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In re Hernandez

United States District Court, N.D. Illinois, Eastern Division

March 26, 2018

In re ELENA HERNANDEZ Debtor/Appellant.



         Debtor Elena Hernandez appeals to this Court, pursuant to 28 U.S.C. § 158(a)(1), from a decision of the United States Bankruptcy Court denying debtor's claimed exemption of her workers' compensation claim and associated proceeds. For the following reasons, the bankruptcy court's decision is affirmed.


         On December 1, 2016, Ms. Hernandez filed a Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Northern District of Illinois. On Schedule C, she claimed as exempt a pending workers' compensation claim under 820 ILCS 305/21 (section 21 of the Illinois Workers' Compensation Act), which states “[n]o payment, claim, award or decision under this Act shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages.” (See Appellant Designation of R. on Appeal at 25, 76 (hereinafter, “R.”), ECF No. 4-1.) The claim, as valued by Ms. Hernandez, comprised $31, 000 of the $32, 300 total assets listed. (R. at 21.) On December 3, 2016, Ms. Hernandez settled her workers' compensation claim with her employer without trustee knowledge or bankruptcy court approval. (R. at 72.)

         The creditors identified by Ms. Hernandez in her Chapter 7 bankruptcy petition consist solely of medical providers. (R. at 29-32.) Included therein are Marque Medicos Fullerton, LLC, Medicos Pain and Surgical Specialists, S.C., and Ambulatory Surgical Care Facility, LLC (together, the “Objecting Creditors”)-certain medical providers who provided services to Ms. Hernandez for the injury associated with her workers' compensation claim. (Id.) On February 3, 2017, the Objecting Creditors filed an objection to Ms. Hernandez's claimed exemption. (Appellant Br. at 2 (citing R. at 71).)

         On April 12, 2017, the bankruptcy court held a hearing on the objection. (Apr. 12, 2017 Tr. at 1, ECF 5.) Ms. Hernandez maintained that “under Illinois law [] a workers' compensation claim award that is properly listed is 100 percent exempt.” (Id. at 8:23-25.) The Objecting Creditors contended that exempting the claim would “write [them] out of [their] statutory rights under Illinois law to participate and protect [their] rights” regarding payment for medical services rendered. (Id. at 3:21-23.) The bankruptcy court sustained the objection and denied Ms. Hernandez's claimed exemption of the proceeds associated with her workers' compensation claim. (R. at 90.)

         On April 27, 2017, Ms. Hernandez filed a motion for leave to appeal an interlocutory order, which this Court granted. (R. at 92-93.) This appeal followed.


         “In an appeal from a bankruptcy court's decision, . . . the bankruptcy court's findings of fact are upheld unless clearly erroneous and the legal conclusions are reviewed de novo.” In re A-1 Paving & Contracting, Inc., 116 F.3d 242, 243 (7th Cir. 1997). “A debtor's entitlement to a bankruptcy exemption is a question of law.Matter of Yonikus, 996 F.2d 866, 868 (7th Cir. 1993), abrogated on other grounds by Law v. Siegel, 134 S.Ct. 1188 (2014).

         Chapter 7 of the Bankruptcy Code provides “an insolvent debtor the opportunity to discharge his debts by liquidating his assets to pay his creditors.” Law, 134 S.Ct. at 1192. The filing of a bankruptcy petition under Chapter 7 creates an estate inclusive of “all legal and equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Essentially all the debtor's property, including any causes of action, becomes property of the bankruptcy estate. Putzier v. Ace Hardware Corp., 50 F.Supp.3d 964, 982 (N.D. Ill. 2014). The bankruptcy estate is placed under the control of a trustee, 11 U.S.C. § 704, who alone “is responsible for managing liquidation of the estate's assets and distribution of the proceeds.” Law, 134 S.Ct. at 1192. “This exclusive authority [to administer and dispose of the estate] includes the right to pursue the debtor's pre-petition causes of action.” Putzier, 50 F.Supp.3d at 982.

         Pursuant to 11 U.S.C. § 522(b), a debtor may exempt certain property. Exempt property is “removed from the sweeping scope of the bankruptcy estate” and not liquidated to satisfy creditor claims. 11 U.S.C. § 522(c); Matter of Yonikus, 996 F.2d at 870. Illinois has opted out of the federal exemption scheme in 11 U.S.C. § 522(d) of the Bankruptcy Code, 735 ILCS 5/12-1201, and an Illinois debtor can “utilize only those exemptions allowed under Illinois law.” In re Swiontek, 376 B.R. 851, 864 (Bankr. N.D.Ill. 2007). To exempt property, debtors must claim the property as exempt in the schedule of assets of their bankruptcy petition. Fed.R.Bankr.P. 4003(a). An exemption can only be claimed on property after it is first part of the bankruptcy estate. Matter of Yonikus, 996 F.2d at 869. Once the debtor claims property as exempt, the trustee or creditors may object to the claimed exemption. 11 U.S.C. §522(1). The bankruptcy court then determines whether the property is exempt. See Fed. R. Bankr. P. 4003(c). Under Illinois law, the court may exempt property with respect to certain claims, without exempting it with respect to all claims. In re Fisherman, 241 B.R. 568, 574-75 (Bankr. N.D.Ill. 1999) (exemptions may be “valid as to some claims” but “invalid as to others”); see also In re Eichhorn, 338 B.R. 793, 797 (Bankr. S.D. Ill. 2006) (property held in tenancy by the entirety is exempt from claims against only one of the tenants, but not exempt from claims in which all tenants are liable). Such a result does not run afoul of the Bankruptcy Code, which broadly empowers states to define the scope of their exemptions. See In re Ondras, 846 F.3d 33, 35-36 (7th Cir. 1988) (holding that 11 U.S.C. § 522 does not prohibit state exemption scheme that “place[s] property beyond the reach of only certain creditors (i.e. contract creditors) while keeping the property within the reach of other creditors [i.e.] tort creditors”).

         Ms. Hernandez, relying on In re McClure, 175 B.R. 21 (Bankr. N.D.Ill. 1994), contends that her claim and any associated proceeds are entirely exempt under section 21 of the Illinois Workers' Compensation Act (“WCA”). In McClure, the bankruptcy court held the language of section 21-“[n]o payment, claim, award or decision under [the WCA] shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages”-exempts workers' compensation claims from any bankruptcy estate, even though it does not explicitly mention bankruptcy or “employ the words ‘exemption' or ‘exempt.'” Id. at 23.

         The Court fully agrees with the McClure decision that, based on section 21, workers' compensation claims are exempt from a debtor's bankruptcy estate as against general creditors. But critically, in 2005, eleven years after McClure was decided, the Illinois General Assembly amended the WCA. The Court agrees with the Objecting Creditors that, based on the text of the 2005 Amendments, workers' compensation claims and associated proceeds are not exempt with respect to pertinent medical providers.

         The 2005 amendments significantly altered the WCA by establishing a fee schedule limiting what medical providers can collect for certain procedures, 820 ILCS 305/8.2(a), and adding several provisions governing how medical providers bill and receive payment. Medical providers, upon becoming aware an injury is work-related, are required to bill employers directly, instead of employees. 820 ILCS 305/8.2(d). During the pendency of any dispute between the employee and employer over whether the injury is compensable under the WCA, medical providers are to “cease any and all efforts to collect payment” from the employee, 820 ILCS 305/8.2(e-5), (e-10), but any statute of limitations or statute of repose applicable to the provider's collection efforts is tolled. Id. Although collections must cease while the dispute is pending, “[u]pon a final award or judgment by an Arbitrator or the [Illinois Workers' Compensation] Commission, or a settlement agreed to by the employer and the employee, a provider may resume ...

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