Attorney Eric Levine has an in-depth article recapping recent Ninth Circuit case decisions in the summer issue of the Oregon State Bar Debtor-Creditor Section Newsletter. You can read his article in full below.
Eric is an associate in Tonkon Torp’s Litigation Department. He has authored briefs filed in state and federal courts, including the U.S. Court of Appeals for the D.C. Circuit and the D.C. Court of Appeals; and he has contributed to amicus briefs filed with the Supreme Court of the United States.
NINTH CIRCUIT CASE NOTES
Under Logical Relationship Test, Courts Must Consider Equitability of Recoupment in Each Individual Case
Cooper v. Social Security Administration, ___ F.4th ___, 2025 WL 866003 (9th Cir. Mar. 20, 2025).
The Ninth Circuit held that recoupment is impermissible when the Social Security Administration seeks to recoup overpayments from a debtor-beneficiary who engaged in no malfeasance. In doing so, the Ninth Circuit joined the Third Circuit in a split with the First and Eighth Circuits.
Darrin Lenald Cooper suffered a disabling injury at work in 2007 and eventually filed for bankruptcy. He applied for and received workers’ compensation. Twelve years later, he applied for Social Security Disability Insurance benefits (SSDI). In his application, he disclosed that he received workers’ compensation, but the Social Security Administration (SSA) improperly processed his forms and indicated that he did not receive those benefits. Accordingly, he received higher SSDI payments than if SSA had properly processed his forms. Cooper later filed a no-asset Chapter 7 bankruptcy. Neither he nor the SSA knew that he had been overpaid SSDI benefits, so he did not schedule the overpayment as a debt, nor list the SSA as a creditor. Cooper received a discharge and continued to receive SSDI.
The SSA learned of the overpayment and sought to recover it despite the discharge. It relied on the doctrine of “equitable recoupment,” which provides an exception to the discharge injunction. Recoupment must arise from the same transaction or occurrence as a plaintiff’s claim and is asserted strictly for the purpose of abatement or reduction of such claim. This distinguishes it from a setoff, which is about mutual debts, but not from the same claim.
To determine if a claim arises from the same transaction or occurrence, the Ninth Circuit uses the “logical relationship test.” The test asks whether the relevant rights being asserted against the debtor are sufficiently logically connected to the debtor’s countervailing obligations such that they may be fairly said to constitute part of the same transaction. Here, the SSA argued that the continuing SSDI payments were logically connected to the past overpayments, and therefore the pre-petition overpayment justified a reduction of future payments until the overpayment was recovered.
The bankruptcy case was reopened, and the bankruptcy court ruled in the SSA’s favor. It held that the pre-petition overpayments were logically linked to post-petition entitlements because the SSA must consider an applicant’s entire work history, so the SSA must consider work history that pre- and post-dates a petition. The BAP affirmed, holding that under Ninth Circuit precedent, it was precluded from considering the equities of the case when applying the logical relationship test.
The Ninth Circuit reversed and clarified that the logical relationship test demands consideration of equitability, including the purpose of the Bankruptcy Code, in each individual case. For support, it looked to In re Gardens Regional Hospital and Medical Center, Inc., 975 F.3d 926 (9th Cir. 2020). There, a California agency sought to recoup from a hospital in Chapter 11 bankruptcy by discounting the state’s payments to the hospital through the state’s Medicaid program. The Ninth Circuit allowed some but not all discounts. The agency could not discount future payments to the hospital to reimburse patient services; however, because California’s Medicaid scheme involves circular payments where hospitals pay into a common fund and receive payments from that fund, those payments could be discounted. There was a logical connection between the future payments and the circular scheme, but no connection between the future payments and patient services.
As applied in this case, the Ninth Circuit focused on the fact that the SSA overpaid Mr. Cooper because of its own error. The court repeatedly cautioned that recoupment should only be applied in bankruptcy cases where it would be inequitable for the debtor to enjoy the benefits of a transaction without its obligations. Cooper had disclosed that he was receiving workers’ compensation benefits. His no-asset Chapter 7 bankruptcy discharged even his unscheduled debts. His SSDI payments provided ordinary and necessary living expenses. In these circumstances, allowing recoupment would defeat the purpose of the Bankruptcy Code—to provide a fresh start to honest but unfortunate debtors. Because the court could consider the equities, which favored Cooper, the Ninth Circuit reversed and remanded.
Federal Receivership Courts Can Extinguish Certain Third-Party State Causes of Action When Approving Global Settlements
S.E.C. v. Peterson, 129 F.4th 599 (9th Cir. 2025).
This appeal presented three questions: (1) whether a district court that has equitably appointed a receiver may issue a bar order extinguishing claims against non-receivership entities; (2) whether such an order violates the Anti-Injunction Act, 28 U.S.C. § 2283; and (3) whether a bar order issued in this case was unfair. The Ninth Circuit held that the district court had authority, the Anti-Injunction Act did not preclude the bar orders, and the challenged bar order was not unfair.
ANI Development, LLC (ANI) was operated as a Ponzi scheme. It ostensibly provided short-term, high-interest loans to businesses seeking California liquor licenses. It attracted investors who believed that their investments were held in escrow accounts by Chicago Title Company (Chicago Title). ANI did not in fact supply loans to liquor license applicants, nor were there escrow accounts with Chicago Title. Instead, ANI had a single holding account with Chicago Title, which ANI’s owner used as a personal slush fund and to funnel profits to earlier investors. ANI also used funds to bribe Chicago Title officials, who forged paperwork to make it appear as though the funds were held in separate escrow accounts.
Eventually the scheme collapsed, and several lawsuits followed. First, the SEC brought a civil enforcement action. The district court appointed a receiver over ANI and stayed all litigation against it. In response, ANI’s defrauded investors brought claims in state court against third parties that aided in the Ponzi scheme, including Chicago Title. Chicago Title settled with over 300 defrauded investors and paid over $163 million. Chicago Title did not settle with Kim Peterson and his related entities (collectively, “Peterson”), who was a net-winner and had recruited investors to the Ponzi scheme. That case continued.
Meanwhile, back in federal court, the district court authorized the receiver to sue Chicago Title and for Chicago Title to sue the receivership estate. The receiver and Chicago Title reached a global settlement, which included orders barring any further litigation against Chicago Title or a law firm (Nossaman[1]) stemming from the Ponzi scheme. That extinguished Peterson’s state-court claims against Chicago Title, so Peterson appealed.
Peterson made three arguments. First, he argued that the district court lacked authority to issue the bar order, but the Ninth Circuit disagreed. The Ninth Circuit provided two reasons: the receiver’s claims and Peterson’s claims against Chicago Title “substantially overlapped,” and the bar order was necessary to protect the ANI receivership’s assets. Looking to three cases from the Fifth Circuit,[2] the Ninth Circuit held that district courts have authority to prevent litigation that interferes with a receiver’s efforts to recover losses if the litigation arises from the same fraudulent conduct. Here, Chicago Title’s misconduct allowed ANI to continue its Ponzi scheme for longer. That increased its liability for fraud. The receiver sought to recover its losses from that increased liability. Similarly, Peterson sought to recover its losses because of Chicago Title’s role in the Ponzi scheme. Because both parties’ claims stem from the same conduct by Chicago Title, they “substantially overlapped.” And because they substantially overlapped, the district court had authority to issue the bar order.
Second, Peterson argued that the Anti-Injunction Act precluded the bar order. The Ninth Circuit found Peterson’s argument without merit. The Anti-Injunction Act provides that a “court of the United States may not grant an injunction to stay proceedings in a State court except . . . where necessary in aid of its jurisdiction or to protect or effectuate its judgments.” The Ninth Circuit again approvingly cited the Fifth Circuit’s Zacarias case, which held that an order barring state proceedings that threatened receivership property was in aid of the federal court’s jurisdiction over that property.
Third, Peterson argued that the bar order against Chicago Title was unfair, and the Ninth Circuit rejected Peterson’s argument again. Peterson argued that he could not share in the receiver’s settlement with Chicago Title because, as a net Ponzi-scheme winner, he could not recover through a claim in the receivership estate, nor could he get relief directly from Chicago Title. But the Ninth Circuit ruled that the reason Peterson would not receive payment was significant (and in doing so returned to the Fifth Circuit’s jurisprudence). It explained that the reason Peterson would get nothing from the receivership estate was because he was entitled to nothing through the Ponzi formula that applied to all creditors. Peterson was neither exempt from it, nor categorically excluded from submitting a claim; he was just entitled to nothing. In that circumstance, a district court does not abuse its discretion in issuing a bar order.
Voluntary Retirement Contributions Are Not Disposable Income for Chapter 13
In re Saldana, 122 F.4th 333 (9th Cir. 2024).
In a split opinion, the Ninth Circuit held that voluntary contributions to employer-managed retirement plans are not disposable income of the employee under Chapter 13 of the Bankruptcy Code.
Jorden Marie Saldana filed for a Chapter 13 bankruptcy. As an above-average earner, she applied various exclusions, deductions, and allowances to calculate her disposable income. Her plan included no payments to unsecured creditors. The trustee challenged her disposable income calculation. Relying on In re Parks, 475 B.R. 703 (9th Cir. B.A.P. 2012), the bankruptcy court held that Ms. Saldana’s voluntary contributions to her employer-managed retirement account should be included in her disposable income. That change meant her unsecured creditors would see around a 30% return. Ms. Saldana appealed. The district court and the Bankruptcy Appellate Panel upheld the bankruptcy court’s ruling. The Ninth Circuit reversed.
The majority saw this as a simple issue. Section 1325 provides the calculation for a debtor’s disposable income. Section 541(b) states that any amount withheld, or received, by an employer from the wages of employees for payment as contributions to qualifying retirement plans “shall not constitute disposable income as defined in Section 1325(b)(2).” Thus, the Ninth Circuit concluded that the plain language is clear, and a debtor can exclude any amount of their voluntary retirement contributions to employer-managed plans from their disposable income.
The Ninth Circuit also reasoned that its interpretation was consistent with the canons of statutory construction. Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act, passed in 2005, courts routinely held that voluntary retirement contributions were disposable income. Congress amended the Bankruptcy Code to encourage reorganization under Chapter 13 and discourage chapter 7 bankruptcies. The 2005 amendments added the Section 541(b) language excluding retirement contributions from disposable income. Because courts presume a significant change in statutory language has meaning, the Ninth Circuit concluded that Congress intended to change the status quo, and so it changed the treatment of retirement contributions in Chapter 13.
In dicta, the court goes on to explain why three alternative interpretations are wrong. In one reading, disposable income includes all voluntary retirement contributions, but such an interpretation is wrong because it renders the 2005 amendment meaningless. In another reading, voluntary contributions are not disposable income, so long as the debtor was making payments prior to declaring bankruptcy. However, that has no textual support. Finally, a third reading espoused that the average of the last six months of voluntary contributions would be excluded from disposable income. The Ninth Circuit again rejected this for lack of textual support.
Judge Callahan dissented. She argued that the language was not plain. As evidence, she pointed to the fact that over 20 years since the 2005 amendments, courts have adopted four different interpretations. She would have adopted the logic of In re Parks and held that prepetition retirement contributions are not estate property, but post-petition contributions are.
This article was originally published in the Summer 2025 issue of the Oregon State Bar Debtor-Creditor Newsletter.
[1] These consolidated appeals challenged both the order barring claims against Chicago Title and the order barring claims against Nossaman. The challenge to the Chicago Title order was brought by Peterson. The Nossaman challenge was brought by Ovation Fund Management II. Because the Ninth Circuit applied the same logic to both appeals, this summary only addresses the Chicago Title bar order for the sake of brevity.
[2] Zacarias v. Stanford International Bank, Ltd., 945 F.3d 883 (5th Cir. 2019); SEC v. Stanford International Bank, Ltd., 927 F.3d 830 (5th Cir. 2019); Rotstain v. Mendez, 986 F.3d 931 (5th Cir. 2021
