Lee v. Schweiker

• Decision Date: 29 June 1984
• Docket Number: No. 83-1564,83-1564
• Citation: 739 F.2d 870
• Parties: 11 Collier Bankr.Cas.2d 834, Bankr. L. Rep. P 69,914, 6 Soc.Sec.Rep.Ser. 98, Unempl.Ins.Rep. CCH 16,982 Lillie LEE, Appellant, v. Richard S. SCHWEIKER, Secretary of Health and Human Services, Appellee.
• Court: U.S. Court of Appeals — Third Circuit

Page 870

739 F.2d 870

11 Collier Bankr.Cas.2d 834, Bankr. L. Rep. P 69,914,

6 Soc.Sec.Rep.Ser. 98,

Unempl.Ins.Rep. CCH 16,982

Lillie LEE, Appellant, v. Richard S. SCHWEIKER, Secretary of Health and Human Services, Appellee.

No. 83-1564.

United States Court of Appeals Third Circuit.

Argued March 7, 1984.

Decided June 29, 1984.

Irv Ackelsberg (argued), Community Legal Services, Inc., Philadelphia, Pa., for appellant.

Edward S.G. Dennis, Jr., U.S. Atty., Walter S. Batty, Jr., Asst. U.S. Atty., Chief of Appeals, Virginia R. Powel (argued), Asst. U.S. Atty., Philadelphia, Pa., Randolph W. Gaines, Deputy Asst. General Counsel for Litigation, John B. Watson, Chief of Assistance Payments Litigation, Robin F. Kaplan, Atty., Office of the General Counsel, Social Security Division, Dept. of Health and Human Services, Baltimore, Md., for appellee.

Before HUNTER and BECKER, Circuit Judges, and HOFFMAN, District Judge. ^*

OPINION OF THE COURT

BECKER, Circuit Judge.

This appeal presents two technical issues of bankruptcy law. The first involves the extent to which the doctrine of recoupment allows the Social Security Administration ("SSA") to continue recovering a pre-bankruptcy overpayment from the benefit checks of a debtor after she has filed a Chapter 13 petition, in spite of the automatic stay created by 11 U.S.C. Sec. 362. The second involves the application of the limitation on setoffs contained in 11 U.S.C. Sec. 553(b), known as the "improvement in position test," to the situation in which the SSA agrees to recover an overpayment by means of monthly deductions from a beneficiary's benefit checks, rather than by means of legal process. We are also confronted with the question whether section 207 of the Social Security Act, 42 U.S.C. Sec. 407, renders SSA immune from the limitations placed on creditors by the Bankruptcy Code.

Appellant Lillie Lee is a recipient of old age benefits under the Social Security Act. In 1980, Lee received overpayments from the SSA amounting to $746.50. When the overpayments were discovered, SSA made arrangements to recover the amounts overpaid from Lee by deducting part of her monthly benefits over a period of eight months. Less than three months later, Lee filed a bankruptcy petition. SSA, unaware of the filing, continued to make the deductions from Lee's monthly benefits until the entire overpayment had been recovered. Lee then brought this proceeding to recover the amounts of the overpayment, asserting that the continued withholding of part of her benefits after the filing of the bankruptcy petition violated the automatic stay created by 11 U.S.C. Sec. 362, and that the amounts withheld before the filing of the petition were a setoff that improved the position of SSA within ninety days of the bankruptcy filing, and thus were barred by the limitation on setoffs contained in 11 U.S.C. Sec. 553.

We reject the contention that Sec. 207 deprives the bankruptcy court of subject matter jurisdiction over the SSA. ¹ We agree with appellant that the continued deduction of part of her monthly benefits after the filing of her bankruptcy petition violated the automatic stay, and that she thus may recover the amounts withheld after the date of filing. We disagree, however, that the withholding of part of her checks in the ninety days before the petition violated the "improvement in position" test of section 553, and thus Lee may not recover that portion of the overpayments which SSA withheld before the petition was filed.

I.

The debtor, Lillie Lee, is receiving monthly retirement benefits of $406.20 under Title II of the Social Security Act, 42 U.S.C. Sec. 401 et seq. In 1980, Lee had earned income that reduced her entitlement to benefits. That income was not reported to SSA and as a result there was an overpayment of benefits totalling $746.50. When the overpayment was discovered, Lee requested that SSA recover it by reducing her benefits by approximately twenty-five percent, or $102 per month, until the overpayment was recovered. Beginning with her check dated September 3, 1981, Lee received the reduced payments. ²

On November 13, 1981, Lee filed a petition under Chapter 13 of the Bankruptcy Code. Under the Code, the amounts deducted from Lee's social security benefits would be "exempt" from the claims of her creditors if she were entitled to recover them from SSA. 11 U.S.C. Sec. 522(d)(10). The bankruptcy trustee therefore did not make an effort to recover the amounts deducted. Lee, however, properly instituted an adversary proceeding pursuant to section 522(h) to recover the deductions for herself. ³ She asserted that the deductions made prior to the filing of the petition were recoverable under either 11 U.S.C. Sec. 547 or 11 U.S.C. Sec. 553, ⁴ and that the post-petition deductions were a violation of the automatic stay provided for in 11 U.S.C. Sec. 362.

The bankruptcy court held that SSA could keep all the sums it had deducted from Lee's benefit checks both before and after the petition was filed. 25 B.R. 135. The basis for this holding was that, as the holder of a statutory setoff right, 42 U.S.C. Sec. 404(a)(1), SSA was entitled to be treated as a secured creditor under 11 U.S.C. Sec. 506(a). The court held that the debtor therefore could not recover the amounts SSA had deducted without providing SSA with adequate protection, 11 U.S.C. Sec. 362, that the burden of showing adequate protection was on the debtor, and that no evidence of adequate protection had been provided.

In addition to the primary contentions raised on this appeal, SSA raised a number of other defenses to Lee's recovery of the amounts deducted from her monthly benefits. The bankruptcy court rejected a defense based on sovereign immunity, citing 11 U.S.C. Sec. 106. This ruling was clearly correct. See In re Neavear, 674 F.2d 1201, 1203-04 (7th Cir.1982). The court also rejected the contention that section 207 of the Social Security Act, 42 U.S.C. Sec. 407, deprives the bankruptcy court of subject matter jurisdiction over the SSA. We deal with this contention in Part II, infra. SSA also argued that the overpayments would not be dischargeable in a bankruptcy proceeding and thus that Lee's Chapter 13 plan could not be confirmed. The bankruptcy court did not render a decision on this point, and SSA does not raise it on this appeal. The Seventh Circuit rejected this contention in Neavear 67 F.2d at 1206, and we find its disposition of the question persuasive. See also Gutierrez v. Schweiker, 15 B.R. 268 (N.D.Ill.1981); Rowan v. Morgan, 15 B.R. 834 (Bankr.N.D.Ohio 1981). After disposing of SSA's other contentions, the bankruptcy court accepted the SSA's defense that as the holder of a statutory right to setoff SSA was in effect a secured creditor, and thus that Lee could not recover the amounts withheld without providing SSA with adequate protection.

The district court affirmed the judgment of the bankruptcy court but did not address the grounds relied on by the bankruptcy court. Rather the district court held that the SSA's right to recover the overpayment was a right to "recoupment," and that therefore the debtor was thus not entitled to the amounts withheld from her monthly benefit checks. Under this approach, the amounts withheld from Lee's benefit checks were not "property of the estate," and thus were not subject to either the automatic stay created by Sec. 362 or the "improvement in position" test of Sec. 553. The debtor appeals.

II.

SSA argues that it is exempt from the bankruptcy laws under section 207 of the Social Security Act, 42 U.S.C. Sec. 407, SSA has raised this argument before several courts, all of which have rejected it. See In re Neavear, 674 F.2d 1201 (7th Cir.1982); In re Rowan, 15 B.R. 834 (Bankr.N.D.Ohio 1981). Nonetheless the SSA has raised the argument again before us, and we join these other courts in rejecting it.

Section 207 states:

(a) The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.

SSA relies on the language "none of the ... rights existing under this subchapter shall be subject to ... the operation of any bankruptcy ... law," to assert that it is protected from any modification of the obligations of recipients to repay previous overpayments. The courts have held, however that the purpose of this section is to protect recipients from losing benefits to creditors, not to protect the federal fisc from the bankruptcy of recipients. See In re Greene, 27 B.R. 462 (Bankr.E.D.Va.1983). We too believe that the language relied on by SSA, when taken in context, does not evince any intent to protect SSA, but rather an intent to protect the recipients of benefits from creditors who might seek to obtain rights to their benefits, by means of either contract or legal process. It would be inconsistent with the clear intent of the statute to twist its language to hold that a beneficiary could not take advantage of a bankruptcy discharge, the purpose of which is to free future income from prior claims. We hold, therefore, that section 207 does not provide SSA with the blanket protection it asserts, but instead has no effect on its rights and liabilities when a beneficiary asserts her rights under the Bankruptcy Code as a protection against SSA collection efforts.

III.

Lee relies on the automatic stay in asserting her right to recover the amounts withheld from her benefit checks after the filing of her petition. 11 U.S.C. Sec. 362. The district court rejected this argument, stating that since Lee's debt to SSA arose out of the same "transaction" as SSA's debt to Lee, SSA had a right of "recoupment" that was not subject to either the automatic stay or the limitations on setoff found in section...