On April 4, 2013, Mr. Napoleon executed an agreement with Bio-Medical d/b/a Greensboro Kidney Center pursuant to which he agreed to “cooperate in seeking, collecting, and paying over to [Bio-Medical] any and all insurance proceeds” with respect to all medical services rendered to Ms. Napoleon.

In addition, Mr. Napoleon agreed that “if the insurance proceeds cannot be paid directly to [Bio-Medical],” he would “collect them and pay them over to [Bio-Medical] within five (5) days of receipt.”

Throughout the spring and summer of 2013, Anthem sent a series of reimbursement checks to the Napoleons. These were made payable to Mr. Napoleon, who signed some of them over to Bio-Medical, but not all; instead, the Napoleons deposited multiple checks into their own accounts and used the funds for other purposes.

On September 16, 2013, Bio-Medical filed a lawsuit against the Napoleons, alleging causes of action for breach of contract and, in the alternative, for unjust enrichment and/or fraud.

On January 6, 2014, the court appointed a receiver to collect future disbursements from Anthem to the debtors. The court subsequently entered partial summary judgment in favor of Bio-Medical on its breach of contract claim in the amount of $29,897.83, “for dialysis services rendered.”

On July 28, 2014, the court entered a temporary restraining order enjoining the Napoleons from transferring any assets to third parties, requiring them to account for the reimbursement checks, freezing their assets up to the amount of $68,882.26 (representing the sum total of checks that at that time had been issued by Anthem, but not turned over to Bio-Medical), and setting a preliminary injunction hearing for August 5, 2014.

On August 4, 2014, the Napoleons filed a petition under Chapter 13 of the U.S. Bankruptcy Code.

In early 2016, the Napoleons received two checks (the “Additional Checks”) in the amounts of $5,552.88 and $5,531.65, both of which were issued by Anthem to Mr. Napoleon. The Napoleons filed amended schedules in their bankruptcy case to reflect receipt of the Additional Checks and amended their Schedule C to indicate that Mr. Napoleon claimed $4,999 in proceeds from the checks as exempt.

Bio-Medical objected, arguing that the debtors could “not exempt an asset” that was not part of their bankruptcy estate under Bankruptcy Code Section 541. More specifically, Bio-Medical argued that the checks never came into the estate by reason of the assignments executed by the Napoleons, and noted further that the agreement executed by the parties precluded their effort to exempt these checks.

In response, the Napoleons contended that the checks were property of the estate and that claiming the exemption was appropriate.

The question before the bankruptcy court was whether the Additional Checks were property of the Napoleons' bankruptcy estate or property of Bio-Medical.

The Bankruptcy Code

Bankruptcy Code Section 541 provides that:

property of the estate

includes:

all legal or equitable interests of the debtor in property as of the commencement of the case

11 U.S.C. § 541

The Bankruptcy Court's Decision

The bankruptcy court decided that the Additional Checks were property of Bio-Medical.

In its decision, the bankruptcy court explained that there was “ample precedent” to the effect that “when a purchaser of an insurance policy assigns its proceeds elsewhere, the assignee or beneficiary owns the proceeds, and the bankrupt's estate does not.”

The bankruptcy court then agreed with Bio-Medical that the Napoleons had no ownership interest in the insurance proceeds from the time of the first assignment and, therefore, also had no enforceable interest at the time they filed their bankruptcy petition – and, that they likewise had “no basis upon which to claim an ownership interest in these most recent Additional Checks.”

In the bankruptcy court's opinion, notwithstanding the fact that the checks were made out only to Mr. Napoleon, and that Mr. Napoleon had executed his assignment of the proceeds over a year after Ms. Napoleon had executed hers, it was “patently clear that all of the insurance proceeds were assigned to Bio-Medical.”

The bankruptcy court rejected the implicit argument by the Napoleons that Ms. Napoleon, as the patient, lacked the authority to assign the proceeds to Bio-Medical because the checks were made out to Mr. Napoleon as the policyholder. The two written “express assignments” established “in the plainest of terms that each of the debtors agreed that Bio-Medical was entitled to all reimbursement payments made by Anthem in connection with Bio-Medical's provision of medical services to Ms. Napoleon; and, further, that the debtors would affirmatively take the appropriate steps to remit those payments to Bio-Medical.”

Accordingly, the bankruptcy court concluded that the two Additional Checks were the property of Bio-Medical and not part of the Napoleons' bankruptcy estate and it ordered the Napoleons' counsel to convey to Bio-Medical the Additional Checks that were in his possession. Moreover, it ordered the Napoleons to turn over any additional reimbursement payments they might receive from Anthem in the future within five days of receipt.

The case is In re Napoleon, No. 14–04454–5–SWH (Bankr. E.D.N.C. May 12, 2016).