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Separate Military Service Periods Considered Single Transactions for Recoupment Purposes

By: Carole Ann Liscio

St. John’s University School of Law

American Bankruptcy Institute Law Review,   Staff Member

 

            Under the Extended Military Benefits Program-Full Pay/Repayment Plan, created by New York City (“City”) following the attacks on September 11, 2001, qualified individuals are able to receive both their City employee salary and their military salary while they are serving in the military.[1] The program requires that once an employee returns from military duty, they must repay the lesser of the wage advance or the difference between the salary paid by the City and their U.S. military salary, less a 7.65% adjustment for Social Security and Medicare and a 15% administrative adjustment.[2]  In In re Matamoros, the United States Bankruptcy Court in the Southern District of New York held that the City could not recoup the advance salary received by Fernando Matamoros (the “Debtor”) because the Debtor’s military service occurred over three separate occurrences.[3] The Debtor, an employee of the New York City Police Department, participated in the Extended Military Benefits Program after he engaged in a covered operation with the U.S. Army.[4] Before reporting for service, the Debtor entered into a “Military Pay Reimbursement Agreement,” pursuant to which he agreed to repay the City an undetermined portion of his salary received while he was in service.[5] Over three covered periods, the Debtor received compensation in the amount of $308,395.98 from the City and $153,581.10 from the military.[6] Upon his return, in October 2010, the Debtor agreed to pay the City $93,642.76 over a ten-year period, through $220.03, bi-weekly payroll deductions.[7] However, in June 2018, the Debtor filed for bankruptcy relief under Chapter 13 of Title 11 of the United States Code (the “Bankruptcy Code”) and scheduled the City as a creditor for $50,947.00.[8] Notwithstanding the Debtor’s bankruptcy filing, the City continued payroll deductions until September, 2018.[9] Because the Court found that each time an employee was called for military duty a new enrollment must be executed, there was no single set of transactions that would allow the City to recover under the recoupment doctrine.[10]

            Recoupment is “a deduction from a money claim through a process whereby cross demands arising out of the same transaction are allowed to compensate one another and the balance only to be recovered.”[11] Because bankruptcy law policy favors equal treatment of creditors and bank court supervision over secured creditors, the recoupment doctrine is narrowly construed.[12] Therefore, the term “transaction” is given a restricted definition,[13] and recoupment “may occur only within a single contract or transaction or a single set of transactions.”[14] For example, in In re McMahon, the bankruptcy court found that claims for unemployment benefits were based on separate transactions and therefore not recoupable because they were founded on separate periods of unemployment.[15] Similarly, in In re Matamoros, Debtor’s participation in the program ended at the conclusion of each ordered military service; the Debtor served three separate periods and therefore each time he was called to serve again, a new enrollment in the program began.[16] Additionally, because of the equitable nature of the recoupment doctrine “the facts in the particular case are important.”[17] In Malinowski, where the Court would not take away unemployment benefits from a debtor who was not accused of any wrongdoing,[18] the Court in Matamoros favored protecting veterans in bankruptcy law as well.[19]

The court’s decision in Matamoros is consistent with the current trend toward offering greater protection to veterans in bankruptcy law. Recently, President Trump signed legislation, the Honoring American Veterans in Extreme Need Act (“HAVEN”), which prevents debt collectors from considering military disability benefits as disposable income subject to seizure during a bankruptcy.[20] However, before HAVEN, bankruptcy courts held that disabled veterans were required to include military disability benefits in their disposable income in bankruptcy proceedings.[21]



[1] See In re Matamoros, No. 18-01639 CGM, 2019 WL 3543865 at *3 (Bankr. S.D.N.Y. Aug. 2, 2019) (because the plan’s purpose was to compensate City employees called to military duty in “covered operations” following the terrorist attacks on September 11, 2001, the law gave the City authority to determine how the program was implemented).

[2] See id.

[3] See id.

[4] See id.

[5] See id. at 4.

[6] See id. (“Debtor was paid by the military over three covered time periods: March 31, 2005 to March 15, 2006; November 24, 2006 to November 4, 2008; and November 15, 2008 to February 21, 2010.”).

[7] See id.

[8] See id.

[9] See id.

[10] See id.

[11] See In re Matamoros, No. 18-01639 CGM, 2019 WL 3543865 at *10.

[12] See McMahon, 129 F.3d. 93, 133 (2d Cir. 1997).  

[13] Malinowski v. N.Y. State DOL (In re Malinowski), 156 F.3d 131, 133 (2d Cir. 1998); See McMahon, 129 F.3d at 96 (stating “a mere logical relationship is not enough,” to determine a single transaction).

[14] In re Matamoros, No. 18-01639 CGM, 2019 WL 3543865 at *12.

[15] See McMahon, 129 F.3d at 96 (“We simply cannot stretch the requirement of a single transaction, which is central to recoupment, to a lifetime government insurance scheme, which in practical application must be based upon eligibility created by a specific period of time. The statutory scheme renders the requirement of transaction applicable to the separate periods of eligibility rather than the scheme as a whole.”).

[16] In re Matamoros, No. 18-01639 CGM, 2019 WL 3543865 at *13 (citing Westinghouse Credit Corp. v. D’Urso, 278 F.3d 138, 146 (2d Cir. 2002)).

[17] In re Malinowski, 156 F.3d at 133 (“Recoupment is in the nature of a defense, the purpose of which is to do justice viewing one transaction as a whole.”); see In re Matamoros, No. 18-01639 CGM, 2019 WL 3543865 at *11 (describing that because Debtor had no post-petition claims or demands against the City, the City asserted equitable recoupment as a claim for relief rather than in the nature of a defense and therefore misapplied the doctrine).

[18] See Malinowski, 156 F.3d at 135 (“The Department [of Labor] asks us to take away the unemployment insurance safety net from a debtor in bankruptcy, who has not been accused of willful wrongdoing in connection with the overpayment.”).

[19] See In re Matamoros, No. 18-01639 CGM, 2019 WL 3543865 at *10.

[20] Honoring American Veterans in Extreme Need Act of 2019, 116th Cong. § 679 (2019-2020) (“excludes any monthly compensation, pension, pay, annuity, or allowance paid under title 10, 37, or 38 in connection with a disability, combat-related injury or disability, or death of a member of the uniformed services, except that any retired pay excluded under this subclause shall include retired pay paid under chapter 61 title 10 only to the extent that such retired pay exceeds the amount of retired pay to which the debtor would otherwise be entitled if retired under any provision of title 10 other than chapter 61 of that title.”).

[21] Jill C. Walters, HAVEN ACT Provides Military Veterans With Increased Income Protections in Bankruptcy, Nat. L. Rev (Aug. 28, 2019), https://www.natlawreview.com/article/haven-act-provides-military-veteran...