What happens if a client who kept insurance funds proceeds later files for bankruptcy? Will a bankruptcy court allow the debtor to keep monies intended for you? According to a recent New York court case, the answer is no. The bankruptcy court refused to grant a discharge to a debtor who failed to turn over insurance checks to the provider.
Medical and restoration services are often provided without payment upfront. Instead, the client agrees, in writing, to remit payments once received from the insurance carrier. The client is responsible for the full amount of the invoice (rather than just the amount of the insurance payment plus any deductible) if they do not turn over the insurance payment to the provider.
In the case at hand, the creditor sued their former client for breach of contract in New York State Court. The creditor alleged that the debtor received and failed to turn over the insurance payments. The former client had also promised to repay the creditor on multiple occasions. The debtor failed to provide evidence to the contrary, and the creditor was awarded judgment for the full amount owed by the debtor.
The debtor later went on to file for bankruptcy. On the list of debts that the now-bankrupt client was looking to discharge was the judgment obtained for keeping payments intended for the service provider.
The creditor objected to the debtor’s request to have the debt relieved. Since the former client failed to testify as to what they did with the insurance checks, and the court had already awarded judgment in the debt collection case, the bankruptcy court would not rehear the issue.
It wasn’t the fact that the debtor had converted the funds that led the bankruptcy court to declare the debt non-dischargeable. It was the fact that the debtor had deposited the funds into their account. This showed that the debtor received services from the provider and, by depositing the checks into their account, demonstrated an intent not to pay for those services. The failure to turn over the checks under these circumstances constituted embezzlement. Embezzlement is an exception to the dischargeability of a debt in bankruptcy.
It was helpful that the creditor had filed and secured a judgment in the debt collection case. By doing so, the bankruptcy court was stopped from reviewing the underlying facts. The only question before the bankruptcy court in determining whether the debt was dischargeable was whether the debt fell under 11 U.S.C. § 523(a)(2), (4), or (6). Here, the facts supported the debtor’s actions as embezzlement, which fell under the exceptions to discharging the debt.
Based on the facts and law, the court found that the judgment entered by the creditor was non-dischargeable. The creditor’s judgment remains and will be valid for 20 years, allowing them the ability to pursue payment.
When a client fails to turn over insurance payments, there is a clear advantage to obtaining a judgment in a debt collection case. If you have a non-paying client or a debt collection matter you need assistance with, contact us for a consultation.
