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In re Harmon

filed: October 25, 1995.


Appeal from the United States Bankruptcy Court for the District of Oregon. BK. No. 392-35798-H7, Adv. No. 93-3422. Honorable Donal D. Sullivan, Chief Bankruptcy Judge, Presiding.

Before: Volinn, Hagan, and Ashland, Bankruptcy Judges.

Author: Volinn

VOLINN, Bankruptcy Judge:


Appellant, State Accident Insurance Fund Corporation (SAIF), is liable to the debtor for compensation for a permanent partial disability she suffers due to a work-related injury. SAIF seeks to reduce the amount of the award by a sum equal to an excess of temporary disability payments which SAIF overpaid to the debtor on her claim.*fn1 On cross-motions for summary judgment, the bankruptcy court determined that the overpayments could not constitute a setoff under 11 U.S.C. § 553,*fn2 nor could SAIF deduct the overpayments by way of recoupment. It entered a declaratory judgment to that effect. We REVERSE.


On May 30, 1987, Verda Kathlyn Harmon filed a claim under Oregon's Workers' Compensation Law, O.R.S. §§ 656.001 et seq., arising from an injury she received in a work-related accident on February 25, 1985. SAIF, which acts for the State of Oregon in regard to workers' compensation, responded to Ms. Harmon's claim by paying her temporary disability or "time-loss" payments. SAIF continued to make time-loss payments through April 15, 1992, for a total of $28,495. The State of Oregon ultimately determined that a substantial portion of this amount, $10,436.67, was an overpayment.

Under Oregon law, SAIF is entitled to "credit"*fn3 the amount of such overpayment against a permanent disability award. In June 1992, SAIF issued Ms. Harmon a notice of case closure which stated that she had not sustained any permanent injury. The notice of closure commenced the state proceedings which led to a finding of overpayment referred to above. These proceedings were ongoing at the time debtor filed her chapter 13 petition on August 28, 1992.

SAIF's right to reduce the amount of any permanent disability award by the amount of excess time-loss payments was first presented to the bankruptcy court in a motion for civil contempt, filed by the debtor in December 1992. The motion alleged that SAIF had violated the automatic stay of § 362 and the permanent injunction of § 524 by asserting a right of recoupment against the debtor's right to an as yet undetermined permanent disability award. In the reply memorandum to the motion for civil contempt, debtor's counsel stated that, absent recoupment by SAIF, the debtor would be entitled to some $15,000 in permanent partial disability funds.

The debtor dismissed this proceeding voluntarily, but revisited the issue by way of a motion in which she sought a declaratory judgment that withholding of any portion of a permanent award would violate the stay. For various procedural reasons, the parties and the court determined that a ruling on the issue was not necessary at that time. Instead of entering a formal Disposition of the motion, Bankruptcy Judge Hess drafted a letter opinion, dated June 22, 1993, which stated that in his view, if SAIF reduced a permanent disability award, it would violate the automatic stay. The court's analysis was based on its reading of Lee v. Schweiker, 739 F.2d 870 (3rd Cir. 1984), a case that barred the government from offsetting or recouping pre-petition overpayments of social security benefits from benefits due to the debtor post-petition.

The debtor converted her case to one under chapter 7 on May 13, 1993, and it was assigned to Bankruptcy Judge Sullivan. On July 8, 1993, SAIF filed a complaint for declaratory relief to resolve whether it was entitled to credit its alleged overpayment of time-loss benefits against a permanent award to which the debtor might be entitled. The parties brought cross-motions for summary judgment. While articulating some reservations about the letter opinion, Judge Sullivan adopted its Conclusion in favor of the debtor. The judgment provided that SAIF could not recover excess temporary disability payments from any future permanent disability award.*fn4 SAIF filed this timely appeal on September 22, 1993.

In February 1994, a BAP panel determined that the issue presented was not ripe for review because no permanent award had yet been established. Accordingly, it dismissed the appeal without prejudice to reinstatement. In November 1994, the Workers' Compensation Board of the State of Oregon issued its order. The Board adopted a state referee's permanent disability award and affirmed his finding that the debtor had become "medically stationary" on May 18, 1991. The Board authorized SAIF to "offset" the excess temporary disability payments as of that date against the permanent disability payment due. The debtor did not appeal the order of the Workers' Compensation Board. SAIF reinstated the instant appeal in January 1995.


The doctrines of setoff and recoupment are equitable in nature, and their use by the bankruptcy court is permissive. As such, the court's decision is reviewed for an abuse of discretion. In ...

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