by The Ninth Circuit has issued a significant ruling in In re Cooper, reversing the Bankruptcy Appellate Panel’s (BAP) decision that allowed the Social Security Administration (SSA) to recoup overpaid Social Security Disability Insurance (SSDI) benefits from a debtor who had received a bankruptcy discharge. The court’s decision strengthens the protections afforded to debtors under the Bankruptcy Code by ensuring that the SSA cannot automatically sidestep the discharge injunction through the doctrine of equitable recoupment.
Background
Darrin Lenald Cooper, an SSDI beneficiary, filed for Chapter 7 bankruptcy and received a discharge of his debts in 2020. Before his bankruptcy filing, SSA had mistakenly overpaid Cooper’s benefits due to an administrative error. However, neither Cooper nor SSA realized this mistake at the time of the bankruptcy proceedings. Two years after his discharge, SSA attempted to recover the overpayment by reducing Cooper’s monthly SSDI benefits.
Cooper moved to hold SSA in contempt for violating the discharge injunction, but the bankruptcy court ruled in favor of SSA, allowing the agency to recoup the overpayment. The BAP affirmed the bankruptcy court’s decision, reasoning that Cooper’s entitlement to SSDI benefits and the overpayment were logically related under the equitable recoupment doctrine. Cooper then appealed to the Ninth Circuit.
The Ninth Circuit’s Ruling
The Ninth Circuit reversed the BAP’s decision, rejecting SSA’s argument that it had an automatic right to recoupment. The court clarified that the logical relationship test, which determines whether obligations arise from the same transaction or occurrence, must include an equitable analysis in the bankruptcy context.
Key points from the ruling include:
- Recoupment is not automatic: The court emphasized that the doctrine of equitable recoupment does not grant creditors an unfettered right to recover discharged debts. Courts must consider the fundamental purpose of the Bankruptcy Code, which is to provide a fresh start for honest but unfortunate debtors.
- SSA’s own error: The overpayment resulted from SSA’s mistake, and Cooper had engaged in no malfeasance. The court held that allowing SSA to recoup under these circumstances would be inequitable and inconsistent with the protections of bankruptcy law.
- Protecting Social Security benefits: The ruling aligns with the purpose of both the Social Security Act and the Bankruptcy Code in shielding SSDI benefits from creditors post-bankruptcy. The court reinforced that SSA, like any other creditor, is subject to the discharge injunction.
Implications for Debtors and Consumer Bankruptcy Practitioners
This decision is a crucial victory for consumer bankruptcy debtors, ensuring that SSA cannot unilaterally decide to recoup pre-bankruptcy overpayments from post-bankruptcy benefits. The ruling will likely influence how SSA handles overpayment cases in bankruptcy and may lead to a reevaluation of its internal policies.
For bankruptcy practitioners, this case underscores the importance of challenging improper recoupment claims and advocating for debtors’ rights under the Bankruptcy Code. It also reinforces the need to scrutinize government agencies’ claims in bankruptcy proceedings to ensure they do not overreach.
NACBA and NCBRC’s Role
The National Association of Consumer Bankruptcy Attorneys (NACBA) and the National Consumer Bankruptcy Rights Center (NCBRC) played a vital role in this case. Both organizations submitted an amici brief, authored by NCBRC Board member Tom Mayer of Kramer Levin Naftalis & Frankel LLP, arguing against SSA’s overreach. Mayer also participated in oral argument before the Ninth Circuit, helping to secure this important win for consumer debtors.
This ruling sets an essential precedent for protecting the rights of bankruptcy debtors against improper government recoupment efforts and ensuring that the fresh start promised by the Bankruptcy Code remains intact.