Improperly Exhausted MSA by Sister while Claimant in Jail not Dischargeable in Sister’s Bankruptcy

Commentary, Medicare Set-Aside Blog, Medicare Set-Asides, MSA Administration on March 13, 2014 | Posted by Jennifer Jordan, JD, MSCC

That got your attention, didn’t it? This is an argument against self-administration that no one is really giving proper consideration. The story goes like this:

Stephen Hubanks was an appliance serviceman for GE in the late 1990s when he suffered a back injury and ended up on comp. Admirably he was able to return to work only to be injured again a few years later, this time permanently and totally by SSA standards. Beyond the WC claim, he received $1,200/month in SSDI and $1,400 from MetLife in disability insurance. Life was good for Mr. Hubanks until he developed a drug addiction that landed him in jail in 2006. The opinion is silent as to whether the drug addiction was related to the comp treatment for low back pain in the early 2000s but we can speculate. In order to make bail, Mr. Hubanks granted his sister, Sabra Jouett, two separate powers of attorney that she found on the internet so that she could go get money out of his bank account. He never revoked those.

Once permanent incarceration became inevitable, Mr. Hubanks opened a checking account with his sister and arranged for all of his SSDI and disability checks to be direct deposited into it. During his incarceration, those checks totaled $116,551.24. Additionally, in 2008, his attorney settled his WC claim for $144,971.24 plus an MSA with a $19,971.24 seed and $2,276.17 annual payments for 22 years (I guess the fact that Medicare doesn’t provide payments for treatment received while in prison wasn’t something that insurer took into consideration when they identified Medicare’s interest in that settlement and so began making those payments immediately.) Mr. Hubanks’ attorney delivered those funds to the sister with a detailed explanation as to what she needed to do with the MSA funds, so as to not leave her brother without access to Medicare benefits. Mr. Hubanks was paroled on October 14, 2010. Any guesses as to what was waiting for him?

Almost immediately upon his incarceration, Sabra lied to her brother that his SSDI and MetLife payments had stopped. The court states that “[e]ach month, with the alacrity of a twelve-year-old spending his or her first allowance, Sabra emptied the Hubanks Account. Within a day or two of the automatic deposit of funds by the SSA or Met Life, Sabra took the money for her own purposes. She took cash through ATM withdrawals. She bought products from, among others, General Electric, Lowe’s, Sam’s Club, and Walmart.” One day after the WC settlement was deposited into Hubanks’ account in 2008, his sister transferred $40,000 to her personal account to pay off some family loans, collection agencies, a car loan and her daughter’s cheerleading expenses. Yes, apparently her spending was not limited to what she stole from her brother, but went on to encompass the Medicare Set-aside funds as well. About a month later, she transferred another $52,000 and that same day bought her husband a Porsche and a pool table. By Christmas that year, her personal account was overdrawn, meaning all the money was gone. Luckily, that MSA was structured. The first MSA check rolled in on May 10, 2010. It was gone on May 11th.

When asked about her justification for spending all of her brother’s money, she simply stated that it was a joint checking account and as a result, there were absolutely no restrictions on how she spent its contents. She later testified that she had a oral agreement with her brother that she could spend any and all of his settlement money in exchange for a promise to assist in a future business venture when he got out of jail. The opinion documents a few other theories that she put forth, such as the money was used to buy the house he lived in upon his release, but the court did not find any of them convincing.

Now this opinion is from a bankruptcy court. After Mr. Hubanks sued his sister for the money she stole, she and her husband attempted to file for bankruptcy and have that debt discharged. The issue before the court here is whether this is a dischargeable debt or not. Mr. Hubanks argued that it is not dischargeable under §523(a)(2) of the Bankruptcy Code. While the court couldn’t get there under subsections (a)(2)(A) or (B), which requires that a creditor establish:

(1) That a representation was made by the debtor;

(2) That the representation was false;

(3) That the representation was made with the intent to deceive the creditor;

(4) That the creditor relied upon the representation;

(5) That such reliance was justifiable; and

(6) That, as a result of such reliance, the creditor suffered loss.

or

(B) use of a statement in writing–

(I) that is materially false;

(ii) respecting the debtor’s or an insider’s financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive.

 

§ 523(a)(4) of the Bankruptcy Code does provide that:

(a) A discharge under section 727, 1141, 1228(a), 1228(b) or 1328(b) of this title does not discharge an individual debtor from any debt-

(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.

 

And that’s where poor Sabra ran into some issues. Those power of attorney forms that she downloaded of the internet were very clear that in no uncertain terms that she had fiduciary duties. With regard to proving defalcation, the court was looking for a culpable state of mind, “one involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior.” The opinion states that the Court had “little difficulty finding that Sabra acted with wrongful intent and with a full disregard of the fiduciary duty she owed to her brother. Each and every time money was placed in the Hubanks Account, regardless of its source, Sabra, with very limited exceptions, spent the money as if it were her own. When Hubanks asked her if the disability payments from the SSA and Met Life had stopped, she lied to him. When the workmen’s compensation claim settled, she took that money and dissipated it almost immediately. She knew exactly what she was doing and who she intended to benefit.”

With some credit granted for moneys allegedly spent on Mr. Hubanks’ benefit, a total denial of attorneys’ fees and punitive damages and the brother-in-law being allowed to claim that he had nothing to do with the elaborate life he led for over a decade, Sabra officially owes her brother $229,109.23, and that will continue to be the case after her bankruptcy is final. But one has to wonder what good is a judgement against a woman who’s last known employment was “mortgage loan originator” in the early to mid-1990s. But for the ability to steal from her brother, she may well have landed in jail herself, had she stayed in that business just a bit longer.

And finally to the point, what now happens to Stephen Hubanks’ ability to obtain treatment for his permanent disability for which he received over $70,000 from his workers’ compensation carrier to prevent him from seeking Medicare benefits? Given the unlikely event that anyone, particularly the sister, will be able to return those funds to the MSA for proper exhaustion, who bears the responsibility for Mr. Hubanks’ treatment beyond those remaining $2,300 annuity checks? He will never be able to prove total exhaustion. So now, not only do we have to worry about what claimants will do with their MSA funds, we can add their family members to that list.

And by the way, what a great story for why structured settlements are the best way to slow down MSA disappearances. You’d think that just being in jail with absolutely no need for a bass boat would be the best protection of MSA funds. Go figure…

 

For the full story (all 30 pages of it), see:

IN RE DAVID K. JOUETT and SABRA B. JOUETT, Debtors. STEPHEN E. HUBANKS, Plaintiff, v. DAVID K. JOUETT and SABRA B. JOUETT, Defendants.
Case No. 13-10005-M Chapter 7 Adv. No. 13-01015-M
UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF OKLAHOMA
2014 Bankr. LEXIS 950
March 12, 2014, Decided