Law ambiguous on whether comp claim is exempt in bankruptcy

A circuit court referred a case for consideration to the Illinois Supreme Court to decide if a workers compensation settlement can be exempt in a bankruptcy proceeding.

In Re Elena Hernandez, three-judge panel of the 7th U.S. Circuit Court of Appeals in Chicago certified the question on Monday of whether the Illinois Workers Compensation Act can exempt the proceeds of a workers comp settlement from the claims of medical care providers who treated the injury or illness associated with that settlement.

Ms. Hernandez filed for Chapter 7 bankruptcy in December 2016 and reported as exempt her pending workers comp claim valued at nearly $31,000. Two days after her filing, she settled the comp claim.

However, Ms. Hernandez owed significant sums to three health care providers who treated her work-related injuries, including more than $28,000 to an ambulatory surgical center, $58,000 to a chiropractic clinic and $50,000 to a pain management physician’s practice. They objected to her claimed exemption, arguing that a 2005 amendment to the state’s workers comp act enabled unpaid health care providers to reach workers compensation awards and settlements, and also claiming that because she failed to notify her bankruptcy trustee of the settled claim that it was a product of fraud. The bankruptcy court denied the exemption and Ms. Hernandez appealed. The U.S. District Court for the Northern District of Illinois in Chicago affirmed the ruling, holding that “using the workers compensation exemption to thwart this specific class of creditors would frustrate the Act’s purpose.”

She then appealed to 7th U.S. Circuit Court of Appeals, which unanimously declined to rule and certified the question to the Illinois Supreme Court. The circuit court noted that the 2005 amendments made several changes to the state’s workers comp system, including imposing a new fee schedule and billing procedure for care providers. However, the circuit court noted that it did not have an Illinois Supreme Court opinion clarifying the boundaries of the state’s workers comp act or the ability to classify a settlement as an exemption.

The court found that the amendments stated that after a claim is settled, a provider may seek collection from the employee capped at the fee schedule price ceiling if the case if compensable, but also noted that payment for noncompensable services was the responsibility of the employee.

“The health care providers here argue that these amendments carve out an exception to the exemption … for care providers who treat an employee’s work-related injuries or illnesses” and the district judge, in his decision, concluded that the act continues to exempt workers comp claims against general creditors, but not “against medical providers after the debtor settles her … claim with her employer.”

However, the court found that Ms. Hernandez was correct that the plain text of the amended act does not contain specific language on exceptions on whether workers comp settlements would be within the reach of medical creditors.

“The Act never discusses which assets are available to healthcare providers seeking to vindicate their collection rights,” the court said.

As a result, the circuit court declined to hold that the act’s amendments no longer block this class of creditors or whether the act creates an exemption in the first place and certified the question.

Attorneys in the case were unable to be reached for comment.

This article was first published by Business Insurance.

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