Bankruptcy Court Declares WCMSAs are a “Trust”

CMS, Commentary, Medicare Set-Aside Blog, Medicare Set-Asides, MSP Litigation on January 7, 2015 | Posted by Jennifer Jordan, JD, MSCC

I have been waiting for over seven years since In re Sanchez for another bankruptcy court to tell us whether or not MSA funds would be excluded assets in bankruptcy. Today I finally found out that they are not, but the point is kind of irrelevant. According to the US Bankruptcy Court for the Middle District of Pennsylvania, a Medicare set-aside is not subject to administration by a Bankruptcy Trustee because it is not property of the bankruptcy estate. Because the Court declared that an MSA met the legal definition of a “trust” under Maryland law, the claimant only held legal title, thus excluding it from the estate pursuant to 11 U.S.C. 541(d).

Now in the early years of MSAs, the term Medicare set-aside trust was used quite freely but purposefully abandoned by MSA professionals and the majority of the legal and insurance professions because the term conveys a much greater legal obligation than existed under federal law. Use of the term trust confers a fiduciary duty that the Medicare Act does not require given that the Medicare Act does not even acknowledge the existence of Medicare set-asides. Because federal law does not even require the establishment of an MSA, it is impossible to believe that a trust can be created in that same process. But this Court arrived at that conclusion none the less.

It is not totally unreasonable to see why the court arrived at this opinion. It followed sound legal arguments and cited all of its authority. Here are the steps as laid out by the court:

  • A debtor’s bankruptcy estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1).
  • Property in which debtor holds only legal title is excluded from the bankruptcy estate. 11 U.S.C. § 541(d).
  • “A trust is a legal instrument in which assets are held in the name of the trust and managed by a trustee for the benefit of a beneficiary.” Lewis v. Alexander, 685 F.3d 325, 332 (3d Cir. 2012).
  • The Court looks to state law to determine whether a trust has been created. City of Farrell v. Sharon Steel Corp., 41 F.3d 92, 95 (3d Cir. 1994).
  • Under Maryland Law (note this is a MD WC claim and claimant resides in PA), “a trust exists where the legal title to property is held by one or more persons, under an equitable obligation to convey, apply, or deal with such property for the benefit of other persons.” Long Green Valley Ass’n v. Bellevale Farms, Inc., 68 A.3d 843, 856 (Md. 2013); see also In re Shank, 240 B.R. 216, 221 (Bankr. D. Md. 1999).
  • An express trust exists where the parties exhibit an intention to create a trust. Long Green Valley Ass’n, 68 A.3d at 856.
  • To create an express trust the following requirements must exist:
1) a subject-matter;
2) a settlor, competent to create a trust;
3) a person capable of holding the subject-matter as trustee; and
4) a beneficiary, for whose benefit the property is being held.
See In re Shank, 240 B.R. at 221-22; Sieling v. Sieling,135 A. 376, 382 (Court of Appeals of Maryland 1926).

 

It is when the opinion starts talking about intent of the parties that the Court’s arguments get a little week for the taste of anyone who has ever been involved in the establishment of an MSA.  It began by citing not the MSP or the Code of Federal Regulations, but rather the “Self-Administration Toolkit for Workers’ Compensation Medicare Set-Aside Arrangements” published online by CMS last year. From it the court emphasized that WCMSA funds were only to be used to pay for medical expenses otherwise covered by Medicare. From the settlement agreement, it quoted the amount allocated expressly for future treatment and the section about having protected Medicare’s interests by not intentionally shifting the burden of this future care to Medicare. Through these two sources, the Court deduced that although there was no express agreement to create a trust, that no such words were needed because the parties language and actions clearly indicate their intent. The parties to the settlement agreement were competent to create the trust, the claimant capable of holding funds as trustee (irony of his being bankrupt lost on the court I guess), and the entities providing medical services to claimant were beneficiaries of the trust. Having found all the elements to create a trust, the Court found that the MSA was to be held in trust for the benefit of medical providers related to the claimant’s WC settlement and therefore the MSA is not property of the bankruptcy estate or subject to administration of the Trustee.

So there it is. You can squander everything you’ve got (in two years mind you: DOL was in 2010, $277,741.88 settlement was on 12/1/11 & bankruptcy filing was on 3/8/14) and leave your creditors high and dry, but the bankruptcy court will leave your with your MSA bank account, unrestricted by any known state or federal law. Mind you that there were several medical providers listed as creditors but the Court did note that, although the issue was not before it, that there might be some potential for them to recover from the exempted MSA as beneficiaries of the trust. From a carrier’s perspective, I guess this is a good outcome. As I alluded to above, administration of a trust actually carries a fiduciary duty, therefore claimants can actually be accountable in tort for breaching their fiduciary duties by misappropriating MSA funds rather than simply being in breach of the settlement contract. And this additional potential accountability is particularly important to me since I just love when one of our MSAs ends up in federal case law. You know we just want to believe we are doing good and protecting Medicare one MSA at a time, and then stuff like this happens. Ah, to live in blissful ignorance…

 

IN RE: JESUS ARELLANO, Debtor STEVEN M. CARR, Chapter 7 Trustee
Objectant v. JESUS ARELLANO, Respondent
CHAPTER 13 CASE NO. 1:14-bk-00990 MDF ,
UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
2015 Bankr. LEXIS 9
January 5, 2015, Decided