Debtor May Not Exempt Portion of Worker’s Comp Order Earmarked for Medical Care Providers

Posted by NCBRC - March 23, 2022

The chapter 7 debtor was not entitled to exempt the portion of a settlement he negotiated with his employer and worker’s compensation insurer where that amount was in a trust for the benefit of his medical care providers and, therefore, did not become part of the bankruptcy estate. Ryan v. Branko PRPA MD, LLC, No.21-449 (E.D. Wisc. March 2, 2022).

Prior to filing for bankruptcy, the chapter 7 debtor was injured at work and negotiated a Worker’s Compensation compromise agreement with his employer and his worker’s compensation insurer. The agreement provided that the debtor was to receive $120,000, and the debtor’s counsel, Richard Fortune (FSMC), was to receive $30,000 in legal fees. The agreement designated an additional $400,000 to be paid to the debtor’s medical care providers, with 80% of any remaining amount going to the debtor and 20% going to FSMC. Before making any payments to his medical creditors, the debtor and his wife filed for chapter 7 bankruptcy listing the Worker’s Compensation award in the amount of $781,000 and claiming it as exempt in its entirety. The trustee and one of the medical creditors objected to the exemption.

The bankruptcy court found that the debtor could exempt the amount he received through the agreement but that the $400,000 earmarked for the medical care providers was in a trust for the benefit of those creditors and therefore never entered the bankruptcy estate. It further found that, because the medical claims were more than the double the $400,000 earmarked for their repayment, the debtor’s interest in the remainder funds was insufficient to bring it into the bankruptcy estate.

The debtor appealed to the district court.

The first issue on appeal was whether the bankruptcy court properly found that the $400,000 was in a trust for the benefit of the medical care providers. The debtor pointed to Wis. Stat. §102.27(1) which provides:

  • Except as provided in sub. (2), no claim for compensation shall be assignable, but this provision shall not affect the survival thereof; nor shall any claim for compensation, or compensation awarded, or paid, be taken for the debts of the party entitled thereto.

The bankruptcy court found that the section must be read in conjunction with the entire statute, and that Wis. Stat. §102.26(3) sheds light on its interpretation. That section provides:

Fees and costs

(a) Except as provided in par. (b), compensation exceeding $100 in favor of any claimant shall be made payable to and delivered directly to the claimant in person.

(b) 1. Subject to sub. (2), upon application of any interested party, the department or the division may fix the fee of the claimant’s attorney or representative and provide in the award for that fee to be paid directly to the attorney or representative.

  1. At the request of the claimant medical expense, witness fees and other charges associated with the claim may be ordered paid out of the amount awarded.

The bankruptcy court found that a trust exists when there is: “(1) a trustee, who holds property and is subject to equitable duties to deal with it for the benefit of another, (2) a beneficiary, to whom the trustee owes equitable duties to deal with trust property for its benefit, and (3) trust property, which is held by the trustee for the beneficiary.”

The district court agreed that the statutory scheme is such that an employee is not necessarily entitled to all the proceeds from a negotiated Worker’s Compensation order. Here the funds were placed in a separate account which was managed by FSMC as Trustee, and FSMC was obliged to pay the funds to the medical creditors. The court found these circumstances met the requirements under Wisconsin law to constitute a trust for the benefit of the medical creditors.

In so holding, the court rejected the debtor’s argument that, because the employee is the only party with standing to bring a worker’s compensation claim, only the employee is “entitled” to receive funds under section 102.27(1). Again, reading the statute as a whole, the court found that the amount specifically earmarked for the debtor was the only amount to which he was “entitled.”

The court further found that even if there was no express trust created by the agreement, there was a constructive trust. In finding the existence of a constructive trust, the bankruptcy court found, and the district court agreed, that allowing the debtor to receive and exempt the $400,000 designated for medical creditors would be “unjust enrichment” caused by a “mistake,” the existence of which constitute grounds for creation of a constructive trust under Wisconsin law.

Finally, the court rejected the debtor’s argument that his interest in the remainder portion of the $400,000 was sufficient to bring that portion of the order into the bankruptcy estate. The court found that the debtor’s interest was contingent on there being a remainder and, given the fact that the medical bills totaled more than $800,000, the court agreed with the bankruptcy court’s finding that the debtor’s interest would have no value to the bankruptcy estate.

The court affirmed.

Ryan ED Wisc Mar 2022

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