Matter of Gaither, Bankruptcy No. 95-11897.

• Decision Date: 23 August 1996
• Docket Number: Bankruptcy No. 95-11897.
• Parties: In the Matter of Charles E. GAITHER and Barbara J. Gaither, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

200 B.R. 847 (1996)

In the Matter of Charles E. GAITHER and Barbara J. Gaither, Debtors.

Bankruptcy No. 95-11897.

United States Bankruptcy Court, S.D. Ohio, Western Division.

August 23, 1996.

Jay T. Bosken, O'Connor, Acciani & Levy, Cincinnati, Ohio, for Petitioners.

Donnita Carroll, Asst. Attorney General, State of Ohio, Bureau of Employment Services, Revenue Recovery Section, Columbus, Ohio, for Respondent.

ORDER DENYING DEBTORS' MOTION FOR CONTEMPT

J. VINCENT AUG, Jr., Bankruptcy Judge.

This matter is before the Court on the Debtors' motion to find the Ohio Bureau of Employment Services (OBES) in civil contempt. (Doc. 20). The OBES has filed a response to the motion. (Doc. 23).¹ The Court has jurisdiction over this case pursuant to 28 U.S.C. § 1334 and the General Order of Reference entered in this District. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(O).

Facts

In 1994 and 1995, the Debtors received unemployment benefits through the OBES. Subsequently, the OBES determined that the benefits collected by Barbara Gaither from July 2, 1994 to August 27, 1994, totaling $909, and the benefits collected by Charles Gaither from January 14, 1995 to February 11, 1995, totaling $590, were obtained by fraudulent misrepresentations. (OBES Resp. to Mot., Exs. A and B, doc. 22). Specifically, according to the OBES determinations, the Debtors were ineligible for unemployment benefits during these periods because of a failure to properly report that they "worked and had earnings during these weeks." (Id.). According to the OBES, the Debtors did not appeal the OBES determinations of fraudulent misrepresentation. (OBES Resp. to Mot. at 2, 3,).²

Pursuant to Ohio Revised Code § 4141.35, the OBES canceled the Debtors' benefit claims and ordered the Debtors to return the overpayments. Additionally, the OBES ordered any valid future benefit claims be applied to the overpayments until such are repaid in full.³

On May 15, 1995, the Debtors filed a petition under Chapter 13 of the Bankruptcy Code. The Debtors listed the OBES on their statements and schedules as an unsecured creditor for the overpaid benefits. The Debtors' confirmed plan provides for a 35 percent payout to allowed unsecured claims.

After filing the bankruptcy petition the Debtors submitted a new claim for unemployment benefits. The OBES withheld payment of the new claim, instead applying these benefits to the previous overpayment until such is paid in full. The issue before this Court is whether the OBES is in violation of the automatic stay for applying the postpetition unemployment benefits toward repayment of the prepetition overpayments. 11 U.S.C. § 362. In addressing this issue it is helpful to examine setoff and recoupment in bankruptcy and the cases applying these concepts to the repayment of unemployment benefits.

Setoff and Recoupment

"The right of setoff (also called "offset") allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding `the absurdity of making A pay B when B owes A.'" Citizens Bank of Maryland v. Strumpf, 516 U.S. ___, ___, 116 S.Ct. 286, 289, 133 L.Ed.2d 258, 262 (1995) citing, Studley v. Boylston National Bank, 229 U.S. 523, 33 S.Ct. 806, 57 L.Ed. 1313 (1913). The Bankruptcy Code does not create a federal right of setoff; however, subject to certain exceptions, 11 U.S.C. § 553(a) preserves any setoff rights which otherwise exist. Strumpf, at ___, 116 S.Ct. at 289.

Pursuant to § 553, a debt owed by a creditor to the debtor may be setoff against a claim the creditor holds against the debtor, however, only debts and claims which "arose before commencement of the case" may be setoff against each another, prepetition claims against a debtor cannot be setoff against postpetition debts owed to the debtor. 11 U.S.C. § 553(a); Lee v. Schweiker, 739 F.2d 870, 875 (3rd Cir.1984); In re Maine, 32 B.R. 452, 454 (Bankr.W.D.N.Y. 1983). A setoff requires mutual debts, generally arising out of separate transactions. In re Alpco, Inc., 62 B.R. 184, 188 (Bankr. S.D.Ohio 1986); In re Harmon, 188 B.R. 421, 425 (Bankr.9th Cir.1995); In re University Medical Center, 973 F.2d 1065, 1079 (3rd Cir.1992). The exercise of a setoff is subject to the automatic stay, 11 U.S.C. § 362(a)(7); Strumpf, at ___, 116 S.Ct. at 289, and the bankruptcy discharge injunction. 11 U.S.C. § 524; In re Maine, 32 B.R. at 454. The application of a setoff is permissive and lies within the equitable discretion of the trial court. In re Southern Indus. Banking Corp., 809 F.2d 329, 332 (6th Cir.1987).

Recoupment is an equitable doctrine. In contrast to setoff, recoupment is not mentioned by the Bankruptcy Code but rather is recognized through judicial decisions. See, Reiter v. Cooper, 507 U.S. 258, 265 n. 2, 113 S.Ct. 1213, 1218 n. 2, 122 L.Ed.2d 604 (1993) ("It is well settled . . . that a bankruptcy defendant can meet a plaintiff-debtor's claim with a counterclaim arising out of the same transaction, at least to the extent that the defendant merely seeks recoupment.") see also, In re Heffernan Memorial Hosp. Dist., 192 B.R. 228, 230 (Bankr.S.D.Cal.1996); In re American Sunlake Ltd. Partnership, 109 B.R. 727, 730 (Bankr.W.D.Mich.1989). Unlike setoff, recoupment does not involve mutual debts, In re Alpco, Inc., 62 B.R. at 188; In re Harmon, 188 B.R. at 425; In re Heffernan Memorial Hosp. Dist., 192 B.R. at 230, and is not subject to the automatic stay. In re Maine, 32 B.R. at 455. Because recoupment only reduces a debt, rather than constituting an independent basis for a debt, it is not a claim in bankruptcy, therefore, it is not subject to the discharge injunction. In re Maine, 32 B.R. at 455; In re Harmon, 188 B.R. at 425.

Recoupment "is essentially a defense to the debtor's claim against the creditor rather than a mutual obligation, and is applied when the limitations on setoff in bankruptcy would be inequitable." Lee, 739 F.2d at 875 (alteration added); In re University Medical Center, 973 F.2d at 1079-80. "In recoupment, the elements of the debt may arise either before or after the commencement of the case." In re Harmon, 188 B.R. at 425. "The only real requirement regarding recoupment is that the sum can be reduced only by matters arising out of the same transaction as the original sum." Waldschmidt v. CBS, Inc., 14 B.R. 309, 314 (M.D.Tenn.1981).

An express contractual right to recoupment is not necessary for a creditor to exercise recoupment, nor does the mere fact that a contract exists between a creditor and a debtor automatically allow a creditor to exercise recoupment. In re University Medical Center, 973 F.2d at 1080. In bankruptcy, however, recoupment "has been applied primarily where the relevant claims arise out of the same contract." Lee, 739 F.2d at 875 (alteration added), see also, In re Alpco, Inc., 62 B.R. at 188 ("a single contract may be considered as one transaction for the purposes of recoupment").

With the understanding that a contract may satisfy the "same transaction" requirement, the bankruptcy cases addressing the recoupment and setoff of overpaid unemployment benefits examine whether filing for unemployment benefits pursuant to a state statute is viewed as similar to a contract or more like a statutory social entitlement. If viewed as similar to a contract, the "same transaction" requirement may be satisfied. Depending on the factual situation, equity considerations may then allow recoupment.

The Parties Contentions

The Debtors rely principally on In re Ross, 83 B.R. 673 (Bankr.E.D.Mo.1988).⁴ Ross is factually identical to the instant case and addressed the issue of whether the Missouri Division of Employment Security (MDES) violated the automatic stay by withholding and applying the debtor's postpetition unemployment benefits against prepetition overpayments obtained by the debtor through fraud.

In Ross, the bankruptcy court relied upon the reasoning of Lee v. Schweiker, supra. Lee involved the Social Security Administration (SSA) withholding a debtor's postpetition social security benefits to recover prepetition benefit overpayments. In Lee, the SSA argued that it was simply exercising a right of recoupment. The court disagreed, stating that a social welfare statute is an entitlement and therefore is not similar to a contract. Lee, 739 F.2d at 876. In Lee, the court viewed the social security payments as separate transactions independently made on a monthly basis according to the recipient's entitlement eligibility. Because each month was viewed as a separate transaction the debtor's obligation to repay previous overpayments was not subject to recoupment but rather "the ordinary rules of bankruptcy," which limited the SSA to recovery of the prepetition overpayments through a setoff. 739 F.2d at 875-76. Ultimately, the court held that § 553(a) prevented the SSA from setting-off prepetition monthly overpayments with monthly benefits payable postpetition. Id. at 876.

The bankruptcy court in Ross adopted the reasoning of Lee, viewing unemployment insurance as "more akin to other social welfare programs" than to a contract. 83 B.R. at 675. Viewing the claims as not arising from the same transaction, the bankruptcy court held that the MDES did not exercise a recoupment but rather violated the automatic stay when it setoff the debtor's postpetition unemployment benefits against prepetition overpayments. Id.

On appeal of Ross, however, the district court reversed the bankruptcy court, stating that the bankruptcy court should have followed the reasoning of In re Maine, supra.⁵In re Ross, 104 B.R. 171, 172 (E.D.Mo.1989). In re Maine, looks upon the right to receive unemployment benefits as more "likened to . . . a societal contract" than a statutory social welfare entitlement. 32 B.R. at 454. The court in In re Maine allowed recoupment of the overpaid benefits because the debtor and the creditor's claims arose from the same societal contract for unemployment compensation. 32...