United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 11-2582
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In re: *
*
Joseph Warren Terry, *
* Appeal from the United States
Debtor, * Bankruptcy Court for the
______________________________ * Western District of Missouri.
*
Joseph Warren Terry, *
*
Appellee, *
*
v. *
*
Standard Insurance Company, *
*
Appellant. *
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Submitted: March 13, 2012
Filed: August 3, 2012
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Before WOLLMAN, COLLOTON and BENTON, Circuit Judges.
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BENTON, Circuit Judge.
Joseph Warren Terry, who receives long-term disability benefits, filed a
Chapter 7 bankruptcy petition. He later sued the bankruptcy trustee, seeking a
declaration that his disability insurance provider, Standard Insurance Company,
should not have reduced his benefits by the amount of certain “voidable” payments.
The bankruptcy court ruled that Standard was precluded from recouping the
payments. In re Terry, No. 08-43123, 2010 WL 2891710 (Bankr. W.D. Mo. July 21,
2010). Standard appealed to the Bankruptcy Appellate Panel, which reversed and
remanded, holding that recoupment was subject to a “balancing of the equities.” In
re Terry, 443 B.R. 816, 821 (B.A.P. 8th Cir. 2011). On remand, the bankruptcy court
found that the equities prevented Standard from recouping the payments. In re Terry,
453 B.R. 760, 764 (Bankr. W.D. Mo. 2011). Standard again appeals, arguing that (1)
the BAP erred in ordering the bankruptcy court to weigh the equities, and (2) the
bankruptcy court abused its discretion in how it weighed them. Having jurisdiction
under 28 U.S.C. § 158(d)(2), this court reverses and remands.
I.
Terry, a Missouri state employee, had a long-term disability policy issued by
Standard. Standard began paying him disability benefits in August 2006. By the
policy, benefits to a disabled employee are reduced by any Social Security disability
benefits (and the employee must actively pursue them). Terry authorized Standard
to automatically withdraw from his bank account any retroactive Social Security
disability benefits. On July 17, 2008, Terry received a $45,316.54 lump-sum award
of retroactive Social Security disability benefits. Standard withdrew that amount
from Terry’s bank account a week later. Terry filed for Chapter 7 bankruptcy on July
31. The trustee categorized the $45,316.54 Standard withdrew as a voidable
preference under 11 U.S.C. § 547. The trustee demanded that Standard return the
money. Standard complied. After returning the money to the trustee, Standard began
deducting $430.20 each month to recover the retroactive benefits. Standard stopped
the deductions after the bankruptcy court voiced its concern that they might violate
the automatic stay or the discharge injunction. Standard paid Terry its previous
retroactive withholdings, but expressly reserved the right to reinstate deductions if a
court determined they were permissible.
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Terry filed an adversary complaint against the bankruptcy trustee, seeking an
exemption for the $45,316.54 and a declaration that Standard could not make
deductions from his disability benefits. The trustee objected, arguing that under 11
U.S.C. § 522(g), Terry could not claim an exemption because he voluntarily
transferred the money to Standard. The bankruptcy court agreed with the trustee.
Standard then claimed a right of recoupment, which the bankruptcy court
rejected. Standard appealed to the BAP, which reversed and remanded. The BAP
held that Terry’s obligation to repay the $45,316.54 arose from the same transaction
as Standard’s obligation to pay his long-term disability benefits. The BAP remanded
for a determination whether it was equitable for Standard to recoup the overpayments
from Terry, holding that
recoupment is only allowed where it would be ‘inequitable for the
debtor to enjoy the benefits of that transaction without also meeting its
obligations,’ and recoupment should be narrowly construed in
bankruptcy. [U.S. Postal Serv. v. Dewey Freight Systems, Inc., 31 F.3d
620, 623 (8th Cir. 1994).] Standard’s rights are not absolute, and the
equities must be weighed. Because the bankruptcy court did not reach
the question of whether the equities favor allowing recoupment, we must
remand.
On remand, the bankruptcy court weighed the equities and ruled that Standard
could not recoup the payments.
On balance, considering all the equities, Standard is simply in a better
position to sustain this loss than the Debtor is, and not just because
Standard is a “big insurance company with deep pockets.” Having
observed Terry in Court and being aware of his medical prognosis, the
Court believes that Terry’s employment prospects are extremely bleak,
casting great doubt on whether he can ever make up for this loss of
income, whereas Standard (presumably) has the ability to continue
writing policies and earning money for the foreseeable future.
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Standard appeals, arguing that the BAP erred in concluding the bankruptcy court
must weigh the equities.
II.
In an appeal from the BAP, this court independently reviews the bankruptcy
court's decision, applying the same standard of review as the BAP. In re Danduran,
657 F.3d 749, 752 (8th Cir. 2011), citing In re Ungar, 633 F.3d 675, 678-79 (8th Cir.
2011). Fact findings by the bankruptcy court are reviewed for clear error; its
conclusions of law are reviewed de novo. Id. As the facts of this case are
undisputed, the BAP’s ruling is reviewed de novo. Capital One Auto Fin. v. Osborn,
515 F.3d 817, 821 (8th Cir. 2008).
Recoupment allows a defendant to deduct its claim from the amount the
plaintiff could otherwise recover if the claim arises out of the same transaction or
subject matter on which the plaintiff sued. In re NWFX, Inc., 864 F.2d 593 (8th Cir.
1989). Recoupment is “an equitable principle that allows a creditor in bankruptcy ‘to
show that because of matters arising out of the transaction sued on, he or she is not
liable in full for the [debtor's] claim.’” U.S. Postal Service v. Dewey Freight System,
Inc. 31 F.3d 620, 622-23 (8th Cir. 1994), quoting 4 Collier on Bankruptcy ¶ 553.03,
at 553–17 (15th ed. 1994). “To justify recoupment in bankruptcy, ‘both debts must
arise out of a single integrated transaction so that it would be inequitable for the
debtor to enjoy the benefits of that transaction without also meeting its obligations.’”
Id. at 623, quoting In re University Medical Ctr., 973 F.2d 1065, 1081 (3d Cir. 1992).
Terry argues that a creditor who meets the same-transaction test can be denied
recoupment based on a balancing of the equities, citing Dewey and Missouri cases
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describing recoupment as “equitable.”1 In Dewey, this court did not say it was weighing
the equities, but in examining recoupment “from the perspective of the Bankruptcy
Code’s treatment of executory contracts,” this court referred to recoupment as an
“equitable doctrine.” Id. at 622-23. This court noted, “Not surprisingly, given the
equitable nature of the doctrine, courts have refrained from precisely defining the same-
transaction standard, focusing instead on the facts and the equities of each case.” Id. at
623.
Discussing the “equities of each case,” this court in Dewey did not set forth an
additional element or precondition to recoupment. Id. Instead, this court highlighted the
equitable nature of recoupment to acknowledge the unfairness of requiring recoupment
when the same-transaction test is not met. Id. Dewey does not require courts to perform
an independent “balancing of the equities” test apart from the same-transaction analysis.
Nor do the Missouri cases Terry cites require a separate test. See Crouch, 47 S.W.2d
371; Burger, 46 S.W.2d 436.
Terry invokes three cases from other circuits, claiming that “the majority of
Circuits to have addressed the issue of recoupment in bankruptcy have . . . applied it as
directed by the equities of each case.” See In re Malinowski, 156 F.3d 131, 135 (2d
Cir. 1998) (denying recoupment “in light of the equitable nature of the recoupment
remedy”); In re Peterson Distributing, Inc., 82 F.3d 956, 960 (10th Cir. 1996) (“The
‘same transaction’ requirement acts as a mechanism to ensure that equitable reasons
for recoupment are present before a creditor may attain priority through the doctrine
1
See Boone Nat’l Sav. & Loan Ass’n v. Crouch, 47 S.W.3d 371, 374 (Mo.
2001) (“The concept of equity is invoked because recoupment is based on equitable
principles.”); Burger v. Wood, 446 S.W.2d 436, 444 (Mo. App. 1969) (“recoupment
[is] equitable in nature and designed to reduce plaintiff’s demand only ‘so far as in
reason and conscience it ought.’”). But see Birkenmeier v. Keller Biomedical, LLC,
312 S.W.3d 380, 387 (Mo. App. 2010) (treating recoupment as a legal, rather than
equitable, remedy by affirming the trial court’s use of a jury instruction on
defendant’s asserted right of recoupment).
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of recoupment . . . A ‘same contract equals same transaction’ rule would be overly
simplistic. Instead, as our case law illustrates, the ‘same transaction’ analysis involves
an examination of the parties' equities”); In re Straightline Investments, Inc., 525
F.3d 870, 882 (9th Cir. 2008) (“The doctrine of recoupment does not apply here,
however, because it is an equitable remedy . . .”). However, in two of those cases,
Malinowski and Peterson, the court applied the same-transaction test, holding that the
claims failed to meet it. In the Straightline case, the court did not apply a same-
transaction analysis, but ruled that recoupment was inapplicable in light of the
parties’ inequitable conduct, because the transaction itself violated the bankruptcy
court’s order. None of the cases cited by Terry answers the question here: whether
a creditor who meets the same-transaction test can be denied recoupment based on a
separate balancing-of-the equities test.
The First Circuit expressly rejected a separate balancing-of-the-equities test for
recoupment in bankruptcy. In re Slater Health Center, Inc., 398 F.3d 98, 104 (1st
Cir. 2005). That court held:
[T]he ‘same transaction’ analysis itself inherently embodies competing
issues of equity, for the simple reason that ‘it would be inequitable for
[a debtor] to enjoy the benefits of the same transaction without also
meeting its obligations.’ In at least most cases, analysis of the
recoupment issue should both begin and end with the same transaction
question without discussing other equitable issues. Since we have
already determined that the same transaction test is met in this case, we
need not go further.
Id. at 104 (emphasis in original) (internal citations omitted). This court agrees.
The BAP erred by introducing a separate “balancing of the equities” test into
the doctrine of recoupment and by invoking these equitable principles to deny
Standard a right of recoupment after finding that the obligations at issue arose out of
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the same transaction. Fairness and equity may influence whether two competing
claims arise from the same transaction, but a court should not impose an additional
“balancing of the equities” requirement once a party meets the same-transaction test.
* * * * * * *
The judgments of the bankruptcy appellate panel and the bankruptcy court are
reversed, and the case remanded to the bankruptcy court for further proceedings
consistent with this opinion.
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