Terry v. Standard Insurance Co. (In re Terry)
- Summarized by Adam Ballinger , Faegre Drinker Biddle & Reath LLP
- 13 years 11 months ago
- Citation:
- Case No. 10-6058 (B.A.P. 8th Cir. January 28, 2011)
- Tag(s):
-
- Ruling:
- The Bankruptcy Appellate Panel reversed and remanded the bankruptcy court's order which held that 11 U.S.C. § 502(h) alone prevented Standard from asserting an equitable recoupment defense. The BAP explained the section 502(h) assumes the existence of a prepetition claim and instructs the court on how such claim is to be allowed in the case - nothing more. It does not limit Standard's rights to recovery. Standard had a general unsecured claim for the overpayment of benefits, but it did not file a proof of claim, its claim was not allowed, and was subsequently discharged. The discharge may prevent Standard from affirmatively recovering on its claim, but it does not impair the ability of Standard to assert the equitable defense of recoupment to defend against demands by the Debtor by withholding payment of future benefits in order to reimburse itself for the overpayment. Since the bankruptcy court did not determine if the equities favored allowing Standard a recoupment defense, the BAP remanded the question to the bankruptcy court.
- Procedural context:
- Creditor appealed from an order of the bankruptcy court granting the debtor's complaint for a declaratory judgment. The bankruptcy court determined that the creditor may not recoup $45,316.54 of disability insurance "overpayments" from the debtor's future disability payments.
- Facts:
- Joseph Terry (the "Debtor") was insured under a group long term disability policy through the Missouri State Employee's Retirement System. On December 6, 2005 the Debtor became disabled and under the disability policy Standard Insurance Company ("Standard") began paying benefits. Two years later, the Debtor was awarded Social Security Disability benefits which included a retroactive payment of $45,316.54 (the "Overpayment"). The debtor's disability insurance policy provided that his benefits under the policy would be reduced by any Social Security payments he received. Standard was entitled to be reimbursed for the Overpayment from the future benefit payments Standard would have made to the Debtor. The disability policy required the Overpayment to be repaid immediately. Based on the terms of the disability policy, the Debtor returned the Overpayment amount to Standard on July 24, 2008. On July 31, 2008 the Debtor filed a voluntary chapter 7 petition. Shortly thereafter, the the chapter 7 trustee sent a preference demand letter to Standard and demanded repayment of the Overpayment amount it received on July 24, 2008. Standard immediately repaid the Overpayment amount to the chapter 7 trustee and reinstated the Debtor's obligation to reimburse Standard for the Overpayment from the Debtor's future disability benefit payments. The Debtor commenced a declaratory judgment action against the chapter 7 trustee and Standard on multiple grounds. The only issue determined by the bankruptcy court was whether Standard may exercise the equitable right of recoupment post-bankruptcy to recover from the debtor the money that Standard turned over to the trustee.
- Judge(s):
- Kressel, Chief Judge and Nail, Bankruptcy Judge. Saladino, Bankruptcy Judge dissenting.
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