Equitably dividing personal injury proceeds

Posted Tuesday, July 26th, 2022 by Gregory Forman
Filed under Equitable Distribution/Property Division, Of Interest to Family Court Litigants, Of Interest to Family Law Attorneys, South Carolina Specific

A recurring issue in South Carolina family court is how to “equitably” divide proceeds from personal injury, tort, or Workers’ Compensation claims.  The injured spouse typically feels the proceeds shouldn’t be divided, as they are compensation for an injury that was literally personal.  The other spouse typically feels the proceeds are marital property and should be divided as though they were any other asset. Neither view is correct.

Two South Carolina Supreme Court cases from the early 1990’s address this issue: Mears v. Mears, 308 S.C. 196, 417 S.E.2d 574 (1992) and Marsh v. Marsh, 313 S.C. 42, 437 S.E.2d 34 (1993).

Mears involved the equitable distribution of proceeds from a husband’s wrongful discharge settlement.  The discharge pre-dated the divorce filing but the claim and the settlement post-dated that filing.  Husband argued the funds were non-marital, both because the claim post-dated the filing and because the claim was intended compensation for future wages.  The family court refused to award Wife any of the proceeds and Wife appealed.

The Supreme Court rejected Husband’s argument that the funds were non-marital because the claim settled after the divorce was filed. The Supreme Court noted the triggering date to make these funds marital was the date of the wrongful termination.  It further noted, “classification of the settlement is problematic because the settlement presumably contained components for loss of wages that occurred after commencement of marital litigation, exemplary damages, statutory damages and numerous other elements of damage.”  It decided to “remand the case to the trial court for a determination of the proper portion of the settlement which should be classified as marital property.” In doing so it “recognize[d] the difficulties facing the trial court on remand in trying to unscramble the various components of the settlement. We remind the husband, however, that because the cause of action accrued before the date of valuation, the award is presumably marital property.”

Marsh involved the equitable distribution of personal injury proceeds.  At trial the family court awarded Wife 20% of Husband’s personal injury claim and Husband 20% of Wife’s consortium claim. Husband appealed, claiming “the proceeds are not marital property because the settlement included compensation for pain and suffering as well as compensation for loss of future post-divorce income.”

The Supreme Court noted three approaches to dividing such proceeds. One approach is to treat the proceeds as non-marital.  Another “referred to as the literal or mechanistic approach,” is to treat the proceeds as fully marital.  The third approach “often referred to as the analytic approach…involves an evaluation of the purpose of the compensation in the determination of the character of the award or settlement as marital or personal.” Under this approach, “compensation for pain and suffering is personal.  Compensation for loss of wages and medical expenses incurred during the marriage is marital but compensation for future economic losses non marital.” (citations omitted).

The Supreme Court decided to adopt the literal or mechanistic approach.  However, it noted this terminology is misleading:

The determination of whether property is marital or non-marital is but the first step in the process of equitably dividing the assets of the parties in a divorce action. Once the value and the status of the various assets as marital or non marital have been determined, the family court must then consider a host of factors relevant to the equitable division of the property deemed marital….

Classifying the property as marital merely gives the family court the authority to divide the award as the equities presented in the particular case may require. For example, the award or settlement may be the only asset of the marriage. The injured spouse who has collected against his or her tortfeasor or another liable party may be in better health and financial status than the other spouse who may have no responsible party from whom to collect.

Marsh also overruled Mears to the extent Mears could be read as allowing the family court to classify a portion of personal injury proceeds as non-marital before equitably dividing the remainder. While the analytic approach is more elegant, the mechanistic approach is the one South Carolina has adopted.

I’ve only tried one case involving equitable distribution of personal injury proceeds and that was in 2005.  In that case the parties fought over the equitable distribution of a $58,000 worker’s compensation settlement.  Prior to my involvement the family court had already awarded each party $10,000 from these proceeds.  Husband (my client) argued Wife shouldn’t receive any more; Wife argued she was entitled to half the remaining proceeds.  The family court awarded her another $4,500, representing 25% of the total proceeds. Its reasoning was that both parties had suffered economic hardship due to Husband’s injury.  Especially under a pre-Lewis, abuse of discretion standard of review, it was not worth appealing.

The family court’s decision from that one trial is consistent with orders I have reviewed addressing this issue. I’ve never seen the family court award the non-injured spouse none of the proceeds from a personal injury claim but I’ve also never seen the family court award that spouse half the proceeds.  In the right circumstances I could see an appellate court affirming an award on none or half of a personal injury claim; however, it would take highly unusual facts for it to do so.  For an injured spouse to offer nothing to settle equitable distribution of a personal injury claim or for the non-injured spouse to demand half is to seek results that will likely require trial and may well not be sustained on appeal.

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