Thigpen v. United States (In re Thigpen)

• Decision Date: 30 September 2018
• Docket Number: 17 C 7222
• Parties: IN RE James THIGPEN, Debtor. James Thigpen, Appellant, v. United States of America, Appellee.
• Court: U.S. District Court — Northern District of Illinois

590 B.R. 810

IN RE James THIGPEN, Debtor.James Thigpen, Appellant,

v.United States of America, Appellee.

17 C 7222

United States District Court, N.D. Illinois, Eastern Division.

Signed September 30, 2018

Kathryn Marie Liss, Daniel Payne Lindsey, LAF, Chicago, IL, for Appellant.

Michael Joseph Kelly, United States Attorney's Office, United States Trustee, Clerk Bankruptcy Court, U.S., Jacqueline Cox, Northern District of Illinois, Chicago, IL, for Appellee.

Gary Feinerman, United States District Judge

MEMORANDUM OPINION AND ORDER

James Thigpen appeals the bankruptcy court's orders granting the Government's motion to amend its judgment and denying his motion to enforce the automatic stay. Docs. 1, 1-3, 1-4. The bankruptcy court's ruling is vacated and the case is remanded for consideration of the Government's motion for relief from the automatic stay.

Background

The pertinent facts are undisputed. In May 2009, Thigpen pleaded guilty to violating 18 U.S.C. § 641 by fraudulently obtaining Supplemental Security Income ("SSI") benefits, which are intended to provide income security to qualifying persons with disabilities. Doc. 6-2 at 99-108; see United States v. Thigpen , No. 06 CR 779 (Manning, J.). The district court sentenced him to two years' probation and ordered him to pay $49,327.17 in restitution to the Social Security Administration ("SSA") "in increments of 10% of [his] net, monthly income." Doc. 6-2 at 117-122. Each month for almost eight years, Thigpen paid SSA approximately ten percent of his monthly Social Security Old-Age, Survivors, and Disability Insurance ("OASDI") benefits, his only source of income during that time. Doc. 8 at 7-8; see Doc. 6-2 at 32, 36-37.

In March 2017, SSA began withholding 100 percent of Thigpen's OASDI benefits. Doc. 6-2 at 183; Doc. 8 at 6; Doc. 10 at 7. Thigpen quickly filed for Chapter 13 bankruptcy. Doc. 6-2 at 7-72. Citing the equitable recoupment doctrine, the Government moved the bankruptcy court to confirm that the automatic stay, see 11 U.S.C. § 362(c)(3)(A), did not apply to its withholding of Thigpen's OASDI benefits or, alternatively, for relief from the automatic stay. Doc. 6-2 at 78-122. While the motion was pending, the bankruptcy court confirmed a Chapter 13 plan providing that Thigpen would pay SSA $100 per month, just over 10% of the total benefit, in restitution. Id. at 2-4, 141, 172; Doc. 8 at 6.

The bankruptcy court denied the Government's motion regarding the automatic stay. Doc. 6-2 at 183; Doc. 6-3 at 1-3. The bankruptcy court reasoned, in pertinent part, that the district court's criminal restitution order mandating payment "in increments of 10% of defendant's net, monthly income" was res judicata and precluded the bankruptcy court from authorizing SSA to withhold 100 percent of Thigpen's benefits. The Government moved to amend the bankruptcy court's judgment, Doc. 6-3 at 5-25, and Thigpen cross-moved for an order compelling SSA to pay the OASDI benefits that SSA was continuing to withhold, id. at 27-29. The bankruptcy court granted the Government's motion, denied Thigpen's motion, and vacated its prior order. Docs. 1-3, 1-4. Citing In re Wernick , 2016 WL 7212508 (N.D. Ill. 2016), the bankruptcy court held that SSA's withholding of Thigpen's OASDI benefits constituted recoupment and thus was not subject to the automatic stay, and also that the criminal restitution order was not res judicata. Ibid. Thigpen timely appealed. Doc. 1.

Discussion

Thigpen offers several challenges to the bankruptcy court's order, but it is necessary to consider only one—that SSA's withholding of Thigpen's OASDI benefits is not recoupment and thus does not fall outside the scope of the automatic stay. As the Government agreed at the argument on this appeal, Doc. 13, if the recoupment doctrine does not apply, then SSA's withholding of Thigpen's OASDI benefits is subject to the automatic stay. This court reviews de novo the bankruptcy court's decision on the recoupment issue. See In re Terry , 687 F.3d 961, 963 (8th Cir. 2012) ; In re Holyoke Nursing Home, Inc. , 372 F.3d 1, 3 (1st Cir. 2004) ; Matter of Kosadnar , 157 F.3d 1011, 1013 (5th Cir. 1998).

Filing a bankruptcy petition "operates as a stay, applicable to all entities, of ... any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the [bankruptcy] case ...." 11 U.S.C. § 362(a)(6). "[T]he setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor" is also stayed. Id. § 362(a)(7) ; see Citizens Bank of Md. v. Strumpf , 516 U.S. 16, 20, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995) (recognizing that 11 U.S.C. § 362 imposes a "restriction upon when an actual setoff may be effected—which is to say, not during the automatic stay"); In re Univ. Med. Ctr. , 973 F.2d 1065, 1079-80 (3d Cir. 1992). Property subject to the recoupment doctrine, by contrast, is exempt from the automatic stay. See In re Malinowski , 156 F.3d 131, 133 (2d Cir. 1998) ("The distinction between set-off and recoupment is crucial because set-off claims are subject to the automatic stay of 11 U.S.C. § 362...."); In re McMahon , 129 F.3d 93, 96 (2d Cir. 1997) ("While a ‘setoff’ is subject to the automatic stay provision of 11 U.S.C. § 362, a recoupment is not."); United States v. Consumer Health Servs. of Am., Inc. , 108 F.3d 390, 395 (D.C. Cir. 1997) (noting that the recoupment doctrine "exempts a debt from the automatic stay when the debt is inextricably tied up in the post-petition claim"); Matter of U.S. Abatement Corp. , 79 F.3d 393, 398 (5th Cir. 1996) ; In re Davidovich , 901 F.2d 1533, 1537 (10th Cir. 1990).

The dispositive question here is whether SSA's withholding of Thigpen's OASDI benefits to cover the debt he owes from SSA's prior overpayment of SSI benefits qualifies as a recoupment or merely a setoff. The difference between the two doctrines is this: Recoupment applies only if the debtor's and the party's mutual obligations arise out of the "same transaction," N. Tr. Co. v. Peters , 69 F.3d 123, 135 (7th Cir. 1995) ; see also Consumer Health , 108 F.3d at 395 (noting that the recoupment doctrine "exempts a debt from the automatic stay when the debt is inextricably tied up in the post-petition claim"), while setoff applies if the obligations arise from different transactions, see Univ. Med. Ctr. , 973 F.2d at 1079-80. Whether the mutual obligations here—Thigpen's pre-petition obligation to repay his ill-gotten SSI benefits to SSA, and SSA's ongoing post-petition obligation to pay Thigpen OASDI benefits—arise out of the same transaction turns on the governing statutes and regulations. See Consumer Health , 108 F.3d at 395 (in a case concerning the withholding of Medicare payments to the debtor Medicare provider, noting that "[i]n determining whether the pre-petition and post-petition services should be thought of as one transaction, the key to us is the Medicare statute"); see also Holyoke Nursing Home , 372 F.3d at 4 ; In re TLC Hospitals. , 224 F.3d 1008, 1013 (9th Cir. 2000). After all, as the Seventh Circuit explained in a different context: "Property interests ... are created and their dimensions are defined by existing rules or understandings that stem from an independent source such as state law-rules or understandings that secure certain benefits and that support claims of entitlement to those benefits." Hussey v. Milwaukee Cnty. , 740 F.3d 1139, 1142-43 (7th Cir. 2014) (internal quotation marks omitted).

The D.C. Circuit's opinion in Consumer Health , which considered whether the recoupment doctrine applied to the government's withholding payment for post-petition Medicare services to recover pre-petition overpayments to the debtor provider, illustrates how the analysis should be conducted. 108 F.3d at 394-96. The D.C. Circuit began by noting that the statute defining the debtor's entitlement to payment instructed the Secretary of Health and Human Services to determine how much providers "shall be paid" for services, "with necessary adjustments on account of previously made overpayments or underpayments." Id. at 394 (quoting 42 U.S.C. § 1395g(a) ). The court held that the Secretary's withholding payment for post-petition services was a recoupment, reasoning: "Since [the Medicare statute] requires the Secretary to take into account pre-petition overpayments in order to calculate a post-petition claim ... 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. at 395 ; see also Holyoke Nursing Home , 372 F.3d at 4 (adopting the D.C. Circuit's reasoning and result); TLC Hospitals , 224 F.3d at 1013 (same).

The bankruptcy court relied exclusively on Wernick in holding that the recoupment doctrine covered SSA's withholding of Thigpen's post-petition OASDI benefits to recover the pre-petition debt he owes SSA for his fraudulent receipt of SSI benefits. Docs 1-3, 1-4. Wernick considered whether the recoupment doctrine covered SSA's post-petition withholding of OASDI benefits to compensate for the debtor's pre-petition fraudulent receipt of OASDI benefits. 2016 WL 7212508, at *1. The district court observed that the statute authorizing SSA to withhold such benefits, 42 U.S.C. § 404, helped to define the debtor's entitlement to those benefits. Id. at *4. The court also noted that, in cases where the earlier benefits were obtained fraudulently, § 404 and its implementing regulations require SSA to withhold ongoing benefits rather than leaving the decision to the agency's discretion. Id. at *3 ; see 42 U.S.C. § 404(a)(1)(A) (requiring SSA to reduce benefits to account for prior overpayments); id. § 404(b) (permitting SSA to relax the requirement where the overpayment was without fault, but not when the overpayment was with fault); 20 C.F.R. § 404.502(a)(1) (requiring SSA to reduce benefits to...