IN RE: RALPH E. MCDONALD NANCY N. MCDONALD CASE NO. 93-51750
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
RALPH E. MCDONALD
NANCY N. MCDONALD
a/k/a Nancy Newman
d/b/a Southeast Diamond Co., Inc.
DEBTORS CASE NO. 93-51750
The issue before the court is whether the debtor Nancy N. McDonald is entitled to an exemption of $7,500 under KRS 427.150(2)(c) in $13,000 received by the chapter 7 trustee upon settlement of a prepetition tort claim of the debtor.
FINDINGS OF FACT:
On or about December 27, 1989 the McDonalds' automobile was involved in a two-car accident in Fayette County, Kentucky. Insofar as the court can determine from the record only the debtor Nancy N. McDonald sustained physical injury in the accident. Thereafter, the McDonalds filed an action for damages in Fayette Circuit Court against the driver of the other automobile. Civil Action No. 90-CI-4349, styled Nancy McDonald and Ralph E. McDonald vs. Christina Tramontin.
The lawsuit was pending when the McDonalds filed a joint petition for relief under chapter 7 of the U. S. Bankruptcy Code in this court on November 8, 1993. Thereupon, their causes of action became property of their respective estates to be pursued and administered by the trustee in bankruptcy.
In Schedule B, Item 20, to their joint petition the debtors included as an asset a personal bodily injury claim against Christina Tramonin [sic] as having a value of $3,000. The debtors claimed an exemption pursuant to KRS 427.150(2)(c) in the amount of $3,000 in the proceeds of any recovery in their action against Ms. Tramontin.
The applicable statute provides as follows:
427.150 Property totally or partially exempt
. . . .
(2) An individual shall be entitled to exemption of the following property:
. . . .
(c) A payment, not to exceed seven thousand five hundred dollars ($7,500), on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or an individual of whom the debtor is a dependent.
On January 3, 1994 the trustee, who was duly appointed and qualified on November 9, 1993, timely filed an objection to the exemption claimed by the debtors under KRS 427.150(2)(c) on the ground the cited statute exempts only a portion of any personal injury claim. At a hearing held on March 14, 1994, the court sustained the trustee's objection to the claimed exemption as well as to the debtors' claim of a homestead exemption in excess of the $10,000 monetary amount provided by KRS 427.060.
More than a year later, on April 5, 1995, the debtors, by counsel, filed an amendment to Schedule C to their joint petition asserting an exemption in an "unknown" amount in a "Personal Bodily Injury Claim Against Christina Tramonin [sic]" and a 100% exemption in "Any Payment In Compensation Of Loss of Future Earnings."
On July 18, 1995 the trustee moved the court for an order permitting the trustee to accept an offer of settlement of the personal injury action for $13,000 and for an adjudication that the debtors are not entitled to any exemption in the proceeds of the settlement.
The motion, which was served on the debtors clearly states in paragraph 3 thereof "the trustee believes the offer to be attributed entirely to a claim for pain and suffering, and therefore not exempt under 11 USC section 522 and KRS 427.150."
It is admitted that the McDonalds' insurance carrier, Castle Insurance Company ("Castle"), paid to Nancy N. McDonald $38,995 in Basic Reparations Benefits ("BRB"), which includes approximately $31,000 in medical expenses and $7000 in lost wages. Castle then assigned its subrogation rights to Christina Tramontin's carrier by way of settlement. The trustee's position is that the funds he has received in the settlement with Ms. Tramontin's insurance carrier are in payment for the pain and suffering of the debtor Nancy N. McDonald from injuries sustained in the automobile accident in question and are not exempt under KRS 427.150.
On August 14, 1995 the court heard the motion of the trustee for an order approving the settlement. The debtors did not file a written response to the motion. The court approved settlement of the state court action for $13,000 but reserved for future ruling the question of entitlement to the funds. An order approving the settlement was entered on September 21, 1995. Attached to the order is an agreement executed by the trustee and his attorney releasing the trustee's claim against Christina Trimontin and her insurance carrier, Travelers Insurance Company, which reads:
I, James D. Lyon, as trustee in bankruptcy for Nancy McDonald and Ralph E. McDonald, further understand and agree that this settlement is a compromise of a doubtful and disputed claim, and that this payment is not to be construed as an admission of liability on the part of [Christina Trimontin and Travelers Insurance Company], by whom liability is expressly denied. However, due to the above [referenced] payments made by Castle Insurance Company, for medical expenses and wage loss, it is the desire of the parties hereto to designate the payments from the Travelers Insurance Company as compensation solely for pain and suffering.
SETTLEMENT AGREEMENT AND FULL AND FINAL RELEASE, dated 9/21/95, unnumbered p. 2.
CONCLUSIONS OF LAW:
The federal bankruptcy code exemption scheme is set out in 11 U.S.C. § 522(d)(1) through (11). Kentucky "opted out" of those provisions and established its own exemption scheme, KRS 427.170. See In re Cottrell, 82 B.R. 45 (Bankr. W.D. Ky. 1987), affirmed by 876 F.2d 540 (6th Cir. 1980). However, KRS 427.150(2)(c) is essentially identical to 11 U.S.C. § 522(d)(11)(D). Both statutes provide an exemption for:
A payment, not to exceed seven thousand five hundred dollars ($7,500), on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or an individual of whom the debtor is a dependant. (Emphasis supplied).
Thus, the debtors are entitled to an exemption to the extent of $7,500 in the recovery on the prepetition personal injury claim, except to the extent that the recovery is compensation for pain and suffering or for actual pecuniary loss suffered by Nancy N. McDonald.
All Basic Reparations Benefits, plus any added reparations benefits for medical expenses, are also exempt pursuant to Kentucky's Motor Vehicle Reparations Act, KRS 304.39-010, et seq. The debtors did not claim an exemption under this latter statute but apparently the trustee is not contesting their right to retain as exempt the reparations payments they received from their own insurance carrier.
Clearly, the payments received by the McDonalds from their insurance carrier for medical expenses and lost wages, Basic Reparations Benefits totalling $38,995, are exempt. KRS 304.39-260 (Exemption of benefits).
The trustee timely filed an objection to the debtors' claim to an exemption in any recovery on the personal injury claim beyond what is provided by KRS 427.150(2)(c), and the objection was sustained.
The trustee did not object to the exemption claimed by the debtors in the amendment filed on April 5, 1995 to Schedule C to their joint petition. However, this appears to be immaterial because none of the settlement proceeds is attributable to any "Personal Bodily Injury Claim Against Christina Tramonin [sic]." By the terms of the settlement, which was not objected to by the debtors, the settlement proceeds are in settlement of any claim of Nancy N. McDonald for pain and suffering.
Accordingly, the court agrees the debtors are not entitled to an exemption in the settlement proceeds.
By the court -
James D. Lyon, Esq.
Jeffrey A. Darling, Esq.
Ralph E. McDonald
Nancy N. McDonald
Roger Vanover, Esq.