Academic journal article Missouri Law Review

Recoupment and Bankruptcy: How to Effectuate Bankruptcy Policy through the Same Transaction Test

Academic journal article Missouri Law Review

Recoupment and Bankruptcy: How to Effectuate Bankruptcy Policy through the Same Transaction Test

Article excerpt

Terry v. Standard Ins. Co. (In re Terry), 687 F.3d 981 (8th Cir. 2012)


Mixing the federal Bankruptcy Code with common law claims can certainly be a precarious endeavor. The complexity of applying common law doctrines to bankruptcy cases is apparent when a defendant invokes the defense of recoupment to reduce his liability against a bankrupt plaintiff's claim.

Recoupment has been described as a "powerful tool" in bankruptcy, capable of seriously influencing an individual's income or an organization's ability to reorganize. (1) In essence, the common law equitable doctrine of recoupment allows a "creditor's claim against a debtor to be reduced by reason of some claim the debtor has against the creditor." (2) It was first applied under the Bankruptcy Code in the 1980's and has since become well established. (3) More recently, however, a number of courts have shown a "judicial distaste" for the doctrine and have refused to allow defendants to successfully utilize the recoupment defense against bankrupt plaintiffs. (4) Some scholars would seek to abolish recoupment completely or, at the least, severely limit its scope in the context of bankruptcy. (5)

This Note will explore the interaction between recoupment and bankruptcy by focusing on the Eighth Circuit's decision in In re Terry. (6) Terry is significant because the Eighth Circuit allowed an insurance company to recoup pre-petition overpayments from the bankrupt debtor's post-petition benefits. (7) In doing so, the Eighth Circuit refused to acknowledge a separate balancing of the equities test, independent from the traditional same transaction requirement, when determining a creditor's recoupment defense. (8)

This discussion will center on recoupment's "same transaction" test and why it can be utilized to achieve sound bankruptcy policy by denying recoupment claims. It is this Note's contention that Terry's precedent, that the doctrine of recoupment does not include a separate equitable balancing test, will not be as devastating to bankrupt plaintiffs as initially thought by bankruptcy practitioners and judges. This is because the same transaction test is still a viable legal tool capable of denying recoupment.


As an employee of the State of Missouri and member of the Missouri State Employees' Retirement System (MOSERS), Joseph Terry received a group long-term disability policy through Standard Insurance Company (Standard). (9) In the event of a disability, the Long Term Disability (LTD) policy provided eligible employees a monthly long-term benefit for the purpose of protecting the disabled employees' earning abilities and bridging the gap between the date a disability occurred and the date of recovery or retirement. (10)

Similar to most long term disability plans," (11) Standard's policy included a setoff provision that classified Social Security benefits as "deductible income." (12) This means that Standard's obligation to pay the disabled employee was reduced, dollar-for-dollar, by any amount the employee received from social security disability insurance. (13) Under the LTD policy, it was the obligation of the disabled employee to refund Standard for any overpayment of benefits that resulted from collecting social security income. (14)

Terry became disabled and unable to work on December 6, 2005, as the result of severe bipolar disorder with psychotic features. (15) He subsequently filed a long-term disability claim under the LTD policy. After the insurance company approved the claim, Terry began receiving benefits from Standard in August of 2006. (16) Pursuant to the deductible income provision of the LTD policy, Terry authorized Standard to automatically withdraw from his bank account any retroactive Social Security disability payments he received in order to satisfy the resulting "overpayment" of benefits obligation. (17) In July 2008, Terry received a $45,316. …

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