, therefore, the state proceedings cannot have preclusive effect in this case. Accordingly, I will affirm the decision of the Bankruptcy Court denying the State's motion for reconsideration.

I. FACTUAL AND PROCEDURAL BACKGROUND

In October, 1990, Chen lost his job at Bally's Park Place Hotel and Casino, in Atlantic City, New Jersey. See Transcript of Trial Before Judge Wizmur, on October 23, 1997 ("10/23/97 Tr."), at 31 (testimony of Chen). Shortly thereafter, Chen obtained a part-time job at Resorts International, another casino located in Atlantic City. See id.

In November of 1990, Chen applied for "part-time unemployment benefits," see id. at 31-32, since he had only part-time employment. Chen needed assistance in filling out the application for unemployment benefits, because the form was printed in English and Chen, who is Chinese and knows very little English, was unable to read it. See id. at 40. Chen received help from a friend with whom Chen had worked. See id. at 40-41. Even with this help, Chen failed to respond to one of the questions on the application, the one which asked if he was working part-time. See id. at 19. A claims agent also reviewed the form to ensure that "all information requested was provided," id. at 20 (testimony of John C. Galvin, a supervising investigator with the Bureau of Benefit Payment Control for the Department of Labor), but did not notice that this question remained unanswered. Chen claims that he did not provide an answer to this question, because "at the time he was applying for part-time benefits so he thought he didn't have to fill out that line, the questions." Id. at 33 (testimony of Chen). As a result, Chen received unemployment compensation, despite the fact that he had a part-time job.

In the summer of 1992, the New Jersey Department of Labor (the "Department") conducted its regular, "quarterly cross match that by computer . . . checks the wages reported by New Jersey employers and the benefits paid on unemployment insurance claims by social security number." Transcript of Trial Before Judge Wizmur, on Aug. 5, 1997 ("8/5/97 Tr."), at 7 (testimony of Priscilla Carrano, supervisor of investigations with the New Jersey Department of Labor, Unemployment Insurance Division). "This particular cross match . . . indicated that Mr. Chen was employed at Resorts International Hotel/Casino during the period when he was collecting full unemployment benefits." Id. A further investigation of "the payroll information from Resorts International . . . supported a finding that he was employed during the time he received benefits." Id. As a result, the Department "sent Mr. Chen a letter dated August 11th, 1992, advising him of the findings of the investigation and requesting that he report for a" hearing to determine "whether he had to pay back any benefits." Id. at 7-8. The letter informed Chen that this hearing was scheduled for August 18, 1992, only one week after the letter had been sent. See id. at 8.

Chen did not appear at the hearing on August 18, 1992. Id. Consequently, the Director of Unemployment Insurance, on behalf of the Department, "issued its determination and demand for the refund of the unemployment benefits." Id. The Department made this determination on March 16, 1993, without any additional investigation, and concluded that Chen "was not entitled to the benefits that had been paid for the weeks of December 22nd, 1990 through June 29th, 1991, and that he had been overpaid $3,630." Id. Further, the Department decided that Chen had committed "fraud and that he was being fined $907.50 and disqualified from unemployment benefits for one year." Id. The Department made its finding of fraud "based on the fact that no earnings were reported by Mr. Chen and every two weeks Mr. Chen had to file a mail certification for benefits," which asked if he had worked. Id. at 9.

Chen appealed this determination. See id. at 10-11. On April 16, 1993, Chen appeared before the Appeal Tribunal, specifically, Hearing Examiner, Michael Capaccio, who reviewed the decision of the Director of Unemployment Insurance and took testimony from Chen. See id. at 11. Chen was...