What’s On Their Minds: Responsibility for Subrogation Lien in a Personal Injury Settlement. Ohio Bureau of Workers’ Compensation v. Jeffrey McKinley and Heritage-WTI, Inc., et al.

By Marianna Bettman on June 30, 2015

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

“Isn’t this a textbook example of a lawyer for the Bureau just dropping the ball– making a mistake– and now you are in the Supreme Court asking us to fix it?” Justice Pfeifer to the Deputy Solicitor.

On June 23, 2015, the Supreme Court of Ohio heard 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 to the Bureau of Workers’ Compensation means that both the claimant and the tortfeasor remain liable to the Bureau 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.

The value of the Bureau’s subrogation lien was $885,808.56. Between October 28, 2004 and November 4, 2004, McKinley and the Bureau tried to compromise and settle the amount of the lien. The Bureau refused to accept less than $338,856.08 (we’re calling this 340,000, as everyone did at the argument), but no agreement was reached.

On December 10, 2004, McKinley and Heritage entered into a settlement agreement, which made no mention of a payment to the Bureau. The agreement called for Heritage to pay McKinley a 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.

Because of the impasse at reaching an agreement with McKinley on the amount to be paid to satisfy the subrogation lien, a meeting was held on January 10, 2005 before the Administrator’s Designee, at which McKinley, Heritage, and the Bureau were all represented. 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 was not produced at the meeting.

After the January 10, 2005 hearing, the Administrator’s Designee determined that the $340,000 sought by the Bureau was reasonable and should be paid to the Bureau.

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 found the Bureau had received notice of the settlement talks, and that the settlement did not exclude payments by the Bureau. Thus, the trial court granted summary judgment to Heritage. 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 Statute

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.)

For other pertinent precedent, read the oral argument preview here.

Arguing Counsel

Stephen P. Carney, Deputy State Solicitor, for Appellant Bureau of Workers’ Compensation

Patrick Kasson, Reminger Co. LPA, Columbus, for Appellee Heritage-WTI, Inc.

At Oral Argument

Bureau’s Argument

The Bureau has the right to recover from both Heritage and McKinley after they tried to settle a tort case without an express provision to pay the Bureau. Even though by law, the Bureau is entitled to seek the entire subrogated amount, which was $890,000, the Bureau states in open court that if it wins, it is still willing to accept the $340,000 it proposed years ago.

The failure to include the Bureau in the settlement amounts to excluding the Bureau for three reasons. First, the plain meaning of the word exclude is to not include. Second, a contrary reading undercuts the entire statute. And third, the facts here show this is a textbook example of what the General Assembly meant to avoid, namely parties walking away from their obligations to the Bureau.

The Deputy Solicitor spent a lot of time painstakingly detailing the chronology of what happened here. According to the state’s version, the Bureau had been trying to negotiate with McKinley, but reached an impasse in November of 2004, and asked for a three-way sit down which was set for January of 2005. By November, the Bureau knew that a settlement was imminent between McKinley and Heritage, but was never informed at the time that McKinley and Heritage had actually signed a settlement agreement in December 2004. The Bureau was not included in the signing of that agreement, nor was the Bureau shown or told about the agreement at the January 2005 meeting with the Administrator’s Designee. At that point the Bureau still believed no settlement had yet occurred. No settlement agreement was produced. By April, the Bureau was suspicious, and sent a demand letter to McKinley. The Bureau was in court within ninety days of its demand letter. Delays after that were because McKinley challenged the constitutionality of the subrogation statute, and brought a statute of limitations challenge to the claim. The Bureau was in litigation with McKinley from 2005-2008 over the amount owed, as well as the constitutionality of the statute. The Bureau never actually saw a copy of the December 2004 Settlement Agreement until 2012.

While the December 2004 Settlement Agreement between McKinley and Heritage does contain general language requiring McKinley to indemnify Heritage, nowhere does it expressly say that McKinley is to pay the Bureau. The agreement is silent on the subject of paying the Bureau; it was thus excluded by omission. If something is left out, it is excluded. When an agreement is silent, the statute steps in to fill the void. The lower courts were wrong in finding that “ exclude” must mean expressly exclude.

Heritage’s Argument

Counsel for Heritage also took a lot of time with the company’s version of the events.

There is no joint and several liability under the subrogation statute unless the Bureau is not given notice of the settlement talks, or is excluded from the settlement. Neither happened here.

Both Heritage and McKinley knew in November of 2004 that the Bureau would settle its lien for $340,000. The Bureau then separately negotiated with McKinley over this, and sent him an agreement to this effect to be signed only by McKinley and the Bureau. Heritage then settled with McKinley, knowing what the Bureau’s top number was. McKinley went to the January 2005 meeting with the Administrator’s Designee hoping to get that number reduced, which is his right under the statute, but he failed. When that meeting was over, the Bureau issued an order which says the claimant (McKinley) shall remit payment within 30 days of the receipt of this order or the Bureau would certify it to the AG’s office for collection. But the Bureau never did that. It never filed a collection action. The only claim that could be certified would be a claim arising out of the settlement proceeds, so the Bureau must have known about it, but just failed to collect on it. Four years later, Heritage learned that McKinley had never paid the Bureau—and that the Bureau did not file a counterclaim in McKinley’s suit against it.

This court has twice struck down previous versions of the subrogation statute at issue here, because back in the day, lawyers would actually exclude the Bureau by claiming a settlement was for pain and suffering only, and not medical bills or expenses. That is the context of understanding what “excludes” means. Furthermore, the amount the Bureau is entitled to here is only its proportionate share, as set forth is subsection (B) of the statute, not the entire amount it paid to McKinley.

In its jurisdictional memorandum, the Bureau said it would prefer to collect from a large commercial entity. It wants to remedy what it calls McKinley’s double recovery by making Heritage pay twice, which is unfair. This court should not re-write this statute by holding exclude means failure to include.

What Was On Their Minds

The Subrogation Statute and the Meaning of Exclude

Is it the Bureau’s position that there is no way it can be excluded from this repayment statute, asked Chief Justice O’Connor? (answer, yes) Isn’t the public policy contained in the statute to collect the money so it can be given to the next person?

Isn’t the Bureau asking the court to write language the legislature did not write, asked Justice O’Neill? The Bureau wants to be included, but the legislature said it can’t be excluded?

Isn’t the Bureau asking the statute be rewritten to say “fails to address” instead of exclude, or ignore, asked Justice Lanzinger? In a sense, doesn’t that change the meaning of the statute?

Justice Pfeifer commented that he was intrigued that the Bureau wanted the court to say “if we are not mentioned, we are therefore excluded.” Wouldn’t that cause every contract drafter to try and figure out every possible thing that needed to be included?

What Did They Know and When did They Know it?

The two briefs seem to leave us almost with a different set of facts, commented Justice Pfeifer. So who is not telling us the truth?

The Settlement Agreement

Wasn’t the state included in the settlement discussion, asked Justice Pfeifer? When the Deputy Solicitor answered yes and no, he asked, rather sharply whether it was yes or no.

Does the settlement agreement say that McKinley will pay and Heritage will be held harmless and McKinley agrees to indemnify Heritage, asked Justice O’Donnell? There is no express provision excluding the Bureau, is there? Is the Bureau excluded by omission? Doesn’t there have to be a clause that specifically excludes payment?

Is there anything in the agreement that precludes an action against McKinley, asked Justice French?

Heritage thought the Bureau was on notice and participated all the way, asked Chief Justice O’Connor? The Bureau really doesn’t care which one pays it? Did the parties intend to exclude the Bureau? If the contract is silent, does the statute step in and fill the void? What did the Bureau tell Heritage to do here?

Isn’t the case here because of the failure of the settlement to say, ok we are settling for a million dollars, and $340,000 of that is going to the Bureau, asked Justice O’Neill?

Weren’t the amounts paid by the Bureau the amounts that went to McKinley asked Justice French? (answer from Heritage: Bureau only entitled to its proportional share).

What Happened at the January 2005 Meeting with the Administrator’s Designee

What happened when the Bureau sat down at that meeting, asked Chief Justice O’Connor? Who was at the table? The Bureau was trying to broker a settlement at that meeting, but no one said, you are too late, we’ve already signed a deal (correct, said the Deputy Solicitor) Later, she asked the lawyer for Heritage if at that meeting anyone said that Heritage and McKinley had already signed an agreement, or bring the agreement to the meeting. His answer was that he wasn’t there, but the Bureau already knew that, as shown by the language in the order from the Administrator’s Designee. When she pressed, he repeated that he was not there. She asked whether the fact that the Bureau gave McKinley thirty days to pay up meant it knew he had the means to do so.

Was there agreement with the Bureau’s lawyers at that January 2005 meeting that McKinley would pay the money owed to the Bureau, asked Justice O’Donnell? What was the agreement made at this meeting?

What Took So Long

What happened to McKinley’s lawsuit in Washington County asked Chief Justice O’Connor?

Who Dropped the Ball

Justice Pfeifer commented that it wasn’t right that McKinley didn’t pay the Bureau, but the Bureau’s lawyers didn’t protect themselves, noting the failure to file a counterclaim in the suit with McKinley.

Justice O’Neill asked counsel for Heritage, why, when checks were being written, one wasn’t written to the Bureau? (answer: because the Bureau said it was going to get it from McKinley) So the lawyers for the Bureau didn’t do their job? (Counsel for Heritage noted that the Bureau did demand the money at the January settlement meeting, but never filed a collection action.)

McKinley

Is McKinley now in bankruptcy, asked Justice O’Donnell, noting that he was not a party in the Supreme Court case. Is that the problem? (The Deputy Solicitor characterized him as a defendant in the case and a non-participating appellee)

Is McKinley alive and well in the trial court, asked Chief Justice O’Connor? (answer: yes)

Didn’t McKinley file a declaratory judgment action, asked Justice French? But never, what is it that I owe?

Remedy

What recovery is the Bureau seeking, asked Chief Justice O’Connor? (The Deputy Solicitor announced in open court that the Bureau would still accept $340,000 in this case to satisfy its lien.)

Will there have to be a separate action on the subrogation lien, asked Justice O’Donnell? What about the indemnity agreement?

What should the court write here as guidance to others, asked Justice French (with apologies to Justice O’Donnell, who almost always asks this question)

Heritage claims it has done all that is required of it, and any remaining dispute is between the Bureau and McKinley, asked Justice O’Neill? (answer: yes.)

So if the Bureau loses here, it still has its action against McKinley, asked Chief Justice O’Connor? (answer: yes)

How it Looks from the Bleachers

To Professor Bettman

If I had the power, I would declare this case a draw, with neither side winning. It’s no wonder my student contributors disagree with each other, and we all confessed to each other we changed our minds back and forth in the case. Reluctantly, I am going to call this for Heritage, but I actually think the Bureau should win on public policy grounds, and will probably get the Chief’s vote. She seemed to buy the argument that when an agreement is silent on payment, the statute fills the void. It and seems unfair here, on policy grounds, that the Bureau should bear the risk of nonpayment. But I think Justices Pfeifer, O’Neill, O’Donnell and Lanzinger leaned toward Heritage, and will find the Bureau knew about the settlement talks and was not excluded by the agreement. In any event, I don’t think the decision will be unanimous, and there are likely to be several viewpoints expressed in any decision.

There was plenty of bad lawyering to go around here (not by arguing counsel.) Justice Pfeifer, in particular, seemed to jump all over the Bureau for “dropping the ball” as he put it. But I’d extend a fair share of the blame to Heritage, for not specifically, expressly including provision for payment of the Bureau’s lien in the settlement agreement, and for making sure when checks were being cut for the upfront part of the settlement to McKinley, one was cut directly to the Bureau. With the potential for joint and several liability, why not do that?

The record will have to be sorted out about who knew what, and when, but it is also hard to understand why Heritage and McKinley didn’t produce a copy of the December settlement agreement at the January 2005 meeting. Why hide the ball? It’s also hard to understand why the Bureau did not better protect its interests in the various suits filed by McKinley.

I actually would interpret the word “exclude” to mean failure expressly to include, since I think that was the legislative intent. And as hard as Justice Pfeifer was on the Deputy Solicitor, he did write this in Ohio Bur. of Workers’ Comp. v. McKinley (McKinley II):

“Thus, if the amount set forth in the settlement agreement between the claimant and the third party does not address (emphasis added) the payments made by the statutory subrogee, the claimant and third party are liable to repay the statutory subrogee in full.”

From this, exclude arguably means failure to address. The Deputy Solicitor did bring this up at argument, but for some reason, that argument did not seem to find much traction. And I thought Heritage’s counsel doth protest a bit too much about what the Bureau actually knew about the settlement, and when.

To Student Contributor Michael Elliot

This is a tough one to predict. I’m going to say that the Bureau just lost a close one, but I wouldn’t be surprised if this went the other way.

The Bureau and Heritage disagree as to whether the Bureau knew about the negotiations between Heritage and McKinley. Counsel for Heritage made a good point when he mentioned the Bureau’s 30 day notice to McKinley. If the Bureau was unaware of the settlement, how did the Bureau know it could collect from McKinley? This fact might be a key factor in this case. If the Bureau was informed about the settlement, it clearly wasn’t excluded from it.

Chief Justice O’Connor is solidly on the side of the Bureau. She seems to agree with the Bureau’s argument that the General Assembly could not have meant “exclude” to mean “deliberately exclude.”

Justices O’Donnell seems to be on the other side of this argument, as do Justices Lanzinger and Pfeifer. Justice Lanzinger poignantly asked if the Bureau wanted the Court to add language not included in the statute by the General Assembly, a question also asked by Justice O’Neill. Justice Pfeifer asked whether the interpretation the Bureau is asking for will force attorneys to predict any possible third party interest when negotiating a settlement. I thought that counsel for the Bureau provided a satisfactory response, but Justice Pfeifer seemed skeptical.

This leaves three of Justices, O’Neill, Kennedy, and French, unaccounted for. O’Neill seemed to be in the middle early on, but it seems he came to the conclusion that the Bureau’s lawyers did not do their jobs towards the end of the argument. That makes four for Heritage, so I’m cautiously declaring them the winner in this case.

To Student Contributor Connie Kremer

The advocacy of counsel in both arguments makes this a tough call. I do not envy the Justices on this decision, but I presume that—despite my wavering stance—they will not rule it a tie. So, I will commit; though both sides presented individually convincing arguments, I think that the Bureau will prevail.

The facts of this case are notably unclear. Chief Justice O’Connor questioned the facts of the January 2005 meeting, with a response from Heritage that the record was not clear in support of its assertion that the Bureau was aware of the settlement agreement. Justice Pfeifer observed that the briefs for each party seemed to detail totally different sets of facts. Counsel for the Bureau admitted that the record (by my interpretation, referring to the Bureau’s internal record) “isn’t clear.” Despite this, it seemed odd that the Justices did not follow up on Justice Pfeifer’s observation. The parties were minimally pressed to clarify their factual allegations.

There was much discussion about the purported indemnification clause. Counsel for the Bureau asserted that “indemnification doesn’t even arise until one party has to pay out someone,” rather it means that “you will repay me if I have to pay.” This analysis indicates that the indemnification clause serves only as a distraction (neither party has paid the Bureau), the real issue being whether the Bureau was excluded in the agreement between Heritage and McKinley.

So the Justices turn to the meaning of the term “exclude.” The Bureau asserted that it was excluded because all three parties had scheduled a meeting in January 2005, but Heritage and McKinley entered into an agreement in December 2004, while the Bureau was notably not present. Justice O’Donnell points out that there is no specific provision that would expressly exclude payment to the Bureau, citing to Justice Pfeifer’s previous opinion that “the only way that would be a recovery from Heritage would be a provision that specifically excludes payments made by the BWC.” However, the Bureau observed that Justice Pfeifer also referenced that joint and several liability attaching if the agreement fails to address the debt to the Bureau. Justice Lanzinger asked whether the Bureau sought to have the statute rewritten by the court (to indicate that exclude means “fails to address or ignores”). The Bureau requested a plain meaning analysis of the term “exclude” as to mean “not to include,” and asserted that a finding in favor of Heritage would be the finding that rewrites the statute (as it would change the statutory language from “exclude” to “expressly exclude”).

As asserted by Heritage, joint and several liability kicked in under this statute only if the Bureau were not given notice and the opportunity to participate, or if the Bureau’s interests were excluded. Heritage’s take on the term “exclude” essentially is that is means to exclude in application. Heritage asserted that it did not do this, as its settlement agreement with McKinley was sufficient to encompass the debt owed to the Bureau, and further that it contained as a provision McKinley’s agreement to “discharge any and all subrogation liens.” Justice O’Neill asked for Heritage’s take on the Bureau’s interpretation of “exclude,” to which Heritage responded that the Bureau had ignored the remainder of the statutory language, which said the agreement could not exclude any payment made by the Bureau. According to Heritage, it did not, given that the settlement was sufficient to cover the amount owed to the Bureau. Seemingly unsatisfied, Justice O’Neill asked, “Can you explain to the Court then, why—when checks were being written—a check was not written to the Bureau of Workers’ Compensation?” Heritage responded, saying that the Bureau had always intended to collect from McKinley, but failed to follow through on its responsibilities. Given the prior litigation in this case, I don’t think this component of Heritage’s argument will win out.

Both sides make compelling arguments—perhaps public policy will be the deciding factor here. My assertion in favor of the Bureau aligns not only with the oral arguments presented by both sides, but also with Professor Bettman’s repeated public policy question in Torts class as to which party should bear the risk (of nonpayment.) In this case, counsel for the Bureau made a good point in asserting that the risk should be borne by the “people who wrote the deal,” rather than the “people who weren’t in the room.” Though counsel for Heritage asserted that the Bureau sought only to “remedy…McKinley’s double recovery by making [Heritage] pay double,” public policy would suggest that—where one party is at risk for a loss of hundreds of thousands of dollars—the tortfeasor should bear that loss as opposed to a non-liable third party. Chief Justice O’Connor suggested the public policy argument that repayment to the Bureau when due supports the Bureau’s objective in paying the claims of other injured workers who do not have the same option of collecting from an alternative responsible party. I think public policy will swing this case in favor of the Bureau.