In re Hernandez

• Decision Date: 18 March 2019
• Docket Number: No. 18-1789,18-1789
• Parties: IN RE: Elena HERNANDEZ, Debtor-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

918 F.3d 563

IN RE: Elena HERNANDEZ, Debtor-Appellant.

No. 18-1789

United States Court of Appeals, Seventh Circuit.

Argued October 26, 2018

Decided March 18, 2019

Richard D. Grossman, Attorney, Law Offices of Richard D. Grossman, Chicago, IL, for Debtor-Appellant.

Alan J. Mandel, Attorney, Alan J. Mandel Ltd, Skokie, IL, for Appellees.

Before Wood, Chief Judge, and Sykes and Scudder, Circuit Judges.

Sykes, Circuit Judge.

When Elena Hernandez filed a voluntary Chapter 7 bankruptcy petition in December 2016, she reported one sizable asset: a pending workers’ compensation claim valued at $31,000. To place that claim beyond the reach of creditors, she listed it as exempt under section 21 of the Illinois Workers’ Compensation Act ("the Act"), 820 ILL. COMP. STAT. 305/21 (2011), applicable via 11 U.S.C. § 522(b). Two days after filing for bankruptcy, Hernandez settled the claim.

Hernandez owed significant sums to three healthcare providers who treated her work-related injuries. The providers objected to her claimed exemption, arguing that 2005 amendments to the Act enable unpaid healthcare providers to reach workers’ compensation awards and settlements. The bankruptcy court denied the exemption and Hernandez appealed. The district judge affirmed, concluding that using the workers’ compensation exemption to thwart this specific class of creditors would frustrate the Act’s purpose.

We confront an important question of statutory interpretation: whether the Illinois Workers’ Compensation Act, as amended, allows care-provider creditors to reach the proceeds of workers’ compensation claims. Section 21 of the Act has been interpreted by bankruptcy courts to create an exemption for these assets. The 2005 amendments made several changes to the Illinois workers’ compensation regime, imposing a new fee schedule and billing procedure for care providers seeking remuneration. Did those changes alter the scope of section 21?

The Illinois Supreme Court hasn’t addressed the interplay between these competing components of state workers’ compensation law. Without that controlling authority, we find ourselves genuinely uncertain about the correct interpretation. This state-law issue is dispositive, likely to recur, and implicates the effective administration of workers’ compensation in Illinois. Therefore, we respectfully certify the question set forth in this opinion to the Illinois Supreme Court.

I. Background

In December 2016 Hernandez filed a Chapter 7 bankruptcy petition in the Northern District of Illinois. Between 2009 and 2011, she sustained on-the-job injuries and was treated at the Ambulatory Surgical Care Facility, Marque Medicos Fullerton LLC, and Medicos Pain and Surgical Specialists, S.C. In her bankruptcy petition, Hernandez reported unsecured claims held by these healthcare providers. She owed $28,709.60 to Ambulatory Surgical; $58,901.20 to Marque Medicos Fullerton; and $50,161.26 to Medicos Pain and Surgical. She reported minimal assets, listing $1,300 in bank accounts; some inexpensive jewelry; and her pending workers’ compensation claim, which she valued at $31,000.

Hernandez claimed an exemption for the entirety of that claim, citing section 21 of the Illinois Workers’ Compensation Act. Two days after filing her bankruptcy petition, Hernandez settled the claim with her employer, apparently for $30,566.33, without consulting the Trustee. The healthcare providers objected to Hernandez’s claimed exemption, arguing that the amended Act empowered them to reach her settlement. They also urged the court to disallow the exemption on grounds that the settlement was the product of fraud. In April 2017 the bankruptcy court heard argument on the exemption. The judge focused on process-based concerns about Hernandez’s settlement—including her failure to notify interested parties or the Trustee—rather than the statutory arguments raised by the parties. In the end, the judge summarily denied the exemption without a written opinion.

Hernandez appealed to the district court, and Judge Alonso affirmed. His opinion focused exclusively on the interplay between section 21 of the Act and the 2005 amendments codified at 820 ILL. COMP. STAT. 305/8 and 8.2. Relying on In re McClure , 175 B.R. 21 (Bankr. N.D. Ill. 1994), Judge Alonso held that section 21 creates an exemption for workers’ compensation claims but the subsequent amendments "significantly altered" the Act, striking a "balance" by limiting what providers can charge while allowing them to resume collection efforts following a settlement. Reading the Act as a "harmonious whole" and citing interpretive canons against surplusage and absurdity, Judge Alonso rejected Hernandez’s interpretation of the amendments as "not reasonable" because it would undermine a key purpose of the amended Act: ensuring payment for care providers.

Hernandez moved to alter or amend the judgment. At a hearing on the motion, Judge Alonso again rejected her statutory arguments. This appeal followed.

II. Discussion

We apply de novo review to the bankruptcy court’s conclusions of law. First Weber Grp., Inc. v. Horsfall , 738 F.3d 767, 776 (7th Cir. 2013). "A debtor’s entitlement to a bankruptcy exemption is a question of law...." In re Yonikus , 996 F.2d 866, 868 (7th Cir. 1993). Matters of statutory interpretation are likewise questions of law. Boyd v. Ill. State Police , 384 F.3d 888, 896 (7th Cir. 2004).

A bankruptcy estate contains most property interests held by the debtor, including pending claims. 11 U.S.C. § 541(a). Under § 522, some assets within the estate are nonetheless shielded from creditors by statutory exemptions. Clark v. Chi. Mun. Emps. Credit Union , 119 F.3d 540, 543 (7th Cir. 1997) (explaining that under § 522"an individual debtor can retain certain exempt property while the debtor’s non-exempt property may be used to satisfy creditors’ claims"). The Bankruptcy Code recognizes two sources of exemptions: the federal exemptions outlined in § 522(d) and, essentially, all others (that is, federal exemptions beyond § 522(d) and state-law exemptions). See 11 U.S.C. § 522(b)(3). The default rule is that a debtor chooses between these bodies of law. Id. § 522(b)(1). However, states may deny debtors that choice and restrict them to non- § 522(d) exemptions. Id. § 522(b)(2). Illinois has done so. See 735 ILL. COMP. STAT. 5/12-1201 ; Clark , 119 F.3d at 543.

Illinois law carves out exemptions for a broad range of personal property. 735 ILL. COMP. STAT. 5/12-1001. The State’s general exemption statute doesn’t mention workers’ compensation claims or awards. Id. Hernandez relies on section 21 of the Illinois Workers’ Compensation Act, which bankruptcy courts have interpreted as an exemption. In relevant part that section provides: "No payment, claim, award or decision under this Act shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages." 820 ILL. COMP. STAT. 305/21. A version of section 21 has been in place since the early 20th century. See Lasley v. Tazewell Coal Co. , 223 Ill. App. 462, 463 (Ill. App. Ct. 1921).

In the 1994 In re McClure decision, a bankruptcy court classified section 21 as a state-law exemption applicable in bankruptcy proceedings under § 522(b). 175 B.R. at 23–24. The court acknowledged that section 21 isn’t codified alongside other state-law exemptions and doesn’t use the word "exempt." Id. at 23. Even so, the court held that the provision’s plain "language is effective to exempt workers’ compensation claims from judgments of creditors." Id. The court reasoned that the statutory text may not be overridden by "the placement of provisions of state law within a particular codification." Id.

McClure found support for its conclusion in Mentzer v. Van Scyoc , 233 Ill.App.3d 438, 174 Ill.Dec. 512, 599 N.E.2d 58 (1992). Mentzer involved a small-claims dispute in which the trial court ordered a tenant to pay $10 per month to her landlord. Id. 174 Ill.Dec. 512, 599 N.E.2d at 60. The tenant’s income was comprised entirely of workers’ compensation benefits. She objected to the judgment, arguing that section 21 shielded this income from creditors. The Illinois Appellate Court held that "court[s] cannot generally require workers’ compensation benefits to be applied to the debts of a claimant, even when reduced to judgment, unless some specific statutory provision ... so provides." Id. 174 Ill.Dec. 512, 599 N.E.2d at 61. Nor did Illinois’s general exemption statute "supersede or infringe upon the protection given by section 21." Id. Mentzer relied on an earlier Illinois Supreme Court case addressing a claim against a guardianship whose sole asset was a workers’ compensation award. In re Estate of Callahan , 144 Ill.2d 32, 161 Ill.Dec. 339, 578 N.E.2d 985 (1991). Callahan , in turn, held that section 21 prevented the claimant from reaching an award under the Act; in so holding, the court relied in part on a dictionary definition of "debt." Id. 161 Ill.Dec. 339, 578 N.E.2d at 989.

We don’t have a dispositive Illinois Supreme Court opinion clarifying the boundaries of section 21 or even classifying it as an exemption. The parties agree that section 21 creates an exemption and thus haven’t briefed that question, so for the time being we assume that the interpretation embraced in McClure is correct. The crux of the dispute is whether the exemption applies to the claims of healthcare providers after the 2005 amendments.

We turn now to the text of those amendments. First, the General Assembly created a detailed schedule limiting the fees providers may charge for their services to treat job-related injuries or illnesses. 820 ILL. COMP. STAT. 305/8.2. Under section 8.2(a), the Workers’ Compensation Commission ("the Commission") is empowered to set and adjust price ceilings for medical care on a regional basis across Illinois.

The General Assembly also altered section 8(a), requiring employers to "pay the negotiated rate, if applicable,...