Court Opinion

ID: 16140
Source: CourtListenerOpinion
Date Created: 2010-04-25 06:51:32+00
Date Added: 2024-06-11T12:32:07.912550
License: Public Domain

Revised October 30, 1998

               IN THE UNITED STATES COURT OF APPEALS

                          FOR THE FIFTH CIRCUIT

                          ____________________

                              No. 97-40580

                            Summary Calendar
                          ____________________

IN THE MATTER OF STEPHEN J KOSADNAR; PEGGY MARLEA KOSADNAR,

                                      DEBTORS,

STEPHEN J KOSADNAR; PEGGY MARLEA KOSADNAR,

                                       Appellants,

                     v.

METROPOLITAN LIFE INSURANCE COMPANY,

                                       Appellee.

_________________________________________________________________

           Appeal from the United States District Court
                for the Southern District of Texas
_________________________________________________________________
                         October 23, 1998
Before KING, BARKSDALE, and STEWART, Circuit Judges.

PER CURIAM:

     Stephen J. Kosadnar and Peggy Marlea Kosadnar sought to hold

Metropolitan Life Insurance Company in contempt of court for

violating the automatic stay relating to their Chapter 7

bankruptcy.   The bankruptcy court denied the contempt motion, and
the district court affirmed the bankruptcy court’s decision.      For

the following reasons, we affirm the order of the district court

affirming the bankruptcy court’s order denying the contempt

motion.

              I.     FACTUAL AND PROCEDURAL BACKGROUND

     This litigation concerns the terms of employment between

Stephen J. Kosadnar (Kosadnar) and Metropolitan Life Insurance

Company (MetLife).    When first hired in November 1992 as an

account representative, Kosadnar became bound and covered by

MetLife’s Compensation Plan, including the Experienced

Representative Plan (EXP).1    The EXP detailed Kosadnar’s salary

for the first fifteen weeks of work at MetLife.    Kosadnar was

paid eight hundred dollars a week; one hundred dollars each week

was an interim payment, while the other seven hundred dollars a

week was considered an advance against first-year commissions.

The advance payments, including interest, were to be repaid to

MetLife out of Kosadnar’s Expense Reimbursement Account (ERA),

beginning in Kosadnar’s sixteenth week of employment.

     Consistent with the EXP, MetLife began withholding part of

Kosadnar’s ERA in order to recover the amount of commission

advances made to him.    In September 1994, Mr. Kosadnar became a

sales manager, and a few months later, he returned voluntarily to

     1
       This statement and all other factual statements in this
section were stipulated to by the parties in the original
bankruptcy proceeding.

                                   2
his former job as an account representative.    These employment

changes, coupled with MetLife discontinuing the ERA program,

necessitated an alteration in the advance-repayment schedule.      In

January 1995, to accommodate these changes, the remaining

$7903.75 to be repaid to MetLife was spread out over two years,

and MetLife began withholding $75.99 per week from Kosadnar’s

pay.

       Under the Compensation Plan, when an account representative

sells an insurance policy, MetLife provisionally credits the

annualized first-year commission for that policy to a Moving

Average Account (MAA), from which the representative’s commission

payments are made.2   If a policy lapses during its first year,

the account representative must repay part of the first-year

commission for that policy.    Under the Compensation Plan, MetLife

has the right to withdraw the entire amount of the commission

overpayment from the MAA, which would therefore decrease the

amount of commission payments made to the representative.

       One of the policies that Kosadnar sold in January 1994

lapsed, resulting in an obligation to repay to MetLife $5023.26

in unearned commissions.    On January 25, 1995, Mr. Kosadnar made

a formal request that MetLife allow him to spread out this

payment over one year, rather than repaying the entire amount at

once from his MAA.    MetLife granted this request and began to

       2
       Under the Compensation Plan, account representatives
receive ten percent of the balance of the MAA each week.

                                  3
debit $97.00 from Kosadnar’s weekly pay to recover the unearned

commission.    In total, MetLife was withdrawing $172.99 per week

from Kosadnar’s weekly pay.

     On June 8, 1995, Kosadnar and his wife, Peggy Marlea

Kosadnar, filed a petition for Chapter 7 bankruptcy in the United

States Bankruptcy Court for the Southern District of Texas.

MetLife continued to withdraw $172.99 from Kosadnar’s paycheck.

Appellants filed a motion to hold MetLife in contempt of court

for violation of the automatic stay.    On January 30, 1996, the

bankruptcy court denied appellants’ motion, holding that

MetLife’s actions constituted recoupment and were therefore not

subject to the automatic stay.    The district court affirmed the

decision of the bankruptcy court, and the appellants timely filed

an appeal to this Court.

                           II.   DISCUSSION

     The disposition of this case depends on whether MetLife’s

withholdings from Kosadnar’s pay are characterized as recoupment

or setoff.    The bankruptcy and district courts termed the

withholdings as recoupment and therefore held that the

withholdings did not violate the automatic stay imposed by the

bankruptcy court.    We review these lower court conclusions of law

de novo.   See Phoenix Exploration, Inc. v. Yaquinto (In re

Murexco Petroleum, Inc.), 15 F.3d 60, 62 (5th Cir. 1994);

Killebrew v. Brewer (In re Killebrew), 888 F.2d 1516, 1518 (5th

Cir. 1989).

                                   4
     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.’”   United States

Abatement Corp. v. Mobil Exploration & Producing U.S., Inc. (In

re United States Abatement Corp.), 79 F.3d 393, 398 (5th Cir.

1996) (quoting Holford v. Powers (In re Holford), 896 F.2d 176,

178 (5th Cir. 1990) (internal quotations omitted)).   There are

two general requirements to characterizing a withholding as

recoupment--first, some type of overpayment must have been made,

and second, both the creditor’s claim and the amount owed to the

debtor must arise from a single contract or transaction.3    See

Photo Mechanical Servs., Inc. v. E.I. DuPont De Nemours & Co. (In

re Photo Mechanical Servs., Inc.), 179 B.R. 604, 613 (Bankr. D.

Minn. 1995).   When applied, the doctrine allows a bankrupt’s

unsecured creditors to obtain preferential treatment.   See id.

Specifically, money recouped by creditors from an amount owed to

a debtor post-petition would not be subject to the automatic

stay.    See Holford, 896 F.2d at 179.

     A setoff, on the other hand, “involves a claim of the

defendant against the plaintiff which arises out of a transaction

     3
       Appellants claim, without authority, that in addition to
these two requirements, the creditor must possess a contractual
lien to secure future payments. We have rejected the proposition
that the creditor must have any contractual rights to future
payments in order to recoup overpayments. See Holford, 896 F.2d
at 178.

                                  5
which is different from that on which the plaintiff’s claim is

based.”   Holford, 896 F.2d at 178 (citation and quotation

omitted).   The Bankruptcy Code specifically disallows the setoff

of pre-petition claims against post-petition earnings.    See 11

U.S.C. § 553.

     This court must determine whether MetLife’s recovery of

overpayments made to Kosadnar constitutes setoff or recoupment.

The key issues, therefore, are whether MetLife withheld money

that it overpaid to Kosadnar, and whether the pre-petition

overpayments and the post-petition pay arise from the same

transaction.    We find that because MetLife withheld overpayments

arising from the same transaction as Kosadnar’s pay, the recovery

constitutes recoupment.

     First, both the advances against future commissions and the

lapsed-policy commissions represent overpayments by MetLife to

Kosadnar.   MetLife advanced Kosadnar money during his first

fifteen weeks of employment, and these payments were expressly

termed “advances against first-year commissions” in Kosadnar’s

employment agreement.   Similarly, MetLife overpaid Kosadnar for

the lapsed insurance policy, as MetLife credited an entire year’s

commission into Kosadnar’s commission account when, in fact, the

policy was not paid for a year.   These overpayments are exactly

the type of overpayments the recoupment doctrine contemplates.

“The majority view is that when an insurance company advances

commissions to an insurance agent and that agent later files a

                                  6
petition in bankruptcy, the insurance company may recoup those

monies previously advanced as they accrue, post-petition, to the

agent.”   Pruett v. American Income Life Ins. Co. (In re Pruett),

220 B.R. 625, 628 (Bankr. E.D. Ark. 1997) (citing Wineburg v.

Knights of Columbus (In re Sherman), 627 F.2d 594, 595 (2d Cir.

1980); In re Ruiz, 146 B.R. 877, 881 (Bankr. S.D. Fla. 1992);

Williams v. Tomer (In re Tomer), 128 B.R. 746, 759 (Bankr. S.D.

Ill. 1991), aff’d 147 B.R. 461 (S.D. Ill. 1992)); see also Wiley

v. Public Investors Life Ins. Co., 498 F.2d 101, 104 (5th Cir.

1974) (allowing insurance company to recoup advances made in

anticipation of future commissions); Mutual Trust Life Ins. Co.

v. Wemyss, 309 F. Supp. 1221, 1231 (D. Me. 1970) (same).   In each

of these cases, the insurance company advanced its employee-

debtor commissions to which the debtor was not entitled, and the

court found that the insurance company overpaid within the

meaning of the recoupment doctrine.   We therefore have little

difficulty finding that MetLife in this case overpaid Kosadnar by

advancing him money based on future commissions and by assuming

that sold policies would not lapse.

     The central question in this case then becomes whether these

pre-petition advances arise out of the same transaction as

Kosadnar’s post-petition pay.   Appellants claim that because the

advance repayments in this case arose from separate agreements

entered into after the original EXP agreement, the pre-petition

debts and post-petition claims do not arise out of the same

                                 7
transaction.   Appellants argue that there are three separate

transactions in this case--first, the EXP agreement; second, the

lapsed-policy agreement; and third, the alteration of the

advance-repayment schedule.

     There is no general standard governing whether events are

part of the same or different transactions.   “[G]iven the

equitable nature of the [recoupment] doctrine, courts have

refrained from precisely defining the same-transaction standard,

focusing instead on the facts and the equities of each case.”

United States ex rel. United States Postal Serv. v. Dewey Freight

Sys. Inc., 31 F.3d 620, 623 (8th Cir. 1994); see also Official

Comm. of Unsecured Creditors of Baja Boats, Inc. v. ITT

Commercial Fin. Corp. (In re Baja Boats, Inc.), No. 94-60141,

1996 WL 521416, at *3 (Bankr. N.D. Ohio July 24, 1996) (“Whether

the obligations arose from the same transaction is to be

determined by the facts and equities of the particular case.”).

     In this case, we agree with the lower courts that the

overall Compensation Plan was one transaction which encompassed

both MetLife’s claims against Kosadnar based on the pre-petition

advances and Kosadnar’s claims against MetLife for compensation.

First, a plain reading of the Compensation Plan itself indicates

that all of its components should be considered part of the same

transaction.   The parties explicitly agreed in the stipulated

facts that “Kosadnar became bound and covered by . . . EXP, which

is a part of MetLife’s overall compensation plan.”   The EXP did

                                 8
not contain all material terms of the employment relationship

between the parties.    Indeed, the EXP itself is labeled as

Schedule 7, a part of the overall Compensation Plan.

     The Compensation Plan as a whole does contain all material

terms relating to the employment relationship and explicitly

governs all pre-petition and post-petition claims between the

parties.   EXP paragraph 4 described the terms relevant to

Kosadnar’s obligation to repay the commission advance he received

during his first fifteen weeks of employment.    Schedule 2 of the

Compensation Plan detailed how much commission an account

representative had to repay to MetLife if a sold policy lapsed.

The General Provisions Section 301(H) of the Compensation Plan

outlined how an account representative could spread the repayment

of unearned commissions over a term of weeks.    Lastly, the

Compensation Plan explained how the commissions that account

representatives earned for selling policies were calculated.

Therefore, all original terms governing both types of pre-

petition debt at issue here and Kosadnar’s post-petition income

were present in MetLife’s Compensation Plan, which bound both

Kosadnar and MetLife.

     The fact that changed circumstances necessitated changing

the payback schedule for the commission advance does not alter

this analysis.   “[A]pplication of the ‘equitable doctrine [of

recoupment] should not depend on whether the parties expressly

anticipated the problem.’”    Holford, 896 F.2d at 178 (quoting

                                  9
Ashland Petroleum Co. v. Appel (In re B & L Oil Co.), 782 F.2d

155, 159 (10th Cir. 1986) (brackets in original)).   The original

employment terms between MetLife and Kosadnar clearly

contemplated the payback of the commission advances to MetLife.

The later alteration to the terms does not change the fact that

the debt to MetLife arose out of the original employment

contract.

     Similarly, the fact that the lapsed policy arose after

Kosadnar and MetLife entered into the original employment

contract does not mean that the repayment of the lapsed policy

commissions constitutes a different transaction.   The

Compensation Plan clearly provided that account representatives

could spread repayments resulting from rescinded policies.     As

above, the fact that the parties did not anticipate the exact

amount of any eventual lapse does not prevent the lapse from

arising out of the employment contract.4

     Therefore, the Compensation Plan encompasses all relevant

claims by MetLife and Kosadnar, despite later alterations to

repayment terms.   When all claims arise out of one contract

between the parties, application of the recoupment doctrine is

appropriate.   See Aetna Life Ins. Co. v. Bram (In re Bram), 179

     4
       Of course, this type of uncertainty is exactly why such
repayment terms are included in the Compensation Plan. If the
amount of unearned commissions due to lapsed policies could be
accurately forecasted, there would never be a need to repay any
unearned commissions to MetLife.

                                10
B.R. 824, 826 (Bankr. E.D. Tex. 1995) (stating that “the

recoupment doctrine has been applied primarily where the

creditor’s claim against the debtor and the debtor’s claim

against the creditor arise out of the same contract”); Long Term

Disability Plan of Hoffman-La Roche v. Hiler (In re Hiler), 99

B.R. 238, 242 (Bankr. D. N.J. 1989) (finding that “all the claims

arise out of the same contract and that the [creditor] clearly

has a valid right of recoupment against the debtor”).

       In addition, the facts and equities of this case support a

conclusion that the pre-petition debts and post-petition pay

arose from the same transaction.      Each post-petition paycheck

received by Kosadnar is, at least in part, paid from Kosadnar’s

MAA.    The balance of this commission account would be

substantially smaller if Kosadnar had not altered the repayment

schedule for the commission advances and requested a spread of

the unearned commission payback for the lapsed policy.      In this

context, Kosadnar’s efforts to avoid repayments are simply

attempts to avoid the unfavorable aspects of his employment

bargain with MetLife.

       We agree with the bankruptcy court that the analysis of

Aetna Life Insurance Co. v. Bram (In re Bram), 179 B.R. 824

(Bankr. E.D. Tex. 1995), applies here.      In Bram, a debtor was

eligible to receive funds from an employee benefit plan, and the

amount received from the plan was to be decreased by any amount

he received from social security.      See id. at 825.   The debtor

                                 11
continued to collect the full amount of his eligible benefits

from the plan, even after he began to receive payments from

social security, resulting in an overpayment of benefits to the

debtor.   See id. at 825-26.   The bankruptcy court allowed a post-

petition recoupment of these overpayments, stating that “a debtor

may not assume the favorable aspects of a contract (post-petition

payments) and reject the unfavorable aspects of the same contract

(the obligation to repay pre-petition overpayments by means of

recoupment).”   Id. at 826.

     In this case, Kosadnar is attempting to receive the part of

the deal most beneficial to him (the payment from the commission

balance), while avoiding the aspects of the employment contract

least desirable to him (the payback of the overpayments).     As we

agree with the bankruptcy and district courts that repayment of

the unearned and advanced commissions arise out of the same

commission pool and employment contract as the commissions earned

by Kosadnar for which he is paid, we find that the withholdings

by MetLife constitute recoupment.

     Post-petition recoupment does not violate the automatic stay

imposed by the bankruptcy court.      See Holford, 896 F.2d at 179.

“The trustee of a bankruptcy estate ‘takes the property subject

to rights of recoupment.’ . . . ‘[T]he debtor has no interest in

the funds and, therefore, the stay has not been violated.’”      Id.

(quoting Brock v. Career Consultants, Inc. (In re Career

Consultants, Inc.), 84 B.R. 419, 424, 426 (Bankr. E.D. Va.

                                 12
1988)).   Therefore, the bankruptcy court and district court were

correct in declining to hold MetLife in contempt of court for

violating the automatic stay.

                         III.   CONCLUSION

     For the foregoing reasons, we AFFIRM the order of the

district court affirming the bankruptcy court’s order denying the

contempt motion.

                                 13