Bankruptcy – Setoff – Social Security disability benefits

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Where plaintiff chapter 7 debtors seek to recover three setoffs of Supplemental Security Disability Insurance benefits owed by the Social Security Administration to one of the debtors against and in partial satisfaction of a reciprocal debt owed by him to SSA on account of earlier benefit overpayments, the debtors are not entitled to relief under 11 U.S.C. sectionsection553(b) or 547(b).

“Section 553 of the Bankruptcy Code recognizes and preserves creditors’ rights of setoff under applicable non-bankruptcy law … However, subject to exceptions not applicable here, section553 also permits a trustee — or, as here, a debtor acting under section522(h) — to recover from the creditor any amount offset within ninety days immediately preceding the date of the bankruptcy filing to a defined extent. 11 U.S.C. section553(b). Specifically, the trustee may recover the amount so offset ‘to the extent that any insufficiency on the date of such setoff is less than the insufficiency on the later of (A) 90 days before the date of the filing of the petition; and (B) the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency.’ 11 U.S.C. section553(b)(1). For purposes of this subsection, ‘“insufficiency” means amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such claim.’ 11 U.S.C. section553(b)(2).

“Accordingly, a trustee may recover a setoff under 11 U.S.C. section553(b)(1) to the extent that the creditor improved its position within the ninety-day period preceding the debtor’s bankruptcy petition. Application of the improvement-in-position test is strictly mathematical. … First, calculate the insufficiency, or the amount by which the claim of the creditor exceeded the debt owing to the debtor, on the date of setoff; second, calculate the same figure for the ninetieth day prior to the filing of the bankruptcy petition or, if later, for the first date during the ninety?day period when the amount of the claim of the creditor exceeded the debt owing to the debtor; and third, compare the two figures. If the former is less than the latter, there is a decrease in insufficiency, and the creditor must return the difference. … Conversely, if there is no decrease in insufficiency, no recovery may be had.

“I turn now to applying the formula to the present case. … On the ninetieth day before the bankruptcy filing, [James] Damas owed the SSA $13,278, and the SSA owed Damas $5,370, for an insufficiency of $7,908. When the SSA made each of the three payments, it applied $605 of it in partial satisfaction of the overpayment debt and gave the balance, $1,185, to Damas. This reduced the amount of SSA’s claim against Damas in three increments of $605, for a total reduction of $1,815, to a balance after the third reduction of $11,463. Each payment also reduced the amount of Damas’s claim against the SSA by $1,790, the total of the amount paid to him, $1,185, plus the amount credited to Damas’s debt to SSA, $605, for an aggregate reduction of SSA’s debt to Damas over the three payments to $0. With each payment, the insufficiency did not decrease but actually increased by $1,185 per month, for a total increase of $3,555. Because there was no decrease in insufficiency, the extent to which the setoffs may be recovered is $0. …

“Section 547(b) permits the avoidance of certain ‘transfers,’ 11 U.S.C. section547(b) (‘the trustee may avoid any transfer of an interest of the debtor in property’), and only ‘transfers.’ … For purposes of section547 and title 11 in general, ‘transfer’ is defined at 11 U.S.C. section101(54). The definition, though broad in scope, does not expressly include setoff; and, as explained in Braunstein v. Branch Group, Inc. (In re Massachusetts Gas & Electric Light Supply Co., Inc.), 200 B.R. 471, 473 (Bankr. D. Mass. 1996) (setoff is excluded from definition of transfer and therefore not subject to avoidance under 11 U.S.C. section549), the legislative history shows that Congress considered the question and expressly elected to exclude setoff from the meaning of transfer. Accordingly, it is well?settled that setoffs are not transfers and therefore are not avoidable under 11 U.S.C. section547(b). … ‘Congress intended to exclude setoff from the ‘transfer’ definition in order to assure that setoff would be treated exclusively under the provision of section553.’ … Thus, Damas’s count for recovery of the withholdings under section547(b) must fail.”

In Re: Damas, James, et al. (Lawyers Weekly No. 04-001-14) (9 pages) (Bailey, J.) (USBC) (Chapter 7 Case No. 12-15313-FJB; Adversary Proceeding No. 12-1331) (Jan. 6, 2014).

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