B-185731 March 3, 1976

B-185731 March 3, 1976

The Honorable Rex E. Lee Assistant Attoney General Civil Division Department of Justice

Attention: Morton Hollander, Chief Appeliate Division

Dear Mr. Lee:

Subject: In the Matter of Ralph Paul Newman, a bankrupt; United States v. Newman (8th Cir., No. 75-1853)

We refer to your letter dated January 14, 1976 (reference file REL: MH:JHNorris:ger, 105-56-39) requesting our comments concerning prosecution of an appeal in the above-captioned case, with respect to the Government's right to setoff a debt owned to the Government by an employee against the Retirement fund, where the debtor has not yet retired and has received a discharge in bankruptcy.

It appears that Mr. Ralph Paul Newman filed a voluntary petition in bankruptcy on March 26, 1969. At the time, he was a Civil Service engineer in the United States Air Force, a position he still holds. He was also a personal guarantor to the Small Business Administration (SEA) of a $29,000 loan to Advanced Dakota Products, Inc., of New Town, North Dakota, which corporation is new defunct. Prior to the bankruptcy, the SBA initiated collection by setoff, purportedly against contributions which would otherwise be made by the Government on behalf on Mr. Newman to the Civil Service Retirement Fund. It further appears that the SBA was scheduled creditor in the bankruptcy proceedings and that Mr. Newman received his discharge on October 24, 1969, without objection.

The SBA continued to claim a setoff against those funds deposited in the Civil Service Retirement Fund prior to bankruptcy as well as those which accrue thereafter via payroll deductions. In an order dated September 3, 1975, the United States District Court for the District of North Dakota (Northwestern Division, Case No. W69-19 Reopened) held, in effect, that the United States could not continue to use the right of setoff and that Mr. Newman should be restored to all his rights to Civil Services retirement.

Your letter inquiries as to what the GAO's position is and has been regarding "the Government's right to setoff against Civil Service retirement funds debts owed the United States which were discharged in bankruptcy prior to the retirement." Our position in regard to setoff against retirement annuities, in the absence of bankruptcy proceedings, is discussed in our prior letter dated November 27, 1975, in regard to Tomskin v. United States (D.C. N.D. Calif., Civil No. C-75-1079-RHS), addressed to you, and sent to the attention of Mr. Hollander (responding to REL:MH:PBlankenstein:fns, 35-11-96). The Comptroller General has held that setoff may be properly accomplished against an annuity or other Civil Service benefits to which the Government's debtor has an immediate right of payment. 27 Comp. Gen. 703(1948), cf. 39 Comp. Gen. 203 (1959).

The right of setoff is reflected in Section 68 of the Bankruptcy act, 11 U.S.C. Section 108(a)(1970), which provides:

"In all cases of mutual debts or mutual credits between the estates of a bankrupt and a creditor the account shall be stated and one debt shall be setoff against the other , and the balance only shall be allowed or paid." (Emphasis supplied.)

In the instant case, however, the necessary mutuality did not exist. At the time of the discharge in bankruptcy, there was no retirement annuity owed by the Government to the bankrupt. It is well settled that an employee's right under to Civil Service Retirement Act do not accrue until he becomes entitled to some immediate payment under that law, i.e., with the exception of voluntary (additional) contributions, subject to withdrawal upon demand (5 U.S.C. Section 8343 (1970)), benefits do not accrue during the employee's period of active employment, and ae payable only: (1) upon separation from Government service (5 U.S.C. Section 8342 (1970)); (2) retirement (5 U.S.C. Section 8339) (1970, also as amended Supp. IV. 1975); or (3) death (5 U.S.C. Section 8341, 8342, (1970, also as amended Suppl IV, 1975).

We have stated that the amount deposited in the Civil Service Retirement Fund to the credit of an employee who has completed 5 years of service prior to retirement age is required by law to remain in the fund until he leaves Federal service. At the time he leaves Federal service he has the option of drawing an annuity (if he otherwise qualifies) or claiming and drawing out the amount to his credit in the Retirement Fund. Until the monies are so claimed the amount to his credit is not available for setoff. See 39 Comp. Gen. 203, 205 (1959).

Further, since prior to leaving Federal service an employee is not entitled to either the sums to his credit in the Retirement Fund or to the amounts deducted for his paycheck for deposit therein, these amounts would not appear to be available as assets in the bankrupt's estate.

Therefore, since the United States does not owe an employee anything from these funds until his retirement or termination of services, there is no mituality of debts and credits. See Avant v. United States, 165 F. Supp. 802, 805, (1958), 22 Comp. Gen. 330 (1942), and 45 id. 342, 344 (1965).

Accordingly, it is our view that whether or not he is going bankrupt, funds already deposited to the employee's credit in the Retirement Fund along with those accruing therein from payroll deductions may not be reached by any of the employee's creditors, including the United States, at least until the employee becomes entitled to those funds by virture of leaving active Federal service and making a claim therefor.

We have also held that a discharge in bankrupty operates to box enforcement of a claim of the United States arising prior to bankruptcy which was properly discharged. See 22 Comp. Gen. 330 (1942) and 22 id. 1119 (1943), in which we held that amounts to the employee's credit in the Retirement Fund--even when the employee becomes entitled thereto--are not available for setoff against a claim which was discharged in bankruptcy. cf. 45 Comp. Gen. 342 (1965), with respect to withholding pay to satisfy a debt of an employee who received a discharge in bankruptcy with respect to that debt. These cases appear to be relevant to the case at hand, since the Government's claim was listed in the bankrupt's schedule of debts.

Based on the foregoing it is our view that no setoff can be made against amounts in the Retirement Fund until the employee become entitled to the collection action. Hence, whether or not there are other reasons for appealing the court's decision in this case, the ultimate affect of that portion of the decision which would discontinue the setoff of the funds and restore to Mr. Newman to all of his rights to Civil Service Retirement would appear to be correct.

Sincerely yours,

MILTON SOCOTT

FOR Paul G. Dembling General Counsel