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In re Vazquez

April 11, 1986

IN RE VAZQUEZ, GUERRERO AND COMPTON, DEBTORS; VAZQUEZ, AGUSTIN, GUERRERO, DAVID R., AND COMPTON, BARRY A., APPELLANTS
v.
COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE



Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civ. No. 84-5873).

Author: Aldisert

Before: ALDISERT, Chief Judge, and SEITZ and ADAMS, Circuit Judges.

Opinion OF THE COURT

ALDISERT, Chief Justice

This appeal requires us to determine whether reimbursement authorizations signed by appellants created a debt that was discharged by appellants' Chapter 7 bankruptcy proceedings. Appellants signed the authorizations pursuant to an agreement between themselves and the Commonwealth of Pennsylvania requiring reimbursement to the Commonwealth for general assistance (welfare) benefits appellants received pending approval and payment of Supplemental Security Income (SSI) benefits. For reasons stated below, we hold that the authorization does not constitute a debt discharged in bankruptcy and that the Commonwealth is entitled to retain the reimbursement payments.

I.

Appellant debtors, Vazquez, Guerrero, and Compton, filed bankruptcy petitions under Chapter 7. During the pendency of the proceedings, but prior to the receipt of their discharges in bankruptcy, the Social Security Administration determined that appellants were eligible to receive SSI benefits. Prior to receipt of the SSI benefits, appellants had applied for and received welfare benefits from appellee, the Commonwealth's Department of Public Welfare (DPW). DPW, through its General Assistance Program, provides interim assistance to persons awaiting a determination of their eligibility for SSI benefits. As a condition of receiving the interim assistance, the Commonwealth required appellants to sign a reimbursement authorization, form PA 176-S. This agreement provided that the Secretary of Health, Education, and Welfare (sic) would make the first payment of SSI benefits directly to DPW; DPW then would deduct the amount of state welfare paid and send appellants a check for the remainder, if any.*fn1

Appellants listed the amount of state interim benefits they had received on their bankruptcy schedules as debts owed to the Commonwealth. Prior to receiving their bankruptcy discharges, the Secretary of Health and Human Services mailed appellants' initial check for SSI benefits to DPW. DPW then deducted the amount of the interim assistance and remitted the remainder to appellants. Subsequently, appellants received their discharges in bankruptcy, including the debts they had listed as owing to the Commonwealth, with no objection by the Commonwealth.

Pursuant to their bankruptcy discharges, appellants requested that DPW remit the funds it had withheld. DPW refused and appellants then sued DPW for violations of 11 U.S.C. § 524(a) (attempting to collect a discharged debt) and requested return of the withheld funds. The bankruptcy court held in favor of the debtors, but was reversed by the district court. Debtors now appeal.

II.

Appellants make two arguments that they contend entitle them to reimbursement of the funds withheld by the Commonwealth. First, they maintain that the Commonwealth's actions violate two fundamental principles of bankruptcy law: (1) a bankruptcy discharge is complete, except for the nine exceptions listed in 11 U.S.C. § 523, and thus Pennsylvania has undermined the efficacy of the discharge by keeping funds that do not fall under any of the enumerated exceptions and (2) the debtors must receive a "fresh start" following their bankruptcies, which appellants cannot receive because Pennsylvania has seized post-petition assets to satisfy pre-petition claims. Additionally, appellants contend that the reimbursement authorization is merely an authorization and does not function, in effect, as a state law assignment, thus extinguishing the underlying debt. Because these issues implicate the interpretation and application of legal precepts, our review is plenary. Universal Minerals, Inc. v. C. A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir. 1981).

III.

Initially, we must confront the Commonwealth's assertion that the eleventh amendment prohibits federal court jurisdiction over the subject matter of this lawsuit. Pennsylvania contends that the eleventh amendment precludes federal jurisdiction for two reasons: (1) because this case does not implicate the Bankruptcy Code, 11 U.S.C. § 106, is not applicable and (2) an action to recover money rightfully withheld by Pennsylvania cannot subject the Commonwealth to the jurisdiction of the federal courts. Brief for appellee at 8. Again, because this issue implicates the interpretation and application of legal precepts, our review is plenary. Universal Minerals, 669 F.2d at 101-02.

The issues involved in this appeal clearly implicate the Bankruptcy Code. Appellants allege that Pennsylvania has refused to give effect to the bankruptcy discharges they received, relying on 11 U.S.C. § 524(a). Determining whether, first, a debt existed and, subsequently, whether that debt was discharged are questions central to the functioning of the Bankruptcy Code. ...


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