Prior to filing bankruptcy, Ms. Butler filed a charge with the EEOC alleging that she was subjected to sexual harassment and then wrongfully terminated by Home Depot. A settlement was reached with required Home Depot to pay the total sum of $15,000 to Ms. Butler, with $7,500 of such funds directed “as payment for claims for lost wages” and the remaining $7,500 devoted “as payment for ... non-wage claims (including claims of emotional distress).”
Filing bankruptcy, Ms. Butler claimed the full value of the Settlement as exempt under N.C.G.S. § 1C-1601(a)(8) and the Trustee objected to claimed exemption in the $7,500 portion of the Settlement for lost wages, arguing that payment does not constitute “compensation for personal injury” as it was “wholly independent and separate from the Debtor’s alleged personal injury claim.”
The bankruptcy court first noted that unlike the comparable federal exemption in 11 U.S.C. § 522(d)(11)(D), § 1C-1601(a)(8) does not limit the “personal injury” exemption to compensation for personal “bodily” injury, thereby allowing a North Carolina debtor to exempt compensation for emotional distress. Settlement proceeds directed to a debtor’s lost wages, which were the direct result of automobile accident injuries, constitute “compensation for personal injury,” while lost wages paid as part of a settlement involving charges of wrongful termination, sex discrimination, and libel, are not similarly exempt under § 1C-1601(a)(8). In re LoCurto, 239 B.R. at 317.
Relying on Comm’r v. Schleier, 515 U.S. 323 (1995) and O’Gilvie v. United States, 519 U.S. 79, (1996), which considered the similarly worded phrase “damages received … on account of personal injuries or sickness” within the context of section 104(a)(2) of the Internal Revenue Code, the bankruptcy court found that only damages “that were awarded by reason of, or because of, the personal injuries.” In these cases arising from wrongful termination and sex discrimination, the personal injury did not cause the lost wages. Similarly the emotional distress resulting from sexual harassment, while itself exempt, did not cause the lost wages, which were not protected.
Much of these problems could be solved by Plaintiff's attorney better structuring settlement to either explicitly tie lost wages to the personal injury suffered or, more simply, not to classify any funds as lost wages. (This ability to classify settlements may lie at the root of the attempt by Trustees to assert control over pending personal injury claims, so that they can do the opposite.)
This case also relates directly, although on a individual and not mass tort scale, to the The Settlement Trap by Lindsey Simon.
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