It looks like this was an Eclipse or Google Eclipse plugin issue. In the Project > Properties the GAE setting was checked. I even checked and unchecked it to make sure it was turned on. And in fact run and debug modes would work perfectly but the JUnit tests would fail. I just attempted to fix the issue again and I noticed that both the GWT and GAE libraries were missing from the Java path despite the fact that the check boxes in the Google settings were checked. Very weird but now the Junit tests work.
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