Joseph J. Blyskal, Iii, Levying Flesh and Charging Society, Creditors, and Insurance Companies for It: the Irony of Including Personal Injury Awards in the Bankruptcy Estate

• Publication year: 2011

LEVYING FLESH AND CHARGING SOCIETY, CREDITORS, AND INSURANCE COMPANIES FOR IT: THE IRONY OF INCLUDING PERSONAL INJURY AWARDS IN THE BANKRUPTCY ESTATE

INTRODUCTION

A. A Pound of Flesh

"If you repay me not on such a day . . . [a pound] [o]f your fair flesh [will] be cut off and taken . . . ."¹With those words, a Shakespearean creditor agreed to extend a loan on the promise of a pound of flesh from the breast of the guarantor if no one made repayment within three months.²The peculiar agreement seemed odd to the townspeople; for what could a creditor possibly use a pound of flesh?³Regardless, the overzealous creditor persisted in satisfying his debt by the means prescribed.⁴When the creditor sought to collect the flesh of the debtor, the judge ruled that the creditor indeed had an interest in the pound of flesh.⁵However, there was no way to precisely excise a pound of flesh from the body of the debtor without bloodshed.⁶Therefore, the creditor could not foreclose on the collateral because, by the agreement, he was entitled only to a pound of flesh and no more.⁷

It is axiomatic that a creditor cannot take a pound of flesh from the debtor to satisfy a debt. However, with limited exception, awards for personal injury are included in the bankruptcy estate in their entirety and given only limited exemption status.⁸As such, an award meant to compensate the debtor for actual physical loss is given to creditors. This is akin to allowing a creditor to take a pound of the debtor's flesh.

B. Bankruptcy and the Social and Personal Costs of Injury

Nearly 45.8 million Americans do not have health insurance.⁹The cost of an accidental injury ranges from $6800 to $193,800, depending on its locus of occurrence, duration, and severity.¹⁰Costs of injuries include actual physical loss, lost earnings, medical expenses, and mental suffering.¹¹Thus, the uninsured victim of a tort causing personal injury needs as much financial assistance as possible. Financial support for the injured tort victims, especially those without insurance, comes in the form of a monetary recovery intended to replace their losses.¹²Such awards often compensate for the actual loss of flesh and blood by the victim. Thus, a monetary award is figurative flesh to the injured tort victim. However, bankruptcy claims the personal injury recoveries of over 1.5 million Americans each year to repay hungry creditors.¹³

Thus, through bankruptcy creditors levy the flesh of debtors who have received personal injury recoveries. The irony is that in nearly forty-seven percent of the bankruptcies filed, illness or injury is the cause of the filing.¹⁴

There is a problem with including personal injury recoveries in the bankruptcy estate: bankruptcy allows creditors to levy the flesh of innocent debtors. A tort victim loses an arm to a dog bite and in turn brings suit for the injuries. Between filing suit and settlement of the claim, the uninsured victim is forced to file chapter 7 bankruptcy because the victim is uninsured, has incurred countless medical bills, is unable to secure gainful employment as a result of the injuries, and is in need of a discharge from unsecured debt that was incurred at the bequest of all-too-willing creditors.¹⁵After filing bankruptcy, the debtor receives the right to a $105,000 settlement of the claim.¹⁶The settlement is intended in part to figuratively replace the arm of the victim and in part to offset the costs of living and medical expenses because the debtor is now relegated to limited-income employment due to her injuries. However, because the cause of action accrued prepetition, the right to receive the settlement funds is no longer the property of the debtor.¹⁷Rather, the funds are the property of the bankruptcy estate, for the trustee in bankruptcy to collect and divide amongst unsecured creditors.¹⁸If the debtor lives in a state that permits use of federal bankruptcy exemptions, the debtor may keep $18,450 of the settlement.¹⁹However, if the debtor lives in a state which does not permit the use of federal bankruptcy exemptions, the debtor may have to forego the entire settlement amount.²⁰The debtor is thus left without compensation for the loss of his arm. Instead, unsecured creditors take the figurative arm of the debtor to satisfy the debts. This is an inappropriate debt collection practice.

Furthermore, in light of the staggering costs of even routine medical treatment²¹and the subjectivity of personal loss, a legislature cannot accurately estimate the medical expenses of a disabled member of society by ascribing a set exemption amount for a personal injury award. A legislature cannot place a meaningful value upon a tort recovery meant to compensate an individual for a subjective loss. As such, legislative attempts to make such an estimate poorly approximate the amount that an injured debtor will need to sustain the standard of living necessary to prevent future reliance upon social welfare programs for support, or worse, reliance upon other creditors. Considering the fundamental purposes of bankruptcy and tort law, a meager, inflexible, legislatively ascribed exemption for a personal injury recovery is a poor way to compensate an injured debtor and afford the fresh start necessary to prevent future costs to society, creditors, and insurance companies. Legislatures should take into account the aims of bankruptcy, tort law, and the interests of society in assuring adequate compensation to its injured.

This Comment will address the implications of including an award for personal injury in the bankruptcy estate and the ironies underlying the practice in light of the competing, yet parallel, goals of tort law and bankruptcy law. I will present the conflict between the policies underlying the formation of the bankruptcy estate and those governing the right to recovery in tort for personal injury, examine the development of the laws governing the bankruptcy estate with regard to personal injury awards, and offer a suggestion for the reformation of the laws governing exemption of such awards from the bankruptcy estate.

Tort law compensates injured tort victims for their loss while bankruptcy law disregards an insolvent tort victim's rights to recovery in favor of compensating financially solvent creditors. Courts have struggled with the conflicting policies underlying tort law and bankruptcy law. Contrary to the purpose of tort law, courts eventually abided by the Bankruptcy Act of 1978 and began including personal injury recoveries in the bankruptcy estate. A debtor may exempt a portion of such an award from the estate, however, such exemptions are limited in amount. In order to protect the interests of an injured debtor in a fresh start after bankruptcy, prevent the social costs of injury from draining public resources, and preserve the credit facilities of credit-granting institutions for future debtors, legislatures need to increase exemption amounts to better reflect the actual loss of injured debtors and bankruptcy judges need to be able to exercise more discretion over the formation of the bankruptcy estate.

I. FLESHING OUT THE POLICIES: THE COMPETING, YET PARALLEL, GOALS OF

TORT COMPENSATION AND CREDITOR COMPENSATION

A. Introduction

Tort law and bankruptcy law are competing, yet parallel, systems of compensation.²²Tort law aims to compensate the victim of a tort for his losses, while bankruptcy law aims to compensate a creditor for its losses.²³

Tort law is primarily concerned with placing an injured victim in the position that he was in prior to being injured.²⁴Bankruptcy law is concerned with assisting creditors in collecting outstanding debts and assuring that a debtor has a financial fresh start after bankruptcy.²⁵Thus, both tort law and bankruptcy law are concerned with assuring that a debtor can financially support himself.²⁶

The conflict arises when a debtor is compensated in tort but a bankruptcy creditor lays claim to that compensation to satisfy outstanding debts of that debtor.²⁷If a debtor receives the full amount of his tort award, creditors are cheated but the purposes of tort law are fulfilled.²⁸However, if a bankruptcy trustee is allowed to distribute the award to unsecured creditors, the creditors are satisfied but the injured debtor remains uncompensated and without a fresh start.²⁹

B. Principles of Tort Law

A fundamental principle of tort law is to compensate the tort victim.³⁰The victim of a tort should be compensated for his losses incurred due to the actions of a wrongdoer.³¹Accordingly, compensation is awarded to a tort victim to place him back in a position similar to that prior to the tort.³²Money is awarded to make the victim of a tortious act whole by compensating for physical loss and pain and suffering,³³replacing the value of damaged property,³⁴or replacing a lost expectancy.³⁵In short, as a general matter tort law is concerned with compensating the victim's loss.³⁶As such, a monetary award in tort is a figurative, however ephemeral, substitute for what the victim lost.³⁷

Specifically, in an action for personal injury, money damages are a substitute for the tangible losses of the victim.³⁸Monetary awards for breach of contract fulfill the expectations of the aggrieved party or substitute for performance.³⁹Property damaged by tortious trespass is replaced by a monetary award that approximates the lost value of the property.⁴⁰Similarly, tort law compensates the physically injured victim for the loss of flesh. An award in tort does for the debtor what the debtor is unable to do for himself due to the loss of or injury to a body part: provide financial support for him and his dependents.⁴¹Compensation for personal injury takes into account pecuniary losses by awarding the debtor with money to replace lost earnings, pay medical expenses, and compensate for physical loss.⁴²Just as the debtor's flesh is essential to his ability to work and support himself, the replacement of tangible losses is essential to the...