#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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