Creditor’s Subrogation Lien that Arose by Operation of State Law Post-petition was Not a Violation of the Automatic Stay since the Creditor had not Taken “Any Act” to Create the Lien

Creditor’s Subrogation Lien that Arose by Operation of State Law Post-petition was Not a Violation of the Automatic Stay since the Creditor had not Taken “Any Act” to Create the Lien

When Kansas workers are injured on the job, the Kansas Workers Compensation law requires their employers to cover their medical expenses and lost wages. If a third party caused the worker’s injury, the worker can sue and the employer is subrogated to whatever recovery “by judgment, settlement, or otherwise” the worker receives and a lien attaches to that recovery by operation of law. Whether the creation of that lien violates the automatic stay of “any act” to create, perfect or enforce any lien against property of the estate that a worker’s bankruptcy triggers is the issue in this case.

Before she filed this bankruptcy case, the Debtor slipped on a wet floor mat and fell while working for Tyson. Aramark Services had placed the mat at her workplace. After settling her workers compensation claim against Tyson, and after filing bankruptcy, the Debtor sued Aramark for her injuries, settling her personal injury claim for $45,000. Now Tyson claims a right of subrogation and a lien against the settlement proceeds to recoup the $22,061.25 in workers compensation benefits it paid her post-petition. The chapter 13 trustee contends that Tyson’s lien never attached, or if it did, that it is void as having being created in violation of the automatic stay. Because Tyson’s subrogation lien arose by operation of law when the Debtor settled with Aramark, and not because of any affirmative act by Tyson, neither the right of subrogation nor the lien violated the automatic stay and Tyson’s statutory lien on the Aramark recovery is not void.

When she reported her injury, Tyson began paying the Debtor’s medical expenses and other workers’ compensation benefits as required by Kansas law. After the Debtor completed medical treatment for her injury (and after she filed this bankruptcy case), she and Tyson settled her workers compensation claim on June 23, 2014 for a final lump sum payment of $20,000, $13,590.10 of which represented compensation for her permanent partial disability.

Before that, and apparently unbeknownst to Tyson or the workers compensation system, the Debtor and her husband filed this chapter 13 bankruptcy on March 11, 2013. She didn’t disclose her pending workers compensation claim or her potential personal injury claim against Aramark in the schedules, but she did note in the Statement of Current Monthly Income that she was receiving $1,423 monthly for “Workers Comp.” But she also represented in her Statement of Financial Affairs that her “Workers Comp.” benefits ended in February 2013. In fact, Tyson paid the Debtor workers compensation benefits of $27,641.31 before her bankruptcy and another $22,061.25 after she filed. The Debtors’ second amended chapter 13 plan was confirmed on September 4, 2013 and provided for them to make monthly plan payments of $874.00 over sixty months. Tyson didn’t learn of the Debtor’s bankruptcy until 2016.

On June 25, 2014, two days after the Debtor settled her workers compensation claim with Tyson, she sued Aramark in state court and Aramark removed the case to the United States District Court for the District of Kansas. The chapter 13 trustee learned of the Aramark lawsuit in late August of 2015 and on November 5, 2015 filed a motion for turnover of any lawsuit recovery “by way of settlement, judgment or otherwise” as property of the estate. The Debtors amended Schedule B on November 9, 2015 to disclose that the Debtor “may have a slip and fall case against Aramark; however she had received workers comp benefits for the injury and the workers comp carrier [sic] has claimed a lien against any personal injury case relating to the same issue.” On February 10, 2016, the Court granted the turnover motion without objection and directed the Debtors to apply for bankruptcy court approval of the employment of Melinda G. Young, their special counsel, to represent the Debtor in the Aramark lawsuit. Ms. Young’s employment was approved and, in 2016, she settled the Aramark lawsuit for $45,000.

On November 29, 2016, the debtors filed a motion for approval of the compromise under Fed. R. Bankr. P. 9019 and to allow the Debtor’s attorney’s fees and expenses in the Aramark suit. Tyson objected, asserting its subrogation and lien for $22,061.25 of post-petition workers compensation benefits it had paid to or on the Debtor’s behalf.  The Court approved the settlement and the payment of attorney’s fees and expenses, but also ordered that Ms. Young hold the remaining $25,359.37 of the Aramark settlement proceeds in her trust account pending further litigation concerning the validity of Tyson’s lien. The trustee commenced this adversary proceeding to determine the validity of Tyson’s subrogation lien. In his complaint, the trustee asserted only that the lien had either never attached because the settlement had yet to be approved or, if the lien had attached, that it is void because Tyson created it post-petition in violation of the automatic stay. Both the trustee and Tyson move for summary judgment on the complaint.

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