In re Thompson

• Decision Date: 23 May 1995
• Docket Number: Bankruptcy No. 93-15316-AB. Adv. No. 94-1045.
• Citation: 182 BR 140
• Parties: In re William Reid THOMPSON, Debtor. William Reid THOMPSON, Plaintiff, v. BOARD OF TRUSTEES OF THE FAIRFAX COUNTY POLICE OFFICERS RETIREMENT SYSTEM, Defendant.
• Court: U.S. District Court — Virgin Islands, Bankruptcy Division

182 B.R. 140 (1995)

In re William Reid THOMPSON, Debtor.

William Reid THOMPSON, Plaintiff, v. BOARD OF TRUSTEES OF THE FAIRFAX COUNTY POLICE OFFICERS RETIREMENT SYSTEM, Defendant.

Bankruptcy No. 93-15316-AB. Adv. No. 94-1045.

United States Bankruptcy Court, E.D. Virginia, Alexandria Division.

May 23, 1995.

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Robert L. Vaughn, Jr., Glennon, Goodman & Lubeley, Reston, VA, for Thompson.

W. McCauley Arnold, Cowles, Rinaldi & Arnold, Ltd., Fairfax, VA, for the Board.

MEMORANDUM OPINION

MARTIN V.B. BOSTETTER, Jr., Chief Judge.

At issue is whether the defendant, the Board of Trustees of the Fairfax County Police Officers Retirement System (the "Board"), may withhold retirement benefits payable to the debtor, William Reid Thompson, notwithstanding the automatic stay and the discharge injunction. Since 1987, the Board has been withholding benefits from Thompson in order to recover overpayments it made to him during the 1970s and 1980s. Thompson filed his Chapter 7 petition in 1993, and notified the Board of his bankruptcy shortly thereafter. Thompson alleges that the automatic stay prohibits the Board from withholding his retirement benefits. The Board responds that it is allowed to withhold the benefits under the doctrine of recoupment, which operates as an "equitable exception" to the automatic stay. For the reasons that follow, we find that, even if recoupment is an exception to the automatic stay, it does not apply in this instance. The Board, however, does have a right of setoff, as recognized by 11 U.S.C. § 553. Therefore all or part of its claim is secured and has not been discharged. Finally, as explained more fully below, the circumstances of this case dictate that we lift the automatic stay retroactively, as of the petition date, which effectively ratifies the Board's efforts to collect the overpayments.

I.

Thompson joined the police department of Fairfax County, Virginia, in 1969. As a full-time police officer, he became a participant of the disability and retirement plan currently administered by the Board. In 1971, Thompson was injured in a work-related automobile accident. As a result of his injuries, he was granted a disability retirement, and the Board began paying him benefits in 1973.

To address the issues presented here, it is important to provide some background regarding the disability and retirement plan administered by the Board. Currently, the plan is subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), and the plan's provisions include a non-alienation clause, which shields the plan's assets from the reach of outside creditors. See Va.Code § 51-127.30, incorporated in Va.Code § 51.1-805(2) (Michie 1994). The plan's assets derive from employee contributions, contributions made by Fairfax County, and the income generated by investments.

From these assets, the Board pays two types of benefits: disability benefits and retirement benefits. Each benefit is subject to separate limitations and requirements. Under the provisions governing disability benefits, injured police officers may receive payments totaling 66.67% of the salary they would have received had no injury occurred. The Board pays these benefits for the duration of the disability, or until the officer becomes eligible to receive ordinary retirement benefits. During the first five years of receiving disability benefits, a police officer may be required to submit to one medical examination per year, so the Board may determine whether the officer is still disabled and thus entitled to benefits. After this initial five-year period has elapsed, the Board may require a disability recipient to undergo a medical examination every three years. Failure to submit to a medical examination may result in the loss of benefits. In the case at hand, the Board required Thompson to undergo these medical examinations after it started paying him disability benefits in 1973.

In addition to requiring medical examinations, the Board may decrease the amount of disability benefits it pays in proportion to the amount of outside income an injured officer earns. For instance, the Board may reduce benefits to the extent an officer makes over 100% of the average police salary he or she would have received had no injury occurred. To monitor the amount of outside income earned, the Board requires all officers receiving disability benefits to submit their tax returns and W-2 forms each year for the Board's review. If the Board determines, based on this review, that it overpaid disability benefits by a certain amount, it may use all or part of the subsequent payments to offset that amount. Except for the period between 1979 and 1983, the foregoing restrictions and requirements were in effect while Thompson was receiving disability benefits.

As for retirement benefits, retired officers may receive payments totaling 60% of the average salary they were earning before retirement. To qualify for retirement benefits, a police officer must complete 25 years of service. This includes "creditable" service, which means that injured officers, such as Thompson, may qualify for ordinary retirement benefits, even though they retired previously on disability. It is important to emphasize, however, that disability benefits and retirement benefits are separate interests. A police officer may qualify for retirement benefits without ever having received payments for a disability. So too, the plan contemplates that a disabled officer may die or become "separated from service" before he or she completes the requisite 25 years, thus become ineligible to receive ordinary retirement benefits. See id. § 51-127.21, incorporated in Va.Code § 51.1-805(2) (Michie 1994). After reaching the 25-year mark, retired officers may receive ordinary retirement benefits on a monthly basis during the balance of their lives. Most importantly, however, retirement benefits are not subject to the same controls restricting disability payments. In other words, retired police officers need not undergo medical examinations, nor do they have to report any outside income earned.

What prompted this dispute was the outside income Thompson earned while he was on disability. In 1987, Thompson pleaded guilty in federal court to the charges of (1) conspiracy to distribute and sell illegal drugs, (2) making a false statement on a tax return, and (3) making a false statement on an application to purchase a firearm. The Board subsequently determined that, as a result of his illegal activities, Thompson earned over $6 million from 1974 to 1986, and it also found that he either omitted or understated his income in reports he furnished to the Board. Based on its calculations, the Board determined that the overpayments it made during the years 1974-78 and 1984-86 totaled $89,011.47. The Board asked Thompson to repay this amount, but he apparently declined to do so. Pursuant to Va.Code § 51-127.26, incorporated in Va.Code § 51.1-805(2) (Michie 1994), and other provisions, the Board decided to suspend its monthly payments to Thompson until 1999 in an effort to collect the overpayments it made. It thus sought to offset the overpayments against future benefits. Thompson appealed the Board's decision to the Fairfax County circuit court, but the court dismissed the appeal on grounds that it was untimely filed.

On December 29, 1993, Thompson petitioned for relief under Chapter 7 of the Bankruptcy Code, thus invoking the automatic stay. See 11 U.S.C. § 362(a). His attorney promptly notified the Board of the petition's filing, and asserted that the automatic stay prohibited the Board from withholding benefits in order to collect the overpayments it made. Additionally, on January 1, 1994, Thompson obtained his 25 years of creditable service, and thus became eligible to receive ordinary retirement benefits. One month later, on February 1, 1994, the Board informed Thompson that it would continue withholding retirement benefits, notwithstanding the automatic stay. Thompson then commenced an adversary proceeding against the Board, seeking declaratory and injunctive relief and money damages as a result of the Board's alleged violation of the stay. The Board subsequently filed an answer and counterclaim against Thompson.

The relief sought by Thompson is an injunction directing the Board to pay him his monthly retirement benefit of $1,540.89. He also seeks attorney's fees and damages that would compensate him for moving his family to Hawaii, which is an event that occurred postpetition. The Board asserts that it is allowed to withhold the benefits, as they become due, under the doctrine of recoupment, which operates as an "equitable exception" to the automatic stay. Alternatively, the Board asks that the Court lift the stay, and thus enable it to continue withholding the retirement benefits. We took this matter under advisement following a full-day hearing on the merits. Shortly after the hearing, Thompson was granted a discharge which, in turn, terminated the stay. Id. § 362(c)(2)(C). Accordingly, the Board must now contend with the discharge injunction, in addition to the automatic stay.

II.

"The automatic stay is one of the fundamental debtor protections supplied by the Bankruptcy Code." University Med. Ctr. v. Sullivan (In re University Med. Ctr.), 973 F.2d 1065, 1074 (3d Cir.1992). "It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy." H.R.Rep. No. 595, 95th Cong., 2nd Sess. 340 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 54-55, (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5840-41, 6296-97. As additional protection, 11 U.S.C. § 362(h) provides that "an individual injured by any willful...