In re Wernick
| Decision Date | 13 December 2016 |
| Docket Number | Case No. 16-cv-5313 |
| Parties | MARIAN V. WERNICK, Appellant, v. UNITED STATES, Appellee. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER
Appellant, Marian V. Wernick, appeals the United States Bankruptcy Court for the Northern District of Illinois' denial of her motion to find the Social Security Administration in violation of the automatic stay. For the reasons stated below, the Bankruptcy Court's ruling is affirmed in part and reversed in part.
In 2004, Marian Wernick was convicted of defrauding the Social Security Administration by using a false identity to collect benefits that she was not entitled to receive. Wernick pled guilty to that offense and was sentenced to two years of probation. Wernick was also ordered to immediately pay $37,268 in restitution. Because Wernick had no assets or income other than government benefits, the probation department independently agreed that Wernick should make monthly $10 restitution payments as a component of her probation.
Separately, the federal statutes and regulations governing recovery of overpayments by the Social Security Administration provided that the Social Security Administration could not pay Wernick any benefits until an amount equal to the overpayment had been recovered. The Social Security Administration admits that it failed to enforce these regulations until the spring of 2014, when it began withholding the entirety of Wernick's social security benefit checks. Wernick, deprived of her sole source of income, subsequently filed for bankruptcy.
The United States preemptively moved the bankruptcy court to order that the automatic stay did not apply to the benefit withholding or, if it did, to grant the United States relief from the stay. The bankruptcy court ruled that the United States' motion was moot because the collection of restitution and setoff was not in violation of the automatic stay.
Wernick then moved the district court that had heard her criminal case to clarify the restitution order or, in the alternative, institute a restitution payment schedule. The district court subsequently entered an order "request[ing] the Social Security Administration to reconsider the use of its authority to take 100% of the defendant's social security benefits and instead request[ing] the Social Security Administration to reduce it to a more reasonable ten percent of the defendant's net monthly benefits." Despite that order, the Social Security Administration continued to withhold Wernick's benefits because under federal law it lacked the discretion to withhold any less than all of Wernick's benefits. Wernick moved the bankruptcy court to hold that the Social Security Administration was in violation of the automatic stay because, by the Social Security Administration's own admission, its collection of Wernick's benefits was occurring pursuant to federal regulations and not the criminal restitution order. The bankruptcy court denied that motion.
Wernick subsequently returned to the district court, where she moved to institute a payment schedule. The district court granted that motion, and modified the restitution schedule to require Wernick to pay as restitution 10% of her net monthly income. Wernick then returned to the bankruptcy court, where she filed a renewed motion to find the SSA in violation of the automatic stay. The bankruptcy court denied that motion, finding the enforcement of the restitution order to not be subject to the automatic stay "for those reasons set forth in the United States' response and surreply." Wernick now appeals that denial.
This Court reviews the bankruptcy court's findings of fact for clear error. In re Midway Airlines, Inc., 383 F.3d 663, 668 (7th Cir. 2004). Its conclusions of law, however, are reviewed de novo. Id.
Wernick contends that the bankruptcy court's ruling was erroneous because (1) the Social Security Administration's withholding of her benefits under federal statute and regulations did not constitute collection of restitution exempt from the automatic stay under the Mandatory Victims Restitution Act, (2) section 553 of the Bankruptcy Code forbids the SSA's offset of Wernick's monthly benefits, and (3) even if offset were permitted under Section 553, the bankruptcy court retained discretion to control the amount of offset in accordance with equity and fairness.
This Court first turns to Wernick's argument that section 553 of the Bankruptcy Code forbids the Social Security Administration's withholding of Wernick's monthly benefits. Federal statute provides that social security overpayments are to be recovered by decreasing any payments which the overpaid person is entitled to, in accordance with regulations prescribed by the Commissioner of Social Security. 42 U.S.C. § 404(a)(1)(A). Duly enacted regulations provide that:
[i]f an individual to whom an overpayment was made is at the time of a determination of such overpayment entitled to a monthly benefit or a lump sum under title II of the act, or at any time thereafter becomes so entitled, no benefit for any month and no lump sum is payable to such individual . . . until an amount equal to the amount of the overpayment has been withheld or refunded.
20 C.F.R. § 404.502(a)(1). It is undisputed that the Social Security Administration was withholding Wernick's benefits pursuant to these statutes and regulations.
In pertinent part, section 553 of the Bankruptcy Code provides that pre-petition claims against a debtor may not be offset against post-petition debts owed to the debtor. 11 U.S.C. § 553. Wernick contends that her social security benefits were post-petition debts owed to her, and that their withholding to repay her pre-petition overpayment therefore violated section 553. Thegovernment, in response, contends that the withholding constituted a recoupment rather than a setoff and was therefore exempt from section 553.
Recoupment is an equitable principle of general application. Unlike a setoff, which is a form of cross-action occurring when there are two separate, mutual obligations, a recoupment requires that both the debtor's claim against the creditor and the creditor's claim against the debtor arise from a single transaction. In re Klingberg Schools, 68 B.R. 173, 178 (N.D. Ill. 1986), aff'd. per curiam 837 F.2d 763 (7th Cir. 1988) (mem.). While set-off is based on conflicting allegations of indebtedness, recoupment modifies the debtor's right to collect from the creditor without the assertion of a separate and conflicting claim. Id. In the bankruptcy context, recoupment has been applied to allow creditors to recoup amounts owed by the debtor for pre-petition debts from payments to the debtor for post-petition earnings. Id. Recoupments, unlike set-offs, do not violate the automatic stay because when a debtor's claim to funds is met with a valid recoupment defense, the debtor has no continuing interest in the funds. In re Chapman, 265 B.R. 796, 807 (Bankr. N.D. Ill. 2011), aff'd sub nom. Chapman v. Charles Schwab & Co., No. 01 C 9697, 00 A 0358, 00 B 5538, 2002 WL 818300 (N.D. Ill. Apr. 30, 2002).
The concept of recoupment has been consistently applied to the Medicare statute's provisions for paying medical service providers. That statute provides in pertinent part that "[t]he Secretary shall periodically determine the amount which should be paid under this part to each provider of services with respect to the services furnished by it, and the provider of services shall be paid, at such time or times as the Secretary believes appropriate . . . the amounts so determined, with necessary adjustments on account of previously made overpayments or underpayments . . . ." 42 U.S.C. § 1395g(a) (emphasis added). The D.C. Circuit, in interpreting this statute in the bankruptcy context, held that the adjustments for prior overpayments constituted an integral part of calculating payments due and owing to providers under the statute. United States v. Consumer Health Servs. of Am, Inc., 108 F.3d 390,395 (D.C. Cir. 1997). The court therefore concluded that post-petition payments made under that statute could withhold the amount of prior overpayments, because "[t]o conclude otherwise, we think, would allow the Bankruptcy Code to modify an explicit statutory scheme defining liability for particular services." Id. The court reached the same conclusion when it applied the doctrine of equitable recoupment, noting:
In determining whether the pre-petition and post-petition services should be thought of as one transaction, the key to us is the Medicare statute. Since it requires the Secretary to take into account pre-petition overpayments in order to calculate a post-petition claim—as we have described above—Congress rather clearly indicated that it wanted a provider's stream of services to be considered one transaction for purposes of any claim the government would have against the provider.
Id; see also In re Holyoke Nursing Home, Inc., 372 F.3d 1, 3 (1st Cir. 2004) (); In re TLC Hosps., Inc., 224 F.3d 1008, 1013 (9th Cir. 2000) (). The Third Circuit, however, disagreed with this rationale, reasoning that because each HCFA payment provides compensation for services performed in a set time span, each payment concerned different services rendered and thus constituted a separate transaction. In re Univ. Med. Ctr., 973 F.2d 1065, 1081-82 (3d. Cir. 1992).
The Third Circuit is the only circuit to have considered the applicability of equitable recoupment to the Social Security statute.1 In Lee v. Schweiker, 739 F.2d 870 (3rd Cir. 1984), the Third Circuit...
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