Cooper v Social Security Administration (In re Cooper)

In a published opinion, The Ninth Circuit Court of Appeals (the Court) held that the logical relationship test which applies to the equitable doctrine of recoupment demands consideration of the equities, including the purpose of the Bankruptcy Code, in each individual case.  In the instant case, those equitable considerations meant that the Social Security Administration (SSA) was not entitled to recoup an overpayment of Social Security Disability Insurance benefits (SSDI), which had occurred at no fault of the debtor, by deducting the overpayments from the current, ongoing SSDI benefits being paid to the debtor when the overpayment liability had subsequently been discharged in a chapter 7 bankruptcy case.  Cooper v Social Security Administration (In re Cooper), ___ F. 4th ___, 2025 WL 866003 (9th Cir. March 20, 2025).  To view the opinion, click here: https://cdn.ca9.uscourts.gov/datastore/opinions/2025/03/20/24-1084.pdf

Facts

On March 26, 2007, debtor Darrin Cooper suffered a disabling injury while working for Boeing Company in Washington.  Due to the resulting disability, Cooper began receiving workers’ compensation payments in March 2015.  Proceeding pro se, in May 2017 Cooper applied for SSDI benefits because of his disability. In this initial application, Cooper erroneously stated that he had applied for but had not yet received workers’ compensation benefits.  The SSA denied Cooper’s application.

Cooper then hired counsel to appeal the denial.  In April 2019 an administrative law judge found Cooper eligible for SSDI benefits, subject to possible workers’ compensation offsets, because he was fully disabled.  In May 2019, Cooper’s counsel submitted a Workers’ Compensation /Public Disability Benefit Questionnaire (“Questionnaire”) to the Social Security Field Office in Everett, Washington.  The Questionnaire disclosed and accurately described that Cooper was receiving workers’ compensation payments.  Nevertheless, the Everett Field Office failed to properly record Cooper’s benefits in the SSA’s system.

Relying in part on the improperly processed Questionnaire, the SSA then determined Cooper’s monthly payment, including retroactive benefits owed.  In May 2019 the SSA advised  Cooper he was entitled to SSDI benefits of $2000 per month and also was entitled to retroactive benefits going back to May 2016.  Those retroactive benefits totaled $73, 355, with a net of $67, 355 to Cooper after his attorney’s fees were withheld.  The retroactive benefits were miscalculated because of the error by the SSA in recording his receipt of workers’ compensation benefits.  The SSA notified Cooper that an SSDI award might be reduced if he had received workers’ compensation benefits and, if that happened, he might have to pay back an overpayment.

In July 2020 Cooper filed a non-asset chapter 7 case.  At that time neither he nor the SSA realized he had been overpaid SSDI benefits, so he did not schedule the SSA as a creditor.  However, since his case was a no asset case, the discharge he received in October 2020 discharged all debts, whether or not scheduled.  See, White v Nielsen (In re Nielsen),  383 F. 3d 922 (9th Cir. 2004). In November 2020, Cooper responded to an SSA inquiry  about his workers’ compensation benefits by disclosing again that he was receiving such benefits, as he earlier told the Everett Field Office.  He also provided notice of his bankruptcy.  He continued to receive SSDI benefits for the next two years.

In October 2022, the SSA informed Cooper that the retroactive benefits were an overpayment, inaccurately accusing him of not reporting his workers’ compensation benefits.  It then advised Cooper that beginning in January 2023  it would hold back his monthly benefits payment until it had recovered the overpayment unless he chose one of three administrative remedies, none of which he pursued.  When the SSA began adjusting Cooper’s monthly payments due to the overpayment,  his attorney sent it the discharge order and a letter explaining the debt had been discharged.  Nevertheless, the SSA continued reducing Cooper’s monthly payment until February 2023 when his counsel reopened his bankruptcy and moved to hold the SSA in contempt for violating the discharge injunction.  By agreement, the adjustments were held in abeyance while this matter wound its way to the Ninth Circuit. The SSA defended its payment adjustment by asserting that it was entitled to recoupment of the overpayment from Cooper’s ongoing benefits.

After a hearing, the bankruptcy court allowed the recoupment. In an oral ruling it explained that in the Ninth Circuit recoupment could apply to a non-contractual entitlement subject to the logical relationship test.  Using this test, the bankruptcy court concluded  that the statutory scheme behind Social Security benefits, under which prepetition overpayments were transactionally linked to post petition entitlements, the SSA properly could use recoupment.  It saw this as a “very strong logical relationship.”  In ruling it weighed no further equitable principles once the logical relationship was established.

Cooper appealed to the BAP, which affirmed.  It also concluded the statutory scheme passed the logical  relationship test.  Cooper appealed to the Court, which reversed and remanded.

Reasoning

The Court addressed the question before it: whether the SSA may recoup overpaid SSDI benefits from a beneficiary who has already received a discharge in bankruptcy.  It recognized that the “equitable doctrine of recoupment is governed by the logical relationship test, which asks whether the countervailing obligations at issue arose from the same transaction or occurrence such that recoupment is equitable.”  It observed that the bankruptcy court did not address other equities besides the factual and legal connections between the countervailing obligations.  More was required.  It clarified that the “logical relationship test demands consideration of equitability, including the purpose of the Bankruptcy Code, in each individual case.”  Against this backdrop, it concluded that recoupment could not be used in a case where the SSA sought to recoup overpayments subject to a bankruptcy discharge where the debtor was not at fault for the overpayments.

Recoupment which would allow offsetting of future payments as a result of antecedent debt would carry extraordinary power “to undermine the fundamental purpose of the Bankruptcy Code by enabling creditors to evade the discharge injunction.”   Ninth Circuit precedent makes clear that the logical relationship test demands consideration of both equitability and the purpose of the Bankruptcy Code.  It is not sufficient to only have factual and legal relationships between countervailing obligations.  They must also be equitable under the facts of the case to justify recoupment.

The Circuit walked through a long history where it had refused to apply equitable recoupment in a dispute unless the equities of the circumstance allowed the doctrine.  If the party seeking recoupment had behaved inequitably, it was not entitled to the remedy of recoupment.  A court must scrutinize those equities particularly where the Bankruptcy Code and its discharge are at issue.  An overly broad interpretation of the logical relationship test would frustrate the fundamental purpose of bankruptcy proceedings.

In this case, Cooper was not responsible for the overpayments because he fully disclosed that he was receiving workers’ compensation benefits.   He was unaware of the overpayments when he filed his no asset bankruptcy case.  Only two years later did the SSA decide to use recoupment to step around the discharge and collect the debt by deducting it from future SSDI benefits.  This was inequitable.  Moreover the Social Security Act itself cautions against adjusting benefits in a manner that defeats the Act’s purpose by “depriving a person of income required for ordinary and necessary living expenses.”  Therefore, the SSA also recognizes  the need to do equity.

Despite these strictures, the SSA here sought to recoup the overpayment that occurred at its own fault.  The logical relationship test only works if all equities are considered, a step which was lacking here.  The bankruptcy court’s decision is reversed and the case remanded for a ruling which denies recoupment.

Author’s Comments

The Ninth Circuit now has joined the three other circuits – First, Eighth, and Third – which have denied recoupment after a bankruptcy discharge in the absence of some fraud or other misbehavior by the debtor.  On these facts, this is the correct application of a doctrine which arises only in equity. 

[The Commercial Financial Newsletter is written by an ad hoc group of the California Lawyers Association (CLA) Business Law Section. This article was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), a member of the ad hoc group. The opinions contained herein are strictly those of the author.].