In re Minor

• Decision Date: 24 February 2011
• Docket Number: No. 09–12095 B.,09–12095 B.
• Citation: 443 B.R. 282
• Parties: In re Ciara MINOR, Debtor.
• Court: U.S. Bankruptcy Court — Western District of New York

443 B.R. 282

In re Ciara MINOR, Debtor.

No. 09–12095 B.

United States Bankruptcy Court, W.D. New York.

Feb. 24, 2011.

Bulan & Chiari, Horwitz & Ilecki, LLP, Harold P. Bulan, Esq., of counsel, Buffalo, NY, for the Chapter 7 Trustee.Bergen & Schiffmacher, LLP, Joseph R. Bergen, Esq., of counsel, Buffalo, NY, Special Counsel for the Chapter 7 Trustee.Dennis Gaughan, Esq., Hamburg, NY, for Debtor.

REVISED DECISION & ORDER

CARL L. BUCKI, Chief Judge.

The Chapter 7 trustee seeks authorization to settle claims to the proceeds of personal injury litigation. In particular, he proposes to pay sums purportedly due under a pre-settlement finance agreement and to surcharge the debtor's exemption for a portion of that payment. The instant motion presents issues regarding the enforceability of the finance agreement, both under state law and in the context of these bankruptcy proceedings.

Ciara Minor suffered injuries as a result of an automobile accident that occurred on September 29, 2006. Consequently, she commenced litigation in state court to recover compensation for her injuries. While this action was pending, she entered into four separate agreements with an entity called Pre–Settlement Finance, LLC (hereinafter referred to as “PSF”). Pursuant to these agreements, PSF advanced to Ms. Minor an initial sum of $12,500 in November 2007; the further sum of $2,500 in December 2007; the further sum of $3,000 in August 2008; and a final sum of $600 in December 2008. In consideration of these advances, Minor agreed that from the proceeds of her outstanding litigation, PSF would receive the total of its advances, together with processing fees of $875 and together with interest calculated at an annual rate of 42.5 percent. The parties agreed, however, that Ciara Minor would have no personal obligation to pay any sum other than from what she might recover from her personal injury action.

Ciara Minor filed a petition for relief under Chapter 7 of the Bankruptcy Code on May 8, 2009, a date subsequent to her receipt of the four advances from PSF. In schedules filed with her petition, the debtor disclosed the existence of her personal injury cause of action. Listing it as an asset of the bankruptcy estate, Minor reported that her cause of action was subject to the lien of PSF. Further, as allowed under the then applicable provisions of New York Debtor and Creditor Law § 282(3), she asserted an exemption with respect to the first $7,500 of any recovery on account of the personal injury. On June 26, 2009, the trustee filed a timely objection to this claim of exemption. After a hearing on the trustee's motion, the court issued an order holding the trustee's objection in abeyance, until the time of a resolution of the personal injury litigation.

On September 10, 2009, this court granted the trustee's motion to authorize the employment of special counsel to continue the prosecution of the debtor's personal injury litigation. That counsel then negotiated a settlement of the outstanding cause of action. Meanwhile, the trustee undertook negotiations to resolve the interests of PSF. Accordingly, the trustee moved for authority to settle the personal injury cause of action for $55,000; to authorize payment of the fees and disbursements of the estate's special counsel; and to authorize payment of $23,808 to PSF in full satisfaction of any secured claim. Further, the trustee renewed his objection to the debtor's claim of an exemption in any portion of the personal injury recovery. After several hearings on this matter, the court approved the gross amount of the personal injury settlement and authorized payment of the fees and disbursements of special litigation counsel. The court reserved decision, however, on the request to approve the settlement with PSF and to disallow the debtor's exemption.

In support of his request to approve the settlement with PSF, the trustee reports that PSF advanced the sum of $18,600 to the debtor, and that under terms of the funding agreements, the outstanding obligation with interest now totals in excess of $32,000. Thus, the trustee asserts that the proposed settlement of $23,808 represents a meaningful compromise of PSF's claim. In negotiating the settlement amount, PSF represented that it has a capital cost of approximately 15 percent,¹ and that the settlement will essentially allow repayment of principal plus interest at the rate of 16 percent, but without any further reimbursement of legal expenses that PSF would otherwise have been entitled to recover. Further, the trustee opined that litigation with PSF “would involve more actual costs to the estate than would be realized.”

The court has received no opposition to the trustee's request to authorize payment to PSF. Nonetheless, to secure the approval of his motion, the trustee must still demonstrate that the proposed settlement represents a reasonable exercise of his sound discretion. In this regard, at the initial hearing on this matter, the court asked whether the trustee had considered the implications of the New York prohibitions against champerty and usury, as well as issues regarding the enforcement of unconscionable contracts. In partial response to these concerns, counsel for PSF has submitted a ten page letter asserting the legality and enforceablility of the underlying agreements between PSF and the debtor. Counsel wrote that PSF would not voluntarily submit to the jurisdiction of the bankruptcy court but wished merely to offer its position regarding the validity of its underlying claim.² Without now deciding the ultimate scope of this court's jurisdiction with respect to PSF, I have carefully considered the arguments of counsel for PSF and find that they fail to persuade the court that the proposed settlement is reasonable and in the best interests of the bankruptcy estate.

Discussion

The trustee's motion requires that the court determine the reasonableness of a proposed settlement. Generally, the court will approve settlements that fairly resolve issues that are the subject of a good faith dispute. But the mere assertion of a claim or right does not necessarily justify a distribution of estate assets. Although the court does not aim to substitute its judgment for that of the trustee, the trustee must nonetheless demonstrate that the controversy presents sufficient risk to justify the proposed payout. To evaluate such risk, we must examine the merits of PSF's claim to a lien on proceeds from the debtor's personal injury litigation.

The present motion seeks to approve a settlement within the context of a bankruptcy proceeding. Consequently, special bankruptcy considerations will apply. To better explain the application of these factors, however, this opinion will first consider whether PSF could enforce its agreement outside bankruptcy as against the debtor. Under New York law, the question of enforceability involves issues of assignability, usury, and unconscionability.

Under the common law, an injured party could not assign a personal injury cause of action. Juba v. General Builders Supply Corp., 7 N.Y.2d 48, 53, 194 N.Y.S.2d 503, 163 N.E.2d 328 (1959). The State of New York has codified this rule in section 13–101 of the General Obligations Law, which states in relevant part that “[a]ny claim or demand can be transferred, except in one of the following cases: 1. Where it is to recover damages for a personal injury....” However, New York courts have recognized a distinction between the assignment of a claim and the assignment of the proceeds of any recovery on that claim. “Although a cause of action for personal injuries is not assignable, an assignment of the proceeds to be recovered is enforceable as an equitable assignment.” 6A N.Y.Jur.2d Assignments § 22 (2009)(emphasis added).

With regard to the effort of PSF to establish a binding claim against the debtor, a second pitfall arises from the law of usury. General Obligations Law § 5–501(2) states the general rule, that “[n]o person or corporation shall, directly or indirectly, charge, take or receive any money, goods or things in action as interest at a rate exceeding” the prescribed rate. That rate is now set at 16 percent per annum. N.Y. Banking Law § 14–a (McKinney Supp.2007). Pursuant to General Obligations law § 5–511(1), a usurious contract is void, so that the lender is generally precluded from recovery of either principal or interest. The consequences of usury are severe, but exceptions to its application are numerous. New York courts have held that usury limitations apply only to loans and not to investments. See Orvis v. Curtiss, 157 N.Y. 657, 661, 52 N.E. 690(1899). Further, usury might not arise where the right to collect is based on a contingency that the debtor controls. See Sumner v. People, 29 N.Y. 337 (1864).

Arguably, the agreements between PSF and Ciara Minor have been worded to avoid legal limitations with regard to assignment and usury. Except for references to amounts and dates, the four contracts are essentially identical. Each is characterized not as a loan agreement, but as “Plaintiff's Agreement to Pay Proceeds Contingent on Successful Settlement, Judgment or Verdict and Receipt of Proceeds,” and as an “Agreement to Assign Proceeds.” In each agreement, paragraph 3(a) declares that “payment shall be and is by this Agreement an Assignment of Proceeds of Plaintiff's settlement, judgment or verdict proceeds.” Asserting the contingent nature of repayment, paragraph 2 states that “PSF is to be paid only if such proceeds are received through settlement, judgment or verdict.” As if in contemplation of a potential bankruptcy, the following language of paragraph 1(g) attempts to preserve the treatment and characterization of the agreement:

“In the event Plaintiff commences, or has commenced against him/her, any case, or other proceeding, pursuant to any bankruptcy, insolvency, [or] similar law prior to my receipt of the full amount due PSF pursuant to...