Massive award in hotel sexual assault case faces barriers on payout, trust safeguards client

The largest plaintiff’s win recorded in Missouri Lawyer’s Media’s 2022 database reached its official conclusion this year following a final appeal from the defendant. Advance planning using trust accounts helped safeguard the plaintiff’s wins from taxation.

The Eastern District Court of Appeals affirmed the verdict in an opinion from December of last year and the state’s supreme court denied transfer on April 1. At the heart of the case were questions of fault and negligence after a hotel employee sexually assaulted a guest.

Scott Bethune of Davis Bethune & Jones in Kansas City represented plaintiff Shannon Dugan in her suit against the Hyatt Corporation. Bethune said because of the Tax Cut and Jobs Act of 2017, his client would have been taxed on the entire punitive damages verdict amount as well as post-judgment interest, without a deduction for attorney’s fees and expenses.

To avoid this, Bethune helped his client establish the Shannon Dugan Plaintiff Recovery Trust (PRT) with Eastern Point Trust Company, to which she assigned the judgement and that has provisions of a Charitable Remainder, he said.

The PRT had two beneficiaries, Dugan and a charity that meets the definition of a charity under the tax code.

“Because of that 2017 law any punitive damage, verdicts or recoveries, the plaintiff will be taxed on the total amount of the punitive verdict without deduction of attorney’s fees and expenses. Then also that there is a statute that says that any recovery for punitive damages that the Tort Victim’s Compensation Fund of the state of Missouri will receive 50 percent of any punitive verdict after deduction of attorney’s fees and expenses,” Bethune said. “If the case is resolved prior to final judgment, then the Tort Victim’s Compensation Fund does not have a lien to 50 percent. So, in this instance, the defendants were arguing, at some point in time they claimed, ‘Hey, look, you need to reduce your judgment by up to 60 percent otherwise the plaintiff will get $0 after because you have all these taxes.”

Not satisfied with this, Bethune hired a firm to give their plaintiff an independent tax review and worked with a company called Legacy Settlement Groups, which handles structured annuities. He said the group put them in contact with Eastern Point Trust which has utilized this plaintiff recovery trust in other cases around the country.

“We had an opinion letter from a law firm, a national firm, that said that creating a plaintiff recovery trust and transferring the judgment would provide tax savings to the client,” Bethune said. “So, in the end, what happened was you had to make transfer of the judgment or the claim while there’s litigation pending and in before any significant settlement offers have been made. So that’s what we did. After the Supreme Court of Missouri denied application for transfer, the defendant still had the right to seek a writ of certiorari with the U.S. Supreme Court (…) they had 90 days to do that. So while that option for their appeal was still pending, that’s when we made the transfer of her judgment, of Shannon’s judgment, to the plaintiff recovery trust that she created and then the trust (…) is the one that owned the judgment and was responsible for paying attorney’s fees.”

Bethune said his client will still be taxed on post-judgement interest as well as the punitive award.

Bethune encouraged other attorneys to learn about and be aware of plaintiff recovery trusts.

“If there’s ever a component of a judgment that contains punitive damages, it’s definitely worth investigating to see if it would benefit the client to do, I know in our case, she received significant cost savings because of doing this,” he said.