Federal Court: Settlement Agreement Created Express Trust Favoring Injured Worker’s Medical Providers
A federal district court, sitting in Wisconsin, has affirmed a decision by a U.S. Bankruptcy Judge that found $400,000 paid into the trust account of an injured worker’s attorney, and earmarked for payment of medical expenses as part of the settlement of a state workers’ compensation case, was not part of the injured worker’s bankruptcy estate and, accordingly, could not be claimed as exempt property by the worker [Ryan v. Branko PRPA MD LLC, 2022 U.S. Dist. LEXIS 36406 (E.D. Wist., Mar. 2, 2022)]. The court’s decision, which agreed that the arrangement constituted an express trust, puts an end to what the bankruptcy judge had wondered aloud was a “wink-wink” arrangement between the worker and the employer/carrier to avoid the payment of more than $870,000 in medical expenses.
Background
After suffering work injuries in 2016, Ryan sought worker’s compensation benefits under the Wisconsin Workers’ Compensation Act. After three years of litigation, Ryan, his employer, and the workers’ compensation carrier entered into a settlement agreement in which the employer and carrier admitted no liability, but agreed to the payment of $120,000 to Ryan, $30,000 to Ryan’s attorney, and an additional sum of $400,000 to be paid into the attorney’s trust account “for disbursement to medical providers and lienholders.” At the time of the settlement, it was acknowledged that Ryan’s medical bills totaled more than $870,000. The agreement specified, however, that if any balance of the $400,000 remained, it would be paid to Ryan and the attorney on an 80/20 basis. The settlement agreement was subsequently approved by an administrative law judge.
Chapter 7 Petition
Less than one month later, Ryan and his wife filed for Chapter 7 bankruptcy relief. In their amended schedules, the debtors listed the payment under the settlement 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 bankruptcy estate under 11 U.S.C.S. § 541(d). Ryan and his wife claimed the full value of the $400,000 as part of their personal exemptions.
Doctor’s Objection to Exemptions
Branko PRPA MD LLC (“Branko”), a medical provider owed more than $445,000 for medical services provided as a result of Ryan’s 2016 injuries, filed an adversary complaint seeking a determination that the $400,000 held by the attorney was not part of the Ryans’ bankruptcy estate and was held in trust for the benefit of medical providers or, alternatively, that the court should impose a constructive trust. Branko filed a separate objection to the Ryans’ claim of exemption over the funds.
Bankruptcy Judge Disfavors Arrangement
The bankruptcy judge agreed with Branko, finding that the settlement agreement (and ALJ’s Order approving it) created an express trust for the benefit of Ryan’s medical providers and even if it did not create such an express trust, there was a basis to impose a constructive trust on the funds. The judge also found that the Ryans’ remainder interest in the settlement funds was insufficient to bring the proceeds into the bankruptcy estate. At one point in the decision, the judge postulated that the settlement may have been a “wink-wink” arrangement. In any event, the Ryans appealed.
District Court: Express Trust
The U.S. District Court stressed that the record supported the Bankruptcy Court’s conclusion that the plain terms of the settlement agreement and order established the elements of an express trust under Wisconsin law. The arrangement placed Ryan’s attorney in the role of Trustee. The attorney, in turn, owed equitable duties to deal with the trust res for the benefit of the medical providers and lienholders.
Alternatively, Constructive Trust Created
The District Court also held that the Bankruptcy Court’s holding that the defendants’ failure to disburse the funds in accordance with the ALJ’s Order, and the absence of any evidence of negotiation or payment to medical providers and lienholders, once those funds were conveyed to the law firm trust account, to be the type of ‘mistake’ that courts would recognize as grounds for enforcing a constructive trust. The District Court said the Bankruptcy Court had properly concluded that the mistake, along with the Ryans’ unjust enrichment, constituted a basis to impose a constructive trust.
Nor did the District Court find any error in the Bankruptcy Court’s conclusion that Ryan’s total medical debt of approximately $870,684 swallowed the $400,000 payment, and, as a result, any equitable remainder interest would have no value in the Ryans’ bankruptcy. Based on the foregoing, the District Court affirmed the Bankruptcy Court’s decision.
Commentary
Readers may recall that I provided some extensive commentary on the case at the time it was decided by the Bankruptcy Court (to see that commentary, click here). I noted therein that the Administrative Law Judge in the underlying workers’ compensation case was between a rock and a hard place. Ryan had seriously injured. His medical bills totaled almost $900,000. If the case went to trial and Ryan lost, not only would he recover nothing, but the medical providers would likely get nothing either; most workers are judgment-proof. That seems to have been the case with Ryan who, after all, filed a Chapter 7 petition. On the other hand, if the case went to trial and Ryan won, then he’d be paid disability benefits and the medical bills would have been paid in full. And so, the ALJ approved the settlement and no doubt hoped that the $400,000 would be paid over on some equitable basis to the medical providers.
As I mentioned in my commentary on the Bankruptcy Court’s decision, the irony here is that Ryan needed the employer/carrier to deny liability. Without that denial, there would have been no basis for the compromise settlement and, therefore, no reason for the employer/carrier to have paid the $400,000 into Ryan’s attorney’s trust account.
As I mentioned in my earlier commentary, there is a lot that we don’t know about this case. The circumstances of the original injury were not at issue before the Bankruptcy Court. Was there some sort of “wink-wink” here, as the bankruptcy judge wondered aloud? Suffice it to say that if there was such an arrangement, it didn’t work, at least in favor of Ryan. Equity prevailed and the $400,000 presumably was distributed among the medical providers.