REVISED SEPTEMBER 27, 2002
IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
__________________________
No. 01-51027 __________________________
In the Matter of: HERMAN FELIX HORN, Debtor. ___________________________________________________
HERMAN FELIX HORN, Appellant,
versus
UNITED STATES DEFENSE FINANCE AND ACCOUNTING SERVICE,
Appellee.
___________________________________________________
Appeal from the United States District Court For the Western District of Texas (No. A-01-CV-481-JN) __________________________________________________ September 6, 2002
Before REAVLEY, BARKSDALE, and CLEMENT, Circuit Judges.
PER CURIAM:*
The district court’s grant of summary of judgment to the government agency appellee allowed
the agency to continue a statutory reduction of appellant’s military retirement pay, even though
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
1 appellant had filed for bankruptcy. The district court determined that the statutory reduction was a
“recoupment,” not a dischargeable debt, under bankruptcy law. We agree and affirm.
I. Facts and Proceedings Below
When appellant Herman Horn separated from Air Force active duty July 15, 1992, he received
a Special Separation Payment (“SSP”) of $106,327.10 under 10 U.S.C. § 1174a. Horn re-entered
active duty in 1994 and retired at the end of 1997, entitling him to regular retirement benefits to be
paid by appellee, the United States Defense Finance and Accounting Service (“DFAS”). If a person
receives an SSP but later qualifies for retirement pay, the government will deduct the portion
attributable to the pre-SSP service, until the government has fully deducted the SSP amount. 10
U.S.C. § 1174(h)(1).1 In short, the law prevents military retirees from collecting two retirements for
the same period of service.
In Horn’s case, the government reduced his retirement benefits by $2,049.97 each month. Four
months later, Horn filed for bankruptcy and the statutory reduction was suspended. The bankruptcy
court granted DFAS summary judgment, allowing the reduction to continue, because the court
considered the reduction a “recoupment,” not a dischargeable debt. The district court affirmed, and
Horn appealed.
1 The section in full reads: (h) Coordination with retired or retainer pay and disability compensation.— (1) A member who has received separation pay under this section, or separation pay, severance pay, or readjustment pay under any other provision of law, based on service in the armed forces, and who later qualifies for retired or retainer pay under this title or title 14 shall have deducted from each payment of such retired or retainer pay so much of such pay as is based on the service for which he received separation pay under this section or separation pay, severance pay, or readjustment pay under any other provision of law until the total amount deducted is equal to the total amount of separation pay, severance pay, and readjustment pay received.
2 II. Standard of Review
Even though we are the second level of appellate review, “we perform the identical task as the
district court, reviewing the bankruptcy court’s findings of fact under the clearly erroneous standard
and its conclusions of law de novo.” Matter of U.S. Abatement Corp., 79 F.3d 393, 397 (5th Cir.
1996) (footnotes omitted). The facts are undisputed.
III. Analysis
Horn argues that the money withheld from his retirement benefits is a debt that DFAS is enjoined
from collecting under the bankruptcy laws. See 11 U.S.C. § 524(2). He correctly points out that the
retirement reduction is not listed among the “[e]xceptions to discharge” in § 523, and this Court is
aware of the familiar rule that we should not create discharge exceptions for which Congress did not
expressly provide. See Gleason v. Thaw, 236 U.S. 558, 562 (1915) (“In view of the well-known
purposes of the bankruptcy law, exceptions to the operat ion of a discharge thereunder should be
confined to those plainly expressed.”).
DFAS counters that the reduction is not a debt at all; rather, it is a recoupment. The equitable
doctrine of recoupment “allows a defendant to reduce the amount of a plaintiff’s claim by asserting
a claim against the plaintiff which arose out of the same transaction to arrive at a just and proper
liability on the plaintiff’s claim.” Matter of U.S. Abatement Corp., 79 F.3d at 398 (quoting Holford
v. Powers, 896 F.2d 176, 178 (5th Cir. 1990)). Recoupment is “essentially a defense to the debtor’s
claim against the creditor,” id. (citation omitted), and “to the extent that a party is entitled to
recoupment of funds, ‘the debtor has no interest in the funds.’” Id. (quoting Holford, 896 F.2d at
179) (emphasis in original). In other words, “recoupment is in the nature of a right to reduce the
amount of a claim, and do es not involve the existence of independent obligations;” it “applies to
3 define the obligations in question, rather than establish or enforce a separate debt.” 5 COLLIER ON
BANKRUPTCY § 553.10 (15th ed. 2002) (emphasis added). Because we conclude that the payments
and reductions arise under a single statutory scheme— the calculation of Horn’s retirement benefits
—we agree with the district court that the reduction is a recoupment.
No Courts of Appeal have addressed whether a reduction of military retirement pay under §
1174(h)(1) is a recoupment, but the lower courts uniformly hold that when the government reduces
disability pay under § 1174(h)(2) to take account of a previous SSP (i.e., to prevent double recovery
for the same disability), the reduction is a recoupment, not a debt. See, e.g., Snodgrass v. Dep’t of
Veterans Affairs (In re Snodgrass), 244 B.R. 353 (Bankr. W.D. Va. 2000); Boyd v. Dep’t of
Veterans Affairs (In re Boyd), 223 B.R. 536 (Bankr. E.D. Ark. 1998); United States Dep’t of
Veterans Affairs v. Keisler (In re Keisler), 176 B.R. 605 (Bankr. M.D. Fl. 1994); see also Palm v.
United States, 904 F.Supp. 1312, 1314 (M.D. Ala 1995) (describing § 1174(h) as a recoupment
statute). We find the reasoning of these courts persuasive in the present case.
A debt is defined as a ”liability on a claim,” 11 U.S.C. § 101(12), but there is no sense in which
DFAS has a “claim”2 against Horn. DFAS cannot sue a retiree to recover the SSP amount, nor can
it sue the estate of a deceased retiree if the balance has not been fully recovered. The government is
only permitted to reduce the monthly benefits as described in § 1174(h)(1), and thus, it would be
peculiar to describe the statutory reduction as a debt. It is more natural to describe the reduction as
2 “Claim” is defined under 11 U.S.C. § 101
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REVISED SEPTEMBER 27, 2002
IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
__________________________
No. 01-51027 __________________________
In the Matter of: HERMAN FELIX HORN, Debtor. ___________________________________________________
HERMAN FELIX HORN, Appellant,
versus
UNITED STATES DEFENSE FINANCE AND ACCOUNTING SERVICE,
Appellee.
___________________________________________________
Appeal from the United States District Court For the Western District of Texas (No. A-01-CV-481-JN) __________________________________________________ September 6, 2002
Before REAVLEY, BARKSDALE, and CLEMENT, Circuit Judges.
PER CURIAM:*
The district court’s grant of summary of judgment to the government agency appellee allowed
the agency to continue a statutory reduction of appellant’s military retirement pay, even though
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
1 appellant had filed for bankruptcy. The district court determined that the statutory reduction was a
“recoupment,” not a dischargeable debt, under bankruptcy law. We agree and affirm.
I. Facts and Proceedings Below
When appellant Herman Horn separated from Air Force active duty July 15, 1992, he received
a Special Separation Payment (“SSP”) of $106,327.10 under 10 U.S.C. § 1174a. Horn re-entered
active duty in 1994 and retired at the end of 1997, entitling him to regular retirement benefits to be
paid by appellee, the United States Defense Finance and Accounting Service (“DFAS”). If a person
receives an SSP but later qualifies for retirement pay, the government will deduct the portion
attributable to the pre-SSP service, until the government has fully deducted the SSP amount. 10
U.S.C. § 1174(h)(1).1 In short, the law prevents military retirees from collecting two retirements for
the same period of service.
In Horn’s case, the government reduced his retirement benefits by $2,049.97 each month. Four
months later, Horn filed for bankruptcy and the statutory reduction was suspended. The bankruptcy
court granted DFAS summary judgment, allowing the reduction to continue, because the court
considered the reduction a “recoupment,” not a dischargeable debt. The district court affirmed, and
Horn appealed.
1 The section in full reads: (h) Coordination with retired or retainer pay and disability compensation.— (1) A member who has received separation pay under this section, or separation pay, severance pay, or readjustment pay under any other provision of law, based on service in the armed forces, and who later qualifies for retired or retainer pay under this title or title 14 shall have deducted from each payment of such retired or retainer pay so much of such pay as is based on the service for which he received separation pay under this section or separation pay, severance pay, or readjustment pay under any other provision of law until the total amount deducted is equal to the total amount of separation pay, severance pay, and readjustment pay received.
2 II. Standard of Review
Even though we are the second level of appellate review, “we perform the identical task as the
district court, reviewing the bankruptcy court’s findings of fact under the clearly erroneous standard
and its conclusions of law de novo.” Matter of U.S. Abatement Corp., 79 F.3d 393, 397 (5th Cir.
1996) (footnotes omitted). The facts are undisputed.
III. Analysis
Horn argues that the money withheld from his retirement benefits is a debt that DFAS is enjoined
from collecting under the bankruptcy laws. See 11 U.S.C. § 524(2). He correctly points out that the
retirement reduction is not listed among the “[e]xceptions to discharge” in § 523, and this Court is
aware of the familiar rule that we should not create discharge exceptions for which Congress did not
expressly provide. See Gleason v. Thaw, 236 U.S. 558, 562 (1915) (“In view of the well-known
purposes of the bankruptcy law, exceptions to the operat ion of a discharge thereunder should be
confined to those plainly expressed.”).
DFAS counters that the reduction is not a debt at all; rather, it is a recoupment. The equitable
doctrine of recoupment “allows a defendant to reduce the amount of a plaintiff’s claim by asserting
a claim against the plaintiff which arose out of the same transaction to arrive at a just and proper
liability on the plaintiff’s claim.” Matter of U.S. Abatement Corp., 79 F.3d at 398 (quoting Holford
v. Powers, 896 F.2d 176, 178 (5th Cir. 1990)). Recoupment is “essentially a defense to the debtor’s
claim against the creditor,” id. (citation omitted), and “to the extent that a party is entitled to
recoupment of funds, ‘the debtor has no interest in the funds.’” Id. (quoting Holford, 896 F.2d at
179) (emphasis in original). In other words, “recoupment is in the nature of a right to reduce the
amount of a claim, and do es not involve the existence of independent obligations;” it “applies to
3 define the obligations in question, rather than establish or enforce a separate debt.” 5 COLLIER ON
BANKRUPTCY § 553.10 (15th ed. 2002) (emphasis added). Because we conclude that the payments
and reductions arise under a single statutory scheme— the calculation of Horn’s retirement benefits
—we agree with the district court that the reduction is a recoupment.
No Courts of Appeal have addressed whether a reduction of military retirement pay under §
1174(h)(1) is a recoupment, but the lower courts uniformly hold that when the government reduces
disability pay under § 1174(h)(2) to take account of a previous SSP (i.e., to prevent double recovery
for the same disability), the reduction is a recoupment, not a debt. See, e.g., Snodgrass v. Dep’t of
Veterans Affairs (In re Snodgrass), 244 B.R. 353 (Bankr. W.D. Va. 2000); Boyd v. Dep’t of
Veterans Affairs (In re Boyd), 223 B.R. 536 (Bankr. E.D. Ark. 1998); United States Dep’t of
Veterans Affairs v. Keisler (In re Keisler), 176 B.R. 605 (Bankr. M.D. Fl. 1994); see also Palm v.
United States, 904 F.Supp. 1312, 1314 (M.D. Ala 1995) (describing § 1174(h) as a recoupment
statute). We find the reasoning of these courts persuasive in the present case.
A debt is defined as a ”liability on a claim,” 11 U.S.C. § 101(12), but there is no sense in which
DFAS has a “claim”2 against Horn. DFAS cannot sue a retiree to recover the SSP amount, nor can
it sue the estate of a deceased retiree if the balance has not been fully recovered. The government is
only permitted to reduce the monthly benefits as described in § 1174(h)(1), and thus, it would be
peculiar to describe the statutory reduction as a debt. It is more natural to describe the reduction as
2 “Claim” is defined under 11 U.S.C. § 101(5) as a (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured[.]
4 part of the “defin[ition of] the obligation in question,” see COLLIER, supra, at § 553.10, because it
tells officials how to compute an individual’s retirement benefits.
Discharging the reduction as a debt would be a windfall for Horn because it would allow him to
“receive the part of the deal most beneficial to him” (the SSP lump-sum payment) “while avoiding
the aspects... least desirable to him” (the later reduction of retirement). See Kosander v. Metropolitan
Life Ins. Co. (In re Kosander), 157 F.2d 1011, 1016 (5th Cir. 1998) (characterizing insurance
company’s commission advances to the debtor as overpayments which may be recouped). As
mentioned, recoupment is an equitable doctrine, and the equities weigh in the government’s favor in
this case.
Horn directs this Court’s attention to two cases, from other jurisdictions, where statutory
reductions were considered debts. In Lee v. Schweiker, the government took $102 out of the debtor’s
monthly $406 Social Security check because she had previously received an overpayment. 739 F.2d
870, 873 (3rd Cir. 1984). The court, noting that Social Security benefits are “statutory ‘entitlements’
rather than contractual rights” and that “the primary purpose of these statutes is to provide income
security to the recipients,” held the government could not recoup the overpayments. Id. at 876.
Without expressing whether we agree with Lee, the case is distinguishable. The overpayment in
Lee appears to have been simply an error,3 but here, Horn took the lump-sum SSP knowing that he
would not be able to later obtain retirement benefits for the same period of service. Also, military
retirement benefits are meant to provide income to recipients (Horn received over $100,000) more
so than “income security,” as was the case in Lee. Id. (emphasis added).
3 The debtor had received other income which was not reported, but it is unclear from the opinion whether the error was made by the debtor, her employer, or the government.
5 In In re Healthback, the federal government used annual projections to make interim Medicare
reimbursement payments to the debtor, a home health care provider. 226 B.R. 464, 467 (Bankr.
W.D. Ok. 1998). An annual audit determined the precise amounts owed, and later payments were
adjusted to compensate for any overpayment or underpayment. Id. at 467-68. When the debtor filed
for bankruptcy, the government had been withholding a portion of its reimbursement payments to
compensate for past overpayment. Id. The court noted that the federal government’s annual
adjustment “must, necessarily, depend upon the amounts the debtor claims for each separate
transaction between it and its patient” and concluded that “[t]hese transactions are not so inextricably
intertwined that they must be considered one transaction.” Id. at 477-78 (emphasis added). The court
also noted that the equities pointed towards counting the withholdings as debt because the debtor
would “cease to exist” without the funds: “Thus, the harm to the debtor, its 200 employees, patients,
and creditors will be the highest degree of harm possible.” Id. at 476.
Again, without agreeing or disagreeing with Healthback, we note the differences. The present
case involves payments to one individual for the retirement benefits attributable to the same period
of service. By contrast, the federal government in Healthback was withholding full reimbursement
for a new set of patients because it had over-reimbursed for past patients. Second, as explained above,
equity considerations weigh in favor of reco upment in the present case, but they weighed against
recoupment in Healthback.
IV. Conclusion
In sum, we conclude that §§ 1174a and 1174(h) are part of the same statutory scheme because
the grant of a special separation payment is made with the understanding that later retirement benefits
6 will be reduced if the payment turns out to be premature. A reduction in payments under § 1174(h)
is a recoupment, not a debt.
AFFIRMED.