In the Matter of Randall B. Neavear, Debtor.randall B. Neavear, Plaintiff-appellant, v. Richard S. Schweiker, Secretary of Health and Humanservices, Defendant-appellee, 674 F.2d 1201 (7th Cir. 1982)

In this appeal we are presented with a question of first impression at the federal appellate level: whether section 207 of the Social Security Act, 42 U.S.C. § 407 (1976), confers on the Social Security Administration ("SSA") a blanket exemption from the operation of the bankruptcy laws, so that a debt owing to the SSA because of an overpayment of benefits cannot be discharged in bankruptcy. We hold that the SSA enjoys no such immunity from the bankruptcy laws and that the overpayment debt is dischargeable under the provisions of the Bankruptcy Reform Act of 1978, 11 U.S.C. § 1 et seq. (Supp. III 1979) (the "Code" or "Bankruptcy Code").

The debtor and plaintiff in this action, Randall B. Neavear, began receiving social security disability benefits in 1968. Beginning in January, 1976, and continuing until August, 1979, Neavear was not disabled, having engaged in substantial gainful activity as a part-time, self-employed real estate broker. Neavear failed to report this activity to the SSA as required by 20 C.F.R. § 404.1588 (1981), and he and his family continued to receive disability benefits until they were terminated by the SSA in August of 1978.

In August, 1979, Neavear again became disabled and was thus entitled to receive benefits under the statute. The SSA, however, commenced a proceeding to offset the earlier payments improperly received by Neavear against the future benefits to which he was now entitled. Section 204(a) of the Social Security Act, 42 U.S.C. § 404(a) (1976), authorizes such a recovery or recoupment of overpayments by decreasing future benefits. In a decision issued on February 26, 1980, the Administrative Law Judge ("ALJ") found that Neavear had been overpaid $19,818.10 in disability benefits. The ALJ further ruled that a waiver of the recoupment was not warranted because, under section 204(b), 42 U.S.C. § 404(b) (1976), Neavear was not "without fault" in receiving the overpayments and because recoupment would not "defeat the purpose" of the statute. The ALJ accordingly ordered that future benefits payable to Neavear be reduced in satisfaction of the overpayment debt.¹  Neavear did not seek administrative or judicial review of this decision.² 

On April 8, 1980, Neavear filed his Chapter 7 bankruptcy petition, listing on his schedule of debts the $19,818.10 overpayment debt to the SSA. Neavear was subsequently granted a discharge by the bankruptcy court but the SSA continued to reduce his disability benefits pursuant to the ALJ's recoupment order. On July 14, 1980, Neavear filed a complaint in the bankruptcy court seeking a declaration that the overpayment debt had been discharged. The Secretary answered the complaint and interposed four affirmative defenses: (1) that Neavear's action was barred because of his failure to exhaust administrative remedies; (2) that the court lacked jurisdiction because the government had not waived its defense of sovereign immunity; (3) that section 207 of the Social Security Act, 42 U.S.C. § 407 (1976), rendered the debt nondischargeable in bankruptcy; and (4) that the SSA's right of recoupment created a statutory lien precluding discharge of the overpayment debt.³  The bankruptcy court found in favor of the SSA on the first three affirmative defenses, but did not address the question of a statutory lien. Neavear v. Schweiker, 16 B.R. 528 (Bkrtcy, C.D. Ill. 1981). The district court affirmed without opinion.

At the outset we are faced with two issues in the nature of jurisdictional obstacles to Neavear's action against the Secretary: the applicability of the doctrines of administrative exhaustion and sovereign immunity.

The bankruptcy court held that Neavear's complaint was barred because of his failure to seek administrative review of the Secretary's determination that he was at fault in receiving the overpayments of benefits. This ruling was erroneous. "The basic purpose of the exhaustion doctrine is to allow the administrative agency to perform functions within its special competence-to make a factual record, to apply its expertise, and to correct its own errors so as to moot judicial controversies." Continental Can Co. v. Marshall, 603 F.2d 590, 597 (7th Cir. 1979); see Parisi v. Davidson, 405 U.S. 34, 37, 92 S. Ct. 815, 817, 31 L. Ed. 2d 17 (1972); McKart v. United States, 395 U.S. 185, 193-95, 89 S. Ct. 1657, 1662-63, 23 L. Ed. 2d 194 (1969). None of these purposes would be even remotely served by applying the exhaustion doctrine in the instant case.

The bankruptcy court apparently believed that Neavear's complaint in effect sought review of the ALJ's recoupment order. To the contrary, Neavear does not contest the validity of that administrative determination but instead seeks from the bankruptcy court an order declaring that the overpayment debt has been discharged. Neavear thus requests relief that could not have been granted in the administrative proceeding, and the issue of dischargeability presented to the bankruptcy court does not invoke the "special competence" of the SSA. Rowan v. Morgan, 15 B.R. 834, 837-38 (Bkrtcy, N.D. Ohio 1981).⁴  We thus conclude that Neavear was not required, as a condition of obtaining relief in the bankruptcy court, to pursue lengthy and quite possibly groundless administrative appeals of the ALJ's recoupment decision.

There is a somewhat more challenging question whether the Secretary's invocation of the defense of sovereign immunity precludes Neavear's action. The bankruptcy court held that it did, reasoning that sovereign immunity may be waived only where the government files a proof of claim. Because the Secretary did not file a claim in the instant case, the court concluded, he was not amenable to suit at the instance of a Chapter 7 debtor.

The bankruptcy court's decision appears to have ignored section 106(c) of the Code, 11 U.S.C. § 106(c) (Supp. III 1979).⁵  That section, unlike sections 106(a) and (b), does not condition the waiver of sovereign immunity upon the filing of a proof of claim.⁶  The legislative history of section 106(c) indicates that it was enacted in order to codify the Ninth Circuit's decision in Gwilliam v. United States, 519 F.2d 407 (9th Cir. 1975). 124 Cong.Rec. H11,091 (daily ed. Sept. 28, 1978); 124 Cong.Rec. S17,407 (daily ed. Oct. 6, 1978). Gwilliam held that, notwithstanding the failure by the government to file a proof of claim, the bankruptcy court possessed jurisdiction under section 17(c) of the former Bankruptcy Act, 11 U.S.C. § 35(c) (1976), to determine the dischargeability of tax debts upon application of the debtor.⁷  See also McGugin v. District Director of IRS (In re Dolard), 519 F.2d 282 (9th Cir. 1975). This court followed Gwilliam in McKenzie v. United States, 536 F.2d 726 (7th Cir. 1976), where we upheld the jurisdiction of the bankruptcy court to determine the dischargeability of a tax debt despite the government's failure to file a proof of claim:

We hold that Section 17(c), in explicitly allowing the bankrupt to file an application for the determination of the dischargeability of "any debt" waives the sovereign immunity of the United States in any bankruptcy action in which the United States is alleged to be a creditor of the bankrupt, including instances in which federal taxes have become due and owing.

536 F.2d at 729 (emphasis supplied).

Section 106(c) thus preserves the rule, established in Gwilliam and approved by this court in McKenzie, that a debtor may seek a declaration from the bankruptcy court that a debt owed to an agency of the United States is dischargeable. Just as in McKenzie, we perceive no basis for distinguishing between a debt owed to the SSA and those debts owed to the Internal Revenue Service at issue in Gwilliam and McKenzie. Accordingly, we hold that section 106(c) of the Bankruptcy Code waives the sovereign immunity of the United States with respect to questions relating to the dischargeability of debts owed to the government. The bankruptcy court thus committed error when it refused, on grounds of sovereign immunity, to adjudicate the dischargeability of Neavear's overpayment debt.

Having concluded that the bankruptcy court had jurisdiction to adjudicate the dischargeability of the overpayment debt, we turn now to the question whether that debt was dischargeable in bankruptcy.

Section 727(b) of the Bankruptcy Code, 11 U.S.C. § 727(b) (Supp. III 1979), provides that a discharge in bankruptcy "discharges the debtor from all debts that arose before the date of the order for relief," (emphasis supplied), except as provided in section 523.⁸  The issue presented in the instant case is whether section 207 of the Social Security Act, 42 U.S.C. § 407 (1976), confers on the SSA a blanket exemption from the operation of the Bankruptcy Code, so that an overpayment debt is nondischargeable regardless whether the debt falls within one of the exceptions to discharge listed in section 523.

Section 207 provides:

The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.

42 U.S.C. § 407 (1976). By its terms, section 207 is concerned with the protection of social security benefits from the reach of creditors. Since 1963, however, the SSA has interpreted this provision more expansively. Social Security Ruling SSR 63-7 (1963). The SSA believes that the reference in section 207 to "rights existing under this subchapter" embraces not only the rights of social security recipients but also the rights of the agency itself-including the SSA's right to recoup overpayments under section 204, 42 U.S.C. § 404 (1976). The SSA asserts, therefore, that Congress in section 207 conferred upon it a total exemption from the operation of all bankruptcy laws.

In support of the SSA's interpretation of section 207, the Secretary relies solely on the language of the statute.⁹  He offers no reasons of policy to explain why Congress supposedly gave the SSA rights enjoyed by no other creditor,¹⁰  and he does not point to any legislative history supporting his sweeping interpretation. Above all, however, the Secretary's argument must fail because it asks us, in construing the reference to "rights" in section 207, to disregard the surrounding text. Section 207 speaks throughout in terms of the rights of social security recipients (the rights to "future payment," and to "moneys paid or payable") and the protection of their benefits from the reach of creditors (through "execution, levy, attachment, garnishment, or other legal process"). The exemption from "the operation of any bankruptcy or insolvency law" (which should be construed as parallel to the preceding forms of legal process) simply closes off what would otherwise be an additional avenue for creditors to satisfy their claims from the social security benefits of the debtor.¹¹  Thus, section 207 deals only with the protection of social security benefits from creditor action. The Secretary's interpretation of the section turns the statute on its head, since this interpretation would transform a provision designed to protect social security recipients from creditors into a provision conferring super-creditor status on the SSA. We thus conclude that section 207 provides an exemption from the bankruptcy laws only for the benefits of social security recipients, and does not operate to prevent a debtor from obtaining a discharge of a debt owed to the SSA because of an overpayment.¹² 

Our conclusion that section 207 poses no obstacle to a debtor seeking a discharge of an overpayment debt does not, of course, mean that every social security recipient who receives, not without fault, an overpayment of benefits may escape his duty to repay those benefits by means of a quick discharge in bankruptcy. To the contrary, section 523 of the Code provides that debts arising from transactions involving "false pretenses, a false representation, or actual fraud," are not dischargeable. 11 U.S.C. § 523(a) (2) (A) (Supp. III 1979). While we do not necessarily accept what appears to have been the Secretary's argument in the bankruptcy court-that the ALJ's determination that Neavear was at fault in obtaining the overpayments constitutes a finding of a "false representation" precluding discharge-we do agree that at least in some cases an overpayment debt may fall within this category of exceptions to discharge. Whether Neavear's debt to the SSA is such a nondischargeable debt under section 523 is a question we leave for the bankruptcy court to decide on remand of this case.¹³ 

Finally, we pause to note that two recent cases, one now awaiting review in this court, have concluded as we do today that overpayment debts owing to the SSA are dischargeable in bankruptcy. Rowan v. Morgan, 15 B.R. 834 (Bkrtcy, N.D. Ohio 1981); Gutierrez v. Schweiker, 15 B.R. 268 (N.D. Ill. 1981), appeal docketed, No. 81-2243 (7th Cir. 1981). The reasoning employed in these cases, however, is different from ours. Both cases held that the SSA had failed to make timely objections under section 523(c) to the discharge of the overpayment debts. Both courts either accepted or ignored the argument that section 207 of the Social Security Act itself exempts overpayment debts from discharge under the Bankruptcy Code, and found instead that the Code repealed section 207 by implication.¹⁴  We take a more direct path, however, and hold that section 207 does not by itself render overpayment debts nondischargeable. We thus have no occasion to reach the question of an implied repeal.

For the reasons stated herein, we hold that the bankruptcy court had jurisdiction to adjudicate the dischargeability of an overpayment debt owed to the SSA and that section 207 of the Social Security Act does not prevent the discharge of such a debt. We therefore reverse the judgments of the courts below and remand the case for a consideration of the two issues not yet addressed by the bankruptcy court: whether Neavear's overpayment debt is nondischargeable under section 523 of the Code and whether the overpayment debt creates a statutory lien precluding discharge.

Reversed and remanded.