Bankruptcy Law

Editor:
David N. Gunn, Esquire

Bankruptcy doctrine of recoupment does not have an equitable balancing test separate from the same-transaction test. Terry v. Standard insurance Company, No. 11-2582 (8th Circuit August 3, 2012), Wollman, Colloton, and Benton, Js.

Debtor was beneficiary of private disability insurance with a policy that provided for a reduction in benefits based on social security received by the insured. Debtor received $45,316 in retroactive social security benefits and elected to turn this money over to Standard Insurance in order to prevent an interruption in his benefits from his insurer. Debtor filed Chapter 7 bankruptcy two weeks later.

Standard turned the $45,000 over to the Trustee as a preferential transfer but then reduced monthly benefits to Debtor by $430. Standard sought declaration from the Bankruptcy Court that this reduction was allowable recoupment. The Bankruptcy Court ruled in favor of the Debtor. Standard appealed to the BAP, which affirmed the Bankruptcy Court, stating that the doctrine of recoupment is equitable in nature and instructed the lower court to apply a balancing test, which the lower court did and found again in favor of the Debtor. Standard then appealed to the 8th Circuit.

Held
: Judgments of the Bankruptcy Court and BAP reversed. The doctrine of recoupment is an equitable defense that prevents a creditor from being compelled to uphold its end of a transaction after a debtor has used bankruptcy to avoid his own obligations. The 8th Circuit has previously held that recoupment requires all obligations to stem from a single transaction. According to the 8th Circuit, this test and no other is the “equitable” component of the doctrine of recoupment.