Advanced Sick Leave Is Debt Subject to Recoupment

Posted by NCBRC - November 30, 2017

Advanced sick leave created a debt in bankruptcy that was subject to recoupment by the creditor/employer. Patterson v. Social Security Administration, No. 14-65877, Adv. Proc. No. 15-5129 (Bankr. N.D. Ga. Oct. 5, 2017).

Chapter 7 debtor, Tyree Patterson, worked for the Social Security Administration. The SSA had a policy whereby an employee who has exhausted his sick leave can “borrow” against future sick leave and “repay” the borrowed days with later-accrued sick leave. After Mr. Patterson obtained his discharge in bankruptcy, the SSA “collected” on his pre-petition advanced sick leave by reducing his newly accrued sick leave. Mr. Patterson reopened his bankruptcy to complain that the SSA’s conduct violated the discharge injunction.

The court began with the SSA’s argument that the Civil Service Reform Act (“CSRA”) places the matter within the administrative auspices of the SSA and outside the court’s subject matter jurisdiction. The court disagreed, finding that Mr. Patterson’s claim implicated the discharge injunction and was, therefore, a core bankruptcy proceeding over which it had jurisdiction under 28 U.S.C. 1334.

Turning to the issue of whether the SSA’s conduct violated the discharge injunction the court first addressed whether the advancement of sick days created a “debt” within the meaning of section 101(12). There, a “debt” is defined as “liability on a claim.” A “claim,” defined at section 101(5), is a “(A) right to payment . . . or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment.” Under the SSA’s sick leave policy, Mr. Patterson’s use of advance sick days created an obligation to repay that time either in kind through loss of future sick days, or, in the event the employee leaves the SSA with a sick leave deficit, through actual return of funds representing those days borrowed. The court determined that this constituted a prepetition “debt” to the SSA.

The next question, therefore, was whether the SSA violated the discharge injunction when it recouped that debt by divesting Mr. Patterson of newly accrued sick days. The equitable principle of recoupment is intended to prevent the situation in which a debtor benefits from a transaction without meeting his reciprocal obligations. The defense has two components: “(1) there must have been some overpayment by a creditor; and (2) both the creditor’s claim and the amount owed to the debtor must arise from a single contract or occurrence.” Applying these factors, the court concluded “that the recovery of prepetition advanced sick leave from postpetition earned sick leave constitutes recoupment because (1) the advancement of the leave was an overpayment; and (2) the prepetition advanced sick leave and postpetition earned sick leave arise from the same contract and occurrence.” Because the SSA “collected” on Mr. Patterson’s sick leave debt as a recoupment, its action was not an “offset” within the meaning of section 524(a)(2) and did not violate the discharge injunction.

The court dismissed Mr. Patterson’s remaining claims against the SSA as being either insufficiently pled, or falling within the purview of the CSRA and therefore outside the court’s jurisdiction.

Patterson Bankr ND Ga opinion Oct 2017

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