Legal Memorandum: Legal Precedent for a Setoff

Issue: What is the legal precedent for a setoff arising from fraudulent conduct and against claims for benefits?

Area of Law: Litigation & Procedure
Keywords: Setoff; Fraudulent conduct; Claims for benefits
Jurisdiction: Federal
Cited Cases: 425 F. Supp. 2d 863; 636 F.2d 714; 28 F. Supp. 2d 147; 229 U.S. 523; 362 F.3d 667; 605 F. Supp. 2d 210
Cited Statutes: 38 U.S.C. § 3503(a)
Date: 07/01/2014

Setoff is a form of counterclaim, based on the equitable principle that “the demands of mutually indebted parties [must] be set off against each other and that only the balance [may] be recovered . . . .”  20 Am. Jr. 2d Counterclaim, Recoupment and Setoff § 6, at 269 (2005).   The right to setoff is based on general notions of fairness and equity.  Id. (citing In re Myers, 362 F.3d 667, 672 (10th Cir. 2004).  It has also been described as a common-law right.  PC COM, Inc. v. Proteon, Inc., 906 F. Supp 894, 903 (S.D.N.Y. 1995).  The United States Supreme Court has described setoff as “[t]he right of setoff (also called ‘offset’) allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding ‘the absurdity of making A pay B when B owes A.'”  Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 18, 116 S. Ct. 286 (1995) (quoting Studley v. Boylston Nat’l Bank, 229 U.S. 523, 528, 33 S. Ct. 806 (1913)).   

Setoff is similar to a counterclaim because it essentially is an independent action by a defendant against a plaintiff.  “Generally, a setoff must rest on a claim enforceable in its own right.  Thus, an obligation that is not enforceable in an action at law cannot be set off against an opposing claim.”  20 Am. Jur. 2d, supra § 7.  The obligation giving rise to the claimed setoff need not be related to the obligation the other […]

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