Berg v. Soc. SEC. Admin.Berg v. Soc. SEC. Admin.
I.
The facts are undisputed. Berg began receiving Social Security disability benefits in June 1994. In 2002, she returned to work. Although she notified the Agency that she was working again, SSA continued to pay her benefits until December 2003. The Agency subsequently determined that it overpaid Berg in the amount of $25,690. An administrative law judge determined that Berg was without fault in incurring this overpayment, but that SSA could nevertheless recover the overpayment under the terms of the Social Security Act. Based on Berg‘s income and ability to pay, the administrative law judge ordered her to repay $24,000 to the Agency at a rate of $300 per month. Berg did not appeal that decision and began making payments.
Berg stopped working again on November 17, 2012 but continued to make regular, smaller payments towards her SSA debt. In March 2014, Berg filed a new application for disability benefits. Because of Berg‘s age and condition, SSA gave priority consideration to her case and granted her application on July 15, 2014. The Agency determined that Berg met the
By July 2014, Berg had reduced the debt that she owed to the Agency to $19,400. In a Notice of Award letter (“Notice“) dated July 30, 2014, the SSA informed Berg that she was entitled to disability benefits beginning in May 2013, and that she would receive her first check in August 2014. According to the Notice, Berg had accrued benefits at a rate of $1,440 per month from May to November 2013, and at an increased rate of $1,461 from December 2013 through July 2014, due to a cost-of-living adjustment. Her accumulated benefits from May 2013 through July 2014 totaled $20,307. The Notice explained that the SSA would deduct from that total the $19,400 that Berg still owed from the Agency‘s earlier overpayment. In early August 2014, Berg received a check for $907. The SSA subsequently denied a request from Berg to reconsider the Agency‘s decision to recover its earlier overpayment from her back-award.
On August 7, 2014, Berg filed a petition for bankruptcy. She listed the $19,400 that the SSA recovered from her as a setoff in her Statement of Financial Affairs, and also included that same amount as a possible asset subject to recovery in her schedules.
The bankruptcy court noted that a trustee, or as was the case here, a debtor acting under
II.
Although Berg moved under
On appeal, Berg contends that there were no benefits from which the SSA could take an offset until the Agency issued the Notice of Award letter on July 30, 2014. According to Berg, before that Notice was issued, she had no right to a back-award and the benefits awarded therefore accrued on the day that the Notice was issued and the setoff was taken. The bankruptcy court erred, she contends, by treating the back-benefits as accruing over time, month by month, rather than as a lump sum on the date that the Agency made the award, July 30, 2014. Berg also argues that the case law supports her position, and that public policy also favors treating the date of the Notice as the date that her benefits accrued. If the benefits accrued on July 30, 2014, Berg maintains, then the Agency improved its position by the entire amount of the offset during the ninety-day preference period and she would be entitled to recoup $19,400. We conclude that Berg‘s interpretation of the law is incorrect.
The Social Security Act provides that a person who has worked long enough, has paid taxes into the system, and is “under a disability,” “shall be entitled to a disability insurance benefit (i) for each month beginning with the first month after his waiting period ... in which he becomes so entitled to such insurance benefits[.]”
The Social Security Act also provides that, when a benefits recipient has been overpaid, “recovery shall be made” by decreasing the benefit payments to which that person may be entitled.
The bankruptcy court correctly concluded that the transaction at issue here met the elements of a setoff under section 553 of the Bankruptcy Code. Under section 553(a), the overpayment to Berg meant that the Agency had a pre-petition claim against Berg; the SSA‘s award of back-benefits resulted in the Agency owing a pre-petition debt to Berg; the obligations were mutual; and both the claim and the debt were valid and enforceable.
Section 553(b) sets the limits for a creditor‘s right of setoff during the ninety-day period prior to the filing of a bankruptcy petition:
(1) Except with respect to a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, 561, 365(h), 546(h), or 365(i)(2) of this title, if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such creditor the amount so offset to the extent that any insufficiency on the date of such setoff is less than the insufficiency on the later of—
(A) 90 days before the date of the filing of the petition; and
(B) the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency.
(2) In this subsection, “insufficiency” means amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such claim.
The parties seem to agree in principle on the mathematical process that courts apply when calculating the insufficiency. See, e.g., Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030, 1040 (5th Cir. 1987). The dispute comes instead in determining when SSA began to owe benefits to Berg. Although Berg characterizes the issue as when the setoff occurred, the real question is when Berg‘s benefits began to accrue after she filed her second application for disability benefits. Berg asserts that she had no right to benefits at all until the Agency determined in July 2014 that she was entitled to benefits and was owed back-benefits. The back-benefits, Berg contends, accrued on July 30, 2014 when the SSA issued the Notice awarding the benefits. In her view, then, the SSA improved its position by the entire $19,400 that it took in setoff during the ninety-day preference period. The SSA, on the other hand, contends that, although it did not issue its Notice until July 2014, Berg was disabled as of May 2013 and thus began to accrue benefits on a monthly basis at that earlier date. Under that scenario, the SSA improved its position by only $2,015 during the preference period, and that is the amount that should be returned to Berg.3
In support of her argument that she had no benefits from which to take an offset until the date of the Notice awarding those benefits, Berg relies largely on an unpublished decision from a bankruptcy court in North Carolina. See In re Goodman, 2012 WL 529574 (Bankr. E.D.N.C. Feb. 17, 2012). That court assumed without analysis that the date of the award of back-benefits governed the calculation of the insufficiency, treating the date of the Agency‘s decision to award back-benefits as the date of accrual for the entire amount. The bankruptcy court here rejected that case in favor of the reasoning of the Third Circuit in Lee v. Schweiker, 739 F.2d 870 (3d Cir. 1984).
In Lee, the debtor was receiving monthly retirement benefits from the Agency. One year, she engaged in work that should have reduced her entitlement to benefits but the Agency was unaware that she had earned this income and continued to pay her retirement benefits at the higher rate, resulting in an overpayment of approximately $750. Lee reached an agreement with SSA to repay the overpayment by having the Agency reduce her monthly benefits by approximately $100 per month
The court first concluded that, once a bankruptcy petition is filed, “the income provided by Social Security benefits should be protected by the automatic stay,” and that the “right of SSA to recover pre-petition debts should be subject to the limitations on setoff.” 739 F.2d at 876. The court was then faced with calculating the insufficiency on the relevant dates, and that, in turn, depended on when SSA owed the debtor her benefits. The debtor asserted that, under the Social Security Act, a recipient does not become entitled to benefits for a particular month until she survives through the last day of that month, and so the Agency would owe her nothing on August 15 for the month of August.
In order to accrue benefits, all the beneficiary must do is survive; if the debtor survives, SSA must pay. Under these circumstances, we believe that all of the monthly benefits that came due before the filing of the petition should be considered obligations of SSA to the beneficiary ninety days before the petition is filed for the purposes of applying the “improvement in position” test, even though they are not yet payable.
Lee, 739 F.2d at 877. In other words, the court found that the “SSA would be obligated to Lee for three months benefits ... ninety days before the filing.” 739 F.2d at 877 n.13. Under the facts in Lee, that meant that there was no insufficiency ninety days before the filing but an “‘excess’ of debts to the debtor over claims against the debtor.” Id. Because there had not been an improvement in the SSA‘s position in the ninety days prior to the filing of the petition, the SSA was not required to return the amounts recouped before the petition was filed.
That understanding of Social Security benefits as accruing as soon as the recipient survives the month and is lawfully entitled to them is consistent with the Bankruptcy Code‘s concepts of “debt” and “claim” as they are used in section 553(b)(2). We have noted that, although the Bankruptcy Code does not specify when a debtor incurs a debt, the Code‘s definitions of “debt” and “claim” aid our understanding. In re Energy Co-op, Inc., 832 F.2d 997, 1001 (7th Cir. 1987). “The term ‘debt’ means liability on a claim.”
right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured[.]
When Berg filed an application for disability benefits in March 2014, she created an unliquidated, contingent claim against the SSA that related back to the (then undetermined) date that she became entitled to benefits. That date was later determined to be May 2013, and neither party disputes that the SSA accurately calculated the amount of the back-award (starting on that date) in its Notice. The bankruptcy court thus correctly calculated the accrual of Berg‘s benefits as occurring on the dates that she had a right to benefits, or the last day of each month that she was eligible for benefits and survived to the end of the month. On May 9, 2014, the date that was ninety days prior to the filing of the petition, that amount was $17,385. Because Berg then owed the Agency $19,400, the insufficiency on May 9, 2014 was $2,015. On July 30, 2014, the date the SSA took the setoff, Berg still owed the Agency $19,400, but the SSA owed her $20,307. That meant that there was no insufficiency on July 30, 2014, and the SSA had improved its position in the amount of $2,015 during the ninety-day preference period. That is the amount that Berg may now recover.
There is no basis in policy to conclude otherwise. First, section 553 does not bar setoffs entirely but simply prevents a creditor from improving its position during the ninety-day pre-petition period. This limit on setoffs was imposed in order to allow the trustee to recover setoffs that improved the position of one creditor at the expense of all the others during the ninety-day period prior to bankruptcy. Matter of Prescott, 805 F.2d 719, 730 (7th Cir. 1986). As the Third Circuit explained in Lee, Congress was concerned that creditors, primarily banks that had mutual accounts with debtors, would anticipate the filing of a bankruptcy petition and attempt to secure an advantage for themselves by decreasing an insufficiency to the detriment of other creditors. Lee, 739 F.3d at 877. That same concern does not apply to the Agency‘s recovery of overpayments because neither the debtor nor the SSA can do anything to increase the amount of benefits that will accrue during the ninety-day pre-petition period. Essentially, neither party can manipulate the process to the detriment of other creditors. Recognizing the creation of SSA‘s contingent debt to Berg on the date when Berg became entitled to disability benefits (and accruing it monthly thereafter) rather than using the arbitrary date that the Agency issued its administrative decision is consistent with both the Social Security Act and the Bankruptcy Code.
AFFIRMED.