SSA Cannot “Recoup” Payments Obtained by Fraud from Separate Program

Posted by NCBRC - March 15, 2018

The SSA’s withholding of benefits from one program to recover fraudulently-obtained payments made under a separate program was not a “recoupment” free from the strictures of the automatic stay. U.S.A. v. Johnson, No. 17-5224 (N.D. Ill. March 12, 2018).

For more than three years John Johnson fraudulently received retirement social security benefits. Upon learning of the fraud, the SSA calculated that he owed almost $58,000 in ill-gotten benefits and penalties and began withholding his legitimate disability benefits. Mr. Johnson filed for chapter 13 bankruptcy and argued that the SSA’s withholding of his disability benefits violated the automatic stay. The bankruptcy court agreed and the SSA appealed.

On appeal, the court distinguished between set-off, where the automatic stay is applicable, and the equitable doctrine of recoupment, where the body of law holds that the automatic stay does not apply. In the case of recoupment, the mutual obligations must arise out of the same transaction. The court offered as an example a transaction in which A buys a truck from B for $1,000 and finds that he has to put $100 into repairs to make the truck usable. A may “recoup” the difference because only one transaction was involved. For set-off, on the other hand, the transactions must be different. For example: A sells B a bicycle for $100 which B never pays. A then buys a truck from B for $1,000 but pays only $900 claiming a set-off of the price of the bicycle. In that case, the mutual obligations arise out of separate transactions.

Having thus established its framework, the court turned to whether the correct standard to apply was the “logical relationship” standard, as endorsed by the SSA, or the “single integrated transaction” standard promoted by Mr. Johnson. The court noted that the Seventh Circuit had not yet made a determination as to the correct standard then dodged resolution of the question by finding that the SSA’s withholding of Mr. Johnson’s disability benefits was not a recoupment under either standard.

The court turned to the two programs involved. Mr. Johnson’s debt arose out of his fraudulent acquisition of retirement benefits funded by the Federal Old-Age and Survivors Insurance Trust Fund, 42 U.S.C. § 401, and was fixed when the SSA discovered the fraud. On the other hand, the disability benefits owed to Mr. Johnson were funded by congressional appropriation under 42 U.S.C. § 1381. The amount the SSA owed to Mr. Johnson under this statute was variable depending on ongoing statutory calculations. The court found that, based on this statutory construct, the mutual obligations did not arise out of the same transaction and were not logically related as is necessary for a finding of recoupment.

The court found that its conclusion harmonized with decisions in the First, Ninth, and D.C. Circuits in which the courts found that withholding Medicare benefits from later claims to repay earlier overpayments was “logically related” because the broad Medicare construct contemplated flexibility in payments over distinct payment instances. In this case, there was no connection between Mr. Johnson’s entitlement (or lack thereof) to retirement benefits and his entitlement to disability benefits.

The court found that the existence of a statutory justification for the SSA’s withholding benefits from one program to counter an overpayment in another did not change its analysis: the two benefit transactions had no logical relationship. In so finding, the court disagreed with In re Wernick, No. 16-cv-5313, 2016 WL 7212508 (N.D. Ill. Dec. 13, 2016).

The court concluded, therefore, that the bankruptcy court correctly held that the SSA’s withholding of Mr. Johnson’s disability benefits was prohibited by the automatic stay.

Johnson ND Ill opinion March 2018

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