Debtor Keeps Insurance Payment, Can Wipe Out Debt

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By Daniel Gill

A Chapter 13 debtor who kept a medical insurance reimbursement payment instead of delivering it to the helicopter company that airlifted him could have the company’s claim wiped out in his bankruptcy case, a Pennsylvania bankruptcy court ruled ( PHI Air Med. LLC v. Blair (In re Blair) , 2017 BL 206636, Bankr. M.D. Pa., No. 5-16-ap-00010-JJT, 6/16/17 ).

The debt Terry Blair owed to PHI Air Medical LLC wasn’t embezzlement or larceny and could be discharged in Blair’s Chapter 13 case, the June 16 opinion by Judge John J. Thomas of the U.S. Bankruptcy Court for the Middle District of Pennsylvania concluded.

Before he was airlifted by PHI, Blair assigned his right to reimbursement from his medical carrier to the helicopter company.

The insurer paid Blair about $10,000 directly, which he failed to deliver to PHI. Blair then filed for Chapter 13 bankruptcy, which allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three- to five-year period.

The $10,000 debt should survive the bankruptcy case because Blair was a fiduciary who had defrauded PHI, or else because it was the result of embezzlement or larceny under 11 U.S.C. §523(a)(4), PHI argued. The assignment of the right to money from insurance created a constructive trust, it said.

The court disagreed. Blair wasn’t a fiduciary, because constructive trusts—unlike express or resulting trusts—don’t create fiduciary relationships, the court said.

And because the money was paid to Blair, it was his property, the court said.

You can’t steal from yourself, so the property wasn’t taken by larceny, the court said. Similarly, “one cannot embezzle one’s own property,” the court said.

“Just as one cannot steal money from oneself, one cannot embezzle money from a constructive trust,” the court said.

Blair is therefore entitled to a discharge of PHI’s claim if he completes his Chapter 13 plan.

Eric James Filer, Lehighton, Pa., represented Blair. PHI Air Medical was represented by Jeffrey J. Cole, Erie, Pa.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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