In re Gonzales, 03-15390 HRT.

• Decision Date: 29 August 2003
• Docket Number: No. 03-15390 HRT.,03-15390 HRT.
• Citation: 298 B.R. 771
• Parties: In re Tomas M. GONZALES Carolina Georgine Gonzales, Debtors. City of Fort Collins, Movant, v. Tomas M. Gonzales, Daniel Hepner, Trustee, Respondents.
• Court: U.S. Bankruptcy Court — District of Colorado

298 B.R. 771

In re Tomas M. GONZALES Carolina Georgine Gonzales, Debtors.

City of Fort Collins, Movant, v. Tomas M. Gonzales, Daniel Hepner, Trustee, Respondents.

No. 03-15390 HRT.

United States Bankruptcy Court, D. Colorado.

August 29, 2003.

Jerry Sumner, Fort Collins, CO, for Debtors.

Gregory S. Bell, Fort Collins, CO, for creditor.

ORDER RE: MOTION FOR RELIEF FROM STAY

HOWARD R. TALLMAN, Bankruptcy Judge.

This case comes before the Court on City of Fort Collins' Motion for Relief from Stay. The Court has reviewed the file and the pleadings in this matter, has held a hearing and considered the arguments of counsel, and is ready to rule.

The Motion, as it was originally pleaded, has become moot. This proceeding was initiated as a motion for relief from stay. However, the stay terminated on July 30, 2003, when the Debtor was granted a discharge. Counsel for the City of Fort Collins pointed out this fact to the Court at the hearing which was held on August 12, 2003. Nonetheless, counsel requested for the hearing to go forward so that the Court could determine whether or not the City's contemplated action constituted a violation of the discharge injunction. 11 U.S.C. § 524. Debtor did not object to that request and the hearing proceeded on that basis.

The facts are not in dispute. Mr. Gonzales is a former employee of the City of Fort Collins. As of February 6, 2001, he became totally disabled. By reason of his disability, Mr. Gonzales became eligible to receive workers' compensation disability payments. While receiving those payments, he also received payments on account of a private disability insurance policy which was provided to him through the City. Mr. Gonzales did not give notice to the City when he began receiving those disability insurance payments. In addition, Mr. Gonzales is now eligible to receive social security disability income benefits.

Prior to the filing of Mr. Gonzales' bankruptcy petition, the City initiated an administrative action for the purpose of determining whether, and to what extent, Debtor was overpaid workers' compensation benefits due to his receipt of other disability insurance payments. The City also wishes to seek a determination of the adjustment of workers' compensation benefits which is appropriate due to eligibility to receive social security payments. The administrative action has been stayed pending this Court's determination.

The issue before the Court is whether the City would violate the discharge injunction, 11 U.S.C. § 524, by proceeding with an administrative adjudication of whether or not Mr. Gonzales has received an overpayment of workers' compensation benefits and recouping any such overpayment from future benefits due to Mr. Gonzales. The Court finds that such action does not violate § 524.

Colo.Rev.Stat. §§ 8-42-103(1)(c)(I) and (d)(I) provide that certain adjustments must be made to an award of workers' compensation whenever a recipient is also receiving either an award of social security benefits or payments under an "employer pension or disability plan." Colo.Rev.Stat. § 8-42-113.5 provides the means for collecting any overpayment of workers' compensation benefits that may result from the recipient also receiving payments under social security or an employer pension or disability plan. That statute provides that such benefit overpayments may be recovered by reducing future benefit payments due to the recipient. Colo.Rev.Stat. §§ 8-42-113.5(1)(a) & (b). If recovery by that method is not practicable, then the statute provides that the employer or its insurer is authorized to seek an order for repayment. Colo.Rev.Stat. § 8-42-113.5(1)(c).

The Court will first note that the City did not seek a determination from the Court that any portion of the pre-petition overpayment should be excepted from discharge pursuant to 11 U.S.C. § 523. Consequently, any personal liability which Debtor may have for any such overpayment is discharged and the City is foreclosed from seeking an order of repayment under Colo.Rev.Stat. § 8-42-113.5(1)(c). At the hearing, counsel for the City acknowledged that the City seeks to collect any benefit overpayment by means of recoupment from future benefits only.

The term recoupment has a particular meaning and significance in the bankruptcy context. The recoupment doctrine, is an equitable doctrine that allows a creditor to recover a pre-petition debt out of payments owed to the debtor post-petition. In re Adamic, 291 B.R. 175, 181 (Bankr.D.Colo.2003); In re Lord, 284 B.R. 179, 180 (Bankr.D.Mass.2002); Ross v. Missouri Division of Employment Security, 104 B.R. 171, 172 (E.D.Mo.1989). Where a party has a valid right of recoupment, that right is unaffected by the debtor's discharge. Aetna U.S. Healthcare, Inc. v. Madigan (In re Madigan), 270 B.R. 749, 754 (9th Cir. BAP 2001) ("Since recoupment is neither a claim nor a debt, it is unaffected by either the automatic stay or the debtor's discharge."); In re Jones 289 B.R. 188, 191 (Bankr.M.D.Fla.2002) ("Since right of recoupment is not a claim and its potential assertion is not a debt, the right is unaffected by a discharge in bankruptcy which operates as an injunction against actions to collect any debt discharged."). Recoupment allows one party to a transaction to withhold funds due to another party sufficient to recover an obligation owed by that other party and which arises from the same transaction. See Madigan, 270 B.R. at 753-54; In re Adamic, 291 B.R. 175, 181 (Bankr.D.Colo.2003).

In this case, there is no dispute that the City owes an obligation to Mr Gonzales based upon his claim for workers' compensation benefits. The City, in turn, alleges that Mr. Gonzales owes it an obligation based upon an overpayment of benefits.¹ Thus, so long as the obligation alleged to be owed by Mr. Gonzales arises from the same transaction as the workers' compensation claim that Mr. Gonzales has against the City, then the doctrine of recoupment applies.

In some cases, the determination of whether obligations arise from the same transaction can be complex and differences appear in the reported decisions as to how broadly or narrowly the courts are permitted to interpret...