In re Madigan
| Decision Date | 06 December 2001 |
| Docket Number | BAP No. WW-01-1240-MaMoR. Bankruptcy No. 97-15323. |
| Citation | 270 BR 749 |
| Parties | In re John Clifford MADIGAN, Jr., Debtor. Aetna U.S. Healthcare, Inc., Appellant, v. John Clifford Madigan, Jr.; John S. Peterson, Chapter 7 Trustee, Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
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Grant E. Courtney, Lane, Powell, Spears & Lubersky, Seattle, WA, for Aetna U.S. Healthcare, Inc.
Kevin R. Hansen, Wolfley Basden Hansen, P.S., Port Angeles, WA, for John Clifford Madigan, Jr.
Before: MARLAR, MONTALI, and RUSSELL, Bankruptcy Judges.
In this equitable recoupment case, we are asked to determine if there is a "logical relationship" between two long-term disability ("LTD") claims which were separated by an intervening bankruptcy petition. The debtor asserted that the insurer had violated his discharge injunction by adjusting his postpetition benefits in order to recover its prepetition overpayments. The bankruptcy court denied recoupment to the insurer, holding that the two claims were different transactions. We AFFIRM.
Debtor John Clifford Madigan, Jr. was employed by Boeing Company ("Boeing"), which participated in a group long-term disability insurance plan administered by Aetna U.S. Healthcare, Inc. ("Aetna"). The debtor was covered by Group Policy No. LTD-707 ("Policy"), which provided for monthly benefits payable to employees in the event of disability.
The Policy provided that the amount of benefits could be reduced if the employee became eligible for Social Security payments. In such an event, the Policy gave Aetna the right to recover from the employee the excess benefits, or to adjust for overpayments by deducting such excess amounts from "any subsequent monthly benefits payable to the employee."
The Policy defined "one period of total disability" as "any two separate periods of total disability which arise from the same or related causes and which are separated by less than six months of active work."
In 1996, the debtor applied for LTD benefits and, in connection therewith, signed a "Reimbursement Agreement" in which he promised, among other things, to reimburse Aetna for any overpayments.1
The debtor received LTD benefits from January 1996 through June 1997. The debtor also applied for Social Security benefits, and in June 1997, he received a retroactive lump sum payment of $17,400 from Social Security. He did not tell Aetna about the Social Security benefits.
On July 7, 1997, after Aetna learned about the Social Security benefits, it sent a demand letter to the debtor for reimbursement in the sum of $17,029.07. However, the debtor did not reimburse Aetna.
The debtor returned to work at Boeing in August 1997. On September 25, 1997, Aetna sent a letter to the debtor stating that his "eligibility for LTD terminated August 25, 1997." Aetna again demanded payment of the balance of overpayments in the amount of $15,630.24 (having applied the final payment).
On November 18, 1997, the debtor filed a chapter 7 petition.2 The debtor listed Aetna as an unsecured creditor. On his Statement of Financial Affairs, the debtor explained that he had used the Social Security lump sum payment to pay his debts. In 1998, the debtor received a discharge, and his no-asset bankruptcy case was closed.
In November 1999, the debtor applied a second time for disability benefits under the Policy. The record does not state, and it was not determined by the bankruptcy court, whether this application was for the same disability or a new disability. In connection with this application, the debtor executed a new Reimbursement Agreement on November 26, 1999.3
The debtor was approved for benefits, effective November 1999, and began to receive reduced payments in April 2000. Aetna informed the debtor that it had applied the past-due benefits for the months of November 1999 through March 2000 — a total of $3,836.70 — to the 1997 $15,630.24 overpayment. Aetna also informed the debtor that it would continue to adjust future benefits to recover the $11,793.54 prepetition balance. On April 1, 2000, the debtor received a medical retirement.
In November 2000, the debtor filed a motion to reopen his bankruptcy case in order to file a complaint against Aetna for its alleged violation of the § 524 discharge injunction.4 Aetna opposed the motion, arguing that it was entitled to equitable recoupment. Both parties filed supplemental briefs, affidavits and exhibits. The debtor explained that he suffered from depression and personality disorders, and described the suffering allegedly caused him by Aetna's withholding of benefits.
The bankruptcy court treated the pleadings as a motion for summary judgment, and at the January 12, 2001 hearing, ruled in favor of the debtor.5
Presuming that the debtor's illness was the same for both disability periods, the court nevertheless held that the two-year interval between those periods and the Policy's language created separate disability claim periods. Thus, it held that the overpayment for the first disability claim was not "logically related" to Aetna's reimbursement rights relative to the second disability claim, and therefore the "same transaction" requirement for equitable recoupment had not been met. Instead, the court concluded that Aetna's action was a prohibited postpetition setoff.
The court's order was entered on May 15, 2001, and, in relevant part, it found Aetna to be in violation of the discharge injunction of § 524, and ordered Aetna to pay the debtor $12,654.99 — the amount withheld from the debtor's postpetition disability benefits through April 2001, with interest. Aetna timely appealed.
Whether Aetna's prepetition right to overpayments under the first disability claim arose from the "same transaction" as the debtor's postpetition claim for disability benefits, such that equitable recoupment applied to the overpayments.
We review de novo the bankruptcy court's application of undisputed facts to the law concerning equitable recoupment. Sims v. U.S. Dept. of Health and Human Servs. (In re TLC Hosps., Inc.), 224 F.3d 1008, 1011 n. 7 (9th Cir.2000) ).
The granting of a summary judgment is also reviewed de novo. Madden v. ITT Long Term Disability Plan, 914 F.2d 1279, 1283 (9th Cir.1990). "We must determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law." Id.; Fed.R.Bankr.P. 7056/ Fed.R.Civ.P. 56(c).
Equitable recoupment is a common law doctrine that is not expressly recognized in the Bankruptcy Code, but is preserved through judicial decisions. 5 Collier on Bankruptcy ¶ 553.10 (15th ed. rev. 2001). The bankruptcy trustee takes property subject to the rights of recoupment. Megafoods Stores, Inc. v. Flagstaff Realty Assocs. (In re Flagstaff Realty Assocs.), 60 F.3d 1031, 1035 (3rd Cir.1995). See also Reiter v. Cooper, 507 U.S. 258, 265 n. 2, 113 S.Ct. 1213, 122 L.Ed.2d 604 (1993) ().
Recoupment "`is 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) () (emphasis in original). It involves "netting out debt," Oregon v. Harmon (In re Harmon), 188 B.R. 421, 425 (9th Cir. BAP 1995), and is allowed "because it would be inequitable not to allow the defendant to recoup those payments against the debtor's subsequent claim." Newbery, 95 F.3d at 1401; Long Term Disability Plan of Hoffman-La Roche, Inc. v. Hiler (In re Hiler), 99 B.R. 238, 243 (Bankr.D.N.J.1989) ().
The justification for the defensive use of recoupment in bankruptcy is that there is no independent basis for a "debt," and therefore there is no "claim" against estate property. Harmon, 188 B.R. at 425; § 101(5) (); § 101(12) (). Since recoupment is neither a claim nor a debt, it is unaffected by either the automatic stay or the debtor's discharge. Id.; TLC Hosps., 224 F.3d at 1011; Newbery, 95 F.3d at 1399-1400; Mercy Hosp. of Watertown v. New York State Dept. of Social Servs., 171 B.R. 490, 494-95 (N.D.N.Y.1994); § 524.
In recoupment, the respective claims may arise either before or after the commencement of the bankruptcy case, but they must arise out of the same transaction. Newbery, 95 F.3d at 1399. The creditor is allowed "to assert that certain mutual claims extinguish one another . . . in spite of the fact that they could not be `setoff' under 11 U.S.C. § 553." Lee v. Schweiker, 739 F.2d 870, 875 (3rd Cir. 1984).
The "same transaction" requirement essentially distinguishes recoupment from "setoff" or "offset," a similar equitable doctrine of debt adjustment, governed by § 553, which requires the existence of mutual, prepetition debts. Id. Therefore, if Aetna is not entitled to recoupment, the debtor's bankruptcy discharge would prevent an offset of Aetna's discharged prepetition claim against the debtor against its postpetition obligation to the debtor. Davidovich v. Welton (In re Davidovich), 901 F.2d 1533, 1539 & n. 4 (10th Cir.1990) ).
In this appeal, Aetna argues that recovery of the...
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