In re Mcgreevy

388 B.R. 917

In re Stephen J. McGREEVY and Susan S. McGreevy, Debtors John S. Lovald, Trustee, Plaintiff, v. Stephen J. McGreevy, Susan S. McGreevy, Avera McKennan Hospital, Wellmark Blue Cross Blue Shield of South Dakota, and United Fire Group, Defendants.

Bankruptcy No. 04-41113.

Adversary No. 07-4050.

United States Bankruptcy Court, D. South Dakota.

May 16, 2008.

James A. Craig, Craig Law Office, Sioux Falls, SD, for Debtors.

John S. Lovald, Pierre, SD, for trustee.

DECISION RE: SUBROGATION RIGHTS HELD BY DEFENDANT WELLMARK BLUE CROSS BLUE SHIELD OF SOUTH DAKOTA

CHARLES L. NAIL, JR., Bankruptcy Judge.

The matter before the Court is Trustee-Plaintiff John S. Lovald's Complaint to Determine Extent and Priority of Liens. This decision deals with his complaint only as it relates to Defendant Wellmark Blue Cross Blue Shield of South Dakota's subrogation claim. This is a core proceeding under 28 U.S.C. § 157(b)(2). This decision and subsequent order shall constitute the Court's findings and conclusions under Fed.R.Bankr.P. 7052. As set forth below, the settlement funds received by Trustee-Plaintiff Lovald arising from the subject July 26, 2004 accident are not estate property to the extent of Defendant Wellmark Blue Cross Blue Shield of South Dakota's subrogation claim arising from medical debts it paid or is obligated to pay on Debtor Stephen McGreevy's behalf.

I.

Trustee-Plaintiff John S. Lovald ("Trustee Lovald") and Defendant Wellmark Blue Cross Blue Shield of South Dakota ("Wellmark") have stipulated Stephen J. McGreevy ("McGreevy") was involved in a car accident on July 26, 2004. As a result of the accident, McGreevy sustained certain personal injuries requiring medical care and prescription drugs. At the time of the accident, McGreevy had health care coverage through Wellmark pursuant to a "Blue Select" Benefits Certificate and drug benefit coverage through Wellmark pursuant to a "Blue Rx" Benefits Certificate. On behalf of McGreevy and pursuant to the health insurance policy, Wellmark paid $2,682.46 to medical care providers and for prescription drugs for the treatment of McGreevy's personal injuries proximately caused by the accident.¹ All payments but one were made by Wellmark after August 27, 2004, the date McGreevy and his wife Susan S. McGreevy filed a joint chapter 7 petition in bankruptcy. The one pre-petition payment made by Wellmark was $14.46 for a prescription. The post-petition payments by Wellmark on McGreevy's behalf for post-petition medical services or prescriptions totaled $2,668.00.

This Court approved, on July 31, 2007, a settlement of $38,534.95 for McGreevy's personal injury claim from the accident.² After the fees for the attorney employed by the estate to handle the personal injury claim ($13,959.12) and the amount Debtors have claimed exempt ($3,596.00) are deducted, the remaining balance of the settlement proceeds is $20,979.83.

Trustee Lovald and Wellmark presented three documents by stipulation: the two insurance policies and a statement of the medical claims Wellmark paid on McGreevy's behalf. McGreevy's "Blue Select" policy with Wellmark provided, inter alia, once McGreevy "receive[d] benefits under this certificate arising from an illness or injury, [Wellmark assumed] any legal right [McGreevy had] to collect compensation, damages, or any other payment related to the illness or injury, including benefits from ... [t]he responsible person's insurer." Under the policy, McGreevy could not "compromise, settle, surrender, or release any claim or right of recovery ..., without getting [Wellmark's] written permission." The policy also provided McGreevy "must reimburse [Wellmark] to the extent of benefit payments made under this certificate if payment is received from the other [responsible] party or parties[,]" and "[t]he amount of [Wellmark's] subrogation interest shall be paid first from any funds recovered on your behalf from any source, without regard to whether you have been made whole or fully compensated for your losses." The prescription drug policy had a similar subrogation provision.

The record in the related main case, Bankr.No. 04-41113, also establishes Wellmark received notice of Trustee Lovald's proposed settlement through counsel. Wellmark did not object to the proposed settlement; others did. On July 26, 2007, Trustee Lovald's proposed settlement was approved as to the amount, but the Court directed the "[r]ights or interests in the settlement proceeds shall be determined by subsequent appropriate adversary proceedings." The attendant order entered July 31, 2007 reserved ruling on the interests of the objecting parties and the subrogation claimants.

On August 10, 2007, Trustee Lovald commenced an adversary proceeding against several defendants, including Wellmark, and asked the Court to sort out the various interests in the settlement funds. As to Wellmark, Trustee Lovald said:

Defendant Wellmark Blue Cross Blue Shield is asserting a subrogation interest in the settlement proceeds, superior to the bankruptcy estate's interest, in the amount of $2,662.46, for post petition medical payments it made on behalf of Stephen McGreevy, pursuant to its insurance contract with Stephen McGreevy.

....

That none of the claims referenced in paragraphs X through XIII were of record when the bankruptcy was filed, and Trustee's interest in the proceeds is superior to those claims pursuant to 11 USC 544(a)(2).

In its answer, Wellmark admitted its interest was not filed in any public record prepetition but denied the trustee's interest in the settlement proceeds under 11 U.S.C. § 544(a)(2) was superior to its subrogation interest. It asked to be paid $2,667.46 from the settlement proceeds.³

Based on their briefs, the parties, though perhaps reluctantly so by Trustee Lovald, agreed the settlement proceeds, to the extent of the $14.46 Wellmark paid pre-petition for a prescription, did not become property of the bankruptcy estate. The Court concurs. The tougher, remaining issue is whether the settlement funds necessary to make Wellmark whole for the post-petition payments it made related to the July 26, 2004 accident are also excluded from property of the estate.

Wellmark argues it has a constructive trust on the settlement funds for its postpetition payments under S.D.C.L. § 55-1-11 and the funds in trust are excluded from property of the estate under 11 U.S.C. § 541(d) as property in which Debtors held only legal title and not an equitable interest on the petition date. Trustee Lovald challenges the Bankruptcy Court's ability to impose a constructive trust for post-petition payments and the appropriateness of doing so at this time.

II.

When a debtor files a petition in bankruptcy, all his legal and equitable interests are transferred to the bankruptcy estate. 11 U.S.C. § 541(a). While state law determines the nature and extent of a debtor's interest in property, Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979), § 541 dictates to what extent the debtor's interest becomes property of the bankruptcy estate. Lindquist v. JNG Corp. (In re Lindell), 334 B.R. 249, 253 (Bankr.D.Minn.2005) (citing N.S. Garrott and Sons v. Union Planters National Bank (In re N.S. Garrott and Sons), 772 F.2d 462, 466 (8th Cir. 1985)). Section 541(a) defines property of the estate broadly, and encompasses conditional, future, speculative, and equitable interests of the debtor. U.S. ex rel. Gebert v. Transport Administrative Services, 260 F.3d 909, 913 (8th Cir.2001) (cites therein).

Property of the bankruptcy estate includes all causes of action the debtor could have brought at the time of the petition, which the case trustee, under 11 U.S.C. § 704, then has standing to assert. Moratzka v. Morris (In re Senior Cottages of America, L.L.C.), 482 F.3d 997, 1001 (8th Cir.2007) (citing Mixon v. Anderson (In re Ozark Rest. Equip. Co.), 816 F.2d 1222, 1225 (8th Cir.1987)); 11 U.S.C. § 323 (trustee, as representative of the estate, has capacity to sue and be sued). The trustee stands in the debtor's shoes and may not assert interests or rights greater than what the debtor himself possessed on the petition date. United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05 and nn. 8, 9, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983); Drewes v. Vote (In re Vote), 276 F.3d 1024, 1026 (8th Cir.2002); and Constellation Dev. Corp. v. Dowden (In re B.J. McAdams, Inc.), 66 F.3d 931, 935 (8th Cir.1995).

As this Court noted in In re David L. and Sharon R. Klundt, Bankr. No. 05^2197, slip op. at 12, 2008 WL 591072 (Bankr.D.S.D. March 3, 2008), § 541(d) essentially provides whenever an interest in property is limited in a debtor's hands, it is equally limited in the hands of the bankruptcy estate. Ramette v. Digital River, Inc. (In re Graphics Technology, Inc.), 306 B.R. 630, 634 (8th Cir. BAP 2004). One such limiting interest recognized in South Dakota is a subrogation interest held by an insuror. Schuldt v. State Farm Mutual Automobile Ins. Co., 89 S.D. 687, 238 N.W.2d 270, 271 (1975). As discussed therein, an insuror may be entitled to subrogation either by contract or in equity for the amount of the indemnity paid. Id.

In this adversary proceeding, the burden of establishing a particular asset is property of the bankruptcy estate rests with Trustee Lovald. See Evans v. Robbins, 897 F.2d 966, 968 (8th Cir.1990) (cites therein), and DeBold v. Case (In re Tri-River Trading, LLC), 329 B.R. 252, 263-64 (8th Cir. BAP 2005), aff'd, 452 F.3d 756 (8th Cir.2006). The burden shifts to Wellmark to show the estate's interest in the settlement funds is limited by its subrogation interest. Tri-River Trading, 329 B.R. at 263.

III.

The Court concludes the bankruptcy estate's interest in the settlement funds is limited by Wellmark's subrogation interest. Based on the provisions in the Wellmark policies, it is clear Debtors' interest in the settlement funds was limited by Wellmark's right to be...