Revised October 30, 1998
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
____________________
No. 97-40580
Summary Calendar
____________________
IN THE MATTER OF STEPHEN J KOSADNAR; PEGGY MARLEA KOSADNAR,
DEBTORS,
STEPHEN J KOSADNAR; PEGGY MARLEA KOSADNAR,
Appellants,
v.
METROPOLITAN LIFE INSURANCE COMPANY,
Appellee.
_________________________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
_________________________________________________________________
October 23, 1998
Before KING, BARKSDALE, and STEWART, Circuit Judges.
PER CURIAM:
Stephen J. Kosadnar and Peggy Marlea Kosadnar sought to hold
Metropolitan Life Insurance Company in contempt of court for
violating the automatic stay relating to their Chapter 7
bankruptcy. The bankruptcy court denied the contempt motion, and
the district court affirmed the bankruptcy court’s decision. For
the following reasons, we affirm the order of the district court
affirming the bankruptcy court’s order denying the contempt
motion.
I. FACTUAL AND PROCEDURAL BACKGROUND
This litigation concerns the terms of employment between
Stephen J. Kosadnar (Kosadnar) and Metropolitan Life Insurance
Company (MetLife). When first hired in November 1992 as an
account representative, Kosadnar became bound and covered by
MetLife’s Compensation Plan, including the Experienced
Representative Plan (EXP).1 The EXP detailed Kosadnar’s salary
for the first fifteen weeks of work at MetLife. Kosadnar was
paid eight hundred dollars a week; one hundred dollars each week
was an interim payment, while the other seven hundred dollars a
week was considered an advance against first-year commissions.
The advance payments, including interest, were to be repaid to
MetLife out of Kosadnar’s Expense Reimbursement Account (ERA),
beginning in Kosadnar’s sixteenth week of employment.
Consistent with the EXP, MetLife began withholding part of
Kosadnar’s ERA in order to recover the amount of commission
advances made to him. In September 1994, Mr. Kosadnar became a
sales manager, and a few months later, he returned voluntarily to
1
This statement and all other factual statements in this
section were stipulated to by the parties in the original
bankruptcy proceeding.
2
his former job as an account representative. These employment
changes, coupled with MetLife discontinuing the ERA program,
necessitated an alteration in the advance-repayment schedule. In
January 1995, to accommodate these changes, the remaining
$7903.75 to be repaid to MetLife was spread out over two years,
and MetLife began withholding $75.99 per week from Kosadnar’s
pay.
Under the Compensation Plan, when an account representative
sells an insurance policy, MetLife provisionally credits the
annualized first-year commission for that policy to a Moving
Average Account (MAA), from which the representative’s commission
payments are made.2 If a policy lapses during its first year,
the account representative must repay part of the first-year
commission for that policy. Under the Compensation Plan, MetLife
has the right to withdraw the entire amount of the commission
overpayment from the MAA, which would therefore decrease the
amount of commission payments made to the representative.
One of the policies that Kosadnar sold in January 1994
lapsed, resulting in an obligation to repay to MetLife $5023.26
in unearned commissions. On January 25, 1995, Mr. Kosadnar made
a formal request that MetLife allow him to spread out this
payment over one year, rather than repaying the entire amount at
once from his MAA. MetLife granted this request and began to
2
Under the Compensation Plan, account representatives
receive ten percent of the balance of the MAA each week.
3
debit $97.00 from Kosadnar’s weekly pay to recover the unearned
commission. In total, MetLife was withdrawing $172.99 per week
from Kosadnar’s weekly pay.
On June 8, 1995, Kosadnar and his wife, Peggy Marlea
Kosadnar, filed a petition for Chapter 7 bankruptcy in the United
States Bankruptcy Court for the Southern District of Texas.
MetLife continued to withdraw $172.99 from Kosadnar’s paycheck.
Appellants filed a motion to hold MetLife in contempt of court
for violation of the automatic stay. On January 30, 1996, the
bankruptcy court denied appellants’ motion, holding that
MetLife’s actions constituted recoupment and were therefore not
subject to the automatic stay. The district court affirmed the
decision of the bankruptcy court, and the appellants timely filed
an appeal to this Court.
II. DISCUSSION
The disposition of this case depends on whether MetLife’s
withholdings from Kosadnar’s pay are characterized as recoupment
or setoff. The bankruptcy and district courts termed the
withholdings as recoupment and therefore held that the
withholdings did not violate the automatic stay imposed by the
bankruptcy court. We review these lower court conclusions of law
de novo. See Phoenix Exploration, Inc. v. Yaquinto (In re
Murexco Petroleum, Inc.), 15 F.3d 60, 62 (5th Cir. 1994);
Killebrew v. Brewer (In re Killebrew), 888 F.2d 1516, 1518 (5th
Cir. 1989).
4
Recoupment “‘allows a defendant to reduce the amount of a
plaintiff’s claim by asserting a claim against the plaintiff
which arose out of the same transaction to arrive at a just and
proper liability on the plaintiff’s claim.’” United States
Abatement Corp. v. Mobil Exploration & Producing U.S., Inc. (In
re United States Abatement Corp.), 79 F.3d 393, 398 (5th Cir.
1996) (quoting Holford v. Powers (In re Holford), 896 F.2d 176,
178 (5th Cir. 1990) (internal quotations omitted)). There are
two general requirements to characterizing a withholding as
recoupment--first, some type of overpayment must have been made,
and second, both the creditor’s claim and the amount owed to the
debtor must arise from a single contract or transaction.3 See
Photo Mechanical Servs., Inc. v. E.I. DuPont De Nemours & Co. (In
re Photo Mechanical Servs., Inc.), 179 B.R. 604, 613 (Bankr. D.
Minn. 1995). When applied, the doctrine allows a bankrupt’s
unsecured creditors to obtain preferential treatment. See id.
Specifically, money recouped by creditors from an amount owed to
a debtor post-petition would not be subject to the automatic
stay. See Holford, 896 F.2d at 179.
A setoff, on the other hand, “involves a claim of the
defendant against the plaintiff which arises out of a transaction
3
Appellants claim, without authority, that in addition to
these two requirements, the creditor must possess a contractual
lien to secure future payments. We have rejected the proposition
that the creditor must have any contractual rights to future
payments in order to recoup overpayments. See Holford, 896 F.2d
at 178.
5
which is different from that on which the plaintiff’s claim is
based.” Holford, 896 F.2d at 178 (citation and quotation
omitted). The Bankruptcy Code specifically disallows the setoff
of pre-petition claims against post-petition earnings. See 11
U.S.C. § 553.
This court must determine whether MetLife’s recovery of
overpayments made to Kosadnar constitutes setoff or recoupment.
The key issues, therefore, are whether MetLife withheld money
that it overpaid to Kosadnar, and whether the pre-petition
overpayments and the post-petition pay arise from the same
transaction. We find that because MetLife withheld overpayments
arising from the same transaction as Kosadnar’s pay, the recovery
constitutes recoupment.
First, both the advances against future commissions and the
lapsed-policy commissions represent overpayments by MetLife to
Kosadnar. MetLife advanced Kosadnar money during his first
fifteen weeks of employment, and these payments were expressly
termed “advances against first-year commissions” in Kosadnar’s
employment agreement. Similarly, MetLife overpaid Kosadnar for
the lapsed insurance policy, as MetLife credited an entire year’s
commission into Kosadnar’s commission account when, in fact, the
policy was not paid for a year. These overpayments are exactly
the type of overpayments the recoupment doctrine contemplates.
“The majority view is that when an insurance company advances
commissions to an insurance agent and that agent later files a
6
petition in bankruptcy, the insurance company may recoup those
monies previously advanced as they accrue, post-petition, to the
agent.” Pruett v. American Income Life Ins. Co. (In re Pruett),
220 B.R. 625, 628 (Bankr. E.D. Ark. 1997) (citing Wineburg v.
Knights of Columbus (In re Sherman), 627 F.2d 594, 595 (2d Cir.
1980); In re Ruiz, 146 B.R. 877, 881 (Bankr. S.D. Fla. 1992);
Williams v. Tomer (In re Tomer), 128 B.R. 746, 759 (Bankr. S.D.
Ill. 1991), aff’d 147 B.R. 461 (S.D. Ill. 1992)); see also Wiley
v. Public Investors Life Ins. Co., 498 F.2d 101, 104 (5th Cir.
1974) (allowing insurance company to recoup advances made in
anticipation of future commissions); Mutual Trust Life Ins. Co.
v. Wemyss, 309 F. Supp. 1221, 1231 (D. Me. 1970) (same). In each
of these cases, the insurance company advanced its employee-
debtor commissions to which the debtor was not entitled, and the
court found that the insurance company overpaid within the
meaning of the recoupment doctrine. We therefore have little
difficulty finding that MetLife in this case overpaid Kosadnar by
advancing him money based on future commissions and by assuming
that sold policies would not lapse.
The central question in this case then becomes whether these
pre-petition advances arise out of the same transaction as
Kosadnar’s post-petition pay. Appellants claim that because the
advance repayments in this case arose from separate agreements
entered into after the original EXP agreement, the pre-petition
debts and post-petition claims do not arise out of the same
7
transaction. Appellants argue that there are three separate
transactions in this case--first, the EXP agreement; second, the
lapsed-policy agreement; and third, the alteration of the
advance-repayment schedule.
There is no general standard governing whether events are
part of the same or different transactions. “[G]iven the
equitable nature of the [recoupment] doctrine, courts have
refrained from precisely defining the same-transaction standard,
focusing instead on the facts and the equities of each case.”
United States ex rel. United States Postal Serv. v. Dewey Freight
Sys. Inc., 31 F.3d 620, 623 (8th Cir. 1994); see also Official
Comm. of Unsecured Creditors of Baja Boats, Inc. v. ITT
Commercial Fin. Corp. (In re Baja Boats, Inc.), No. 94-60141,
1996 WL 521416, at *3 (Bankr. N.D. Ohio July 24, 1996) (“Whether
the obligations arose from the same transaction is to be
determined by the facts and equities of the particular case.”).
In this case, we agree with the lower courts that the
overall Compensation Plan was one transaction which encompassed
both MetLife’s claims against Kosadnar based on the pre-petition
advances and Kosadnar’s claims against MetLife for compensation.
First, a plain reading of the Compensation Plan itself indicates
that all of its components should be considered part of the same
transaction. The parties explicitly agreed in the stipulated
facts that “Kosadnar became bound and covered by . . . EXP, which
is a part of MetLife’s overall compensation plan.” The EXP did
8
not contain all material terms of the employment relationship
between the parties. Indeed, the EXP itself is labeled as
Schedule 7, a part of the overall Compensation Plan.
The Compensation Plan as a whole does contain all material
terms relating to the employment relationship and explicitly
governs all pre-petition and post-petition claims between the
parties. EXP paragraph 4 described the terms relevant to
Kosadnar’s obligation to repay the commission advance he received
during his first fifteen weeks of employment. Schedule 2 of the
Compensation Plan detailed how much commission an account
representative had to repay to MetLife if a sold policy lapsed.
The General Provisions Section 301(H) of the Compensation Plan
outlined how an account representative could spread the repayment
of unearned commissions over a term of weeks. Lastly, the
Compensation Plan explained how the commissions that account
representatives earned for selling policies were calculated.
Therefore, all original terms governing both types of pre-
petition debt at issue here and Kosadnar’s post-petition income
were present in MetLife’s Compensation Plan, which bound both
Kosadnar and MetLife.
The fact that changed circumstances necessitated changing
the payback schedule for the commission advance does not alter
this analysis. “[A]pplication of the ‘equitable doctrine [of
recoupment] should not depend on whether the parties expressly
anticipated the problem.’” Holford, 896 F.2d at 178 (quoting
9
Ashland Petroleum Co. v. Appel (In re B & L Oil Co.), 782 F.2d
155, 159 (10th Cir. 1986) (brackets in original)). The original
employment terms between MetLife and Kosadnar clearly
contemplated the payback of the commission advances to MetLife.
The later alteration to the terms does not change the fact that
the debt to MetLife arose out of the original employment
contract.
Similarly, the fact that the lapsed policy arose after
Kosadnar and MetLife entered into the original employment
contract does not mean that the repayment of the lapsed policy
commissions constitutes a different transaction. The
Compensation Plan clearly provided that account representatives
could spread repayments resulting from rescinded policies. As
above, the fact that the parties did not anticipate the exact
amount of any eventual lapse does not prevent the lapse from
arising out of the employment contract.4
Therefore, the Compensation Plan encompasses all relevant
claims by MetLife and Kosadnar, despite later alterations to
repayment terms. When all claims arise out of one contract
between the parties, application of the recoupment doctrine is
appropriate. See Aetna Life Ins. Co. v. Bram (In re Bram), 179
4
Of course, this type of uncertainty is exactly why such
repayment terms are included in the Compensation Plan. If the
amount of unearned commissions due to lapsed policies could be
accurately forecasted, there would never be a need to repay any
unearned commissions to MetLife.
10
B.R. 824, 826 (Bankr. E.D. Tex. 1995) (stating that “the
recoupment doctrine has been applied primarily where the
creditor’s claim against the debtor and the debtor’s claim
against the creditor arise out of the same contract”); Long Term
Disability Plan of Hoffman-La Roche v. Hiler (In re Hiler), 99
B.R. 238, 242 (Bankr. D. N.J. 1989) (finding that “all the claims
arise out of the same contract and that the [creditor] clearly
has a valid right of recoupment against the debtor”).
In addition, the facts and equities of this case support a
conclusion that the pre-petition debts and post-petition pay
arose from the same transaction. Each post-petition paycheck
received by Kosadnar is, at least in part, paid from Kosadnar’s
MAA. The balance of this commission account would be
substantially smaller if Kosadnar had not altered the repayment
schedule for the commission advances and requested a spread of
the unearned commission payback for the lapsed policy. In this
context, Kosadnar’s efforts to avoid repayments are simply
attempts to avoid the unfavorable aspects of his employment
bargain with MetLife.
We agree with the bankruptcy court that the analysis of
Aetna Life Insurance Co. v. Bram (In re Bram), 179 B.R. 824
(Bankr. E.D. Tex. 1995), applies here. In Bram, a debtor was
eligible to receive funds from an employee benefit plan, and the
amount received from the plan was to be decreased by any amount
he received from social security. See id. at 825. The debtor
11
continued to collect the full amount of his eligible benefits
from the plan, even after he began to receive payments from
social security, resulting in an overpayment of benefits to the
debtor. See id. at 825-26. The bankruptcy court allowed a post-
petition recoupment of these overpayments, stating that “a debtor
may not assume the favorable aspects of a contract (post-petition
payments) and reject the unfavorable aspects of the same contract
(the obligation to repay pre-petition overpayments by means of
recoupment).” Id. at 826.
In this case, Kosadnar is attempting to receive the part of
the deal most beneficial to him (the payment from the commission
balance), while avoiding the aspects of the employment contract
least desirable to him (the payback of the overpayments). As we
agree with the bankruptcy and district courts that repayment of
the unearned and advanced commissions arise out of the same
commission pool and employment contract as the commissions earned
by Kosadnar for which he is paid, we find that the withholdings
by MetLife constitute recoupment.
Post-petition recoupment does not violate the automatic stay
imposed by the bankruptcy court. See Holford, 896 F.2d at 179.
“The trustee of a bankruptcy estate ‘takes the property subject
to rights of recoupment.’ . . . ‘[T]he debtor has no interest in
the funds and, therefore, the stay has not been violated.’” Id.
(quoting Brock v. Career Consultants, Inc. (In re Career
Consultants, Inc.), 84 B.R. 419, 424, 426 (Bankr. E.D. Va.
12
1988)). Therefore, the bankruptcy court and district court were
correct in declining to hold MetLife in contempt of court for
violating the automatic stay.
III. CONCLUSION
For the foregoing reasons, we AFFIRM the order of the
district court affirming the bankruptcy court’s order denying the
contempt motion.
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