Summary:
Vermelle Jones Bryant filed a Chapter 7 case in October 2021 but failed to disclose a potential personal injury claim stemming from a medical procedure that occurred just weeks earlier. The case proceeded as a no-asset case, and she received a discharge in early 2022. Nearly three years later, Bryant settled that prepetition claim for $204,000. After the Bankruptcy Administrator moved to reopen the case, the Trustee objected to Bryant’s amended exemption claim under N.C. Gen. Stat. § 1C-1601(a)(8), arguing that because the compensation was not in hand on the petition date, it did not qualify as exempt.
Judge Lena James rejected the Trustee’s narrow, literalist reading and instead adopted a broader interpretation consistent with longstanding bankruptcy practice in North Carolina. Finding the statutory term "compensation for personal injury" ambiguous, Judge James applied North Carolina’s principle that exemption statutes must be liberally construed in favor of debtors.
The court found that Trustee’s novel argument—that only “funds in hand” as of the petition date are exemptible—was not only unsupported by precedent, but would have led to absurd and inequitable results. As the Court noted, such an interpretation would create arbitrary and punitive distinctions among debtors based solely on the timing of a settlement or the administrative speed of their personal injury lawyer. More troublingly, it would have opened the door to post-discharge clawbacks of recoveries that debtors had never concealed with fraudulent intent.
The court refused to read into the statute a temporal restriction that simply isn’t there and instead harmonized the plain text with decades of consistent judicial practice and related legislative amendments. Her invocation of the North Carolina Supreme Court’s distinction between assignable proceeds and unassignable causes of action further bolstered the logic that a debtor holds a protectable interest in “compensation” even when it has not yet been quantified or received.
She concluded that the statute permits the exemption of compensation received postpetition so long as the underlying injury—and hence the legal right to recover for it—occurred prepetition.
The Court emphasized that North Carolina law recognizes a debtor’s prepetition property interest not only in a personal injury claim but also in the prospective proceeds of that claim. The opinion also noted that the General Assembly has not altered the language of the statute despite decades of consistent bankruptcy court interpretations allowing exemptions in such scenarios.
Commentary:
Judge James’ well-reasoned and thorough opinion in In re Bryant squarely reaffirms a debtor-friendly principle that has long animated North Carolina bankruptcy practice: that a prepetition personal injury, even if unliquidated and undisclosed, gives rise to a property interest in potential compensation which the debtor may later exempt under N.C. Gen. Stat. § 1C-1601(a)(8). This is particularly as, unlike the federal exemption for personal injury claims, North Carolina exemption is not only for an unlimited amount, but also protects emotional distress damages, not just bodily injuries. Further, in light of Judge Flanagan from the Eastern District Court in Alston v. NCR that FDCPA claims are personal tort claims, debtors should clearly be entitled to retain all of these causes of action.
As a practical aside, the Court also advised debtors’ attorneys to use the statutory phrase “compensation for personal injury” in their exemption schedules rather than the colloquial but legally muddier term “personal injury claim” and disclose the amount as "Unknown" or for an estimated amount. This clarity could help avoid future litigation over the scope of claimed exemptions, but might require some changes to the Local Form 91-C to more clearly accommodate that
Lastly, a great job by Koury Hicks and Erica NeSmith but also everyone that has worked to compile the scattered and obscure legislative history regarding North Carolina exemptions, particularly as Judge James specifically "commends the efforts of several members of North Carolina’s bankruptcy bar to gather and publicly disseminate the limited legislative history available for N.C. Gen. Stat. § 1C-1601 and its later amendments."
Much of that can be found at North Carolina Exemptions Legislative History with special thanks to Travis Sasser, Kelly Newcomb, Erica NeSmith and others for their contributions. If anyone has more, please let me know, so those can be added.
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To read a copy of the transcript, please see:
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