Oral Argument Preview: Responsibility for Subrogation Lien in a Personal Injury Settlement. Ohio Bureau of Workers’ Compensation v. Jeffrey McKinley and Heritage-WTI, Inc., et al.

Update: On July 23, 2015, the court dismissed this case as improvidently accepted.

Read an analysis of the oral argument here.

On June 23, 2015, the Supreme Court of Ohio will hear oral argument in the case of Ohio Bureau of Workers’ Compensation v. Jeffrey McKinley and Heritage-WTI, Inc., et al., 2014-0795. At issue in this case is whether, pursuant to R.C. 4123.931, a settlement in a personal injury action that does not expressly provide for the payment of a subrogation lien, means that both the claimant and the tortfeasor remain liable to the Bureau of Workers’ Compensation for the subrogated amount.

Case Background

On July 13, 2003, Jeffrey McKinley was severely burned when he fell while building scaffolding inside a boiler at Heritage-WTI’s (Heritage) facility in East Liverpool, Ohio. McKinley was acting in his capacity as an employee of Safway Services at the time of the accident. Following the accident, McKinley filed a claim with the Ohio Bureau of Workers’ Compensation (the Bureau). He has received several hundred thousand dollars from the Bureau for worker’s compensation and medical benefits, and continues to receive benefits. In addition to his worker’s compensation claim, McKinley filed a personal injury lawsuit against Heritage based on premises liability.

On October 25, 2004, the Bureau was notified via letter by McKinley’s attorney of McKinley’s claim against Heritage. This letter indicated that the two parties were in settlement negotiations. The letter also indicated that the statutory subrogation lien inhibited the negotiations, and requested that the Bureau waive or reduce its subrogation lien.

In response to this letter, the Bureau sent letters to McKinley and his attorney notifying them of its subrogation rights and seeking continued updates regarding the settlement negotiations. On October 28, 2004, having received no response from McKinley’s attorney, the Bureau sent another letter seeking an update on the status of the settlement negotiations and notifying McKinley’s attorney that the value of the subrogation lien was $885,808.56 (the value of past and future workers’ compensation benefits paid to McKinley).

Between October 28, 2004 and November 4, 2004 several letters were exchanged between McKinley’s attorney and the Bureau. McKinley’s attorney requested that the Bureau accept 30% of the statutory formula, but the Bureau refused to accept less than $338,856.08.

Given this impasse, McKinley requested and was granted a hearing before the Administrator’s Designee, which was scheduled for January 10, 2005. On December 10, 2004, McKinley and Heritage signed a two-party settlement agreement. The Bureau asserts that neither party  informed the Bureau that a settlement had been reached, nor that an agreement had been signed. Heritage asserts that the settlement agreement was not secret, and that the Bureau was made fully aware of the terms of the settlement during the January 10th hearing.

The agreement between McKinley and Heritage called for Heritage to pay McKinley over $2 million (one lump sum payment of $1.1 million, plus $400,000 to purchase an annuity which would pay periodic payments totaling $972,892.80 over thirty years). The agreement was silent as to any payment to the Bureau. It did include language in an indemnification clause that purports to leave McKinley solely liable for any subrogation liens, and any third party claims.

After the January 10, 2005 hearing, the Administrator’s Designee determined that the amount of $338,856.08 sought by the Bureau was reasonable and should be paid to the Bureau. The Designee was reportedly unaware of the full settlement agreement, accepting an indication that the case would settle for $1.5 million. McKinley did not pay the Bureau its subrogation interest and instead filed a declaratory judgment action in the Washington County Court of Common Pleas challenging the constitutionality of the subrogation statutes and the amount of the Bureau’s lien. The trial court stayed the collection process and determined that R.C. 4123.93 and 4123.931, the subrogation statutes, were unconstitutional. The 4th District Court of Appeals reversed, and the Supreme Court of Ohio upheld the constitutionality of the statutory subrogation scheme.

Soon after the Supreme Court’s decision, the Bureau filed suit, arguing that it had not been notified of the settlement talks, and that the settlement violated its subrogation rights. The Bureau sought to hold McKinley and Heritage jointly and severally liable for its statutory subrogation interest. The trial court dismissed the suit on statute of limitations grounds. The 7th District Court of Appeals reversed, and the Supreme Court agreed that the statute of limitations had not lapsed. The case was remanded to the trial court to proceed on the merits.

On remand, the trial court held that the Bureau could not recover, finding that the Bureau had received notice of the settlement, and there was no evidence that the payments made by the Bureau were excluded from the settlement. The Seventh District affirmed, finding that the settlement agreement did not expressly exclude the amount paid by the Bureau, the settlement amount was more than three times the amount owed to the Bureau, and the Bureau could collect its lien through the appropriate statutory mechanisms.

Key Precedent

McKinley v. Ohio Bur. of Workers’ Comp., 2008-Ohio-1736 (Per Groch v. Gen. Motors Corp., 2008-Ohio-546, R.C. 4123.931 does not violate the Ohio Constitution.)

Ohio Bur. of Workers’ Comp. v. McKinley, 2011-Ohio-4432 (A claim brought by a statutory subrogee pursuant to R.C. 4123.931(G) to recover its subrogation interest is a claim “upon a liability created by statute” and is therefore subject to the six-year statute of limitations of R.C. 2305.07.)

R.C. 4123.931 (Creates a right of recovery against a third party tortfeasor by a statutory subrogee. Under R.C. 4123.931(G), if a claimant receives money for the same injury by settling with a third-party tortfeasor, and the settlement  excludes the subrogated amount, the tortfeasor  and the claimant are jointly and severally liable to the subrogee for that amount.)

Holeton v. Crouse Cartage Co., 2001-Ohio-109 (1995 version of R.C. 4123.931 found unconstitutional because subrogation right in entire amount is overinclusive. There is no double recovery if claimant does not receive enough from the combined recoveries to be made whole. Also, settling claimants were subjected to disparate treatment, since claimants who went to trial could prove damages did not include double recovery, while settling claimants could not.)

Modzelewski v. Yellow Freight Sys., Inc., 2004-Ohio-2365 (1993 version of R.C. 4123.931 held unconstitutional on equal protection grounds, as statutory subrogation did not reach settlement agreements.)

Groch v. Gen. Motors Corp., 2008-Ohio-546 (2003 version of R.C. 4123.931 does not violate the Ohio Constitution.)

Shaw v. Railroad Company, 101 U.S. 557 (1879) (Statutes in derogation of the common law cannot be construed as changing the common law unless those changes are specifically expressed in the statute. If there is any doubt as to the meaning of a statute, the statute should be construed as making fewer changes to the common law.)

Bureau’s Argument

The Bureau notes that R.C. 4123.931(G) has three main requirements: first, that the Bureau receive initial notice that a claimant may have a claim against a third party; second, that the Bureau be provided with further notice before a settlement or recovery is finalized, along with a reasonable opportunity to participate in any process leading to recovery; and third, that both a tortfeasor and claimant remain liable to the Bureau if the process is not followed or if a settlement “excludes” the Bureau’s interest. The Bureau argues that the third requirement was not met here. Further, the Bureau states that the Court of Appeals erred in holding that the statutory “excludes” clause could be triggered only by an express provision in the settlement disclaiming the amount owed.

In this settlement, McKinley and Heritage agreed to settle in a bilateral agreement that did not provide for the Bureau to be paid, violating the third requirement. R.C. 4123.931(G) explicitly states that “if a settlement or compromise excludes any amount paid by the statutory subrogee, the third party and the claimant shall be jointly and severally liable” for the amount. The Bureau argues that under a plain meaning interpretation of the statute, McKinley and Heritage “excluded” the Bureau from the settlement. The statute’s “excludes” clause, it argues, is triggered by failing to include the Bureau’s subrogation lien in the settlement. Put simply, the Bureau is arguing that by not explicitly including the amount owed to it in their settlement, McKinley and Heritage excluded the Bureau from the settlement. The Bureau also argues that it was “excluded” from the settlement under any other reasonable definition of “exclude,” noting that it never saw the settlement agreement until 2012.

In addition, the statute is violated by Heritage’s attempt to evade liability by including a clause that leaves McKinley solely liable. The settlement’s entire purpose is contrary to the purpose of the statute, according to the Bureau, as it purports to let Heritage walk away and leave only McKinley liable for the benefits he received. Further, the settlement’s indemnification cannot transfer any liability from Heritage to McKinley, and Heritage remains liable under the statute as the third party tortfeasor, as Heritage may not contractually override the statute. The idea that the Bureau’s right of action against the tortfeasor cannot be contractually overridden is supported by R.C. 4123.931(H), which gives the Bureau the right to sue the tortfeasor independently, without input from the claimant. Finally, R.C. 4123.93 provides a formula for the amount to which the Bureau is entitled, an amount which cannot be lowered by a contract between the tortfeasor and the claimant.

Finally, the Bureau argues that the appeals court’s interpretation of the “excludes” provision renders the entire scheme meaningless, removing the Bureau’s independent claim against the tortfeasor by allowing the parties to contract around it. Further, the Bureau argues that the intent of the statute was to limit “double recovery” by those receiving both workers’ compensation benefits and a settlement from the tortfeasor. The lower court’s interpretation nullifies this principle. Finally, by requiring the settlement to deliberately exclude the statutory subrogation interest, the court is allowing parties to avoid the consequences of R.C. 4123.931(G) simply by ignoring the statutory subrogee.

Heritage’s Argument

Heritage argues that the Bureau is attempting to torture the record to allow it to recover from a large commercial entity. It argues that the settlement agreement between Heritage and McKinley explicitly required McKinley to discharge the Bureau’s lien. Further, Heritage argues that the Bureau knew about the settlement, negotiated the amount it was owed, and ordered McKinley to satisfy the lien within the parameters of the settlement. Finally, Heritage argues that the “exclude” provision in R.C. 4123.931(G) only describes situations where settlements are tailored to exclude a subrogee’s interest.

Heritage argues that the Bureau received more than adequate notice of the settlement, having attended a hearing in which Heritage, McKinley, and the Bureau were all represented by counsel before the settlement was finalized. After that hearing, the Bureau determined that the offer of $338,856.08 was reasonable, explicitly noting that the settlement was taken into account. The Bureau then neglected to pursue a collection action against McKinley, and waited four years before seeking recovery from Heritage. And when McKinley challenged the constitutionality of the subrogation statute, the Bureau did not counterclaim to recover its subrogation interest.

Next, Heritage argues that the indemnification clause of the settlement clearly includes a provision that requires McKinley to discharge the subrogation lien, stating, “…plaintiff hereby discharges and agrees to indemnify… Defendant against any and all subrogation claims or liens…”

Further, Heritage argues that the amount paid by the Bureau was not excluded by the settlement, and the Bureau is incorrect in asserting that the statute requires the settlement language to include payment to the Bureau before a third party may be absolved of liability. According to R.C. 4123.931(G), liability is triggered only when “any amount paid” by the Bureau is excluded from the settlement between the claimant and the third party.

Heritage notes that the General Assembly was concerned about settlements that would leave the Bureau without means to recover from the claimant. Prior to R.C. 4123.931(G), parties would “exclude” the Bureau’s interest by characterizing a settlement as providing compensation for damages that were not subject to the Bureau’s lien, such as pain and suffering. In this case, McKinley received a settlement amount that was more than triple the Bureau’s lien, and included a provision that required McKinley to discharge all liens. Citing Shaw, Heritage argues that the Bureau’s interpretation of the “exclude” provision to mean that settlements must expressly state that they “include” payment ignores fundamental statutory interpretation principles. Heritage argues that its interpretation of the “exclude” clause is consistent with how subrogation matters are traditionally handled in Ohio. Heritage argues that if the legislature wanted to impose an affirmative duty that payment to the Bureau be expressly mentioned, it would have so stated. According to Heritage, the General Assembly did not intend to disrupt the customary, decades-old settlement practice when it enacted R.C. 4123.931(G).

Finally, Heritage argues that interpreting R.C. 4123,931(G) as imposing strict liability on third-party tortfeasors renders the statute unconstitutional. According to Heritage, under the Bureau’s construction, the only way that Ohio’s businesses can avoid liability is to issue a settlement check directly to the Bureau before the final settlement. Heritage agrees with the Seventh District, which held that such an interpretation would render the statute unconstitutional. Heritage argues that it satisfied its sole obligation of ensuring the amount paid by the Bureau was not excluded. The Bureau argues that Heritage must foot the bill because McKinley failed to meets his own obligation, not because of any wrongdoing on the part of Heritage. This violates Heritage’s due process rights, as it would permit a third party to be held strictly liable solely for another party’s conduct with no means of insulating itself from liability.

In sum, Heritage argues that the Bureau dropped the ball on collecting from McKinley, and is now trying to make up for its own negligence by trying to make Heritage pay twice.

Bureau’s Proposed Proposition of Law No. 1

When a workers’ compensation claimant settles a lawsuit with a third party for the same injury underlying the workers’ compensation claim, the claimant and the third party are jointly and severally liable for the interest of the statutory subrogee if the settlement does not include the required payment to the subrogee. The settlement “excludes” an amount paid by the subrogee, for purposes of R.C. 4123.931(G), if it fails to include that interest, and no express mention of the subrogee is needed to count as exclusion.

Heritage, Inc.’s Proposed Counter-Proposition of Law No. 1

Once proper notice is provided under R.C. 4123.931(G), a third-party tortfeasor cannot be held liable when there is no evidence that the amount paid by the statutory subrogee was excluded from the settlement. Further, the amount paid by a statutory subrogee is not excluded when the settlement includes an amount sufficient to satisfy the subrogation lien and expressly requires the claimant to satisfy the lien with the settlement proceeds.

Amici In Support of Heritage

Amicus, the Ohio Association of Civil Trial Attorneys (OACTA), asserts that the Bureau is wrong in suggesting that a third party remains jointly and severally liable to the Bureau where it has settled with a claimant and signed an agreement that did not expressly mention the Bureau’s lien. OACTA notes that a third party has no direct liability to the Bureau absent a failure to comply with R.C 4123.931, and stresses that nothing in that section creates third-party liability in the circumstances of this case.  OACTA posits that the Bureau seeks to make third parties the guarantors of a claimant’s payment of a subrogation lien, and asserts that such a relationship has not been established by statute or history. OACTA further asserts that the term “exclude” is intended to be read as meaning that the amounts paid by the Bureau cannot be recovered through the settlement, either as a result of an express provision of the settlement, or in practical application of the terms of the settlement. If the Bureau can recover from the settlement, its interests have not been excluded, and joint and several liability is not triggered.

Amicus, Jeffrey McKinley, advocates for of a repeal and re-writing of R.C. 4123.931. In its application to the case at hand, McKinley asserts that the Bureau can prevail only if the settlement excludes any amount paid by the Bureau. McKinley notes that the settlement does not exclude any such amount. McKinley goes on to state that the statute, where ambiguous, should be construed in favor of the employee. The Bureau cannot recover here because its interests were not excluded from the settlement agreement.

McKinley also states that the existence of a settlement agreement between him and Heritage was not a double recovery. Rather, he contends that the combined payments from the Bureau and the settlement with Heritage were insufficient to make him whole. Since there was no double recovery in this case, the Bureau is not entitled to any payment.

Student Contributors: Michael Elliot and Connie Kremer

 

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