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September 23, 1983

STEVEN J. LOSEY, Plaintiff,
LILLIAN ROBERTS, as Industrial Commissioner of the State of New York, Defendant.

The opinion of the court was delivered by: MCCURN



 Plaintiff Steven R. Losey brings this action pursuant to 28 U.S.C. §§ 1331 and 1343 basing his claims for relief on 28 U.S.C. §§ 2201, 2202 and 42 U.S.C. § 1983. He challenges the decision of defendant Industrial Commissioner of the State of New York to withhold current unemployment benefits as an offset to a prior debt claim. He seeks declaratory and injunctive relief and restitution of unemployment benefits.

 Plaintiff contends that the setoff practice as employed by the defendant (1) conflicts with the federal statutory requirement that each state, before it receives federal funds for its unemployment insurance program, demonstrate to the Secretary of Labor that its form of administration of the program is "reasonably calculated to insure full payment of unemployment compensation when due." 42 U.S.C. § 503(a)(1); (2) violates the prohibition on any encumbrance on unemployment insurance, pursuant to 26 U.S.C. § 3304(a)(4); (3) violates the New York Constitution, art. IV, § 8, *fn1" and the fourteenth amendment, due process clause of the federal constitution; and (4) contravenes the purpose of the statutory unemployment benefits scheme in that the setoff was applied without inquiry into the individual financial circumstances of the plaintiff.

 This matter is before the Court on defendant's motion to dismiss pursuant to Fed. R. Civ. P. 12 (b)(6). Defendant contends that the Commissioner's exercise of the common law right of setoff in this instance (1) does not constitute a violation of the state and federal constitutions; (2) comports with the statutory requirements of 42 U.S.C. § 503 and 26 U.S.C.§ 3304; and (3) is not inapposite to the prohibition of unemployment insurance encumbrances. For the reasons set forth below, the motion is denied.


 The factual allegations of the complaint are accepted as true, as required under a Rule 12(b)(6) motion. Jones-Bey v. Caso, 535 F.2d 1360 (2d Cir. 1976); Fine v. City of New York, 529 F.2d 70 (2d Cir. 1975). Plaintiff is an employee at Ithaca Gun Company, Ithaca, New York, and has experienced periodic lay-offs whenever company business has slowed. Plaintiff applied for and received unemployment benefits at varying tims between March, 1976 and May, 1979. The Commissioner, who administers the New York Unemployment Insurance Benefits Program, determined on January 28, 1980, that plaintiff had been overpaid $8,995.00, which he was obligated to repay to the State. The Commissioner further determined that 80 days of benefits were to be forfeited as penalty, pursuant to New York Labor Law § 594.

 Plaintiff had a hobby of repairing television sets. The Commissioner found that even though plaintiff did not receive income in connection with this hobby, the activity did have a money earning potential and that plaintiff was thus guilty of a wilful misrepresentation that he was unemployed. Hence, he was found to have received an overpayment.

 In December, 1981, Mr. Losey was again laid off and subsequently filed a new claim for unemployment benefits. Because of the prior overpayment, the Commissioner ruled that plaintiff, although otehrwise eligible, could not receive benefits until the same was repaid through the offset procedure. This decision was appealed to the administrative law judge, who on February 1, 1982, sustained the determination below. Thereafter, on April 15, 1982, the Unemployment Insurance Appeal Board adopted the administrative law judge's findings of fact and opinion as its own. Without unemployment benefits, plaintiff had no income on which to support his family, or with which to make car and mobile home payments.


 1. The "when due" mandate.

 Only states which comply with the federal statutory requirements qualify for federal funds in the administration of their benefit programs. 42 U.S.C. §§ 501-504. The Secretary of Labor may only cerity federal funds if the states' procedures comport with these requirements. 42 U.S.C. § 503(a) reads in pertinent part:

 The Board shall make no certification for payment to any State unless it finds that the law of such State, approved by the Board under the Federal Unemployment Tax Act, includes provision for --

 (1) Such methods of administration . . . as are found by the Board to be reasonably calculated to insure full payment of ...

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