On January 5, 2015, the United States Bankruptcy Court for the Middle District of Pennsylvania published its opinion on In Re: Jesus Arellano, concluding that property traceable to a pre-bankruptcy petition lump sum workers’ compensation settlement award may be claimed as exempt resources. The court also finds that the WCMSA established a trust for the benefit of medical providers since the express intent of the settlement agreement was to create a fund to pay for medical treatments and prescription drugs related to the work-related injury. By finding that the WCMSA funds were to be held in trust for the benefit of providers of medical services related to the workers’ compensation claim, the court determines that the WCMSA is not property of the bankruptcy estate and may not be administered by the Bankruptcy Trustee for the benefit of creditors. Therefore, the court rules in favor of exempting all proceeds from the settlement agreement and all property acquired with these proceeds.
In 2010, Jesus Arellano (Debtor) sustained a broken hip at work in Maryland. Thereafter, he filed a workers’ compensation claim. On December 1, 2011, Debtor entered into a settlement agreement with his employer whereby Debtor would receive a lump sum payment of $225,000. In addition, $72,741.88 was paid to Debtor as a Medicare set aside for Debtor’s need for future treatment for his injuries.
In January 2012, Debtor deposited both the lump sum settlement and the Medicare set aside in his bank accounts. Debtor admitted that he used to funds to make several purchases – a 2005 Ford F-150 for $17,000, real property located at 3587 Cannon Lane, York PA 17408 for $85,000, and real property located at 3887 Cannon Lane, York PA 17408 for $86,000. On November 1, 2012 Debtor sold the 3887 Property to his brother through an installment agreement for $90,000. Under the terms of the sale, Debtor’s brother is obligated to make payments of $1200 per month, which includes principal and interest at 5.5 percent, until the balance is paid in full in June 2020.
Debtor filed a Chapter 7 bankruptcy petition on March 8, 2014, claiming as exemptions the 3587 Property, the 3887 Property, funds in 2 checking accounts established from Debtor’s workers compensation pay-out, and the Ford F-150 under 11 U.S.C. §522(d)(11)(E).
On April 30, 2014, the Trustee filed an objection to Debtor’s exemption claim asserting that §522(d)(11)(E) did not authorize Debtor to exempt property that was the proceeds of a workers’ compensation claim. On May 22, 2014, Debtor responded to the Trustee’s objection asserting that the property could be exempted under §522(d)(11)(E) and that the property claimed was reasonably necessary for Debtor and his dependents.
A hearing on the Trustee’s objection was held on September 25, 2014, at which time the issues were identified as follows: 1) whether funds or property traceable to the proceeds of a lump sum workers’ compensation settlement received prepetition may be claimed as exempt under §522(d)(11)(E); and 2) if the funds and property may be exempted, whether they are necessary for the support of Debtor and his dependents.
The Trustee based his objection on a decision rendered in 2001 by Judge Thomas in the case of In re Michael, 262 B.R. 296 (Bankr. M.D. Pa. 2001). The facts in In re Michael are similar to the facts here. The debtor received a lump-sum settlement after sustaining a work-related injury prior to filing his bankruptcy petition. On his schedule of exemptions, the debtor listed the proceeds of the settlement as exempt under 11 U.S.C. §522(d)(11)(E). Judge Thomas upheld the trustee’s objection to the exemption claim holding that workers’ compensation claims could not be exempted under §522(d)(11)(E), but must be exempted under §522(d)(10)(C). Judge Thomas cited the analysis of the court in In re Williams, 181 B.R. 298 (Bankr. W.D. Mich. 1995), and adopted the majority view that “workmen’s compensation awards, and the tracing of those awards into certain specific items, are beyond the scope of 11 U.S.C. §522(d)(11)(E).”
To avoid the injustice of finding that workers’ compensation awards paid in installments could be exempted, but those received in a lump sum could not, the bankruptcy court in In re Sanchez, 362 B.R. 342 (Bankr. W.D. Mich. 2007) decided to give the issue a fresh look. In Sanchez, Judge Hopkins looked at the plain meaning of the statute and concluded that workers’ compensation awards may be exempted under §522(d)(11)(E) if the award is traceable to a payment that is intended to compensate the debtor for the loss of future earnings and is reasonably necessary for the support of the debtor or the debtor’s dependents.
The court here agrees with the conclusion of the Sanchez court that §522(d)(11)(E) unambiguously exempts “a payment in compensation of loss of future earnings of the debtor,” including lump sum workers’ compensation payments, without restricting such payment to tort-type actions. The court therefore concludes that §522(d)(11)(E) provides a basis upon which property traceable to a pre-petition lump sum workers’ compensation settlement awarded for the loss of future earnings to the extent that the lump sum is reasonably necessary for the support of a debtor and the dependents of a debtor may be claimed as exempt.
In addition, part of Debtor’s workers’ compensation settlement was a Medicare “set aside” (WCMSA) payment. WCMSA is a “financial agreement that allocates a portion of a workers’ compensation settlement to pay for future medical services related to the workers’ compensation injury, illness, or disease.” The Center for Medicare and Medicaid Services provides that a claimant “can ONLY use a WCMSA to pay for medical treatment or prescription drugs related to his or her workers compensation injury, and ONLY if the expense is for a treatment or prescription Medicare would cover. This is true even if he or she is not yet a Medicare beneficiary.”
The court therefore concludes that the WCMSA provided as a result of Debtor’s settlement agreement established a trust for the benefit of medical providers. The express intent of the settlement agreement was to create a fund from which Debtor was to pay for his medical treatments and prescription drugs related to his work-related injury. Even though the agreement did not specifically state that Debtor is to hold the funds as trustee for the benefit of his medical providers, no such words are needed in order to create an express trust. The subject matter of the trust is the WCMSA of $72,741.88. The parties to the settlement agreement were competent to create the trust, Debtor was capable of holding the funds as trustee, and entities providing medical services to Debtor were named beneficiaries of the trust. Thus, all the requirements necessary to create a trust have been met in the settlement agreement.
By finding that the WCMSA payment was to be held in trust for the benefit of providers of medical services related to Debtor’s workers’ compensation claim, the court finds that the WCMSA is not property of Debtor’s bankruptcy estate and, as such, may not be administered by the Trustee for the benefit of creditors. The court therefore rules Trustee’s objection to Debtor’s exemptions under 11 U.S.C. §522(d)(11)(E) is overruled.
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