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Terry v. Standard Insurance Co. (In re Terry)

In re Terry, --- F.3d ----, 2012 WL 3139364 (8th Cir. Aug. 3, 2012)
The 8th Circuit Court of Appeals REVERSED the 8th Circuit BAP and the Bankruptcy Court for the Western District of Missouri and REMANDED the case to the Bankruptcy Court for further proceedings consistent with the opinion. Reviewing the BAP's decision de novo, the 8th Circuit ruled that: 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 issues arose out of 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 “balance of the equities” requirement once a party meets the same-transaction test. In so ruling, the 8th Circuit clarified that its 1994 opinion rendered in U.S. Postal Service v. Dewey Freight System, Inc., 31 F.3d 620 (8th Cir. 1994) “does not require courts to perform an independent ‘balance of the equities’ test apart from the same transaction analysis.” The 8th Circuit further noted its agreement with the 1st Circuit Court of Appeals’ decision issued in In re Slater Health Center, Inc., 398 F.3d 98, 104 (1st Cir. 2005), in which the 1st Circuit rejected a separate balance-of-the-equities test for recoupment in bankruptcy. The 8th Circuit’s decision did not alter the BAP’s previous finding that the Bankruptcy Court had erred in not permitting Standard to assert the equitable defense of recoupment. The BAP ruled that the debtor's debt to Standard was revived when Standard turned over the $45,316.54 to the trustee in response to the preference demand letter. Standard's right to reimbursement was a claim entitled to be paid as a general unsecured claim as allowed under Section 502(h). Standard did not file a proof of claim, so it's claim was not allowed and it was not entitled to any distribution in the case. Its claim was also discharged under Section 727(b). The BAP found that although the debt was discharged and Standard could not collect the overpayment affirmatively, Standard's equitable defense of recoupment survived and could be exercised under the policy. For recoupment to apply, the creditor must have a claim against the debtor that arose from the same transaction as the debtor's claim against the creditor. The BAP ruled that both parties' rights and obligations arose out of a single contract, i.e. the long-term disability insurance policy. The BAP further commented that recoupment is only allowed where it would be inequitable for the debtor to enjoy the benefits of the transaction without also meeting his obligations, and that it is narrowly construed in bankruptcy.
Procedural context:
After turning over $45,316.54 to the Chapter 7 trustee in response to a preference demand letter, Standard began deducting funds from the debtor's post-petition long-term disability benefits to satisfy the overpayment of $45,316.54 for which Standard was entitled to reimbursement under the long-term disability insurance policy. The bankruptcy court noted its concern that Standard was not entitled to take such action. The debtor commenced an adversary proceeding seeking a declaration of the rights of the parties, turnover by the trustee of the $45,316.54 to the debtor, and judgment preventing Standard from recouping the $45,316.54 from the debtor's past and future benefits. In connection with proceedings related to the debtor's claimed exemptions, the Bankruptcy Court treated as moot and dismissed the debtor's claims against the trustee for turnover of the $45,316.54. As to the debtor's remaining claims, the Bankruptcy Court determined based on Section 502(h) that Standard was not entitled to recoupment. The Bankruptcy Court found that Section 502(h) limited Standard to a claim against the estate and eliminated its rights against the debtor. The Bankruptcy Court did not reach the merits of Standard's recoupment defense and made no findings regarding equitability. Standard appealed to the BAP. The BAP reversed the Bankruptcy Court's determination that Standard was not entitled to recoupment and remanded the matter for a determination as to whether the equities favored recoupment. On remand, the Bankruptcy Court found that the equities prevented Standard from recouping the $45,316.54. Standard appealed to the 8th Circuit, which reversed the BAP and the Bankruptcy Court and remanded the matter to the Bankruptcy Court for further proceedings consistent with the 8th Circuit’s opinion.
Through the Missouri State Employees' Retirement System the debtor, Joseph Terry, received a group long-term disability policy with Standard Insurance Company ("Standard"). The debtor started receiving long-term disability benefits under the policy in August of 2006. In May of 2008, the debtor was awarded Social Security Disability Insurance benefits, including a retroactive payment in the amount of $45,316.54 for a period going back to June of 2006. Pursuant to the policy, long-term disability benefits were reduced by the amount of any Social Security payments received. Standard was entitled to be reimbursed for any such "overpayments." Standard determined it was entitled to recover the $45,316.54 as an overpayment. Pursuant to the policy, Standard was entitled to immediate reimbursement of the overpayment in full. Standard withdrew the total amount from the debtor's bank account pursuant to a pre-authorization signed by the debtor when he submitted his claim under the policy. If the debtor had not had the full amount available for withdrawal, Standard was also entitled under the policy to apply future long-term disability benefits payments to reduce the overpayment. The debtor filed a voluntary petition under Chapter 7 and the trustee sent a preference demand letter to Standard demanding turnover of the $45,316.54 withdrawn from the debtor's account. Standard immediately sent the money to the trustee and began deducting the reinstated overpayment from the debtor's post-petition long-term disability benefits.
Wollman, Colloton, Benton

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