Court Makes New Bankruptcy Law Regarding Exemption of Workers’ Compensation Settlements
Roy Franco
January 12, 2015

The recent decision in the case of In re Arellano, 2015 Bankr. LEXIS 9 for the U.S. Bankruptcy Court for the Middle District of Pennsylvania made new law with regard to workers’ compensation settlements. One part dealt with whether a lump sum settlement amount could be exempt from the Bankruptcy estate. This issue did not involve the Medicare Secondary Payer law. It was a legal discussion regarding the current exemption as set forth in the case law, and if the exemption that is clearly available for tort settlements applied also to workers’ compensation lump sum awards. The court ruled that it did and elected against following the single decision that existed in the past that stated otherwise. Ruling that the bankruptcy statute was unambiguous, the court felt the lump sum settlement that included future wages could be considered exempt from the estate if it met the criteria; and for this case it did.

Claimant as part of his workers’ compensation settlement also entered into a Medicare Set Aside for approximately $72,000. The Court was asked whether this was exempt as well, and surprising said it was not. However, it did not award the right to control the MSA to the bankruptcy trustee. The Court found that the MSA was an express trust in which the claimant only had legal title. The purpose of the funds were to pay providers and as such property that is held in legal title only for the benefit of others, is not part of the claimant’s bankruptcy estate. Consequently, the Trustee could not exercise any rights over the funds.

The Bankruptcy Trustee attempted to present issues that the MSA was used for non-medical purposes, but that issue was not raised earlier, nor the issue of whether certain providers listed as creditors were entitled to the funds. It probably doesn’t matter as those providers could still bill the MSA for their services. If there is insufficient money to pay, then it will become an issue of whether or not Medicare will accept a primary payer position or wait until the claimant can prove the funds were properly spent.

Franco Signor commentary. The decision regarding the MSA is sensible. The MSA is to protect Medicare and if the value of the fund could be subject to the Trustee as part of the value of the bankrupt estate, Medicare would not realize full protection. The MSA should continue to be managed outside of the bankruptcy. However, the claimant’s misappropriation of the funds will more than likely lead to delay in Medicare accepting primary payer status for injuries related to the workers’ compensation claim until a proper accounting can occur.