Bankruptcy and Private Liens

Posted by Michael Russell

Question:
I would like your input on this scenario. A client files bankruptcy on April 15, 2009. Then on April 22, 2009 she is nearly killed in a head-on collision that was not her fault. We find that a $100k limit is the only option available. The ERISA carrier has a $225k lien and the client has applied for (and will get) Social Security. Undoubtedly she will have future bills because of her injuries. Is there any good scenario in this? The bankruptcy lawyer will not respond to my calls.

All I want to do is return as much as possible for the client in the best, legal and ethical way.

Thanks for your input.
Ohio Attorney

Answer:
There are two major components to this question; bankruptcy and ERISA / private lien resolution.

1. Bankruptcy. It depends on what type of bankruptcy they filed. If they filed a Ch.7, the proceeds should not be an asset of the bankruptcy estate, as Ch.7’s are looked at as a “snapshot in time” and since the accident was post-petition, there was no asset to report. However, if she filed a Ch.13, the schedules will need to be amended to show the lawsuit (even if the $$ is undetermined). As you know, many states have exemptions for Personal Injury lawsuits, but they must be listed in order to take advantage of the exemption. So, if she did file a Ch.13, then you would want to consider amending the schedules as appropriate.

2. Lien. Depending on whether the ERISA carrier’s benefits plan is self-funded or insured there may be various defenses depending on whether state or federal law applies and in what jurisdiction this case would fall into. Just based off the facts below it would seem that the made whole defense would be an alternative worth exploring. Because the amounts paid by the carrier far exceed the potential recovery (based off limit of 100k) there will clearly be an argument that the client was not made whole by her recovery. However depending on the jurisdiction and the language of the benefits plan, the made whole rule may or may not apply. To give a more detailed answer on what defenses may apply we would need further info including the funding status of the plan (Form 550 from year of injury), the plan language (summary plan description), and the clients state of residence.

Michael Russell