In her bankruptcy petition, Ms. Hernandez reported unsecured claims held by the three healthcare providers. She owed $28,709.60 to Ambulatory Surgical, $58,901.20 to Marque Medicos Fullerton, and $50,161.26 to Medicos Pain and Surgical.

Ms. Hernandez reported minimal assets, listing $1,300 in bank accounts, some inexpensive jewelry, and a pending workers' compensation claim, which she valued at $31,000.

Ms. Hernandez claimed an exemption for the entirety of the workers' compensation claim, citing Section 21 of the Illinois Workers' Compensation Act.

Two days after filing her bankruptcy petition, Ms. Hernandez settled her workers' compensation claim, apparently for $30,566.33.

The healthcare providers objected to Ms. Hernandez's claimed exemption in the settlement amount, arguing that they had the right to reach it to apply to their debts.

Ms. Hernandez contended that her workers' compensation settlement was exempt from her bankruptcy estate and, therefore, that the healthcare providers were not entitled to any portion of it. She relied on Section 21 of the Illinois Workers' Compensation Act, which provides that, “No payment, claim, award or decision under this Act shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages.”

The bankruptcy court denied the claimed exemption and the U.S. District Court for the Northern District of Illinois affirmed, concluding that using the Illinois workers' compensation exemption to thwart this specific class of creditors would frustrate the law's purpose.

The dispute reached the Seventh Circuit.

The Seventh Circuit's Decision

The Seventh Circuit explained in its decision that the Illinois Supreme Court had not clarified the boundaries of Section 21 or even classified it as an exemption. (The parties agreed that Section 21 creates an exemption and, therefore, had not briefed that question.)

Without guidance from the Illinois Supreme Court, the circuit court said, it would not hold, as the district court had, that Section 21 did not block the healthcare providers.

Therefore, it asked the Illinois Supreme Court to decide if Section 21 exempts the proceeds of a workers' compensation settlement from the claims of healthcare providers that treated the illness or injury associated with the settlement.

The case is In re Hernandez, No. 18-1789 (7th Cir. March 18, 2019). Attorneys involved include: For In the Matter of: ELENA HERNANDEZ, Debtor – Appellant: Richard D. Grossman, Attorney, LAW OFFICES OF RICHARD D. GROSSMAN, Chicago, IL. For MARQUE MEDICOS FULLERTON, LLC, MEDICOS PAIN AND SURGICAL SPECIALISTS, S.C., AMBULATORY SURGICAL CARE FACILITY, LLC, Appellees: Alan J. Mandel, Attorney, ALAN J. MANDEL LTD, Skokie, IL.

Insurance Coverage Law Center Comment

If it agrees to answer the certified question, the Illinois Supreme Court also may decide, in the first instance, whether Section 21 even creates an exemption for purposes of the U.S. Bankruptcy Code.

The issues raised in Hernandez are important, and likely to recur in other cases. That's because in many low-asset bankruptcies, access to the proceeds of a workers' compensation claim determine whether healthcare providers receive compensation at all. Whether the Illinois law permits healthcare providers to reach that asset implicates the state's ability to administer its workers' compensation regime. The Insurance Coverage Law Center will discuss developments in this case as warranted.