In re Carpenter

245 B.R. 39 (2000)

In re Tina L. CARPENTER, Debtor Wal-Mart Stores, Inc., Plaintiff, v. Tina L. Carpenter, Defendant.

Bankruptcy No. 98-26470-S. Adversary No. 98-2190-S.

United States Bankruptcy Court, E.D. Virginia, Norfolk Division.

January 18, 2000.

COPYRIGHT MATERIAL OMITTED

Eugene E. Derryberry, Roanoke, VA, for Wal-Mart.

Carolyn M. Camardo, Portsmouth, VA, for Tina L. Carpenter.

Amended Memorandum Opinion & Order

STEPHEN ST. JOHN, Bankruptcy Judge.

This matter comes on for hearing on the request of the Plaintiff, Wal-Mart Stores, Inc. ("Wal-Mart"), for a declaratory judgement and prayer for monetary relief. Wal-Mart seeks a declaration from this Court that it has an equitable lien against certain proceeds now held by the debtor, Tina L. Carpenter ("Carpenter"). Carpenter received the proceeds from a settlement of a personal injury claim she had against a third party. Wal-Mart further asks this Court to order Carpenter to repay Wal-Mart amounts Wal-Mart had paid in benefits on Carpenter's behalf. Having considered the evidence presented at trial, the Court makes the following findings of fact and conclusions of law.

Findings of Fact

The parties have stipulated to virtually all of the facts necessary for resolution of this dispute. Carpenter was formerly an employee of Wal-Mart and participated in the Wal-Mart Group Health Plan ("Plan"). (Stip. of Facts ¶ 1.) Wal-Mart, acting through its administrative committee, is the plan sponsor and administrator. (Stip. ¶ 2.) The Plan is a self-funded, self-insured health benefits plan and is governed by the provisions of the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et seq. ("ERISA"). (Stip. ¶ 3.)

The Plan pays health benefits to a plan participant in instances in which a third party's acts injure the participant. By its terms, if the Plan pays benefits on behalf of a participant due to such an injury, the Plan retains the right of subrogation to the participant's claims against such third-party, and the right to reimbursement for the participant's recoveries from such third-party. (Stip. ¶ 4.) The rights of subrogation and reimbursement apply regardless of whether such payments are designated as payment for, but not limited to, pain and suffering, medical benefits, other specified damages, or whether the participant has been made whole (i.e. fully compensated for his or her injuries). (Stip. ¶ 5.)

On November 13, 1994, a third party caused a car accident in which Carpenter was injured. (Stip. ¶ 6.) On July 6, 1995, Carpenter executed a Subrogation Rights Notification Acknowledgment ("Acknowledgment") in which Carpenter represented that she had read the provisions of the Plan relating to "reimbursement, reduction and/or subrogation." (Stip. ¶ 7.) After Carpenter executed the Acknowledgment, Wal-Mart, pursuant to the terms of the Plan, commenced paying benefits on the debtor's behalf for injuries she had sustained as a result of the accident. As of September 1, 1998, the date Carpenter filed a voluntary Chapter 7 Bankruptcy Petition, Wal-Mart had paid $106,935.11 in benefits. (Stip. ¶ 8.) On October 13, 1998, Carpenter recovered $125,000.00 as a result of a settlement of her personal injury claim against the third party whose acts caused her injuries. (Stip. ¶ 9.) In her amended schedules, Carpenter claimed the proceeds of her personal injury suit as exempt property pursuant to 11 U.S.C. § 522(b)(2) and Virginia Code § 34-28.1.

At trial, Carpenter testified that she had been limited to a recovery of $125,000.00 against the third-party tortfeasor because that sum represented the extent of the insurance policy limits available to satisfy her claim. (Testimony of Carpenter at 5.) Carpenter's right hand was crushed in the accident and she has underwent nine surgeries in order to reconstruct the hand. (Testimony of Carpenter at 3.) Carpenter displayed her hand for the benefit of the Court, id., and, based upon this examination, it is undisputable that she has sustained an extremely serious injury.

Carpenter further explained that the sole reason for her filing her Chapter 7 bankruptcy petition was the result of the medical bills she sustained as a result of her accident. (Testimony of Carpenter at 4-5.) Carpenter referred to her bankruptcy schedules, which reflect medical expense claims of nearly $300,000.00. (Testimony of Carpenter at 3.) The sole claim reflected on her schedules, other than for medical claims relating to her accident, is a claim resulting from credit card usage in the approximate amount of $3,500.00. Id. Carpenter has retained in her control approximately $83,000 in cash. This money represents the $125,000.00 in settlement proceeds less the attorneys fees and costs subtracted from the proceeds and paid to the attorney who represented Carpenter in her personal injury claim. (Testimony of Carpenter at 6-7.)

Wal-Mart filed the Complaint in this case on November 25, 1998. In its Complaint, Wal-Mart asserts that, under the terms of the Plan, it is entitled to assert an equitable lien against the settlement proceeds notwithstanding entry of a discharge in the debtor's Chapter 7 bankruptcy, and is entitled to be reimbursed to the extent of the settlement proceeds. Wal-Mart asserts that it is entitled to such a lien notwithstanding Virginia Code § 38.2-3405, which prohibits the enforcement of subrogation and reimbursement provisions contained within a health insurance contract. Wal-Mart claims that the Virginia statute is pre-empted by the provisions of ERISA. Wal-Mart further posits that this lien is not avoidable in bankruptcy and requests that the Court order the debtor to pay over to Wal-Mart the settlement proceeds the debtor had received up to the amount that the debtor had received from Wal-Mart.¹

The defendant denies that the plaintiff has a right to an equitable lien and asserts that the proceeds are exempt pursuant to Section 34-28.1 of the Virginia Code, made applicable by 11 U.S.C. § 522. Defendant further argues that the public policy reflected in the enactment of Virginia's antisubrogation statutes denies the creditor the right to recover the settlement proceeds via an equitable lien.

This court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334. In its Complaint, Wal-Mart asserts that this is a non-core proceeding. Wal-Mart is mistaken in this regard, however. 28 U.S.C. § 157(b)(2) provides a non-inclusive list of matters considered as core proceedings. Pursuant to Section 157(b)(2)(K), a proceeding to determine the validity, extent, or priority of a lien is a core proceeding. The current proceeding is a core proceeding because Wal-Mart, in asking the court to determine whether it has a equitable lien, has commenced a proceeding to determine the validity and extent of the lien. 28 U.S.C. § 157(b)(2)(B) also provides that allowance of exemptions from property of the estate are considered core proceedings. This matter is a core proceeding, additionally, because the Court is being asked to determine the extent to which the debtor has a valid exemption.

I. Wal-Mart's Right to an Equitable Lien

In order to establish whether Wal-Mart is entitled to an equitable lien, it is necessary to analyze the effect that ERISA has on both the Plan's provisions and state law. Congress enacted ERISA in order to establish a comprehensive statutory scheme to govern employee benefit plans. See Phoenix Mutual Life Ins. Co. v. Adams, 30 F.3d 554, 558 (4th Cir.1994). As such, ERISA's provisions preempt all state laws that "relate to" all employee benefit plan. See 29 U.S.C. § 1144(a) (1994). ERISA contains a provision, the "savings clause," that states that ERISA's provisions do not apply to any state law which regulates insurance. See id. (b)(2)(A). Yet another provision, however, the "deemer clause," further provides that an employee benefit plan shall not be deemed to be an insurance company for purposes of any State law proporting to regulate insurance. See id. (b)(2)(B).

The parties have stipulated that the Plan is a self-funded, self-insured employee benefit plan of a type that ERISA governs. As a result, the deemer clause applies to the Plan and the Plan is not exempt from ERISA under the savings clause. See FMC Corp. v. Holliday, 498 U.S. 52, 60-61, 111 S.Ct. 403, 112 L.Ed.2d 356 (1990). Thus, any state law that "relates to" the Plan at issue is preempted by ERISA.

A. ERISA Preempts Virginia's Anti-subrogation Statute.

The Supreme Court firmly established that a state's anti-subrogation law may relate to and may be pre-empted under ERISA in FMC. In that case, an employer operating a self-funded health care plan sought a declaratory judgment that it was entitled to subrogation for amounts it had paid for medical expenses of an employee's daughter. See id. at 55. The employer sought this notwithstanding a Pennsylvania law which stated that an employer had no right of subrogation or reimbursement from a claimant's tort recovery with respect to workers' compensation benefits. See id. at 55 n. 1. The district court granted summary judgment in favor of the respondent and the United States Court of Appeals for the Third Circuit affirmed, stating that the deemer clause did not apply because Pennsylvania's anti-subrogation law addressed "a core type of ERISA matter which Congress sought to protect by the preemption provision." See id. at 56.

The Supreme Court reversed. In its opinion, the Court noted that ERISA's preemption clause "is conspicuous for its breadth" and applies not just to state laws specifically designed to affect employee benefit plans, but to every state law that "relates to" an employee benefit plan governed by ERISA. See id. at 58-59. The Court found that Pennsylvania's antisubrogation law related to an employee benefit plan under ERISA's definition because it contained a reference to the types of benefit plans governed by ERISA; furthermore, the Court found that the statute had a...