In re Ballard

• Decision Date: 25 August 1999
• Docket Number: Bankruptcy No. 96-11935.
• Citation: 238 BR 610
• Parties: In re Ricky Clay BALLARD, Debtor.
• Court: U.S. Bankruptcy Court — Middle District of Louisiana

238 B.R. 610 (1999)

In re Ricky Clay BALLARD, Debtor.

Bankruptcy No. 96-11935.

United States Bankruptcy Court, M.D. Louisiana.

August 25, 1999.

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Charles W. White, Baton Rouge, LA, for debtor.

Dwayne M. Murray, Baton Rouge, LA, trustee.

Bennett Boyd Anderson, Lafayette, LA, Special Counsel for trustee.

RULING

LOUIS M. PHILLIPS, Bankruptcy Judge.

Before the Court is a proposed compromise and settlement of a pre-petition cause of action for personal injuries suffered by the debtor, which requires that we answer the question whether the debtor, individually, should be entitled to share to the extent that the settlement amount is attributable to post-petition future medical expenses and, perhaps, post-petition lost earning capacity.

Trustee, attorney for trustee, and the injured debtor in this case seek approval of a pre-petition personal injury suit settlement agreement, with the trustee agreeing that the amount of the settlement is acceptable but urging that the estate is entitled to the whole of the settlement proceeds. The actual terms of the proposed settlement provide for the debtor to receive a portion of the proceeds. There is no dispute that the monetary amount is a good settlement and compromise (in light of the nature of the injuries suffered, the questions concerning attribution of fault, insurance coverage, etc.).

A dispute has arisen over the proposed carving up of the proceeds. The debtor proposes to compromise the lawsuit by bifurcating the recovery into a component representing future medical expenses, that is payable to the debtor, and a component payable to the estate (with the debtor and the estate sharing payment of attorney's fees).

At hearing, in response to questions from the Court evidencing a concern about the estate's lawyer having a conflict of interest (representing the estate but submitting a proposed settlement which allocates a portion of the money to the debtor), it was established that the tortfeasor's insurer proposed the allocation to obtain a consensual release from both the debtor and the estate, without prompting of any kind by the lawyer. The Court believes the lawyer and concludes that the proposal by the defendant(s) is representative of either practice or thinking (or both) within other states (or districts within this state). The trustee responds that the amount apportioned to the debtor for future medical expenses is estate property (pursuant to § 541(a)(1)),¹ is non-exempt, and should be paid over to the estate. The trustee, the trustee's lawyer, and the debtor place the matter before the Court seeking a directive to take back to the defendant insurer (effectively waiving any right to claim the necessity of proceeding by adversary proceeding to obtain declaratory judgment, etc.). Should this Court "split the baby"² and allow bifurcation of pre-and post-petition medical expenses to allocate a portion of the settlement proceeds to the debtor?

In this Ruling we set forth the reason for issuing this opinion for publication (after numerous non-published rulings on this score reaching the same conclusion), decline the proposed bifurcation, and rule that the entire settlement amount is nonexempt estate property.³

FACTS AND PROCEDURAL HISTORY

Debtor Ricky C. Ballard was injured in a two-vehicle collision on November 4, 1994. Mr. Ballard suffered numerous injuries, chief among them a severely fractured hip that required surgery in February of 1996. Mr. Ballard has a limp, is unable to run or jog, and is said to face a future total hip replacement. The debtor is said to have no identifiable post-petition wage loss, but alleges lost earning potential due to his disability.⁴ Mr. Ballard and the driver of the other vehicle each asserted liability against the other. On October 15, 1996 Mr. Ballard filed this chapter 7 bankruptcy. Although Mr. Ballard's Statement of Intention lists suits by and against him stemming from the accident, his damage suit is neither itemized in Schedule "B," nor in any portion presently claimed as exempt in schedule "C."

Counsel who represented Mr. Ballard in the personal injury action before the bankruptcy case was filed was authorized, pursuant to § 327(e), to represent the estate in prosecuting the personal injury action (to the extent of the estate's interest). Given the liability question, as was explained at hearing on the settlement, he has done a good job in obtaining the proposed settlement amount. Counsel obtained, for the Court's consideration, a proposed settlement and compromise whereby the opposing party would pay $55,000, with $10,000 payable to Mr. Ballard personally, for the purpose of paying (or representing the appropriate costs of) future medical bills (primarily a future hip replacement), and, perhaps, compensation for loss of future earning capacity. The remainder would be paid to the estate (the debtor's $10,000 is the payment proposed net of a proportionate share of legal fees and expense).⁵

By all accounts, Mr. Ballard has been a most cooperative party, contributing much time and assistance to the prosecution of the action and, as mentioned, apparently did not inject himself (personally or through counsel) into the litigation or settlement negotiations to seek a personal share of the proceeds. In other words, Mr. Ballard has clearly complied with his duty, contained in § 521(3)⁶ of the Code, to cooperate with the trustee in estate administration.

If there is a case in which the debtor should, equitably, be able to lay claim to a portion of settlement proceeds, this is the case. Maybe that is why we feel compelled to issue this opinion—to publicize the situation of those in Mr. Ballard's position. His accident caused a long-term condition that generates a portion of the personal injury claim. He was in need of bankruptcy relief in the form of securing a discharge of the debt generated by the accident, but the cost of bankruptcy relief (which we find to be the same as the state law would provide outside of bankruptcy) is that his estate (his creditors) get the personal injury claim. Perhaps, because this Court cannot judicially legislate, this opinion is a call to the Louisiana Legislature to analyze this situation to determine whether, within the realm of legislative will, there is a place for people like Mr. Ballard in an amendment to the exemption statutes—to exempt personal injury claims, a portion of personal injury claims, or something.

If there is another reason for this opinion, it is to focus the thinking of parties before this Court, so that: (i) either our conclusions will be brought before a reviewing court and reversed; or (ii) the questions raised here will, at least in this Court, be laid to rest by means of published opinion. Either way, the issue of a debtor's right to a portion of pre-bankruptcy settlement proceeds will be clarified, at least to those coming before this Court.

We think the need for clarification arises at least in part from a Fifth Circuit case, which can be read as providing uncertainty sufficient to allow courts in Louisiana, and perhaps the Fifth Circuit all over, who want to allocate to debtors a portion of settlements of pre-bankruptcy causes of action, to find a basis for doing so. We think that neither the Bankruptcy Code (is it property of the estate?) nor Louisiana state law (if it is property of the estate, is it exempt?) provides for such bifurcation. We offer the following opinion as to why.

ANALYSIS

FIFTH CIRCUIT JURISPRUDENCE— Wischan v. Adler

The effect of a bankruptcy filing upon an ongoing personal injury action was examined by the Fifth Circuit in Wischan v. Adler (In re Wischan).⁷ The Wischan court, faced with a personal injury claim consisting of pre-petition medical expenses and pre- and post-petition pain and suffering, had to answer whether the debtor was entitled to any part of the proposed settlement funds.

The debtor urged a three-pronged argument in support of his claim to a portion of the settlement proceeds (at least the opinion alludes to a three-pronged argument). First, that federal bankruptcy law directs that the lawsuit, because settled post-bankruptcy, is not property of the estate. Second, that if the portion claimed by the debtor was found to be estate property, it was exempt. Third, that state law required that the settlement be bifurcated so that the portion related to compensation for post-petition pain and suffering is property of the debtor, solely. (We break these arguments into three because the Fifth Circuit did. Argument Number 3, though, seems to be a component of Argument Number 1, that the property is not estate property, but on the basis that the Bankruptcy Code cannot make it estate property because of state law, or something like that.)

Drawing from the language of § 541(a)(1)—"all legal and equitable interests of the debtor as of the commencement of the case" become property of the estate—and precedent such as United States v. Whiting Pools, Inc.,⁸ Tignor v. Parkinson,⁹ and Sierra Switchboard Co. v. Westinghouse Electric Corp.,¹⁰ the Fifth Circuit concluded as a general matter that pre-petition lawsuits were property of the bankruptcy estate notwithstanding the fact that they "may have borne fruit in settlement or judgment" post-petition.¹¹

Having determined the plaintiff-debtor's pain and suffering recovery to be property of the estate, the court, called to do so by the debtor's claims, searched for an applicable Louisiana exemption. Noting that federal law provided an exemption for both non-pain and suffering personal injury losses as well as lost future earnings,¹² the Wischan court pointed out that Louisiana had "opted out" of the federal exemption provisions and had no analogous exemption. "Louisiana does not provide an exemption for proceeds from a personal injury claim, for future medical expenses, or for future pain and...