by Finding no logical relationship between the debtor’s obligation to repay pre-petition overpayments and her entitlement to future social security benefits, a bankruptcy court in the eastern district of California denied the Social Security Administration’s request for recoupment. United States v. Angwin, No. 15-11120, Adv. Proc. No. 15-1080 (Bankr. E.D. Cal. April 5, 2016).
As the adult child of a person receiving social security benefits, the debtor, Nancy V. Angwin, was entitled to disability insurance benefits under 42 U.S.C. § 402(d)(1). When she married, and thereby lost entitlement to the benefits, Ms. Angwin failed to inform the SSA. Upon discovery of her marriage, the SSA filed an adversary complaint in Ms. Angwin’s bankruptcy case seeking a declaration that it was entitled to recoupment of the overpayment of approximately $190,000.00 out of Ms. Angwin’s future social security benefits. (The SSA’s additional claim for fraud with respect to the overpayment was stayed pending resolution of the recoupment issue).
For purposes of this motion the court was obliged to determine whether the doctrine of recoupment applied to the overpayment and, if so, whether the overpayment was subject to chapter 7 discharge. The court noted that because of the substantial sum owed, if the SSA were permitted to recoup the overpayment from her future benefits, Ms. Angwin would likely receive little or no benefits for the remainder of her life.
Recoupment is defined in Black’s Law Dictionary as “[t]he withholding, for equitable reasons, of all or part of something that is due.” The court emphasized that recoupment may “arise only out of the same transaction or occurrence that gives rise to the liability sought to be reduced.” In the ninth circuit, determination of whether recoupment arises out of the same transaction is subject to a “logical relationship” test. Under this test, the court found that the SSA would have to demonstrate a logical connection between the overpayments and Ms. Angwin’s future social security benefits.
In its analysis, the court found the reasoning in Lee v. Schweiker (In re Lee), 23 739 F.2d 870 (3rd Cir. 1984), instructive. In that case, the third circuit found that the debtor’s post-petition social security benefits were not amenable to recoupment to recover pre-petition overpayments. The Lee court found that, while both the overpayment and the sought-for recoupment out of future benefits involved social security benefits, recoupment generally arises out of a contract between the parties. The court found that social security benefits are not in the nature of a contract but are a social-welfare construct entitling an individual to government-provided benefits. As such, an obligation to repay an overpayment “is a separate debt subject to the ordinary rules of bankruptcy.”
While the decision in Lee turned on whether the recoupment action arose out of a contractual obligation, the Ninth Circuit’s recoupment law considers the existence of a contract as only one factor in the determination of whether there is the requisite logical relationship between the funds sought to be recouped and the source from which recoupment would come. In this case, “the SSA would have to show that [Ms.]Angwin’s right to receive Post-Petition Benefits bears a substantial relationship to the transactions and events by which she received the Overpayment.” The court was not persuaded that the transactions leading to the overpayment were substantially related to Ms. Angwin’s post-petition benefits because her entitlement to future benefits was based on present disability rather than her condition in the past when she received the overpayment. “The mere fact that the Overpayment and the Post-Petition Benefits may both flow from the same body of law, does not make them ‘substantially related’ for purposes of recoupment.”
The court was unsympathetic to the SSA’s argument that it would be unjust to allow Ms. Angwin to continue to collect disability from the very institution she owes the overpayment to, stating: “It is difficult for this court to understand how the United States of America, with all of its resources, can be ‘unjustly’ treated by a single individual who is apparently unable to support herself.”
The court reminded the SSA that while its recoupment action failed, if Ms. Angwin is not an innocent debtor, but in fact, intentionally sought to obtain benefits to which she knew she was not entitled, the SSA may still pursue a finding that the debt is non-dischargeable under section 523(a).