Debtor’s Valuation of Worker’s Comp Claim Insufficiently Supported

Posted by NCBRC - April 19, 2018

An affidavit by the debtor’s worker’s compensation counsel asserting that at the time of the bankruptcy petition the worker’s comp claim had a mere nuisance value, was insufficient to overcome the IRS’s claim for a secured interest in the amount the worker’s comp case actually settled for several months post-petition. United States v. Austin (In re Austin), No. 17-6024 (B.A.P. 8th Cir. April 9, 2018).

When Scott and Anna Austin filed their chapter 13 petition, Mr. Austin had a pending worker’s compensation action which they valued on their schedules at zero or “unknown amount.” The IRS filed a claim asserting a tax lien to which the Austins objected. While that action was pending, the Austins settled the worker’s compensation claim for $21,448.80, of which they received $15,661.60. The IRS amended its claim to show a tax lien secured by the $15,661.60 settlement amount. The Austins objected again, presenting the affidavit of their worker’s compensation attorney, Michael Smallwood, that, notwithstanding the ultimate settlement amount, the worker’s compensation claim in fact had only a “nuisance” value of $3,000 at the time the Austins filed for bankruptcy. Based on the affidavit, the bankruptcy court reduced the IRS’s secured claim to $3,000.

On appeal, the Bankruptcy Appellate Panel for the Eighth Circuit performed a de novo review of the evidence to address the question of how to value the worker’s compensation claim under section 506(a)(1).

The panel evaluated the Smallwood affidavit and found it insufficient to overcome the presumption of validity of the IRS’s secured claim. The affidavit consisted of Mr. Smallwood’s personal opinion in which he admitted that at the time the Austins filed for bankruptcy he did not yet know the extent of Mr. Austin’s injuries. The panel concluded that the affidavit lacked the financial and factual information necessary to constitute substantial evidence of the value of the IRS’s security interest. The panel also rejected the Austins’ argument that the difference between the actual value of the worker’s compensation claim and the negotiated settlement amount was due to the additional work Mr. Smallwood did between the bankruptcy petition date and the date of the settlement. Rather, the panel found that, while Mr. Smallwood’s post-petition efforts may have revealed the extent of Mr. Austin’s injury and necessary treatment, it was the degree of Mr. Austin’s injury, not Mr. Smallwood’s work, that raised the value of the worker’s compensation claim.

Other problems with the affidavit included the fact that it did not contain any information about early settlement demands or provide any factual basis for his conclusion as to the claim’s worth, and the IRS had no opportunity to cross-examine him as to those issues. The panel concluded that the Smallwood affidavit did not provide the necessary factual support to value the worker’s compensation claim at $3,000.

It reversed.

Austin 8th BAP opinion April 2018

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