A. Unruh Chiropractic Clinic v. De Smet Insurance Co.

#25403-r-SLZ

2010 SD 36

                             IN THE SUPREME COURT
                                     OF THE
                            STATE OF SOUTH DAKOTA

                                   * * * *

A. UNRUH CHIROPRACTIC CLINIC,                 Plaintiff and Appellee,
     v.
DE SMET INSURANCE COMPANY OF
SOUTH DAKOTA,                                 Defendant and Appellant,

      and

DE SMET INSURANCE COMPANY OF                  Third-Party Plaintiff and
SOUTH DAKOTA,                                 Appellant,
     v.
HENRY LENTSCH and DOROTHY
LENTSCH,                                      Third-Party Defendants.

                                   * * * *

                   APPEAL FROM THE CIRCUIT COURT
                   OF THE SECOND JUDICIAL CIRCUIT
                  MINNEHAHA COUNTY, SOUTH DAKOTA

                                   * * * *

                    HONORABLE WILLIAM J. SRSTKA, JR.
                                Judge

                                   * * * *

JAMES R. EVEN                                 Attorney for plaintiff
Sioux Falls, South Dakota                     and appellee.

LARRY M. VON WALD of
Beardsley, Jensen and Von Wald,
 Prof. LLC                                    Attorneys for defendant, third-
Rapid City, South Dakota                      party plaintiff and appellant.

                                   * * * *

                                         ARGUED ON MARCH 24, 2010

                                         OPINION FILED 05/05/10
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ZINTER, Justice

[¶1.]        In the course of providing treatment, Unruh Chiropractic Clinic

(Unruh) obtained assignments of proceeds of personal injury claims from two

patients. The patients’ claims arose out of injuries they sustained in an automobile

accident involving a negligent driver insured by De Smet Insurance Company (De

Smet). Although Unruh gave De Smet notice of the assignments, De Smet settled

the claims on behalf of its insured without paying the proceeds to Unruh for its

unpaid services. Unruh subsequently commenced this action against De Smet to

recover under the assignments. On cross-motions for summary judgment, a

magistrate court ruled in favor of Unruh, concluding that the assignments were

enforceable. The circuit court affirmed, and De Smet appeals. We reverse.

                            Facts and Procedural History

[¶2.]        On June 5, 2007, Henry and Dorothy Lentsch were involved in an

automobile accident with Opal Omanson. Omanson was insured by De Smet. De

Smet apparently conceded that Omanson was at fault.

[¶3.]        On June 6, 2007, Unruh began treating Lentsches for injuries

sustained in the accident. Prior to treatment, Lentsches each signed separate

documents entitled “ASSIGNMENT OF PROCEEDS.” The pertinent language of

the assignments provided:

             In consideration of the furnishing by A. Unruh Chiropractic
             Clinic PC of Chiropractic care at my request and for my benefit;
             I, for myself and my heirs, assigns personal representatives and
             successors in interest, DO HEREBY IRREVOCABLY SELL,
             ASSIGN, TRANSFER AND SET OVER TO A. UNRUH
             CHIROPRACTIC CLINIC PC all my right, title and interest in
             and to any settlement, judgement [sic] or recovery from Opal


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            Omanson to the extent of any unpaid chiropractic charges owed
            by patient to Unruh Chiropractic Clinic PC.

            I, FURTHER FOR MYSELF AND MY HEIRS, ASSIGNS,
            PERSONAL REPRESENTATIVES, AND SUCCESSORS IN
            INTEREST IRREVOCABLY SELL, ASSIGN, TRANSFER AND
            SET OVER TO A. UNRUH CHIROPRACTIC CLINIC PC all my
            rights to receive the proceeds of any policy of insurance
            (including health, accident, liability or other) which indemnifies
            [ ] [Opal Omanson] in the event of such settlement, judgement
            [sic] or recovery, (including specifically the proceeds paid by any
            insurance company on behalf of the above named person) or
            which provides coverage for the assignor, herein.

            IN CLARIFICATION OF THE FOREGOING, it is hereby
            agreed that the patient shall at all times remain the real party
            in interest in the said claim or law suit, and no such rights to a
            cause of action shall inhere to the A. Unruh Chiropractic Clinic
            PC as a result of this assignment. A. Unruh Chiropractic PC’s
            interest in the proceeds is the equivalent of an equitable
            assignment, lien, or other security arrangement confined solely
            to the unpaid balance of its charges of chiropractic services
            rendered in treatment of the patient for matters related to the
            personal injury suffered by the patient at the hands of a third
            party tortfeasor. . . .

[¶4.]       Unruh served copies of the assignments and notices of the assignments

on De Smet. The notices informed De Smet that any proceeds of insurance for

Lentsches’ claims should be paid directly to Unruh to the extent of any unpaid

chiropractic services. The notices further informed De Smet that if Unruh was not

named as a payee on any settlement checks, De Smet would be required to make a

second payment directly to Unruh.

[¶5.]       Lentsches continued treatment with Unruh until July 2007. In

September 2007, Henry arranged for Lentsches’ son, who had a power of attorney

for Dorothy, to enter into settlement negotiations with De Smet. Lentsches

disputed some of Unruh’s charges and they refused to settle with De Smet if it


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included Unruh as a payee on the check. Lentsches’ son ultimately executed

releases of Omanson and De Smet in exchange for cash settlements.

Notwithstanding the notices and assignments, the releases provided that Lentsches

would be responsible for paying their medical care providers. Accordingly, De Smet

delivered the settlement checks directly to Lentsches. Further, De Smet did not

include Unruh as a payee on the settlement checks. The settlement amount

exceeded Unruh’s unpaid charges.

[¶6.]        Unruh learned of the settlements and attempted to collect the amount

owed for unpaid chiropractic services rendered. Unruh first demanded payment

from Lentsches. When Lentsches refused to pay, Unruh demanded payment from

De Smet. De Smet also refused to pay. Unruh subsequently filed this action to

enforce the assignments in small claims court. De Smet removed the case to the

formal side of magistrate court, and both parties moved for summary judgment.

The court acknowledged the common-law prohibition on the assignment of personal

injury claims. The court, however, concluded that there was a legal distinction

between assignments of claims and assignments of proceeds of claims. Therefore,

the court ordered enforcement of the assignments.

[¶7.]        On appeal, the circuit court affirmed. The circuit court acknowledged

the split of authority on the enforceability of such assignments. The court analyzed

the competing views and followed those authorities recognizing the legal distinction

between assignments of claims and assignments of proceeds of claims. Considering

the distinction, the circuit court concluded there was “no danger of champerty or




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any public policy reason to preclude the assignment of expected proceeds from a

personal injury claim.”

                                        Decision

[¶8.]         Summary judgment is proper where “the pleadings, depositions,

answers to interrogatories, and admissions on file, together with the affidavits . . .

show that there is no genuine issue as to any material fact and that the moving

party is entitled to a judgment as a matter of law.” SDCL 15-6-56(c). The parties

agree there is no issue of material fact regarding the creation of the assignments.

The enforceability of the assignments is a question of law. “We review questions of

law de novo with no discretion given to the circuit court.” Pauley v. Simonson, 2006

SD 73, ¶ 7, 720 NW2d 665, 667 (citation omitted).

[¶9.]         South Dakota recognizes the common-law prohibition on the

assignment of personal injury claims. See Schuldt v. State Farm Mut. Auto. Ins.

Co., 238 NW2d 270, 271-72 (SD 1975) (holding that subrogation clauses in

automobile policies do not constitute “illegal assignment[s]” of personal injury

claims). The common-law prohibition is grounded on two principles: first, prior to

wrongful death statutes, personal claims did not survive the death of the victim;

and second, the prohibition prevented maintenance and champerty, i.e., profiteering

and speculating in litigation, “which would disturb the peace of society, lead to

corrupt practices, and prevent the remedial process of law.” 1 McKellips v.



1.      Maintenance and champerty are defined as follows:

              Maintenance is . . . “an officious intermeddling in a suit that in
              no way belongs to one, by maintaining or assisting either party
                                                             (continued . . .)
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Mackintosh, 475 NW2d 926, 928 (SD 1991) (citing Schnabel v. Taft Broad. Co., 525

SW2d 819, 823 (MoCtApp 1975) (citations omitted). See also Quality Chiropractic,

PC v. Farmers Ins. Co. of Ariz., 132 NM 518, 522, 51 P3d 1172, 1176 (CtApp 2002)

(noting these doctrines are in place to prevent the “unscrupulous trafficking in

litigation as a commodity”). Although wrongful death statutes have alleviated the

first concern, maintenance, champerty, and the concerns underlying those doctrines

continue to prohibit the assignment of litigation claims. See McKellips, 475 NW2d

926 (voiding, on public policy grounds of champerty, an agreement to loan money to

finance a lawsuit in return for a percentage of the litigant’s recovery).

[¶10.]         De Smet argues that the concerns underlying the common-law

prohibition preclude enforcement of Lentsches’ assignments of proceeds of claims.

De Smet also points out that recent cases have articulated additional factors

extending the common-law prohibition to assignments of proceeds. De Smet

contends that in addition to the older common-law concerns, the enforcement of

assignments of proceeds will discourage settlement and promote litigation, increase

the burden on the tortfeasor and insurer, and open the door for other creditors to




________________________
(. . . continued)
               with money or otherwise, to prosecute or defend it; . . . .”
               Champerty, a form of maintenance, involves an agreement
               under “which a person who has no interest in the suit of another
               undertakes to maintain or support it at his own expense in
               exchange for part of the litigated matter in event of a successful
               conclusion of the cause.”

         McKellips, 475 NW2d at 928-29 (internal citations omitted).


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seek debt protection through assignments. See W. Broad Chiropractic v. Am.

Family Ins., 122 OhioSt3d 497, 912 NE2d 1093 (2009).

[¶11.]       There is a split of authority on the question whether the common-law

prohibition against the assignment of personal injury claims also prohibits the

assignment of proceeds of a claim. The view prohibiting the assignment of personal

injury claims, but allowing the assignment of the proceeds of a claim, is based on

the distinction between legal and equitable assignments. Courts enforcing

assignments of proceeds observe that such assignments are an equitable lien on a

non-vested future interest, and therefore, the assignee cannot control the claim.

Those courts conclude that because the assignee has no ability to independently

pursue the claim when an equitable lien is created, the assignment of proceeds does

not implicate maintenance and champerty or other public policy concerns. See In re

Musser, 24 BR 913 (WDVa 1982) (concluding that a statute expressing the common-

law prohibition against assignments of claims for personal injuries does not

proscribe a hospital from obtaining an equitable assignment of proceeds to the

extent of the value of the services provided by hospital); Hernandez v. Suburban

Hosp. Ass’n, 319 Md 226, 235, 572 A2d 144, 148 (1990) (concluding that such an

assignment is a legally enforceable equitable claim not implicating a “danger of

champerty or maintenance, nor any other public policy reason to preclude” such an

assignment); Achrem v. Expressway Plaza Ltd. P’ship, 112 Nev 737, 741, 917 P2d

447, 449 (1996) (“[A] meaningful legal distinction exists between assigning the

rights to a tort action and assigning the proceeds from such an action. . . . When the

proceeds of a settlement are assigned, the injured party retains control of their


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lawsuit and the assignee cannot pursue the action independently.”); Charlotte-

Mecklenburg Hosp. Auth. v. First of Ga. Ins. Co., 340 NC 88, 91, 455 SE2d 655, 657

(1995) (“There is a distinction between the assignment of a claim for personal injury

and the assignment of the proceeds of such a claim. . . . The assignment of the

proceeds of a claim does not give the assignee control of the case and there is no

reason it should not be valid.”); Winship v. Gem City Bone & Joint, P.C., 185 P3d

1252, 1257 (Wyo 2008) (upholding assignment on alternative grounds, including

that patient “assigned the proceeds of his claim rather than the claim itself”).

[¶12.]       Relying on this line of authority, Unruh points out that it only

obtained “equitable assignments” that specifically provided “no . . . rights to a cause

of action shall inhere to [Unruh] as a result of [the] assignment[s].” Unruh further

points out that the assignments were limited to the extent of the chiropractic

services provided. Under these circumstances, Unruh argues that Lentsches

retained legal control over their claims, and therefore, the public policy concerns

prohibiting the assignment of claims are not implicated by these assignments of

proceeds.

[¶13.]       De Smet relies on cases adopting the opposing view. Those cases

conclude that the common-law prohibition against assignments of claims also

prohibits assignments of proceeds of claims because any distinction between the two

is “at best . . . a distinction without a difference.” Karp v. Speizer, 132 Ariz 599,

601, 647 P2d 1197, 1199 (CtApp 1982) (adopting view that assignments of proceeds

as well as assignments of claims for personal injury are unenforceable because

assignments of proceeds are equivalent to assignments of claims). See also S. Farm


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Bureau Cas. Ins. Co. v. Wright Oil Co., 248 Ark 803, 809, 454 SW2d 69, 72 (1970)

(stating “there is no sound basis for distinguishing between the cause of action and

its proceeds as far as assignability is concerned”); Town & Country Bank of

Springfield v. Country Mut. Ins. Co., 121 IllApp3d 216, 218-19, 459 NE2d 639, 640-

41 (1984) (concluding that the distinction between assignments of claims and

proceeds is a fiction not necessary to support public policy prohibiting assignments

of proceeds); Midtown Chiropractic v. Ill. Farmers Ins. Co., 847 NE2d 942 (Ind

2006) (construing the common law to prohibit an assignment of proceeds and

leaving it to the legislature to change the rule); Quality Chiropractic, 132 NM at

525-27, 51 P3d at 1179-81 (rejecting the distinction between assignments of claims

and proceeds, observing that public policy prohibits allowing assignments to be

treated “as currency” for any purpose, and litigation complications in the medical

arena make “it best to leave to the legislature the decision as to whether to

recognize health care assignments”).

[¶14.]       We observe that there is a technical, legal distinction between the

assignment of a personal injury claim and the assignment of the proceeds of that

claim. The assignment of a personal injury claim is a legal assignment that

involves the “transfer of a present right which divests the assignor of all control

over that which is assigned.” Musser, 24 BR at 919. On the other hand, one can

only obtain an equitable assignment of a prospective settlement or judgment arising

from a claim because it is “[a]n assignment . . . of a future right, such as money to

be acquired in the future[.]” Id. South Dakota has long recognized this distinction

and allowed enforcement of equitable assignments of proceeds of claims not yet


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matured. In Sykes v. First Nat’l Bank, we concluded that an assignment of proceeds

of a claim not yet matured creates an equitable right that is valid and enforceable:

“[A]n assignee of a part of a designated and specific fund, whether due or to become

due, is in equity the owner of the fund, and may enforce its payment by one who has

possession of the specific fund, who has no superior claim upon it, with notice of the

assignment.” 2 SD 242, 255, 49 NW 1058, 1062 (1891). In contrast, we noted that

“legal assignment[s] . . . must be of a debt or fund in existence at the time, and of

the whole thereof, or of a part of a debt or fund then in existence[.]” Id. For those

courts enforcing assignments of proceeds of claims, this distinction is important

because by transferring the whole right to an existing claim:

             [T]he assignor’s right to performance by the obligor is
             extinguished and the assignee acquires a right to such
             performance. See J. Calamari & J. Perillo, The Law of Contracts
             § 18-3 (2ded 1977)[ ]; Restatement (Second) of Contracts § 317
             (1981). In other words, a legal assignment is a transfer of a
             present right which divests the assignor of all control over that
             which is assigned.

Musser, 24 BR at 919. Based on the transfer of control to the assignee, legal

assignments of claims directly implicate maintenance and champerty. On the other

hand, those courts that enforce equitable assignments avoid the common-law policy

concerns of maintenance and champerty by concluding that “the equitable assignor

retain[s] exclusive control over his lawsuit and any settlement thereof.” Id. at 920.

[¶15.]        Unruh relies on this distinction, reiterating that it only obtained

equitable assignments. Unruh argues that because South Dakota has followed the

legal versus equitable assignment distinction since our Sykes decision in 1891, we

should follow those authorities allowing enforcement of assignments of proceeds of


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personal injury claims to the extent services were provided. Subsequent South

Dakota law does not, however, support Unruh’s argument.

[¶16.]       It took only six years from South Dakota’s 1891 recognition of the

distinction between legal and equitable assignments until this Court also

recognized that equitable assignments violating public policy may not be enforced.

See State, to Use of Perkins v. Barnes, 10 SD 306, 310, 73 NW 80, 82 (1897)

(refusing to enforce an assignment of future salary on the ground that, at that time

in our history, “such an assignment [was] void as against public policy”). Therefore,

although we recognized the distinction between legal and equitable assignments, we

also recognized that the distinction does not permit enforcement of an equitable

assignment that violates public policy. Although public policy strongly favors

freedom to contract, “[it] is not an absolute right or superior to the general welfare

of the public.” Siefkes v. Clark Title Co., 88 SD 81, 88, 215 NW2d 648, 651-52

(1974).

[¶17.]       Under the facts of this case, the technical, legal distinction between

legal and equitable assignments did not avoid the concerns underlying the common-

law prohibition. “[M]aintenance is . . . ‘officious intermeddling in a suit that in no

way belongs to one, by maintaining or assisting either party with money or

otherwise, to prosecute or defend it[.]’” McKellips, 475 NW2d at 928 (citation

omitted). Henry Lentsch’s affidavit, which Unruh has not contested, alleged that

after Henry told Unruh he did not believe his wife required further chiropractic

care, Unruh “told [Henry] that [Unruh] had a lawyer who would handle [the

Lentsches’] claims and get the money [they] needed to pay for the treatments.”


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Unruh also failed to dispute Henry’s affidavit alleging that Unruh attempted to

bring about the termination of the power of attorney the Lentsches’ son possessed.

It appears Unruh was attempting to intermeddle in maintaining litigation against

the tortfeasor.

[¶18.]       Furthermore, these assignments interfered with the law’s historical

preference for settlement of disputes. See Driscoll v. Driscoll, 1997 SD 113, ¶ 17,

568 NW2d 771, 774 (stating that “it is good public policy to encourage settlement

agreements”); Heidemann v. Rohl, 86 SD 250, 261, 194 NW2d 164, 170 (1972) (“It is

not the policy of the law to encourage litigation, but rather to favor settlement.”

(citation omitted)) abrogated on other grounds by Chambers v. Dakotah Charter,

Inc., 488 NW2d 63 (SD 1992); Busch v. S.D. Cent. Ry. Co., 29 SD 44, 45, 135 NW

757, 758 (1912) (“[T]he law favors the settlement of disputed claims out of court.”).

The Ohio Supreme Court recently discussed this concern. W. Broad Chiropractic,

122 OhioSt3d at 500-01, 912 NE2d at 1097. In that case, an injured victim of an

automobile accident assigned her right to proceeds from a prospective settlement in

exchange for chiropractic care. In holding the assignment of proceeds

unenforceable, the court explained how such assignments promote litigation and

discourage settlement:

             A chiropractor or other assignee expects full payment and lacks
             interest in negotiating the amount of the debt. Likewise, the
             third-party insurer lacks the ability to dispute the amount or
             reasonableness of the charges. The insurer must take these
             factors into account when settling the claim, and the result may
             be less to the injured party, forcing him or her to litigate in
             hopes of obtaining a greater recovery.




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Id. at 500-01, 912 NE2d at 1097. See also Quality Chiropractic, 132 NM at 526, 51

P3d at 1180 (“[A]llowing injured tort victims to assign the proceeds of their personal

injury claims could add unnecessary complications to the settlement of relatively

straightforward cases.”).

[¶19.]         In this case, after the Lentsches gave the assignments, a dispute

developed between the Lentsches and Unruh over the charges for and necessity of

Dorothy’s treatment. 2 Dorothy was 87 years of age and not competent to make

decisions regarding her care. Nevertheless, Unruh does not dispute that it denied

Henry access to view his wife’s treatments and threatened to have legal action

taken against Henry if he did not bring his wife back for more treatment. As a

result of these disputes, Henry “[took] the position that [he] would not settle the

claims against Ms. Omanson if the insurance company insisted upon including

[Unruh] on the settlement checks because the billings were disputed.” Unruh has

not disputed that the Lentsches would not settle their claims if Unruh was made a

joint payee on the settlement check. Furthermore, there is no dispute that Unruh

demanded full payment from the Lentsches and De Smet. Thus, the Lentsches

were being pressured to litigate with the tortfeasor and insurer or relent on their

disputes with Unruh. This put the Lentsches in the position articulated in W.

Broad Chiropractic. It discouraged settlement and promoted litigation contrary to



2.       Lentsches alleged that Unruh increased his rates from those previously
         charged. Unruh does dispute this allegation. Although the merits of the
         dispute are contested, the merits are not material. In this case, it makes no
         difference whether Unruh increased its rates upon learning of the insurance
         and obtaining assignments. The only material matter is the uncontested
         existence of a dispute, which added complications to settlement.

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the law’s well-established preference for settlement of disputes. See Driscoll, 1997

SD 113, ¶ 17, 568 NW2d at 774; Heidemann, 86 SD at 261, 194 NW2d at 170;

Busch, 29 SD at 45, 135 NW at 758.

[¶20.]       We finally note two more recently expressed concerns. First, such

assignments “open[ ] the door for other creditors to seek debt protection through

[such] assignments. . . .” W. Broad Chiropractic, 122 OhioSt3d at 501, 912 NE2d at

1097. The Ohio Supreme Court explained that this result necessarily follows

because there is no basis to enforce assignments to chiropractors but not other

potential creditors. Second, “if an injured person executes multiple assignments to

a variety of creditors, the third-party insurer may be faced with determining the

priority of assignments and how to distribute settlement proceeds pro rata among

numerous assignees if the debt exceeds the amount of the settlement.” Id.

Therefore, allowing the assignment of proceeds of personal injury claims may

increase the burden on the insurer by “thrust[ing] [it] into a credit situation that is

completely unrelated to the underlying accident, and the unrelated third party

becomes a de facto collection agent that must prioritize and pay debts to avoid

personal liability.” Id. See Quality Chiropractic, 132 NM at 526, 51 P3d at 1180

(stating assignments that increase the burden on the obligor are unenforceable

(citing Herzog v. Irace, 594 A2d 1106, 1108-09 (Me 1991))).

                                      Conclusion

[¶21.]       These equitable assignments implicated the common-law concerns

underlying maintenance and champerty. They permitted Unruh to intermeddle in

the Lentsches’ decision relating to the pursuit of litigation. Because of the dispute


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regarding the necessity and cost of treatment, the assignments also discouraged

settlement and increased the burden on the insurer and tortfeasor. Consequently,

we are compelled to align ourselves with those cases recognizing that the vestiges of

maintenance and champerty, the common-law concerns underlying those doctrines,

and the considerations recognized in more recent decisions prohibited the

assignments of proceeds of these personal injury claims. Although we acknowledge

that competing public policy considerations have been articulated by courts

adopting the opposing view, see Hernandez, 319 Md at 235, 572 A2d at 148, we

leave it to the Legislature to balance the competing public policies and authorize

such assignments should it determine that the opposing policy concerns no longer

prohibit such assignments.

[¶22.]       GILBERTSON, Chief Justice, and KONENKAMP, MEIERHENRY,

and SEVERSON, Justices, concur.




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