Cooper v. Social Security AdministrationCooper v. Social Security Administration
Frederick Philip Corbit, Julia W. Brand, and Gary A. Spraker, Bankruptcy Judges, Presiding
Argued and Submitted February 11, 2025 Seattle, Washington
Filed March 20, 2025
Before: Ronald M. Gould and Jacqueline H. Nguyen, Circuit Judges, and Richard D. Bennett, Senior District Judge.*
Opinion by Judge Bennett
SUMMARY**
Bankruptcy
The panel (1) reversed the Bankruptcy Appellate Panel’s decision affirming the bankruptcy court’s order denying a debtor’s motion to hold the Social Security Administration in contempt for violating the bankruptcy discharge injunction by adjusting the debtor’s monthly benefits to recoup an overpayment of Social Security Disability Insurance benefits; and (2) remanded to the Bankruptcy Appellate Panel with instructions to remand to the bankruptcy court for further proceedings.
Through its own error, the Social Security Administration overpaid the debtor before his Chapter 7 no-asset discharge in bankruptcy. Two years after his discharge, it recouped the overpayment debt by reducing his monthly benefits.
The panel held that the equitable recoupment doctrine allows recovery of a discharged debt where the creditor and debtor share countervailing obligations that meet the logical relationship test. Under that test, obligations are logically related when they arise from the same transaction or occurrence such that recoupment is equitable. The panel clarified that the logical relationship test demands
consideration of the equities, including the purpose of the Bankruptcy Code, in each individual case. Agreeing with other circuits, the panel held that recoupment is impermissible where, as here, the Social Security Administration seeks to recoup overpayments from a bankrupt beneficiary who engaged in no malfeasance.
COUNSEL
Marc S. Stern (argued), Seattle, Washington, for Appellant.
Kyle A. Forsyth (argued), Assistant United States Attorney; Tessa M. Gorman, United States Attorney; United States Department of Justice, Office of the United States Attorney, Seattle, Washington; for Appellee.
Thomas M. Mayer (argued) and Nancy Bello, Kramer Levin Naftalis & Frankel LLP, New York, New York, for Amici Curiae National Consumer Bankruptcy Rights Center and National Association for Consumer
OPINION
BENNETT, Senior District Judge:
This appeal arises at the intersection of the Bankruptcy Code,
As an SSDI beneficiary who received a no-asset discharge in bankruptcy in 2020, Appellant Darrin Lenald Cooper (“Cooper”), received protections under both the Social Security Act and the Bankruptcy Code. Through its own error, the Social Security Administration overpaid Cooper before his discharge in bankruptcy. It then recouped the overpayment debt by reducing his monthly SSDI benefits two years after his discharge.
An issue of first impression in our Circuit, we consider whether the Social Security Administration (“SSA”) may
recoup SSDI benefits it overpaid, through its own error, from a beneficiary who has already received a no-asset discharge in bankruptcy. Recoupment is an equitable doctrine that predates the Bankruptcy Code and allows recovery of a discharged debt where the creditor and debtor share countervailing obligations that meet our logical relationship test. See, e.g., Sims v. United States Dep‘t of Health & Human Servs. (In re TLC Hosps., Inc.), 224 F.3d 1008, 1011 (9th Cir. 2000). Under that test, obligations are logically related when they arise from the same transaction or occurrence such that recoupment is equitable. Id. at 1011, 1014.
In this case, the bankruptcy court and Bankruptcy Appellate Panel (“BAP”) determined that recoupment was permissible because the overpayment and ongoing entitlement
We clarify that the logical relationship test has never precluded consideration of the equities. Indeed, the logical relationship test requires courts to evaluate such considerations to ensure that recoupment is equitable in each case. Aligning with our sister courts that have considered similar issues, we hold that recoupment is impermissible where, as here, SSA seeks to recoup overpayments from a bankrupt beneficiary who engaged in no malfeasance. Accordingly, we REVERSE and REMAND for further proceedings.
BACKGROUND
An understanding of this appeal requires an explanation of the Bankruptcy Code, the Social Security Act, and the facts underlying Cooper’s case.
I. Bankruptcy Code
“The principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’” Marrama, 549 U.S. at 367 (quoting Grogan, 498 U.S. at 286–87). Bankruptcy offers multiple paths by which individuals may seek to overcome debt. “[C]hapter 7 of the Bankruptcy Code, which governs liquidations, embodies two ideals: (1) giving the individual debtor a fresh start, by giving him a discharge of most of his debts; and (2) equitably distributing a debtor’s assets among competing creditors.” Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1203 (9th Cir. 2005). Accordingly, Chapter 7 allows a debtor to “discharge . . . prepetition debts following the liquidation of the debtor’s assets by a bankruptcy trustee, who then distributes the proceeds to creditors.” Marrama, 549 U.S. at 367; see also
Discharge under
II. Social Security Act
Under the Social Security Act,
draws from the Trust Fund to distribute monthly SSDI benefits. BARRY F. HUSTON, CONG. RSCH. SERV., supra, at 3;
SSA determines an SSDI applicant’s entitlement to payment in three stages: (1) SSA determines the individual’s eligibility for SSDI benefits; (2) SSA determines the individual’s primary insurance amount; and (3) SSA determines the individual’s correct monthly payment. In the first stage, applicants generally qualify for SSDI benefits if they meet the legal definition of “disabled,” are “fully insured,” and have earned sufficient credits based on covered earnings in the years preceding their application. See
continuous period of not less than 12 months[.]”3
After an individual has established eligibility for SSDI benefits, SSA determines his “primary insurance amount,” which is his monthly benefits amount without adjustments. See
Finally, in the last stage of the entitlement process, SSA determines the beneficiary’s correct monthly payment. This stage requires SSA to consider other benefits—including workers’ compensation or other forms of Social Security payments—that the beneficiary has received.
that the total benefits amount falls below the eighty-percent threshold.
Once SSA has completed every stage of the entitlement process, an SSDI beneficiary is entitled to receive monthly benefits payments in the correct monthly payment amount.4 Such entitlements are subject to periodic review, and SSA “must evaluate [the beneficiary’s] impairment(s) from time to time to determine if [he is] still eligible for payments based on disability.”
Beneficiaries who have filed for bankruptcy receive protections under both the Social Security Act and the Bankruptcy Code. Specifically,
III. Cooper’s Case
On March 26, 2007, Cooper suffered a disabling injury while working for Boeing Company in Washington. Due to his resulting disability, Cooper began receiving gross monthly workers’ compensation payments of at least $4,862.25 in March 2015. In May 2017, without the assistance of counsel, Cooper applied for SSDI benefits based on his disability. In his application, Cooper
mistakenly reported that he had applied for but had not yet received workers’ compensation benefits. SSA denied Cooper’s application, and he hired counsel to appeal the denial.
On April 30, 2019, an administrative law judge found Cooper eligible for SSDI benefits, subject to possible workers’ compensation offset provisions, because he was fully disabled within the definition of
Relying in part on the improperly processed Questionnaire, SSA then determined Cooper’s monthly payment, including any retroactive benefits owed. On May 10, 2019, SSA mailed Cooper a Notice of Award (“Notice”) informing him that he was entitled to SSDI benefits of approximately $2,000 per month beginning in May 2019.5 The Notice disclosed that Cooper was also entitled to retroactive SSDI benefits dating back to May 2016 and detailed the process by which SSA would calculate the retroactive benefits owed. The Notice then explained that
SSA would hold the SSDI benefits accrued between May 2016 and April 2019 pending its determination of whether Cooper had received Supplemental Security Income benefits during that period such that his SSDI benefits should be reduced.
The Notice also stated that Cooper’s SSDI award may be reduced if he had received workers’ compensation benefits. The Notice advised: “At that time, you may have to pay back any Social Security benefits that you were not due. Please let us know the decision on the [workers’ compensation] claim right away.” In August 2019, SSA disbursed $67,335.50 to Cooper, representing $73,355.50 in retroactive SSDI benefits less $6,000 withheld and paid directly to Cooper’s counsel during his appeal. Because SSA previously failed to correctly record Cooper’s workers’ compensation benefits in its system, SSA did not account for Cooper’s workers’ compensation benefits when calculating the retroactive SSDI benefits. As a result, this retroactive benefits payment contained $73,112.90 in overpaid SSDI benefits.
In July 2020, Cooper filed for a no-asset Chapter 7 bankruptcy. At that time, neither Cooper nor SSA was aware that he had received more than $73,000 in overpaid benefits in August 2019. Because Cooper was unaware of the overpayment, he
In November 2020, approximately two weeks after Cooper’s bankruptcy case was discharged, SSA sent Cooper a letter requesting information about his workers’ compensation benefits. In response, and consistent with the Questionnaire he filed with the Everett Field Office on May 1, 2019, Cooper disclosed, once again, that he was receiving workers’ compensation benefits. Cooper also provided notice of his bankruptcy and explained that any debts he might owe SSA were discharged. For the next two years, Cooper continued to receive his SSDI benefits each month, subject to cost of living adjustments.
On October 30, 2022, SSA sent Cooper a letter informing him for the first time that the retroactive benefits paid to him in August 2019 had included $73,112.90 in overpaid funds. SSA stated that Cooper had not timely informed SSA of his workers’ compensation benefits, which caused SSA to calculate his benefits without accounting for his workers’ compensation payments. Accordingly, SSA explained that beginning in January 2023, it would hold back Cooper’s monthly benefits payments until it had recovered the overpayment.6 In the letter, SSA advised Cooper that he could (1) ask SSA to hold back less than his full monthly benefit; (2) appeal SSA’s decision regarding the overpayment; or (3) request a waiver of recovery. Cooper did not request any form of relief from SSA.7
In December 2022, SSA adjusted Cooper’s monthly payment by $2,498.90, which reduced his overpayment balance to $70,641.00. In January 2023, SSA began to hold back Cooper’s monthly payments, and Cooper did not receive SSDI benefits that month. In response, on January 25, 2023, Cooper’s bankruptcy attorney faxed and mailed to SSA a copy of Cooper’s discharge order and a letter explaining that his debt to SSA had been discharged. On January 31, 2023, SSA informed Cooper’s bankruptcy attorney that it would not honor the discharge because it had not received timely notice of the bankruptcy and the overpayment was not listed in the bankruptcy filing. On February 14, 2023, SSA notified Cooper that it would withhold $1,893.00 from his monthly benefits going forward.
In February 2023, Cooper reopened his bankruptcy and moved for the bankruptcy court to hold SSA in contempt for adjusting his monthly benefits in violation of the discharge injunction.8 SSA suspended further adjustment of Cooper’s monthly benefits pending resolution of litigation, and the bankruptcy court received briefing and heard oral argument on Cooper’s motion. Cooper contended that any debt to SSA was discharged regardless of SSA’s notice because debts owed to creditors in a no-asset bankruptcy are discharged even
On May 10, 2023, after an initial hearing and supplemental briefing, the bankruptcy court issued an oral decision in favor of SSA. The bankruptcy court determined that equitable recoupment allowed SSA to recover the discharged SSDI overpayment without violating the discharge injunction in Cooper’s case. The bankruptcy court explained that, in the Ninth Circuit, recoupment may apply to non-contractual entitlements subject to the logical relationship test. Applying that test, the bankruptcy court concluded that the statutory scheme supporting Social Security benefits envisions pre-petition overpayments logically linked to post-petition entitlements because it requires SSA to consider an individual’s entire work history, including pre-petition benefits payments, when determining SSDI entitlements. The bankruptcy court reasoned that a “very strong logical relationship” existed because the countervailing obligations arose from the same entitlement program and basis for entitlement. The bankruptcy court suggested, however, that it would be “fair” for the Government to consider Cooper’s position when addressing the timing and amount of recoupment.
Cooper timely appealed to the BAP, which affirmed the bankruptcy court. The BAP explained that the bankruptcy court had not abused its discretion because the overpayment and adjustment satisfied the logical relationship test. Specifically, the BAP determined that the pre-filing overpayment and post-filing adjustment arose from the same disability, disability period, statutory scheme, and common fund. Although the BAP acknowledged Cooper’s argument that his retention of the overpayment would not offend equity, it determined that contrary Ninth Circuit law and Cooper’s failure to utilize remedies within the Social Security Act precluded ruling in his favor. Finally, the BAP
concluded that the bankruptcy court had properly considered the equities because it held an evidentiary hearing and allowed supplemental briefing.
This appeal followed.9
STANDARD OF REVIEW
We review the BAP’s decision de novo, applying “the same standard of review that the BAP applied to the bankruptcy court’s ruling.” Boyajian v. New Falls Corp. (In re Boyajian), 564 F.3d 1088, 1090 (9th Cir. 2009). The BAP in this case reviewed the bankruptcy court’s decision for abuse of discretion. A bankruptcy court abuses its discretion when it applies the incorrect legal rule or when “its application of the correct legal standard to the facts was illogical, implausible, or without support in inferences that may be drawn from the facts in the record.” USAA Fed. Sav. Bank v. Thacker (In re Taylor), 599 F.3d 880, 888 (9th Cir. 2010). The scope of the bankruptcy discharge injunction is a legal issue reviewed de novo. See Palmdale Hills Prop., LLC v. Lehman Com. Paper, Inc. (In re Palmdale Hills Prop.), 654 F.3d 868, 875 (9th Cir. 2011).
DISCUSSION
In this appeal, we consider whether SSA may recoup overpaid SSDI benefits from a beneficiary who has already
recoupment is equitable. See Gardens Reg’l Hosp. & Med. Ctr. Liquidating Tr. v. California (In re Gardens Reg’l Hosp. & Med. Ctr., Inc.), 975 F.3d 926, 934 (9th Cir. 2020). In the proceedings below, SSA argued that the logical relationship test permits consideration of only the factual and legal connections between the countervailing obligations. The bankruptcy court did not address other equities in its opinion, and the BAP determined that our precedent precluded consideration of equitability. On appeal, SSA also argues that the Social Security Act and Bankruptcy Code can be harmonized to permit recoupment of overpaid benefits in all cases. We clarify that the logical relationship test demands consideration of equitability, including the purpose of the Bankruptcy Code, in each individual case. We conclude that recoupment is not permissible where, as here, SSA seeks to recoup overpayments it made absent any fault by a no-asset bankrupt beneficiary.
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As “the ancestor of the compulsory counterclaim,” recoupment is an equitable doctrine preserved through judicial decisions. In re Gardens Reg’l Hosp. & Med. Ctr., Inc., 975 F.3d at 934 (quoting Coplay Cement Co. v. Willis & Paul Grp., 983 F.2d 1435, 1440 (7th Cir. 1993)). We have defined recoupment as “the setting up of a demand arising from the same transaction as the plaintiff’s claim or cause of action, strictly for the purpose of abatement or reduction of such claim.” Newbery Corp. v. Fireman’s Fund Ins. Co., 95 F.3d 1392, 1399 (9th Cir. 1996) (quoting 4 Collier on Bankruptcy ¶ 553.03, at 553–15 (15th ed. 1995) (emphasis in original)). Recoupment is distinct from setoff, which is preserved in the Bankruptcy Code and “allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding ‘the absurdity of making A pay
B when B owes A.’” Citizens Bank v. Strumpf, 516 U.S. 16, 18 (1995) (quoting Studley v. Boylston Nat’l Bank, 229 U.S. 523, 528 (1913)); see also
Although it is never referenced in the Bankruptcy Code, recoupment “exempts a debt from the automatic stay [or discharge] when the debt is inextricably tied up in the post-petition claim.” In re TLC Hosps., Inc., 224 F.3d at 1011 (quoting United States v. Consumer Health Servs. of Am., Inc., 108 F.3d 390, 395 (D.C. Cir. 1997)); see Aetna U.S. Healthcare, Inc. v. Madigan (In re Madigan), 270 B.R. 749, 754 (BAP 2001) (“Since recoupment is neither a claim nor a debt, it is unaffected by either the automatic stay or the debtor’s discharge.”). That is, by seeking only to “defin[e] the amount owed under a single claim” without raising an independent claim or debt against the debtor, recoupment enables a creditor to recover discharged debt that would otherwise be inaccessible. In re Gardens Reg’l Hosp. & Med. Ctr., Inc., 975 F.3d at 933 (citing Reiter v. Cooper, 507 U.S. 258, 265 n.2 (1993)); see also In re TLC Hosps., Inc., 224 F.3d at 1011 (citing 5 Collier on Bankruptcy ¶ 553.10, at 553–104 (15th ed. rev. 1996)). Recoupment thus carries extraordinary power to undermine the fundamental purpose
of the Bankruptcy Code by enabling creditors to evade the discharge injunction and collect discharged debts.
“The limitation of recoupment that balances this advantage is that the claims or rights giving rise to recoupment must arise from the same transaction or occurrence that gave rise to the liability sought to be enforced by the bankruptcy estate.” In re TLC Hosps., Inc., 224 F.3d at 1011 (emphasis in original). To determine whether claims arise from the same transaction or occurrence, we apply a logical relationship test derived from
We have applied this test by evaluating the “legal and factual connections between the two countervailing obligations.” In re Gardens Reg’l Hosp. & Med. Ctr., Inc., 975 F.3d at 936. We have recognized legal relationships where claims arose from a common statutory framework or common fund. See id. at 938 (determining countervailing obligations’ roots in common fund supported finding logical relationship); In re TLC Hosps., Inc., 224 F.3d at 1013 (determining countervailing obligations’ roots in statutory scheme supported finding logical relationship). We have similarly recognized factual relationships where claims
arose from a contract between the creditor and debtor. See Newbery, 95 F.3d at 1402–03.
“We have long held that ‘whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of’ the Bankruptcy Code.” Law v. Siegel, 571 U.S. 415, 421 (2014) (quoting Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988)). In recognition of recoupment‘s power to encroach on the fresh start policy underpinning the Bankruptcy Code, we have repeatedly cautioned that “courts should apply the recoupment doctrine in bankruptcy cases only when ‘it would . . . be inequitable for the debtor to enjoy the benefits of that transaction without meeting its obligations.‘” Newbery, 95 F.3d at 1403 (quoting Univ. Med. Ctr. v. Sullivan (In re Univ. Med. Ctr.), 973 F.2d 1065, 1081 (3d Cir. 1992)); In re Gardens Reg‘l Hosp. & Med. Ctr., Inc., 975 F.3d at 934 (quoting Newbery, 95 F.3d at 1403); In re TLC Hosps., Inc., 224 F.3d at 1013, 1014 (quoting Newbery, 95 F.3d at 1403; In re Univ. Med. Ctr., 973 F.2d at 1081). This appeal identifies a potential tension between the logical relationship test and our precedent that equitable recoupment should apply only where it prevents a debtor from inequitably benefitting from a transaction. Before reaching the facts of Cooper‘s case, therefore, we clarify that the logical relationship test demands consideration of
I. Logical Relationship Test
Our prior decisions make clear that our logical relationship test demands consideration of both equitability and the purpose of the Bankruptcy Code. In Newbery Corp. v. Fireman’s Fund Insurance Co., 95 F.3d 1392 (9th Cir. 1996), we applied equitable recoupment to a payment dispute between Chapter 11 debtor Newbery Corporation and creditor Fireman‘s Fund Insurance Company. Id. at 1400. We explicitly provided that “we agree with the Third Circuit‘s observation that courts should apply the recoupment doctrine in bankruptcy cases only when ‘it would . . . be inequitable for the debtor to enjoy the benefits of that transaction without meeting its obligations.‘” Id. at 1403 (quoting In re Univ. Med. Ctr., 973 F.2d at 1081). We then applied recoupment because the parties’ claims arose from the same contract such that the logical relationship test, including the equitability standard, was satisfied. Id. at 1402–03. In so holding, we made clear that the logical relationship test evaluates the legal and factual connections between the obligations at issue to determine if those connections are sufficient to make recoupment equitable. That is, the factual and legal relationships between countervailing obligations alone cannot justify recoupment unless they establish that recoupment is equitable on the facts of the case.
In In re TLC Hospitals, Inc., 224 F.3d 1008 (9th Cir. 2000), we applied the logical relationship test before separately evaluating the equitable considerations that supported recoupment. Chapter 7 debtor TLC Hospitals (“TLC“), which operated hospitals that received Medicare funding from the United States Department of Health and Human Services (“HHS“), received overpayments of $112,061 in HHS Medicare funding in 1993 but was underpaid by $68,871.71 for Medicare services in 1994. Id. at 1010. After TLC filed for bankruptcy, HHS sought to recoup its overpayment by deducting the 1993 overpayments from the amount it owed TLC for the 1994 underpayments. Id. According to the statutory scheme governing Medicare,
We explicitly acknowledged the role of the equities when we refused to apply equitable recoupment in a dispute between an individual creditor and a commercial debtor in Aalfs v. Wirum (In re Straightline Investments, Inc.), 525 F.3d 870 (9th Cir. 2008). In that case, we declined to reach the logical relationship test because we determined that the creditor had continued
Before reaching the recoupment issue, however, we cautioned that courts must scrutinize the effect of recoupment in each case because of its potential to “undermine the fundamental purpose of” the Bankruptcy Code. Id. at 934–35 (quoting 5 Collier on Bankruptcy, ¶ 553.10[3] (Richard Levin & Henry J. Sommer eds., 16th ed. 2019)). For this reason, we rejected California‘s assertion that there was a sweeping right to setoff in the statute and
We have never held that the logical relationship test precludes consideration of the equities. Our sister circuits have addressed the role of equity under the logical relationship test. The First and Eighth Circuits have concluded that a distinct balancing-of-the-equities test is inappropriate because “[t]he ‘same transaction’ analysis itself inherently embodies competing issues of equity, for the simple reason that ‘it would be inequitable for [a debtor] to enjoy the benefits of the same transaction without also meeting its obligations.‘” Terry v. Standard Ins. Co. (In re Terry), 687 F.3d 961, 964 (8th Cir. 2012) (quoting Slater Health Ctr., Inc. v. United States (In re Slater Health Ctr., Inc.), 398 F.3d 98, 104 (1st Cir. 2005)). The Third Circuit, however, has rejected a logical relationship test that collapses equitability into the logical relationship between the countervailing obligations, explaining “[f]or the purposes of recoupment, a mere logical relationship is not enough.” In re Univ. Med. Ctr., 973 F.2d at 1081. The Second Circuit has favorably cited the Third Circuit‘s holding. See Malinowski v. N.Y. State Dep‘t of Labor (In re Malinowski), 156 F.3d 131, 133 (2d Cir. 1998) (“The Third Circuit has held that ‘a mere logical relationship is not enough’ to warrant recoupment
Our logical relationship test demands consideration of the equities, including the fundamental purpose of the Bankruptcy Code. The factual and legal connections that undergird any logical relationship must be such that recoupment is equitable on the facts of the specific case and thus will not improperly encroach on the Bankruptcy Code‘s policy of limiting setoff. See, e.g., In re TLC Hosps., Inc., 224 F.3d at 1014 (“Sound equitable considerations support HHS‘s right to recoup . . . If a provider in bankruptcy does not wish to be subject to Medicare‘s system of adjustments, it can cease providing Medicare services.“); In re Gardens Reg‘l Hosp. & Med. Ctr., Inc., 975 F.3d at 938 (“And for the same reasons, allowing recoupment in the unique context presented here would not encroach upon, or undermine, the policy judgments reflected in the Bankruptcy Code‘s limitations on setoffs.“).
We have cautioned that an overly broad interpretation of the logical relationship test would frustrate the fundamental purpose of bankruptcy proceedings. In re Gardens Reg‘l Hosp. & Med. Ctr., 975 F.3d at 934–35; see also In re TLC Hosps., Inc., 224 F.3d at 1012 (The “‘logical relationship’ concept is not to be applied so loosely that multiple occurrences in any continuous commercial relationship would constitute one transaction.“). Accordingly, courts may only apply equitable recoupment where it is equitable and consistent with the Bankruptcy Code‘s “principal purpose . . . to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.‘” Marrama, 549 U.S. at 367 (quoting
II. Recoupment of Overpaid SSDI Benefits
In this case, SSA reduced Cooper‘s monthly SSDI benefits in 2023 to recoup an overpayment debt discharged in Cooper‘s bankruptcy two years prior. The bankruptcy court and the BAP concluded that this reduction constituted permissible recoupment based on legal connections where both claims arose from the same statutory scheme and trust fund and factual connections where both claims arose under the same disability and disability period. The parties do not dispute the underlying facts, and the applicability of equitable recoupment in this case depends on whether their countervailing claims “arise from the same transaction or occurrence that gave rise to” Cooper‘s ongoing benefits entitlement such that recoupment is equitable. See In re Gardens Reg‘l Hosp. & Med. Ctr., 975 F.3d at 934 (quoting In re TLC Hosps., Inc., 224 F.3d at 1011). We conclude that, despite some legal and factual connections between the overpayment and Cooper‘s SSDI entitlement, the application of recoupment to his case was inequitable
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As an initial matter, we address SSA‘s contention on appeal that this case requires no consideration of the logical
As our sister courts have held, the Social Security Act protects SSDI benefits from recovery in bankruptcy and contains no language that would exempt SSA from this limitation. See, e.g., Neavear v. Schweiker (Matter of Neavear), 674 F.2d 1201, 1205 (7th Cir. 1982); Rowan v. Morgan, 747 F.2d 1052, 1055 (6th Cir. 1984). The plain language of the Social Security Act curtails creditors’ ability to access a debtor‘s entitlement to ongoing benefits:
The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the
operation of any bankruptcy or insolvency law.
Moreover, the Social Security Act and its derivative regulations caution that SSA should not adjust benefits in a manner that defeats the purpose of Title II by “depriv[ing] a person of income required for ordinary and necessary living expenses.”
Finally, as an equitable doctrine not mentioned in the Bankruptcy Code, “recoupment is not subject to all of the same strictures in bankruptcy as setoff.” In re Gardens Reg‘l Hosp. & Med. Ctr., 975 F.3d at 933; see also Newbery, 95 F.3d at 1399 (“[T]he limits placed on setoff under section 553 generally do not apply to recoupment claims.“). Recoupment is exempt from the automatic stay and the strict mutuality and pre-filing requirements that govern obligations subject to setoff.10 In re Gardens Reg‘l Hosp. & Med. Ctr., 975 F.3d at 933 (citing Newbery, 95 F.3d at 1398–99); see also
We reject a sweeping right to recoupment of discharged Social Security overpayments as inconsistent with the Bankruptcy Code and the Social Security Act. Equitable recoupment only comports with the Bankruptcy Code if it is
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Appropriate consideration of the equities in Cooper‘s case reveals that recoupment was not permissible here. Although limited legal and factual relationships existed between the overpayment and Cooper‘s present benefits entitlement, recoupment undermined the fundamental purpose of the Bankruptcy Code and deprived an innocent beneficiary of his income in violation of the fundamental purpose of the Social Security Act. The logical relationship between the overpayment and subsequent adjustment was not sufficient to overcome these inequities.
A. Factual & Legal Relationships
As the BAP recognized, some factual relationship exists between Cooper‘s pre-petition overpayment and his post-petition entitlement because they arose from the same disabling condition during the same disability period. See In re Madigan, 270 B.R. at 760–61 (noting factual connection where countervailing obligations arose from the same disability claim separated by an intervening bankruptcy petition). Social Security regulations requiring beneficiaries to provide periodic updates as to their disabling condition may weaken the factual connection, see
Similarly, although the legal relationship between the pre-petition overpayment and the post-petition entitlement is somewhat tenuous, the overpayment and present entitlement arose from the same statutory scheme and the same Trust Fund. As discussed above, the statutory scheme governing SSDI benefits requires SSA to consider workers’ compensation payments and prior benefits overpayments to determine a beneficiary‘s correct monthly payment.
Unlike the Medicare statute at issue in In re TLC Hospitals, Inc., however, the statutory scheme governing Social Security benefits does not contemplate a continuous system of estimated payments and subsequent reimbursements. Compare
Where the Medicare statute contemplated intentional overpayments by authorizing advanced payments based on estimated costs that were then adjusted to account for any prior over- or underpayment,
Relatedly, a limited legal relationship exists between the pre-petition overpayment and the ongoing entitlement because they arose from the same Trust Fund. Mere genesis in a common fund cannot establish a logical relationship between countervailing claims. See id. at 938 (applying recoupment based on common fund and “distinctive” payment system of continuously hospital payments into segregated funds and payments to hospitals out of segregated funds). As we have noted, “the ‘logical relationship’ concept is not to be applied so loosely that multiple occurrences in any continuous commercial relationship would constitute one transaction.” In re TLC Hosps., Inc., 224 F.3d at 1012. Even so, some logical relationship results where the overpayment and present entitlement stem from the same Trust Fund. See In re Gardens Reg‘l Hosp. & Med. Ctr., 975 F.3d at 937–38 (recognizing legal relationship between countervailing obligations where both obligations arose from the same Medi-Cal fund).
In the context of SSDI benefits, however, the common fund supports only a weak legal relationship because SSDI beneficiaries do not make ongoing payments into the Trust Fund from which SSA draws their benefits. First, beneficiaries necessarily receive benefits based on their prior accrual of credits because individuals can only earn credits by working. See
Second, distinct from the hospital and payment scheme at issue in In re Gardens Regional Hospital and Medical Center, Inc., workers who earn credits do not make designated payments into the Trust Fund. See U.S. SOC. SEC. ADMIN., PUBL‘N NO. 05-10072, supra at 1–3; BARRY F. HUSTON, CONG. RSCH. SERV., supra, at 1. Workers pay social security taxes, which are invested in United States government securities and deposited into the General Fund of the Treasury, making the original tax revenue “indistinguishable from revenues in the General Fund that come from other sources.” BARRY F. HUSTON, CONG. RSCH. SERV., supra, at 1. While Social Security income is accounted for in trusts divided according to SSDI benefits and retirement benefits, taxpayers do not allocate their payments specifically to one trust or another.
B. Consideration of the Equities
The factual and legal connections supporting the logical relationship between the overpayment and ongoing entitlement to SSDI benefits do not make recoupment equitable in this case. Cooper received a discharge of all his debts in bankruptcy in 2020, nearly two years before he and SSA learned of the overpayment.11 This discharge resulted in the closure of his bankruptcy case and included even the unlisted overpayment debt because unlisted debts are discharged in a no-asset Chapter 7 bankruptcy. See In re Nielsen, 383 F.3d at 926–27. In the context of a disabled debtor entitled to ongoing SSDI benefits, recoupment violates our repeated warning that “courts should apply the recoupment doctrine in bankruptcy cases only when ‘it would be inequitable for the debtor to enjoy the benefits of
Equitable recoupment in this case deprives Cooper not only of the fresh start intended by Chapter 7 bankruptcy, but also of necessary living expenses to which he is indisputably entitled in contravention of the express purpose of Title II Social Security benefits. See
The statutory schemes undergirding SSDI benefits and Chapter 7 bankruptcy share an intent to preserve vulnerable individuals’ income security.
Additional equitable considerations further disfavor recoupment. There is no evidence that Cooper engaged in conduct that would make it inequitable for him to retain the benefit of the overpayment. Both parties agree that the overpayment occurred at least in part due to SSA‘s own processing error. Cooper‘s attorney submitted his workers’ compensation information to SSA in 2019 during his appeal of SSA‘s denial of his 2017 application, and Cooper had no reason to believe SSA was unaware of his workers’ compensation benefits until he received the notice from it in 2022, after the debt had been discharged. Thus, Cooper did not deliberately mislead SSA regarding his workers’ compensation benefits, and SSA had the correct information at the time that it improperly calculated Cooper‘s retroactive benefits award. Cooper‘s failure to utilize the appeal remedies contained in the Social Security Act also does not constitute inequitable behavior. There is no requirement that a debtor utilize administrative remedies before reopening a bankruptcy proceeding based on a creditor‘s alleged violation of the discharge injunction. See
Recoupment was improper in this case because it was not “inequitable for the debtor to enjoy the benefits of that transaction without meeting [his] obligations.” See Newbery, 95 F.3d at 1403 (quoting In re Univ. Med. Ctr., 973 F.2d at 1081). Although taxpayers fund SSDI benefits such that any overpayment becomes a public burden, $73,112.90 is relatively insignificant to SSA given Cooper‘s individual circumstances. Unlike the commercial entities to which we have previously applied recoupment, Cooper did not earn the right to SSDI benefits by voluntarily entering a contract to assume mutual payment obligations or providing services as part of a business arrangement: he qualified and is entitled to government aid because he earned enough credits before suffering a disability that renders him unable to work. See In re Gardens Reg‘l Hosp. & Med. Ctr., 975 F.3d at 939; Newbery, 95 F.3d at 1402–03; see also Spraic v. U.S. R.R. Ret. Bd., 735 F.2d 1208, 1212 (9th Cir. 1984) (“[S]ocial security benefits ‘are not contractual . . . .‘” (quoting U.S. R.R. Ret. Bd. v. Fritz, 449 U.S. 166, 174 (1980))). In accordance with the statutory structure of SSDI benefits, Cooper accrued his entitlement to ongoing benefits before the events of this case transpired. Moreover, as SSA‘s own definition of disability acknowledges, Cooper cannot voluntarily cease his reliance on SSDI benefits. See In re TLC Hosps., Inc., 224 F.3d at 1014 (“It is fair for HHS to adjust for such overpayments . . . If a provider in bankruptcy does not wish to be subject to Medicare‘s system of adjustments, it can cease providing Medicare services.“);
CONCLUSION
For the foregoing reasons, we REVERSE the decision of the BAP and REMAND to the BAP with instructions to remand to the bankruptcy court for further proceedings consistent with this opinion.
REVERSED AND REMANDED.
Notes
“Congress intended by this language to adopt the broadest available definition of ‘claim.’” Johnson v. Home State Bank, 501 U.S. 78, 83 (1991).(A) 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; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.