Summary:

In Talley v. Folwell, the Fourth Circuit affirmed the dismissal of constitutional claims brought by retired North Carolina teacher Patsy Talley, who had received over $86,000 in retirement overpayments due to a longstanding administrative error. When the Teachers’ and State Employees’ Retirement System (TSERS) discovered the error eight years later, it began recouping the overpaid amount through a reduction in Talley’s monthly benefits. Talley did not dispute the overpayment but alleged that the state violated her due process and equal protection rights by reducing her benefits without a prior hearing or clear standards governing recoupment procedures.



The district court dismissed most of Talley’s claims, holding that Eleventh Amendment immunity barred her official-capacity claims and that the individual defendants were protected by qualified immunity. The court also found her equal protection and substantive due process claims failed to state a plausible constitutional violation. The Fourth Circuit agreed, finding that any alleged lack of pre-deprivation process was cured by a post-deprivation hearing before an administrative law judge. The court emphasized that the recoupment process was rational and statutorily authorized, and that Talley had not shown a clearly established constitutional right requiring a hearing before benefit reductions in this context. Her motion to amend the complaint to add new plaintiffs was also denied as untimely and procedurally deficient.



Commentary:



If TSERS merely made an administrative error (as appears to be the case here), and there is no allegation that Talley knew about the overpayments or fraudulently induced them, then no § 523(a) exception would appear to apply, and the debt would be dischargeable in bankruptcy.  

This raises the next critical issue: even if the overpayment is discharged, TSERS may argue for a right of recoupment or setoff, which are equitable doctrines that allow deduction from ongoing payments even in bankruptcy.    N.C. Gen. Stat. § 135-9(b)   expressly allows  TSERS to recover overpayments by offsetting against future benefit payments.

If Talley was not receiving future payments from TSERS (e.g., if she had already taken a lump sum or otherwise separated from the system), then recoupment might not be possible, and the state would be limited to collection as a creditor—and being dischargeable without further ability to collect from other sources.

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