Equitable Recoupment Does Not Violate Stay

Posted by NCBRC - October 25, 2018

The creditor’s equitable recoupment of an overpayment of retirement benefits from the debtor’s ongoing monthly benefit payments did not violate the automatic stay. Williamson v. PARS, No. 17-1375 (B.A.P. 9th, Oct. 10, 2018) (unpublished).

The Public Agency Retirement System (PARS) erroneously calculated Barbra Williamson’s entitlement to supplemental retirement benefits by listing her yearly salary as monthly. When it discovered the mistake, PARS offset Ms. Williamson’s retirement benefit overpayment by withholding from the ongoing monthly payments to which she was entitled. Ms. Williamson filed for chapter 13 bankruptcy and sought sanctions against PARS for violation of the automatic stay. The bankruptcy court found no violation and denied the motion.

The Bankruptcy Appellate Panel began by making a distinction between a set-off, under section 553, and recoupment, which is not provided for in the Code. A set-off permits a creditor to offset a pre-petition debt it owes the debtor against a pre-petition obligation from the debtor to the creditor, and requires the creditor to acquire relief from the automatic stay before taking the set-off. Recoupment, on the other hand, is an equitable principal which is not subject to the automatic stay and which, unlike set-off, is not limited to pre-petition debts. Equitable recoupment requires that the counter-debts arise out of the same transaction, and the Ninth Circuit applies a “logical relationship” test to this element.

The BAP found that the debt Ms. Williamson owed to PARS and PARS’s obligation to her arose out of the same transaction as they were both related to her application for, and entitlement to, retirement benefits arising out of her work on City Council and the City Planning Board.

The panel rejected Ms. Williamson’s argument that courts overstep their authority by applying an exception to the automatic stay that is not listed in section 362(b). The panel found that it was bound by Ninth Circuit precedent, United States v. Martinez-Rodriguez, 472 F.3d 1087, 1093 (9th Cir. 2007), establishing that equitable recoupment does not violate the stay. The panel also rejected Ms. Williamson’s argument, based on Third Circuit precedent, that recoupment is limited to contractual agreements and that social welfare benefits are not contractual. The panel found that the case cited by Ms. Williamson was inapposite as the Third Circuit applies a narrower test for application of equitable recoupment than the Ninth Circuit’s “logical relationship” test.

Finally, the panel rejected Ms. Williamson’s argument that the pension benefit overpayment was not subject to recoupment because it was comparable to wages and state law prohibits recoupment from wages already paid to an employee. The panel simply found that retirement benefits are not wages under California law.

The panel affirmed.

Williamson 9th BAP Oct 2018


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