The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:
The Seventh Circuit Court of Appeals (the Court) recently held that an order, which arose from a workers’ compensation action, directing a debtor’s employer to deposit funds in debtor’s lawyer’s trust account for payments to medical creditors created an express trust such that the funds were excluded from the debtor’s chapter 7 bankruptcy estate and he was not entitled to claim an exemption in them. Ryan v. Branko Prpa MD, LLC, 55 F.4th 1108 (7th Cir. 2022).
To view the opinion, click here.
Debtor Rodney Ryan (Ryan) was injured on the job and sought worker’s compensation in Wisconsin for his injuries. He settled the action with a Compromise Agreement (the “Settlement”) which provided that the employer and insurer would pay $120,000 to Ryan, $30,000 to his lawyers, and $400,000 (the “Fund”) to the trust account of his lawyers “for disbursement to medical providers and lienholders.” A state administrative law judge (ALJ) approved the Settlement and ordered the payments as set forth above.
Less than a month later, and before any money in the Fund was disbursed to medical providers, Ryan filed a chapter 7 bankruptcy and attempted to exempt the entire Fund from the bankruptcy estate. He used an exemption available under Wisconsin law, Wisc. Statutes § 102.27(1), which provides “no claim for [worker’s]compensation, or compensation awarded, or paid, [may] be taken for the debts of the party entitled thereto.” His schedules reflected that he owed more than $800,000 in unpaid medical bills. One of his medical creditors, Branko Prpa, objected to the exemption, asserting that the Fund in the attorney’s trust account was not Ryan’s property, but instead was created to pay his medical providers exclusively. At most, Ryan had legal, but not equitable, title to the Fund.
On summary judgment, the bankruptcy court ruled in favor of Prpa, concluding that the ALJ order created an express trust in favor of Prpa and other providers and, if not, that a constructive trust would be imposed because Ryan would be unjustly enriched if allowed to keep the Fund. Ryan appealed to the district court, which affirmed, and then to the Court, which also affirmed, finding that the ALJ order created an express trust and the Fund was not property of the estate under Bankruptcy Code § 541(d).
Section 541(d) of the Bankruptcy Code provides that if a debtor holds legal, but not equitable, title to property, it is excluded from the bankruptcy estate. To determine whether Ryan had equitable title to the Fund, the Court considered whether the ALJ order created an express trust. Under Wisconsin law, an express trust is created when three things converge: “(1) a trustee, who holds the trust property and it subject to equitable duties to manage it for the benefit of another; (2) a beneficiary to whom those duties are owed; and (3) trust property, which is held by the trustee for the beneficiary.” (citations omitted) The Court looked to the terms of the Settlement, as ordered by the ALJ, and found all three elements satisfied. The trustee was the law firm and its trust account, who had a duty to use the Fund for disbursements to the medical providers who were the beneficiaries, and the Fund was the trust property.
The Court rejected Ryan’s arguments that the magic words ‘for the benefit of” or “to be held in trust” were absent in the order. The use of the words “for disbursement to” was more telling than those terms to confirm that Ryan had no equitable interest in the Fund. In addition, the fact that the amount owed the medical providers was double the money in the Fund was no defense, since a state court interpleader action was available to resolve the appropriate distribution of the Fund among the providers.
Since Ryan had no equitable interest in the Fund, it was excluded from the bankruptcy estate. Because exemptions are only available to protect property of the estate from creditors, Ryan was not entitled to exempt the Fund.
This decision must be the correct result. In layman’s parlance, the money in the Fund was earmarked for payment to the medical providers only and never belonged to Ryan. He could not exempt what he did not own. Here, the law of express trusts in Wisconsin (which seems to have universal elements) and Bankruptcy Code § 541(d) resulted in the right ruling.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.