After paying disability (SSDI) benefits to the debtor, Damas, for several years the SSA determined that it had overpaid him by $13,478. It therefore began deducting $605 from his monthly benefit. When Damas filed for bankruptcy he sought to recover the amount the SSA had collected toward this debt during the ninety day period preceding the petition date. The court granted summary judgment in favor of the SSA. Damas v. U.S.A., No. 12-15313, A.P. 12-1331 (Bankr. D. Mass. Jan. 6, 2014).
The parties agreed and the court found that the debtor had standing to seek recovery of the funds under section 522(h) and that the proper vehicle to seek recovery of a setoff was section 553(b)(1). That section provides that setoffs may be recovered “to the extent that any insufficiency on the date of such setoff is less than the insufficiency . . . 90 days before the date of the filing of the petition.” Therefore, if the amount by which a creditor’s claim against the debtor exceeds the debt owed the creditor by the debtor, known as the “insufficiency,” decreases within ninety days of filing the petition, the creditor can only setoff an amount which will leave the “insufficiency” where it was ninety days before the petition was filed.
The difficulty in application of this “improvement in position” to the facts here is that the test is typically applied in the context of two discrete debts, while disability payments are an ongoing income stream. Damas argued that at the beginning of the ninety day period the SSA owed him nothing since the obligation to pay was contingent upon his living to the end of each month. On the other hand, Damas had a specific debt to the SSA. Therefore, the insufficiency ninety days prior to the petition was the entire amount of the debt ($13,478). On the date of the petition, the SSA still owed nothing, but the because of setoff during the ninety day period prior to bankruptcy, Damas’s debt to the SSA has been reduced to $11,463. Therefore, the SSA has improved its position by the amount of the setoff.
The third circuit case of Lee v. Schweiker (In re Lee), 739 F.2d 870 (3d Cir. 1984) analyzed this conundrum and applied a solution that the court in Damas followed. In Lee the facts were essentially the same as those here. The circuit court there noted the difference between setoff by a bank where the bank is in a unique position to manipulate the insufficiency to the detriment of other creditors. The SSA, on the other hand, can do nothing to alter the benefits it will be obligated to pay the debtor. For that reason, the court in Lee calculated the insufficiency at the beginning of the ninety day period by balancing the debt owed to the SSA against what the SSA will owe during the ninety day period. In Lee, the amount the SSA was obligated to pay over the ninety days prior to bankruptcy exceeded the amount of the overpayment. Therefore, ninety days prior to the bankruptcy filing, there was no insufficiency.
In Damas, the court applied the reasoning in Lee to find that at the beginning of the ninety day period the SSA owed Damas $5,370 (representing three months of benefits) and Damas owed the SSA $13,278, for an insufficiency of $7908. At the end of the three month period, Damas had made three payments of $605 by virtue of the setoff, and the SSA had completely discharged its “debt” to Damas. Therefore, the insufficiency increased to $11,463 ($13, 278 – ($605 x 3) – $0) and Damas was not entitled to return of the setoff amounts. See also Cresta v. United States, 58 B.R. 588 (E.D. Pa., 1986).
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