Opinion
No. 7-02-11975 MA.
January 30, 2006
Steve H. Mazer, Albuquerque, NM, Attorney for Medicine Chest.
Michael J. Caplan, Grants, NM, Chapter 7 Trustee.
MEMORANDUM OPINION
THIS MATTER is before the Court on the Trustee's Objection to Claim #13 ("Objection"). Michael J. Caplan, Chapter 7 Trustee, objected to the claim of Medicine Chest Pharmacy ("Medicine Chest") on grounds that the claim is not a secured claim. Medicine Chest, represented by Steve H. Mazer, contends that it holds a secured claim in the amount of $2,229.90 based on a letter of protection provided to Medicine Chest pre-petition by the Debtor, Margie Gonzales, and her personal injury attorney, Mark J. Caruso. The Court held a final hearing on the Objection on January 10, 2006 and took the matter under advisement. After considering the arguments of counsel and reviewing the relevant case law, the Court finds that the claim of Medicine Chest is unsecured. Consequently, the Objection will be sustained.
The Proof of Claim filed by Medicine Chest does not reflect on its face that it was filed as a secured claim. A copy of the Provider Lien and a copy of the Assignment of Benefits, Lien and Authorization Insurance Benefits and Attorney are attached to the Proof of Claim.
The facts underlying this matter are not in dispute. Pre-petition, Debtor Margie Gonzales initiated a personal injury lawsuit against Cinemark Theaters ("Personal Injury Lawsuit"). Mark J. Caruso of Caruso Law Offices, P.C. was her attorney in connection with that proceeding. See Exhibit F. In connection with the Personal Injury Lawsuit, Margie Gonzales and Mark Caruso provided Medicine Chest with a letter of protection ("Provider Lien") granting Medicine Chest a lien against any proceeds from a settlement or judgment entered in connection with the Personal Injury Lawsuit and authorizing Ms. Gonzales's attorney to pay Medicine Chest directly. See Exhibit D — dated August 30, 2000. Margie Gonzales also executed an Assignment of Benefits, Lien and Authorization Insurance Benefits and Attorney ("Assignment") authorizing her insurance company and or her attorney to pay directly to Medicine Chest any sums due for services provided. See Exhibit C — dated August 30, 2000. The Assignment also purports to give Medicine Chest a lien against all proceeds of any settlement received in connection with the Personal Injury Lawsuit. Id. Medicine Chest provided goods and services to Debtor in connection with her Personal Injury Lawsuit in the total amount of $2,229.90 which sum remains unpaid. See Exhibit A — Proof of Claim.
Debtors filed their voluntary petition under Chapter 7 of the Bankruptcy Code on March 21, 2002. The Personal Injury Lawsuit became an asset to the Chapter 7 estate. In connection with the bankruptcy proceeding, the Trustee filed an Application to Employ Charles A. Wyman as Special Counsel for the Trustee ("Application to Employ Special Counsel") for the purpose of pursuing the Personal Injury Lawsuit on behalf of the Debtor's bankruptcy estate. See Docket No. 14. Attached to the Application to Employ Special Counsel is the Affidavit of Charles A. Wyman which states that he is a member of the firm of Caruso Law Offices, P.C., and that neither he nor the staff of Caruso Law Offices, P.C. "have any connection with the above-named Debtor(s), its creditors, or any other party in interest herein . . . other than I was representing the debtor in her personal injury cause of action at the time she filed her bankruptcy." See Affidavit of Charles A. Wyman. Medicine Chest filed a Proof of Claim in the amount of $2,229.90, and attached to its Proof of Claim copies of its invoices, the Provider Lien and the Assignment. The Trustee, through his special counsel, Charles A. Wyman, settled the Personal Injury Lawsuit on behalf of the bankruptcy estate, and the Trustee received a check in the amount of $40,000.00 made payable to Michael J. Caplan, Bankruptcy Trustee for Margie Gonzales. See Exhibit 1. Of this amount, $15,625.90 was used to pay attorneys' fees of special counsel, $6,500.00 was received for the benefit of the bankruptcy estate, and $17,874.10 was distributed to the Debtors representing their exemption in the proceeds from the Personal Injury Lawsuit. See Trustee's Motion to Approve Compromise of Controversy with Cinemark, USA, Inc. (Docket # 41), Order Authorizing Trustee's Motion to Approve Compromise of Controversy with Cinemark, USA (Docket # 46), and Stipulated Order Directing Trustee to Release Funds to the Debtor (Docket # 48). Medicine Chest received notice of the deadline for filing objections to the Trustee's Motion to Approve Compromise of Controversy with Cinemark, USA ("Motion to Compromise Personal Injury Lawsuit") (Docket # 42), which indicated how the proceeds of the proposed settlement were to be distributed. No distribution to Medicine Chest was proposed in the Motion to Compromise Personal Injury Lawsuit. Medicine Chest did not file an objection.
DISCUSSION
The issue before the court is whether the Provider Lien constitutes a valid, perfected lien against the proceeds from the Personal Injury Lawsuit such that the Chapter 7 Trustee's interest in the Personal Injury Lawsuit as property of the Debtor's bankruptcy estate is subject to the lien. If the Chapter 7 Trustee's interest in the Personal Injury Lawsuit is subject to the Provider Lien, the claim of Medicine Chest is secured by and must be satisfied from the proceeds of the Personal Injury Lawsuit to the extent the proceeds are sufficient to cover the amount of Medicine Chest's claim.
Upon the filing of the Debtors' bankruptcy proceeding, all legal or equitable interests of the Debtors, including Margie Gonzales' interest in the Personal Injury Lawsuit, became property of the Debtors' bankruptcy Estate. 11 U.S.C. § 541; In re White, 297 B.R. 626, 633 (Bankr.D.Kan. 2003) ("An accrued cause of action belonging to the debtor at the commencement of the bankruptcy case is property of the estate.") (citation omitted). Thereafter, the Chapter 7 Trustee became charged with the duty to administer the Personal Injury Lawsuit for the benefit of the estate. See 11 U.S.C. § 704(1) ("The trustee shall — collect and reduce to money the property of the estate . . .").
The Provider Lien and the Assignment both purport to grant Medicine Chest a lien against proceeds from the Personal Injury Lawsuit. Whether the Provider Lien constitutes a valid lien must be determined by reference to applicable state law. See Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) ("Property interests are created and defined by state law."). The Trustee cites Quality Chiropractic, PC v. Farmers Ins. Co. of Arizona, 132 N.M. 518, 51 P.3d 1172 (Ct.App. 2002) for the proposition that assignments of personal injury claims as well as assignments of interests in the proceeds of personal injury claims are invalid. In Quality Chiropractic, a chiropractic clinic that had obtained an assignment and lien from a patient authorizing his attorney or his insurance company to pay the chiropractic clinic directly from the proceeds of any settlement or judgment reached in connection with his personal injury claim sued the insurer seeking to enforce the assignment of the proceeds of the settlement. Quality Chiropractic, 132 N.M. at 520, 51 P.3d at 1174. The New Mexico Court of Appeals adhered to the common law rule prohibiting the assignment of personal injury claims, rejecting any distinction between an assignment of the proceeds of a claim and an assignment of the claim itself, and held that the assignment of proceeds from a personal injury claim was not enforceable against the insurer, a third-party obligor. Id. at 529, 1183. Quality Chiropractic makes clear that assignments of personal injury claims, including assignments of an interest in the proceeds from a personal injury claim are invalid; therefore, neither the Assignment nor the Provider Lien constitutes a valid, enforceable lien against the proceeds of the Personal Injury Lawsuit. Medicine Chest's claim is, therefore, unsecured. This result is consistent with the decision of the Bankruptcy Court for the District of New Jersey in In re Fontaine, 231 B.R. 1 (Bankr.D.N.J. 1999).
In In re Fontaine, the bankruptcy court analyzed applicable New Jersey law to determine whether certain letters of protection created a valid lien against proceeds from a personal injury lawsuit. Id. at 6. Similar to the instant case, the debtor and her personal injury attorney provided the debtor's physician with a document entitled "Doctor's Lien" which authorized the debtor's attorney to pay the physician directly from any sums received in settlement of her personal injury lawsuit, and which purported to grant a lien against the proceeds from any settlement of the personal injury suit. Id. at 4. Similar to New Mexico law, New Jersey law prohibits assignments of interests in personal injury lawsuits. See Weller et al. v. Jersey City, H. P. St. R. Co., 68 N.J.Eq. 659, 61 A. 459 (E. A. 1905). The bankruptcy court analyzed the controlling New Jersey law and found that under New Jersey law, "there can be no prejudgment transfer of an interest in the proceeds of a personal injury claim," and concluded that "[a] letter of protection cannot transfer an interest in a personal injury claim." Id. at 6. Consequently the Doctor's Lien failed to create a valid lien against the proceeds, and the physician's claim was unsecured. Id. at 7.
Medicine Chest points to the inequities of this result, especially given the ethical implications present when the pre-petition personal injury attorney who gave out letters of protection is subsequently hired by the Trustee as special counsel. Medicine Chest cites In re Moore, 2000-NMSC-019, 129 N.M. 217, 4 P.3d 664, 2000-NMSC-019 (2000) (per curiam) and Romero v. Earl, 111 N.M. 789, 810 P.2d 808 (1991), two cases involving attorneys who failed to abide by letters of protection. In Moore, an attorney disciplinary proceeding, the New Mexico Supreme Court found that an attorney who provides a letter of protection is obligated to distribute the proceeds of any settlement in accordance with the agreement. 129 N.M. at 219, 4 P.3d at 666. In Romero v. Earl, the New Mexico Supreme Court held the attorney liable for failing to distribute proceeds in accordance with the terms of a "Doctor's Lien", such that the "Doctor's Lien" was enforceable by the medical provider against the attorney. 111 N.M. at 790, 810 P.2d at 809.
Indeed, Quality Chiropractic also recognized the enforceability of such letters of protection by providers of medical service against the attorneys and/or the patients. 132 N.M. at 527, 51 P.3d at 1181 ("First, an attorney who signs a similar agreement is obligated to honor it. . . . Second, the physician can proceed directly against the patient for the amount owed."). As analyzed in Quality Chiropractic, letters of protection are enforced against attorneys due to their obligation and personal promise contained in such letters of protection, not because letters of protection constitute valid assignments under New Mexico law. Quality Chiropractic, 132 N.M. at 527 ("[T]he courts are not enforcing an assignment, but the direct promise of the attorney and client to pay the health care provider.").
In applying these cases within the bankruptcy context, the Court is troubled by the fact that a pre-petition personal injury lawyer who provides letters of protection and, following the filing of a bankruptcy, becomes employed by the Trustee as special counsel, can avoid this obligation to the medical providers he has agreed to protect. Special counsel settles the personal injury lawsuit on behalf of the bankruptcy estate. The bankruptcy trustee then receives the settlement check from the insurance company, distributing from the proceeds the attorneys' fees due to special counsel, the exemption amount claimed by the debtors, and the balance to the estate to cover trustee's fees and payments to creditors of the estate, while the provider who relied on the letter of protection is left without recourse against the debtor-patient who has listed the claim as an unsecured claim to be discharged in bankruptcy, or against the attorney, who did not receive the entire settlement, but only the amount of his fee.
In this case, the Court is disturbed by the fact that the Debtor's pre-petition personal injury attorney was hired as special counsel by the trustee without disclosing the existence of the pre-petition Provider Lien. Because the Provider Lien does not constitute a valid lien vis a vis the bankruptcy trustee, the personal injury attorney evaded his obligation to abide by the letters of protection because the settlement check was made payable solely to the Trustee.
There is no evidence before the Court that the personal injury attorney directed that the settlement check not be made payable jointly, and the Court does not imply that this occurred.
For this reason, the Court finds that where an attorney has provided letters of protection in connection with a personal injury lawsuit, he has a duty to disclose the names of all parties who received letters of protection in his affidavit required by Rule 2016, Fed.R.Bankr.P. filed in support of an application to employ such attorney as special counsel for the bankruptcy estate. The Chapter 7 trustee must then inform in writing all parties disclosed by the proposed special counsel that the Chapter 7 trustee takes the position that such letters of protection do not constitute valid liens against any proceeds received in settlement of the personal injury lawsuit. In the instant case, it is obviously too late to impose these additional disclosure requirements upon special counsel and the Chapter 7 Trustee, and, because Medicine Chest had notice and an opportunity to object to the Chapter 7 Trustee's proposed settlement and distribution but did not file an objection, the Court does not feel compelled to exercise its equitable powers under 11 U.S.C. § 105 (a) in this case.
An order sustaining the objection to the claim of Medicine Chest as a secured claim will be entered in accordance with this Memorandum Opinion.