In Re Beaumont, Case No. 05-72121 (Bankr.E.D.Okla. 8/7/2008), Case No. 05-72121.
| Decision Date | 07 August 2008 |
| Docket Number | Adv. No. 07-08023.,Case No. 05-72121. |
| Parties | In Re: Samuel Kennegth Beaumont, Sr., Chapter 7, Debtor. Samuel Kennegth Beaumont, Sr., Plaintiff, v. United States of America, ex rel., Department of Veterans Affairs, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Oklahoma |
This adversary proceeding came on for trial on April 18, 2008. Appearances were entered by Richard Walden, attorney for Plaintiff, and Cheryl Triplett, attorney for Defendant. The trial was continued to June 18, 2008, at which time the parties requested that this case be submitted to the Court based upon the pleadings, stipulations, and briefs previously submitted to the Court. The Court took this matter under advisement and now enters its findings and conclusions in conformity with Rule 7052, Fed. R. Bankr. P., in this core proceeding.
The parties have agreed that there are no material facts in dispute, and have provided the Court with a Statement of Stipulated Facts. The Court adopts these stipulated facts, and notes Defendant's statement that it has no personal knowledge of the facts listed below in paragraph numbers 3, 4, 5, and 6, but does not contest these statements for purposes of this trial. These stipulated facts are as follows:
A. Stipulated Facts
1. The Plaintiff is a disabled veteran who began receiving disability benefits from the Defendant in 1993.
2. The disability benefits were awarded to the Plaintiff pursuant to 38 U.S.C. § 1521.
3. In 2001, the Plaintiff received a probate distribution from Earl Meadows in the approximate amount, after applicable taxes, of $285,288.00.
4. Plaintiff used $215,000.00 of the above-described probate distribution to purchase a new residence, including funds necessary to vacate the Meadows' residence and render the new residence livable.
5. The remaining balance of the above described probate distribution (approximately $60,000) was paid to various attorneys in legal fees incurred by Plaintiff during the probate dispute with Mr. Meadows' heirs.
6. The probate dispute is ongoing.
7. Plaintiff reported his probate distribution on his 2001 income tax returns.
8. In approximately the Spring of 2005, the Defendant notified Plaintiff that as a result
of the probate distribution, Plaintiff owed Defendant $18,448.00 for the 2001 probate distribution and that Defendant intended to offset this indebtedness by reducing future disability payments owed to the Plaintiff.1
9. Plaintiff filed bankruptcy on May 18, 2005, and although not listed as a creditor, the Defendant received actual notice of the filing.
10. Plaintiff received his discharge on September 23, 2005.
11. The Defendant continued to offset the indebtedness allegedly owed by Plaintiff throughout the bankruptcy and continues to do so today.
12. Plaintiff appealed the Defendant's decision regarding the alleged indebtedness and said appeal is still pending.
13. Since the time of his bankruptcy filing, the Plaintiff has not received any of his disability benefits from the Defendant.
14. Most of the $18,488.00 allegedly owed by the Plaintiff has been offset by the Defendant.
B. Additional Findings of Fact
In addition to the stipulated facts, the Court finds these additional facts to be true, based upon the briefs and supporting documents provided by the parties, including correspondence between the Plaintiff and the Defendant. The Defendant advised Plaintiff of his initial award of non-service-connected pension in a letter dated August 30, 1993.2
That letter stated that Plaintiff's award was based upon the fact that he had "no countable income." He was also instructed to promptly notify the Defendant "[i]f there is any change in your income . . . [s]ince most changes will affect your monthly rate . . . ." Plaintiff reported the inheritance income on his 2001 Income Tax Return but that return was not filed until after he signed it on January 8, 2003. Once the Defendant became aware that Plaintiff had received the probate distribution, it notified him that his entitlement to benefits had changed, that he had been overpaid, and that his VA benefits would be withheld until the overpayment had been recouped. In addition to referring to the $18,448.00 as "the amount you were overpaid," the Defendant also referred to it as either an "indebtedness" or a "debt." Plaintiff was notified of his right to dispute the determination of the debt or overpayment, and request a waiver due to hardship. Once the Defendant denied his request for a waiver of the "indebtedness," Plaintiff was informed that he would have to pay this "debt" even if he did not have benefits against which the debt could be offset, and that he could pay by means of a monthly repayment plan.
Plaintiff's action is based upon 11 U.S.C. § 362 regarding the automatic stay and 11 U.S.C. § 524 regarding the discharge injunction. Plaintiff alleges that the Defendant's withholding of his disability pension was a violation of the automatic stay and the discharge injunction. Plaintiff further alleges that the amount the Defendant has withheld and continues to withhold is a "debt" as defined in 11 U.S.C. § 101(12), and is, therefore, subject to Plaintiff's bankruptcy filing and discharge. Defendant's position is that the reduction in Plaintiff's disability benefits is merely a recoupment of amounts overpaid by Defendant to Plaintiff, and that such recoupment did not violate the automatic stay nor the discharge injunction. Defendant states that Plaintiff was awarded a non-service connected pension in 1993, and that the amount of the pension was based upon Plaintiff's income.
"Recoupment" is an equitable doctrine in bankruptcy that allows one party to a transaction to withhold funds due another party where the debts arise out of the same transaction. Conoco, Inc. v. Styler (In re Peterson Distributing, Inc.), 82 F.3d 956, 959 (10th Cir. 1996). In other words, the doctrine "allows a creditor to recover a pre-petition debt out of payments owed to the debtor post-petition." City of Fort Collins v. Gonzales (In re Gonzales), 298 B.R. 771 (Bankr. D. Colo. 2003) (citations omitted). The doctrine is to be narrowly construed because its effect is to allow one creditor to attain priority over other creditors. Peterson Distributing, 82 F.3d at 960.
The Defendant argues that it has the right and the duty to pay benefits based upon its determination of disability as well as upon financial need. It is given that authority pursuant to 38 U.S.C. § 1521, and various other statutes regarding the award and payment of veterans' pensions and benefits. Section 1521 specifies that a veteran's pension "shall be reduced by the amount of the veteran's annual income." "Annual income" is defined in § 1503 as "all payments of any kind or from any source." See also 38 C.F.R. § 3.271 () (an "inheritance" qualifies as non-recurring income). Defendant also cites 38 U.S.C. § 5314 as authority for it to offset overpayments against future benefits. That statute is entitled "Indebtedness offsets," and provides that "the Secretary shall . . . deduct the amount of the indebtedness of any person who has been determined to be indebted to the United States by virtue of such person's participation in a benefits program administered by the Secretary."
Pursuant to federal law regarding veterans pension benefits, Defendant has determined that the Plaintiff was overpaid pension benefits because he had income that disqualified him from receiving benefits for some period of time. Plaintiff's pension was to be reduced by the amount of any income he received, including an inheritance. Thus, Defendant argues that Plaintiff owes it monies he received because of an overpayment of benefits. On the other hand, Plaintiff claims that he is owed pension benefits based upon his original determination of eligibility in 1993, and that any overpayment he may have received is simply a debt he owes that is dischargeable in bankruptcy. The issue for this Court is whether Defendant could properly recoup this overpayment from Plaintiff's benefits after Plaintiff filed bankruptcy and continuing after his discharge. If the recoupment doctrine applies, then there is no "debt" or "claim" here as defined in the Bankruptcy Code, and Defendant has not violated the automatic stay nor the discharge injunction. Aetna U.S. Healthcare, Inc. v. Madigan (In re Madigan), 270 B.R. 749, 754 (B.A.P. 9th Cir. 2001).
The recoupment doctrine depends upon whether Plaintiff's obligation to repay arose from the "same transaction" as his claim for pension benefits. See Gonzales, 298 B.R. at 774. This phrase means that "both debts must arise out of a single integrated transaction so that it would be inequitable for the debtor to enjoy the benefits of that transaction without also meeting its obligations." Peterson Distributing, 82 F.3d at 960 (quoting University Medical Ctr. v. Sullivan (In re University Medical Ctr.), 973 F.2d 1065, 1081 (3d Cir. 1992)). This Court must examine the equities of the case, and determine whether the claims "are so closely intertwined that allowing the debtor to escape its obligation would be inequitable . . . ." Peterson Distributing, 82 F.3d at 960.
This Court finds that the obligations of both parties did arise from the "same transaction." Plaintiff's claim for...
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