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City of Wilkes-Barre v. Sheils

January 25, 2008


The opinion of the court was delivered by: Judge James M. Munley United States District Court

(Judge Munley)

(Bankruptcy Appeal)


Before the court is the instant bankruptcy appeal. Having been fully briefed and argued, the matter is ripe for disposition.


In 1996, George Cole, a City of Wilkes-Barre ("the City") police officer, was injured in a car accident in the course of his employment. The other driver was an employee of Luzerne County. The severity of Cole's injuries made him unable to return to work, and the City paid Cole's lost wages and medical bills pursuant to the Pennsylvania Heart and Lung Act, 53 Pa. C.S. §§ 637-38. The City contends that from April 12, 1996 until May 9, 2005, when Cole returned to work, it provided $425,945.69 in benefits to him. Cole initiated a personal injury suit against Luverne County and the driver of the other vehicle involved in the accident in 1996. This suit settled eventually for $495,000. Cole also received $35,000 from his employer's underinsured motorist policy and $25,000 from his own underinsured motorist policy.

Cole also filed a voluntary petition for Chapter 7 protection under the United States Bankruptcy Code. Robert Sheils was appointed trustee, and Paul Perlstein special counsel to the trustee for the purpose of litigating the bankruptcy estate. On January 4, 2005, the trustee filed an amended petition to approve the settlement of debtor's (Cole's) personal injury action. The settlement was for $569,376.31. After disbursements for attorneys fees and expenses, the bankruptcy estate netted $372,176.96, which is currently held in a certificate of deposit. These are the only assets currently held by the trustee.

On October 1, 2004, the City filed a proof of claim with the Bankruptcy Court, arguing that it had a secured claim based on subrogation for the amount of the total pre-petition and post-petition Heart and Lung Act benefits paid to the debtor since his accident. This subrogation, the City argued, entitled it to claim a constructive trust on those funds. This status meant that the City had superior right to those funds than did the bankruptcy estate. After a number of initial proceedings, the City filed an adversary proceeding in the Bankruptcy Court. The City sought an order directing the Trustee to hold all of the settlement proceeds in a constructive trust for the benefit of the City. The City argued that a constructive trust had been imposed on the settlement by virtue of its right to subrogate its payments under the Heart and Lung Act from the debtor's settled lawsuit. The parties filed various motions in this proceeding, eventually culminating in motions for summary judgment. Bankruptcy Judge Thomas then granted summary judgment to the trustee, finding that no constructive trust for the City existed from the funds from the settlement. The City appealed to this court, the parties filed briefs, and we held argument, bringing the case to its present posture.

The Bankruptcy Judge's Opinion

Judge Thomas of the Bankruptcy Court delivered his opinion on May 16, 2007. He found that the City was not entitled to subrogation for its payments under the Heart and Lung Act. Judge Thomas concluded that changes to Pennsylvania's worker's compensation law had renewed a right to subrogation for benefits paid under that law, and that the amendment had also established that "[t]he Commonwealth, its political subdivisions, their officials and employees acting within the scope of their duties shall enjoy and benefit from sovereign and official immunity from claims of subrogation or reimbursement from a claimant's tort recovery with respect to workers' compensation benefits." (Opinion of the Bankruptcy Court (Doc. 2-35) (hereinafter "Opinion") at 2-3). This provision, Judge Thomas found, provided the Debtor, a police officer, with immunity from subrogation claims. He also concluded that the trustee succeeds to the rights of the debtor.

Judge Thomas noted that the amended legislation referred to "worker's compensation" claims, and not claims under the Heart and Lung Act. (Id. at 3). He pointed to Pennsylvania case law, however, that seemed to demonstrate that "the Heart and Lung Act is so closely aligned with the state worker's benefit law that the two should be considered similarly." (Id.). As result, "the Trustee enjoys the benefit of Cole's sovereign immunity defense, resulting in the granting of the Trustee's Motion for Summary Judgment and, thus, denying the City's claim for imposition of a constructive trust by reason of its subrogation claim." (Id.).


We have jurisdiction over the instant bankruptcy appeal pursuant to 28 U.S.C. ยง 158(a)(1), which provides that the district courts of the United States have jurisdiction to hear appeals from final ...

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