Opinion Mondays: Settlements in Contested Cases Can be Fraught With Equitable Challenges
Bankruptcy Court Nixes WI Claimant’s Effort to Avoid Paying Med Providers
Where a Wisconsin worker settled a contested workers’ compensation claim with his employer and its insurer by means of a compromise settlement agreement that called for the payment of $120,000 to the claimant, $30,000 to the attorney that had represented him in the claim, and an additional sum of $400,000 into the attorney’s trust account “for disbursement to medical providers and lienholders,” with any balance of the $400,000 to go to the worker and the attorney on an 80/20 basis, the effect of the agreement—and the ALJ’s subsequent Order approving it—was to create an express trust favoring those medical providers and lienholders, held a federal bankruptcy court, construing Wisconsin property exemption laws [Branko PRPA MD LLC v. Ryan (In re Ryan), 2021 Bankr. LEXIS 739 (E.D. Wis., Mar. 24, 2021)]. Accordingly, in spite of the worker-debtor’s discharge in bankruptcy—which, therefore, extinguished the worker’s obligations to the medical providers, he was nevertheless not entitled to any portion of the $400,000, since it remained outside the bankruptcy estate and, therefore, was not subject to an exemption claim by the bankruptcy debtor (and his wife).
Background
The debtor-defendant, Rodney Ryan, claimed to have sustained an injury at his workplace on August 22, 2016. On September 8, 2016, Ryan presented a workers’ compensation claim to his employer’s insurer, which, in turn, reported the claim to Wisconsin’s Office of Workers’ Compensation Hearings (OWCH). Ryan was represented in the matter by one or more members of the Fortune & McGillis law firm (Fortune).
Following Ryan’s August 2016 injuries, Branko Prpa MD, LLC (Prpa) provided substantial medical services to him. Ryan’s workers’ compensation claim did not move to a final administrative hearing. Instead, Ryan, Fortune, the employer, and the insurer entered into a “full and final” Compromise Agreement, dated August 27, 2019. According to the terms of the agreement, Ryan averred that he had sustained an injury “while performing services growing out of and incidental to his employment,” for which he sought various benefits under Chapter 102 of the Worker's Compensation Act of Wisconsin (“the Act”), including but not limited to, indemnity and medical expense.
Terms of Compromise Settlement
The Compromise Agreement also expressly stated that the employer and the insurer disputed that Ryan had sustained a compensable injury. Nevertheless, the employer and insurer agreed to settle any potential liability under the Act by the payments noted above. As part of the agreement, it was understood that any balance remaining in the $400,000 amount would be split 80/20 between Ryan and Fortune.
Approval of Settlement Agreement
On September 17, 2019, the Compromise Agreement was approved by Order of Administrative Law Judge Donald Doody of the OWCH. The OWCH Order mirrored much of the Compromise Agreement and provided for the payments outlined therein and described above.
Chapter 7 Bankruptcy Petition
Less than one month after Judge Doody entered his Order approving the compromise, Ryan and his wife filed for Chapter 7 bankruptcy relief. In their amended schedules, the debtors listed the payment under the OWCH Order as a “financial asset,” and recorded it has having a total value of $781,000. That total included a separate Workers’ Compensation Medicare Set-Aside Arrangement in the amount of $271,834. It was uncontested that the WCMSA was an express trust, such that the WCMSA funds were excluded from property of the estate under 11 U.S.C.S. § 541(d).
Debtors Sought Exemption
In their Amended Schedule C, the debtors sought an exemption as to the amounts paid directly to Ryan, as well as the $400,000 held in the trust account, citing Wisconsin Statute § 102.27. As for their debts, in addition to the $445,684.00 that the debtors (Ryan and his wife) reported owing Prpa for medical services, the debtors' schedules also listed approximately $425,000.00 in other unsecured medical debt.
Objection to Exemption & Adversary Proceeding
Prpa, as a scheduled creditor, filed an objection to the debtors’ claimed exemption of the payment under the OWCH Order, specifically objecting to the exemption of the $400,000 held in the Fortune firm trust account. Prpa simultaneously filed the instant adversary proceeding against the debtors and the Fortune firm. On January 22, 2020, the debtors received a joint discharge in their “no asset” Chapter 7 bankruptcy. Prpa then moved for summary judgment on its adversary complaint.
Prpa’s Argument
Plaintiff Prpa asserted two theories to argue that the $400,000 held in the Fortune firm’s trust account was not property of the estate. First, under the plain language of the OWCH Order, Prpa contended the parties had created an express trust containing $400,000 for the benefit of medical providers and lienholders. Second and alternatively, because those funds were not properly disbursed, Prpa argued the Court should impose a constructive trust for the benefit of medical providers like Prpa. Prpa contended that the $400,000 was not property of the estate under either theory; therefore, the debtors’ claimed exemption in those funds was invalid.
Ryan’s Arguments
Both the Ryans and the Fortune firm asserted that all funds itemized in the Order were estate property which could be fully protected by an exemption created by the Wisconsin Worker’s Compensation Act. The defendants argued that they held both legal and equitable title to the $400,000, and any attempt of creditors to claim an interest would be contrary to the worker’s compensation statutory scheme (a workers’ compensation claimant’s creditors generally may not reach a workers’ compensation settlement).
Bankruptcy Court’s Decision
Initially, the Bankruptcy Court stressed that before an exemption of property could be claimed, it had to be property of the bankruptcy estate. While the definition of “property” within the bankruptcy estate was broad, the Court stressed that the broad “umbrella” did not expand the rights of a debtor beyond those that existed as of bankruptcy filing. The Court said it must look to state law to determine the nature and extent of a debtor’s interest on the petition date.
Was an Express Trust Established?
The Court observed that under Wisconsin law, a trust is created once three element exist:
- A trustee, who holds the trust property and is subject to equitable duties to deal with it for the benefit of another;
- A beneficiary, to whom the trustee owes equitable duties to deal with the trust property for his benefit; and
- Trust property, which is held by the trustee for the beneficiary.
To satisfy these requirements, Prpa contended that the OWHC Order created an express trust by directing payment to the Fortune firm as trustee, designating Ryan’s medical providers and lienholders as the beneficiaries, and setting the trust res as the $400,000 in the Fortune firm’s trust account. Prpa argued that the language of the OWHC Order was plain.
The Court observed that despite originally agreeing that the Compromise Agreement and Order were plain, the Ryans and Fortune had reversed course and now argued the terms were ambiguous. According to the Court, Fortune contended that trusts were not created by the language of a contract, but rather by the intent of the contracting parties. Fortune contended, therefore, that the Court must accept extrinsic evidence to determine the parties’ intent while negotiating the Compromise Agreement.
Parties’ Intention Was Irrelevant
The Court disagreed with Fortune, however, noting that the interpretive rules applicable to court orders were the same as those applicable to contract interpretation. That is to say that if there was no ambiguity on the face of the stipulation or judgment, the subjective intent of the parties was irrelevant. The Court continued:
Accordingly, the Court first considers whether the text of the Order is plain. If its meaning is plain, it is not open to construction and no extrinsic evidence can be considered. Nor could, under any circumstance, the subjective intent of the parties convert the text of the OWCH Order into superfluous verbiage or a “wink wink” agreement [the Court indicated this was a term that Ryan’s bankruptcy counsel had used at oral argument] under which the express provision for funds in a trust account for benefit of medical providers and lienholders is ignored as surplusage [Opinion, p. 17].
No Ambiguity; Express Trust Created
The Court stressed that while the defendants tried to argue the OWHC Order was ambiguous as to whether it established an express trust for the benefit of medical providers and lienholders, they had failed to identify which terms were ambiguous. The Court agreed with Prpa that the OWHC Order established the elements of an express trust. In directing that the $400,000 be held in the Fortune firm trust account, the OWHC Order placed Fortune and his firm in the role of trustee, under the requirements of Wis. S.C.R. 20:1.15(b)(1) and (d)(1), to deal with those funds “for the benefit of another.” Even though the OWCH Order did not use the words "to be held in trust," the effect was the same, said the bankruptcy court.
Court’s Disposition
Accordingly, the Court held that the only entities that could claim both legal and equitable interests in the funds were “medical providers and lienholders." The OWCH Order not only specified conveyance of the $400,000 to the Fortune firm trust account, but was an order giving notice that “medical providers and lienholders” of Ryan had an interest therein. In as much as the OWHC Order established an express trust for the benefit of Ryan’s “medical providers and lienholders,” under 11 U.S.C. § 541(d), the $400,000 in the Fortune firm trust account had to be excluded from the bankruptcy estate. And as those funds never became property of the estate, there was no merit to Ryan’s claim of exemption of those funds.
Commentary: Contested Nature of Claim Important
There is much that we do not know about Ryan’s claim. Given the fact that the primary issue was whether the $400,000 could be claimed as an exemption in the Chapter 7 proceeding, there was no need to mention how Ryan’s injury occurred. Stated somewhat differently, what was the basis upon which the employer and insurer denied liability. Was this part of the “wink wink” that the bankruptcy judge referred to in her decision?
Ryan’s Injuries Were Serious
It seems clear that Ryan’s injuries were serious. He incurred almost $900,000 in medical charges in his treatment following the injury. Ryan must have contemplated long-term, permanent impairment, with continued expenditure for medical expenses, else there would have been no need to set up the Medicare Set -Aside.
ALJ Was Between Rock and Hard Place
One can’t fault the ALJ here. He was stuck between a rock and a hard place. If the case went to trial and Ryan lost, not only would Ryan recover nothing, the medicals would still be unpaid and Ryan would have made a “judgment-proof” defendant in any collection action filed against him; the “no-asset” Chapter 7 proceeding proves that. On the other hand, if the claim were successfully prosecuted, Ryan might have received more and—important to the facts here—the medical providers would have been paid essentially in full, instead of sharing in the $400,000 fund. The ALJ did what most would do. He determined that $120,000 was a meaningful payment. $400,000 set aside for medicals was much better than nothing. And so, the ALJ approved the settlement.
Was this a “Wink Wink” Agreement?
The entire scenario begs the question as to whether this was, indeed, a “wink wink” agreement, as mentioned by the bankruptcy judge. In other words, just how “contested” was the claim? Although this issue was not discussed by the bankruptcy court, the contested nature of the workers’ compensation claim was a vitally important factor here. Without it, the settlement would likely have taken a much different form, if there had been a settlement at all. Since the employer and insurer had not admitted liability on the claim, there had been no determination that they—the employer and insurer—were liable for the almost $900,000 in medical care provided to Ryan. Unless the claim was accepted by the employer/carrier, or, following a hearing, the OWCH determined the claim in Ryan’s favor, the expense of his medical care was Ryan’s personal debt.
Once the settlement agreement was approved by the ALJ, with no admission of liability on the part of the employer and carrier, the medical providers and/or lienholders would have been within their rights to proceed against Ryan for his medical expenses. Here’s a subtle point: As counter-intuitive as this might sound, Ryan needed his workers’ compensation claim to be contested in order for the settlement to work. Without such a contested claim, there would never have been a $400,000 deposit to the trust account. The employer/insurer would have been directly liable for all reasonable and necessary medical expenses—an amount that was twice that amount.
During the weekend, I checked with some attorney friends who specialize in bankruptcy law. They suggest that, in all likelihood, Ryan contemplated that after the $400,000 was paid into the attorneys’ trust account, the medical providers would come after him for payment. If Ryan and his wife could get a discharge in bankruptcy under Chapter 7, the unsecured debts owed to the medical providers would be extinguished. Under those circumstances, Ryan likely supposed that without valid collection claims, the medical providers would be unable to reach the $400,000. Of course, Prpa, with more than $400,000 at stake, decided to challenge the carefully constructed arrangement. The bankruptcy court then determined that the $400,000 “set-aside” should essentially be handled in the same fashion as the MSA fund—as an express trust.
And who said workers’ compensation claims weren’t interesting?