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Chenault v. The University of Kentucky

United States District Court, E.D. Kentucky, Central Division, Lexington

July 30, 2019


          OPINION & ORDER


         Appellant Cory Chenault, proceeding without counsel, appeals from the Bankruptcy Court's dismissal of his adversary proceeding against Appellees University of Kentucky d/b/a UK Healthcare and Central Kentucky Management Services, Inc. (hereinafter “UK” collectively), related to his Chapter 7 bankruptcy proceedings. See DE 2 (Notice of Appeal), at 1, DE 2-4 (Dismissal Order). Appellees elected to proceed on appeal before this Court, rather than the Bankruptcy Appellate Panel. DE 2-1 (Election). The matter has been fully briefed. DE 8 (Appellant's Brief) & DE 10 (Appellees' Brief). For following reasons, the Court AFFIRMS the Bankruptcy Court's dismissal.

         I. BACKGROUND

         On July 19, 2017, Plaintiff-Appellant Chenault filed a pro se Chapter 7 Petition in the United States Bankruptcy Court for the Eastern District of Kentucky. In re Chenault, No. 17-51449-GRS (Bankr. E.D. Ky. Jul. 19, 2017), ECF No. 1 [hereinafter Bankruptcy Proceeding]. As part of the bankruptcy proceedings, Chenault filed two adversary proceedings, including one against Appellees that led to the instant appeal. See Chenault v. Central Kentucky Management Servs. Inc. and UK Healthcare Hospitals (In re Chenault), No. 17-5024-GRS (Bankr. E.D. Ky. Dec. 20, 2017), ECF No. 1 [hereinafter Adversary Proceeding]; Bankruptcy Proceeding, ECF No. 22.[1]

         Prior to filing the bankruptcy petition, Chenault was in an automobile accident on November 19, 2015. He received related treatment at Defendant UK Healthcare on November 20, 2015, incurring charges totaling $23, 427.53. See Adversary Proceeding, ECF No. 1, Exhibit B (State Farm Explanation of Review). After some time, UK Healthcare Hospitals utilized its debt collection partner, Co-Appellant Central Kentucky Management Services, to initiate collection efforts against Chenault. Though the record does not fully explain those collection efforts, apparently the Kentucky Revenue Department began garnishing Chenault's wages around April 2017, collecting, according to Chenault, less than $5, 000. See DE 10-3 (Hearing Transcript), at 23; Adversary Proceeding, ECF No. 30 (Response), at 3. Chenault indicates he filed for bankruptcy primarily to stop the wage garnishment efforts. See DE 8 at 10. The § 341 meeting of creditors occurred on August 22, 2017, with no creditors attending. Around this time, Chenault heard from his auto insurance provider, State Farm, regarding insurance (Kentucky PIP) proceeds totaling almost $10, 000.[2] On August 22, 2017, State Farm, via letter to Chenault, indicated that “[t]he Personal Injury Protection Benefits limits have been exhausted . . . . and final payment was made on 8/22/2017.” Adversary Proceeding, ECF No. 22-2 (Exhibit B). The check went to UK Healthcare. On August 30, 2017, per Chenault, Central Kentucky Management cashed the $9, 800 insurance proceeds check. Id., ECF No. 22-3 (Exhibit C).

         The Bankruptcy Court entered an Order of Discharge in the Chapter 7 case on November 5, 2017. On December 20, 2017, Appellant filed the instant Adversary Proceeding, arguing Appellees' act of accepting the sum (and cashing the check) from State Farm constituted a violation of the automatic stay. After issues with service, and Chenault's unsuccessful attempt at securing a default judgment, UK filed its Answer and Motion to Dismiss under Rule 12(b)(6) on May 29, 2018. Adversary Proceeding, ECF Nos. 28 (Answer) & 29 (Motion). Chenault responded. Id., ECF No. 30 (Response). The Bankruptcy Court held a hearing on June 28, 2018, id., ECF No. 31, and, subsequently granted UK's motion, id., ECF No. 34.[3] Chenault timely filed notice of his intent to appeal, and UK elected to appeal to this Court.

         For the following reasons, the Court AFFIRMS dismissal.

         II. STANDARD

         Pursuant to 28 U.S.C. § 158(a)(1), this Court has jurisdiction to review final orders entered by the Bankruptcy Court under 28 U.S.C. § 157. This Court reviews de novo the Bankruptcy Court's ruling on a Fed.R.Bankr.P. 7012(b) motion to dismiss.[4] In re Cannon, 277 F.3d 838, 849 (6th Cir. 2002) (both circuit courts and district courts review a bankruptcy court's decision from “essentially the same position, ” which requires de novo review of conclusions of law); see also Hughes v. Sanders, 469 F.3d 475, 477 (6th Cir. 2006). The Bankruptcy Court granted UK's motion to dismiss, finding that Chenault had “not plead sufficient facts in the Complaint to state a plausible claim that a violation of the stay occurred” even after being “given the opportunity to provide additional argument and explain the basis for his Complaint.” DE 2-4 (Dismissal Order). The Federal Rules of Civil Procedure require that pleadings, including complaints, contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). To satisfy this requirement, a complaint must contain enough facts “to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1960 (2007). A complaint may be deficient for failure “to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). Even though a “complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiffs obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 127 S.Ct. at 1964 (citations omitted).

         On a Rule 12(b)(6) motion to dismiss, “all [well-pleaded] factual allegations in the complaint must be presumed to be true” and the court must draw all “reasonable inferences” in favor of the non-moving party. Total Benefits Planning Agency, Inc. v. Anthem Blue Cross & Blue Shield, 552 F.3d 430, 434 (6th Cir. 2008) (citation omitted); Erickson v. Pardus, 127 S.Ct. 2197, 2200 (2007). To that end, a court must judge the sufficiency of a complaint under a two-pronged approach: (1) disregard all “legal conclusions” and “conclusory statements”; and (2) determine whether the remaining “well-pleaded factual allegations, ” accepted as true, “plausibly give rise to entitlement to relief.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1950 (2009). Accordingly, “only a complaint that states a plausible claim for relief survives a motion to dismiss.” Id. (citing Twombly, 127 S.Ct. at 1955). A claim becomes plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 1949. That is, the plaintiffs “[f]actual allegations must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true (even if doubtful in fact).” Twombly, 127 S.Ct. at 1959 (internal citations omitted). If, from the well-pleaded facts, the court cannot “infer more than the mere possibility of misconduct, the complaint has alleged-but has not ‘show[n]'-'that the pleader is entitled to relief” Iqbal, 129 S.Ct. at 1950 (quoting Fed.R.Civ.P. 8(a)(2)). The Bankruptcy Rules import the same standard in an adversary proceeding. See Rule 7012(b); In re HNRC Dissolution Co., 585 B.R. 837, 841 (B.A.P. 6th Cir. 2018), aff'd, 761 Fed.Appx. 553 (6th Cir. 2019) (“[W]hen reviewing the order dismissing [debtor's] adversary complaint, the Panel must construe that complaint in the light most favorable to [the debtor] and accept its allegations as true, drawing all reasonable inferences in [debtor's] favor.”).

         Pleadings and documents filed by pro se litigants are to be “liberally construed, ” and a “pro se complaint, however inartfully pleaded, must be held to a less stringent standard than formal pleadings drafted by lawyers.” Erickson, 127 S.Ct. at 2200 (quoting Estelle v. Gamble, 106, 97 S.Ct. 285, 292 (1976)). However, “the lenient treatment generally accorded to pro se litigants has limits.” Pilgrim v. Littlefield, 92 F.3d 413, 416 (6th Cir.1996) (citing Jourdan v. Jabe, 951 F.2d 108, 110 (6th Cir.1991)). The basic pleading essentials persist in pro se cases. Wells v. Brown, 891 F.2d 591, 594 (6th Cir.1989). A pro se complaint must still “contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Barnett v. Luttrell, 414 Fed.Appx. 784, 786 (6th Cir.2011) (quoting Iqbal, 129 S.Ct. at 1950) (internal quotations and emphasis omitted).

         The Court reviews Judge Schaaf's analysis de novo. He found Chenault's complaint deficient under Rule 12(b)(6) and, based on his searching inquiry at a lengthy hearing, determined that amendment would be futile.[5] This resulted in dismissal and the ensuing appeal.

         III. ANALYSIS

         The Bankruptcy Court correctly dismissed Chenault's adversary proceeding for failure to state a claim under Fed.R.Civ.P. 12(b)(6), made applicable in adversary proceedings by Federal Rule of Bankruptcy Procedure 7012(b). Specifically, the Bankruptcy Court made legal findings, determining (1) that Kentucky law does not give Chenault an interest in the insurance proceeds paid to UK, (2) that “the benefits at issue were never property of the estate[, ]” (3) that, in turn, “neither defendant violated the automatic stay by taking possession of the funds, ” and that (4) Chenault's lack of damages foreclosed the need for amendment. The Court finds it determinative that the insurance proceeds-under the circumstances alleged by Chenault-were not property of the estate.

         In his appeal, Chenault advances three “points.” DE 8 (Brief). First, “whether [UK], by obtaining, possessing, and collecting a check in the amount of $9, 800 from the Appellant's automobile insurance company (State Farm), ” violated the automatic stay. Id. at 2. Second, “whether [UK's use] of the Commonwealth of Kentucky Department of Revenue Division of Collections, to seize . . . collect debt from [Chenault should be] deemed to be illegal and not eligible to use the Revenue Department as Collection Agency.” Id. And, third, that UK's “collection of property under the name and/or estate that [Chenault] has interest in while in Chapter 7 Bankruptcy process, comes as [a] violation of Bankruptcy Code and Due Process of Law.” Id. at 3 (emphasis in original).

         The Court, for various reasons, declines to consider the second argument, raised for the first time on appeal, and without a sufficient jurisdictional basis, and consolidates the first and third[6] arguments in its analysis of the core question of this case: did UK violate the automatic stay by accepting PIP insurance proceeds? The Court finds that no stay violation plausibly occurred because, under the specific circumstances as pleaded in this case, the insurance proceeds were not property of the bankruptcy estate. Further, even had Chenault pleaded valid entitlement to the insurance proceeds-potentially making the proceeds estate property-he failed to sufficiently allege the willfulness and damages necessary to sustain a stay violation claim. This also substantiates Judge Schaaf s denial of leave to amend. Chenault made no amendment request at the hearing; he had cursorily sought leave to amend in the underlying briefing. See, e.g., DE 30 at 6 (“or alternatively amend the complaint”). Judge Schaaf inaccurately said otherwise, DE 2-4 at 5, but he analyzed the potential for a plausible amendment nonetheless.

         A. Automatic Stay Violation

         Chenault argues UK violated the automatic stay by both receiving and cashing the State Farm insurance proceeds. The Complaint itself says little, simply setting out dates of case filing, the creditor meeting, and the sequence of payment. However, the attachments, properly considered in this context, [7] bolster the facts. The materials show Chenault is alleging that State Farm paid $9, 800 in PIP benefits to UK, for 2015 medical services, during the bankruptcy. Does this allege a stay violation?

         Upon the filing of a debtor's bankruptcy petition, an automatic stay arises, which precludes creditors from taking almost any action to obtain property of a debtor's estate or to collect from a debtor upon a prepetition debt outside the bankruptcy process. 11 U.S.C. § 362(a). The automatic stay is among the most fundamental debtor protections in bankruptcy law, and its scope in protecting debtors and debtor property is broad. Easley v. Pettibone Michigan Corp., 990 F.2d 905, 910 (6th Cir. 1993); Lynch v. Johns-Manville Sales Corp., 710 F.2d 1194, 1197 (6th Cir. 1983). In his adversary complaint, Chenault alleges a violation of the automatic stay under § 362(a) and an entitlement to damages under § 362(k).[8] See Adversary Proceeding, ECF No. 22 at 2. The at-issue conduct, here, potentially fits into two categories of stay proscribed activity. Subsection (a)(3) prohibits “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 11 U.S.C § 362(a)(3). Subsection (a)(6) prohibits “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case.” 11 U.S.C. § 362(a)(6). Section 362(k) provides automatic stay damages: “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages.” 11 U.S.C. § 362(k).

         Chenault alleges that a violation of the stay occurred when UK received the insurance proceeds check on August 22, 2017 and cashed that check on August 30, 3017, both events occurring after Chenault filed bankruptcy (July 19, 2017) but prior to discharge (November 3, 2017). Adversary Proceeding, ECF No. 22 at 2-3. Chenault alleged he suffered “significant emotional harm as a result” and that he is entitled to compensatory damages, punitive damages, and costs, as well as attorney's fees. Id. at 3-4. To be a violation of the automatic stay, here, the targeted asset must be property of the estate. 11 U.S.C. § 362(a)(3). Chenault's alleged automatic stay violation is implausible and thus fails (without reaching the scienter or damages requirements) because the at-issue insurance proceeds were not property of the estate.

         B. Insurance Proceeds as Property of the Estate

          Section 541 defines “Property of the Estate.” It provides, in pertinent part:

The commencement of a [bankruptcy] creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) [A]ll legal or equitable interests of the debtor in property as of the commencement of the case.
(6) Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.
(7) Any interest in property that the estate acquires after the commencement of the case.

11 U.S.C. § 541(a)(1), (a)(6), and (a)(7). Congress intended a broad meaning. See United States v. Whiting Pools, Inc., 103 S.Ct. 2309, 2313 (1983). However, “[t]he estate's legal and equitable interests in property rise no higher that those of the debtor.” First Fidelity Bank v. McAteer, 985 F.2d 114, 117 (3rd Cir.1993) (finding that proceeds of credit life insurance policy were property of creditor beneficiary of policy, and not property of bankruptcy estate that owned policy). To the extent that an interest in property is limited in the hands of the debtor, it is equally limited as property of the estate. This limitation concept is well-established in Section 541(d) (“Property in which the debtor holds . . . only legal title and not an equitable interest . . . becomes property of the estate . . . only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.”). 11 U.S.C. § 541(d). “Although the issue of what property is properly included in the debtor's bankruptcy estate raises a federal question, it is well-settled that a debtor's property rights are created and defined by state law.” In re Fordu, 201 F.3d 693, 700 (6th Cir. 1999); see Demczyk v. Mutual Life Ins. Co. (In re Graham Square, Inc.), 126 F.3d 823, 827 (6th Cir.1997) (“To determine the extent of an estate's interest in property, we must look to property rights defined under state law.”); see also Nobelman v. American Savings Bank, 113 S.Ct. 2106, 2110 (1993) (“Congress has ‘left the determination of property rights in the assets of a bankrupt's estate to state law,' since such ‘property rights are created and defined by state law.'”) (quoting Butner v. United States, 99 S.Ct. 914, 918 (1979)). Furthermore, property entering the estate remains subject to the limitations imposed by applicable state and non-bankruptcy federal law, unless the Bankruptcy Code preempts or overrides such law.

         The Sixth Circuit has had limited occasion to consider the contours of whether (or when) insurance proceeds are property of a bankruptcy estate. However, the trend among those circuits to have considered the question is to distinguish between the insurance policy itself, which is unquestionably property of the estate, [9] and policy proceeds, which requires fact-specific analysis.[10] See In re Louisiana World Exposition, 832 F.2d 1391, 1399 (5th Cir.1987) (“The question is not who owns the policies, but who owns the liability proceeds. Although the answer to the first question quite often supplies the answer to the second, this is not always so . . . .”). Matter of Edgeworth, 993 F.2d 51, 55 (5th Cir. 1993); In re Endoscopy Ctr. of S Nevada, LLC, 451 B.R. 527, 542 (Bankr. D. Nev. 2011) (“[T]he principal threshold question in this case revolves around whether the Policy proceeds that are potentially going to be paid to injured third-parties are property of the Debtors' estates.”).

         The Fifth Circuit was one of the earliest courts to consider the policy/proceeds distinction in Edgeworth, supra, which provides some parallels to the instant case. See 993 F.2d at 55. Edgeworth involved a physician, whose patient died while under his care. A month later, the physician filed for bankruptcy protection. Id. The deceased's family sought to sue Dr. Edgeworth for malpractice in state court, looking only to his medical malpractice insurance proceeds for recovery. Id. But, the debtor's medical malpractice liability insurance policy would pay only injured third parties. Id. On that basis, the court concluded that Dr. Edgeworth had no equitable interest in the policy proceeds. Id. The Fifth Circuit panel noted that the proceeds could not be made available for distribution to creditors other than victims of medical malpractice and their relatives. Id. Additionally, the court found that no legitimate secondary impact (discussed further below) would affect the debtor's bankruptcy estate. Id. The court concluded that the policy proceeds were not part of the physician's bankruptcy estate and allowed the state court suit to proceed. Id. The court took pains to distinguish liability policies from policies where the insured/debtor is the beneficiary and has a pecuniary interest in the proceeds of the policy, explaining:

The overriding question when determining whether insurance proceeds are property of the estate is whether the debtor would have a right to receive and keep those proceeds when the insurer paid on a claim. When a payment by the insurer cannot inure to the debtor's pecuniary benefit, then that payment should neither enhance nor decrease the bankruptcy estate. In other words, when the debtor has no legally cognizable claim to the insurance proceeds, those proceeds are not property of the estate.
Examples of insurance policies whose proceeds are property of the estate include casualty, collision, life, and fire insurance policies in which the debtor is a beneficiary. Proceeds of such insurance policies, if made payable to the debtor rather than a third party such as a creditor, are property of the estate and may inure to all bankruptcy creditors. But under the typical liability policy, the debtor will not have a cognizable interest in the proceeds of the policy. Those proceeds will normally be payable only for the benefit of those harmed by the debtor under the terms of the insurance contract.

Edgeworth, 993 F.2d at 55-56 (citations and quotations omitted). Expanding on Edgeworth's reasoning, a district court considered certain factors to determine whether insurance proceeds were estate property, noting that “under the Edgeworth analysis, the type of insurance at issue is critical for determining whether insurance policy proceeds are included within the estate of the insured/debtor.” Landry v. Exxon Pipeline Co.,260 B.R. 769, ...

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