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Wernick v. United States

United States District Court, N.D. Illinois, Eastern Division

December 13, 2016

MARIAN V. WERNICK, Appellant,
v.
UNITED STATES, Appellee.

          MEMORANDUM OPINION AND ORDER

          SHARON JOHNSON COLEMAN United States District Court Judge

         Appellant, Marian V. Wernick, appeals the United States Bankruptcy Court for the Northern District of Illinois' denial of her motion to find the Social Security Administration in violation of the automatic stay. For the reasons stated below, the Bankruptcy Court's ruling is affirmed in part and reversed in part.

         Background

          In 2004, Marian Wernick was convicted of defrauding the Social Security Administration by using a false identity to collect benefits that she was not entitled to receive. Wernick pled guilty to that offense and was sentenced to two years of probation. Wernick was also ordered to immediately pay $37, 268 in restitution. Because Wernick had no assets or income other than government benefits, the probation department independently agreed that Wernick should make monthly $10 restitution payments as a component of her probation.

         Separately, the federal statutes and regulations governing recovery of overpayments by the Social Security Administration provided that the Social Security Administration could not pay Wernick any benefits until an amount equal to the overpayment had been recovered. The Social Security Administration admits that it failed to enforce these regulations until the spring of 2014, when it began withholding the entirety of Wernick's social security benefit checks. Wernick, deprived of her sole source of income, subsequently filed for bankruptcy.

         The United States preemptively moved the bankruptcy court to order that the automatic stay did not apply to the benefit withholding or, if it did, to grant the United States relief from the stay. The bankruptcy court ruled that the United States' motion was moot because the collection of restitution and setoff was not in violation of the automatic stay.

         Wernick then moved the district court that had heard her criminal case to clarify the restitution order or, in the alternative, institute a restitution payment schedule. The district court subsequently entered an order “request[ing] the Social Security Administration to reconsider the use of its authority to take 100% of the defendant's social security benefits and instead request[ing] the Social Security Administration to reduce it to a more reasonable ten percent of the defendant's net monthly benefits.” Despite that order, the Social Security Administration continued to withhold Wernick's benefits because under federal law it lacked the discretion to withhold any less than all of Wernick's benefits. Wernick moved the bankruptcy court to hold that the Social Security Administration was in violation of the automatic stay because, by the Social Security Administration's own admission, its collection of Wernick's benefits was occurring pursuant to federal regulations and not the criminal restitution order. The bankruptcy court denied that motion.

         Wernick subsequently returned to the district court, where she moved to institute a payment schedule. The district court granted that motion, and modified the restitution schedule to require Wernick to pay as restitution 10% of her net monthly income. Wernick then returned to the bankruptcy court, where she filed a renewed motion to find the SSA in violation of the automatic stay. The bankruptcy court denied that motion, finding the enforcement of the restitution order to not be subject to the automatic stay “for those reasons set forth in the United States' response and surreply.” Wernick now appeals that denial.

         Discussion

          This Court reviews the bankruptcy court's findings of fact for clear error. In re Midway Airlines, Inc., 383 F.3d 663, 668 (7th Cir. 2004). Its conclusions of law, however, are reviewed de novo. Id.

         Wernick contends that the bankruptcy court's ruling was erroneous because (1) the Social Security Administration's withholding of her benefits under federal statute and regulations did not constitute collection of restitution exempt from the automatic stay under the Mandatory Victims Restitution Act, (2) section 553 of the Bankruptcy Code forbids the SSA's offset of Wernick's monthly benefits, and (3) even if offset were permitted under Section 553, the bankruptcy court retained discretion to control the amount of offset in accordance with equity and fairness.

         This Court first turns to Wernick's argument that section 553 of the Bankruptcy Code forbids the Social Security Administration's withholding of Wernick's monthly benefits. Federal statute provides that social security overpayments are to be recovered by decreasing any payments which the overpaid person is entitled to, in accordance with regulations prescribed by the Commissioner of Social Security. 42 U.S.C. § 404(a)(1)(A). Duly enacted regulations provide that:

[i]f an individual to whom an overpayment was made is at the time of a determination of such overpayment entitled to a monthly benefit or a lump sum under title II of the act, or at any time thereafter becomes so entitled, no benefit for any month and no lump sum is payable to such individual . . . until an amount equal to the amount of the overpayment has been withheld or refunded.

20 C.F.R. ยง 404.502(a)(1). It is undisputed that the Social Security Administration was withholding Wernick's benefits pursuant ...


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