Third Party Settlement Funds and Workers’ Compensation Lien

Workers’ Compensation Lien/Third Party Settlement Funds

The purpose of this article is to provide answers in regards to a Workers’ Compensation Lien in a Third Party Personal Injury Case. Simply stated, the common facts are Workers (W), while working for Employer (E) gets injured on the job by a Third Party Defendant (D).  W then gets treatment and receives benefits such as payment of medical treatment, wage loss, disability, etc…from Employer’s Workers’ Compensation Insurance Carrier.  W then proceeds against D for compensation for W’s injuries/pain and suffering.   Employer’s Workers’’ Compensation Insurance Carrier then files a lien or a complaint in intervention. The issue then becomes, what are the rights of W, E, and attorneys in relation to any settlement or judgement obtained from D.

I. Discussion of The Relevant Labor Code

A. Where There is a Settlement, With or Without Suit.

          Under Labor Code section 3860, where settlement is effected with or without suit,

         (c)   solely through the efforts of the employee’s attorney, then prior to the reimbursement of the employer…there shall be deducted from the amount of the settlement the reasonable expenses incurred in effecting such settlement, including costs of suit, if any, together with a reasonable attorney’s fee to be paid to the employee’s attorney, for his services in securing and effecting settlement for the benefit of both the employer and the employee.

          (e) Where both the employer and the employee are represented…by separate attorneys in effecting a settlement, with or without suit…there shall be deducted from the amount of the settlement the reasonable expenses incurred by both the employer and the employee or on behalf of either, including costs of suit, if any, together with reasonable attorneys’ fees to be paid to the respective attorneys for the employer and the employee, based upon the respective services rendered in securing and effecting settlement for the benefit of the party represented.

          (f) The amount of expenses and attorneys’ fees referred to…on settlement of suit, or on any settlement requiring court approval, be set by the court. In all other cases these amounts shall be set by the appeals board.

B. Where There is a Judgment.

          Under Labor Code section 3856,

          (b) If the action is prosecuted by the employee alone, the court shall first order paid from any judgment for damages recovered the reasonable litigation expenses incurred in preparation and prosecution of such action, together with a reasonable attorney’s fee which shall be based solely upon the services rendered by the employee’s attorney in effecting recovery both for the benefit of the employee and the employer. After the payment of such expenses and attorney’s fee the court shall, on application of the employer, allow as a first lien against the amount of such judgment for damages, the amount of the employer’s expenditure for compensation together with any amounts to which he may be entitled as special damages under Section 3852.

          (c) If the action is prosecuted both by the employee and the employer…by separate attorneys, the court shall first order paid from any judgement for damages recovered, the reasonable litigation expenses incurred in preparation and prosecution of such action or actions, together with reasonable attorneys’ fees…where they are represented by separate attorneys, based solely upon the service rendered in each instance by the attorney in effecting recovery for the benefit of the party represented. After the payment of such expenses and attorneys’ fees the court shall apply out of the amount of such judgment for damages an amount sufficient to reimburse the employer for the amount of his expenditures for compensation together with any other amounts to which he may be entitled as special damages under Section 3852.

          (d) The amount of reasonable litigation expenses and the amount of attorneys’ fees…shall be fixed by the court.

II. Priority of Disbursement

            As if the wording of the Labor Code is not clear enough, the California Supreme Court weighed in on the matter as several earlier opinions have incorrectly accorded first priority to the employer’s workers’ compensation lien.  In Summers, the Court stated the following,

          “The words of section 3860 are clear as to the priority for disbursing the settlement proceeds. The order of settlement is the same…First, the proceeds are to be used to pay the costs of litigation, including reasonable attorney fees.  Second, after litigation costs have been fully paid, the proceeds are to be used to pay the employer’s reimbursable compensation costs.  Third, the employee receives any balance remaining from the settlement proceeds after payment of litigation costs and reimbursable compensation costs.” Summers v. Newman (1999) 20 Cal.4th.1021, 1027-28. The Court went on to cite its opinion in Quinn, which dealt with Labor Code section 3856 and noted that it was “closely related” and there, they decided “the Legislature has evinced its intention that settlement and judgment situations are treated alike.’” Id. at p. 1030.

          In Summer, the Court was asked to decide a very specific  issue, “When an employer and employee are separately represented by attorneys who each actively participate in achieving settlement, and the settlement proceeds have been used to pay litigation expenses, including reasonable attorney fees to each attorney based on benefit to the party represented, is the payment to the employer for reimbursable compensation costs subject to a deduction for the employer’s share of the litigation expenses?” Summers v. Newman, supra, 20 Cal.4th. at p. 1028-29. The Court held ruled no. In Summers, Rick Summers was severely injured in a head-on collision with another truck while driving for his employer, A. Teichert & Son, Inc. (Teichert).   Id. at p. 1024. Teichert’s workers’ Compensation carrier paid benefits totaling $135,146.95. Ibid. Summers sued the Defendant driver and Teichert’s workers’ compensation carrier intervened in the action. Ibid. at 1024-25. The parties eventually settled for $1 million under which Defendants would pay Teichert and his wife, $575,000.00 in cash immediately, with the balance of $425,000.00 paid later. Ibid. Under the agreement, the Summers would pay Teichert’s workers’ compensation carrier $135,146.95, the full amount of its lien and would set aside in a trust account an additional $25,634.18, the amount being Teichert’s claim for cost and attorney fees. Ibid. Teichert moved to recover attorney’s fees and full reimbursement for workers’ compensation benefits which was granted by the trial court. Ibid. The Court of Appeals eventually affirmed after some procedural hurdles. The California Supreme Court reversed holding that where an “employer and employee are separately represented and the joint efforts of both counsel contribute to a settlement with the third party, the employer’s fair share of attorney’s fees is determined by reference to the benefit conferred on the employer which is the primary criterion used to determine the fee paid to the employer’s attorney.  We conclude the amount of this fee, together with the employer’s fair share of other litigation expenses, is to be deducted from the reimbursable compensation costs paid to the employer.”  Id. at p. 1035.

III.  Common Fund Doctrine

          One who expends attorneys’ fees in winning a suit which creates a fund from which other derives benefits, may require those passive beneficiaries to bear a fair share of litigation costs. Summers v. Newman, supra, 20 Cal.4th. at p. 1030. This is essentially the Common Fund Doctrine and is sometimes referred to as Equitable Apportionment. It is essentially embodied and/or codified in Labor Code section 3860 and 3856.  It is important to note that the problem of the Common Fund Doctrine/Equitable Apportionment usually “arises when both the employee and employer (or employer’s insurance carrier) retain separate attorneys, but one of the attorneys is more active than the other in securing recovery. Kavanaugh v. Sunnyvale (1991) 233 Cal.App.3d 903, 910. The key word here is “active.” Some courts will later call “active participation or passive participation”, but essentially, they are deciding the same issue. The attorney for the employee will always want the Common Fund Doctrine to apply, while the attorney for the employer (workers’ compensation carrier) will never want the Common Fund Doctrine to apply.

IV. Trier of Fact

          The trier of fact that determines “active participation” or “passive participation” is the trial court.   Kavanaugh v. Sunnyvale, supra, 233 Cal.App.3d at p. 915) Once the trial court has determined the intervener has “actively participated” then common fund doctrine or equitable apportionment is not allowed.   Each party will bear their own attorney’s fees and costs.

V. Burden of Proof

If the intervener wants to avoid the common fund doctrine, the burden of proof is upon the intervener to prove that it actively participated in effecting settlement or judgment.

VI. Active v. Passive Participation

          With the above in mind, appellate courts have struggled to define what is “active participation” and what is “passive participation.”  The words “passive participation” is used because that is how some Courts choose to frame the issue, while others use “active participation”.  Accordingly, some appellate courts have disagreed on what these definitions really mean and their opinions could be best characterized as being on a wide spectrum.  Walsh I and Walsh II are on one side of the spectrum. Kavanaugh is sort of in the middle, while Hartwig and Kindt are on the opposite side of Walsh I and Walsh II.   These cases will be discussed below.

          In Walsh v. Woods (1986) 133 Cal.App.3d 764, 768, fn.1., (Walsh I), the First District Court of Appeals stated the following regarding what “active participation” means:

          “[T]he record reflects that intervener’s counsel did attend some depositions, consulted with plaintiff’s experts before trial, presented evidence relating to cross compensation benefits, participated in cross-examination and delivered a closing argument.  If such activities were found to be true, it would constitute “active participation” as a matter of law foreclosing apportionment of attorneys’ fees.”

          On remand, in Walsh II, the court noted that “[t]he trial court found that although plaintiff’s counsel had been primarily responsible for the recovery, intervener’s counsel had also ‘actively participated’ in the lawsuit, albeit minimally.’” Walsh v. Woods (1986) 187 Cal.App.3d 1273, 1275. The trial court also noted that the “intervener’s counsel contributed little, if any, to the ultimate recovery. Counsel’s activities were limited to a few minutes of argument and minimal direct and cross-examination. Id. at 1276, fn1. The appellate court went on to state that the trial court “reluctantly concluded..[that the intervener “actively participated”]…under compulsion of Walsh I that plaintiff was not entitled to the apportionment of attorney’s fees previously paid.”  Id. at p. 1276; (alterations in the original). This is the minimal participation requirement for active participation under Walsh  in the First District.

          In Kavanaugh, the Sixth Appellate Court also weighed in on the issue and indicated that the mere filing of a motion to intervene or a token appearance by a party’s attorney is insufficient to be called active participation. Kavanaugh v. Sunnyvale, supra, 233 Cal.App.3d at p. 915). Additionally, in Kaplan v. Industrial Indemnity Co. (1978) 79 Cal.App.3d 700, citing Quinn, the court stated that filing a lien or complaint in intervention is minuscule, “None of these steps is active in the sense that matters, namely contributing to the creation of the fund out of which the insurer will be reimbursed. citing Quinn v. State of California 1975)15 Cal.3d 162.   In Kavanaugh, the court found that the intervener’s actions such as being involved in “discovery, the pretrial settlement conference, and designated several expert witness for trial, including one expert in accident reconstruction…present during trial, and did engage in some questioning…[and as such, the intervener] may not be characterized as a passive beneficiary of the litigation.”   Any weighing of the degrees of activity of the attorney is improper. Id. at p. 915; (alterations in the original).

          In Hartwig v. Zacky Farms (1992) 2 Cal.App.4th 1550, 1553, the Fifth District Court of Appeals ruled that the intervener (Zacky Farms) presented “insufficient evidence to prove it ‘actively participated’ in the lawsuit which resulted in judgment.” Here, Hartwig received benefits from his employer’s workers’ compensation carrier in the amount of $88,814.23. Id. at p. 1554. Shortly before trial, the workers’ compensation carrier assigned it lien to Zacky for payment of $30,000.00 and the workers’ compensation carrier was dismissed from the case.   The jury returned a verdict for $112,500. Id.  Upon motion by Hartwig for apportionment of fees under Labor Code section 3856, the trial court found that although counsel for the workers’ compensation carrier was “active” in obtaining the $30,000.00, they had nothing to do with obtaining the verdict of $112,500. Id. Therefore, the trial court awarded in attorney’s fees the amount of $32,460.91 from the lien. Id. The appellate court affirmed holding that the only evidence that the workers’ compensation attorney presented was a declaration that stated the following:

          “Our firm prosecuted the case on behalf of the compensation carrier until shortly before trial…Our office spent much time and expense…Our records will reflect that our firm had a representative attend and participate in the deposition of plaintiff, attend settlement conferences, prepare opposition to defendant’s Motion for Summary Judgment, attend hearing on Motion for Summary Judgment, prepare Demand to Exchange List of Expert Witnesses, attend trial confirmation conferences, and attend deposition of defendant, employee Larry Bishop.” Id. at p. 1555-1556.

           The appellate court found the declaration “unspecific and ambiguous” and “falls well short of affirmatively demonstrating the active participation required to defeat apportionment.” Id. at 1556. It goes on to state the “precise nature of (counsel’s) services is entirely unexplained…no evidence of hours expended by (counsel) in connection with his activities, nor was there any concrete description, such as attached copies of documents or copies of transcripts of oral proceedings, which tended to show (counsel’s) participation consisted of any sort of serious attempts to advance his client’s case…The generality of (counsel’s) declaration makes it impossible to determine whether the services he described consisted of a conscientious attempt to represent the carrier’s interest…or a nominal attempt to place a warm body”.  Id. at 1556; (alterations in the original) (internal quotes omitted) The court further states that participating in a deposition could mean just giving a business card, appearing at hearing could be just a statement of presence and representation by counsel, filing an opposition could mean simply the filing or announcement of a once sentence joinder to the respondent’s arguments or papers.  Id. at 1556; (alterations in the original) (internal quotes omitted) This court disagreed with the minimal participation rule of Walsh I and Walsh II. Id. at p. 1557. It also implicitly disagreed with the Kavanaugh court.

          In Kindt v. Otis Elevator Co. (1995) 32 Cal.App.4th 452, 460, the Fourth District Court of Appeals found that the general declaration of counsel of active participation is insufficient to defeat apportionment.  In Kindt, Leola Kindt was injured in an elevator accident while working for her employer.  Id. at p. 454.  The employer’s workers’ compensation carrier paid $20,000.00 in benefits. Id. Shortly before trial, Otis, the Defendant, purchased the workers’ compensation carrier’s lien rights for $11,500.000. Id. Kindt obtained a verdict of $30,000.00, subject to a lien amount of $19,560.45, in favor of Otis. Id. Kindt thereafter, filed a motion for apportionment. Id. The Fourth District Court of Appeals agreed with the Fifth District in Hartwig, calling “The Hartwig rule sound.” Id. at p. 459. Merely showing up for depositions or filing one or two documents, lacking in any real substance, is not sufficient to show active participation. Id. The only evidence the court had from counsel for the workers’ compensation carrier was a declaration in “a very general manner.” Id. at p. 460. The court noted that “Although Intervener’s counsel attended three deposition, he asked only one question of one witness. His expert witness designation named all such witnesses so designated by the plaintiff and defendants in this case.  And although the declaration indicates Intervener’s firm purportedly spent 56.25 hours on the case, it fails to indicate how those hours were spent. We do not know whether the Intervener’s counsel was making a conscientious attempt to advance his client’s interest…or (just) placing a warm body whenever and wherever the opportunity arose.” Id. (alterations in the original) (internal quotes omitted)

VII.  Active Participation Must Result/Contribute To The Settlement/Judgment

          In Luque v. Herra (2000) 81 Cal.App.4th 558, 562, the Second District Court of Appeals ruled that although intervener’s counsel actively participated in the matter, counsel’s participation did not result in the creation of the settlement fund, therefore, the plaintiff’s attorney was entitled to apportionment under the Common Fund Doctrine. Carmen Luque was injured in an automobile accident by Defendant, Fidel Herrera. Id. at p. 560. The workers’ compensation carrier paid $21,670 and the case ultimately settled for Defendant Herra’s policy limit of $15,000.00. Id. Luque subsequently filed a motion for attorney’s fee basically under the Common Fund Doctrine and the trial court granted Luque’s attorneys’ fees of $9,000.00. Id. at p. 561. Luque’s declaration was supported by counsel for Defendant Herra’s declaration stating that he (counsel for Herra) was able to reach an agreement on “first contact” with Luque’s counsel. Id. at p. 561. The workers’ compensation carrier’s counsel filed his own declaration stating that he agreed to the consolidation, responded to request for production of documents, served a request for all prior pleadings, propounded discovery, and attended two settlement conferences.  Id. The court noted that the trial court reasonably found that although counsel for the workers’ compensation carrier actively participated in the matter, none of his activities resulted in the creation of the settlement fund. Id. at p. 562. The declaration of both Luque’s attorney and Herra’s attorney both showed that the “settlement was negotiated between those two attorneys” and that this was not contradicted by the workers’ compensation carrier’s counsel’s declaration.   Id.

VIII.  Weighing The Degree of Contributions is Improper

           In Kavanaugh, the Sixth Appellate Court held that when there is “active participation” by the intervener, the award of attorney’s fees to the employee’s attorney under Labor Code Section 3856, was improper. (Kavanaugh v. Sunnyvale, supra, 233 Cal.App.3d at p. 916) Thomas Kavanaugh was injured by Defendant in an automobile accident while working. Id. at p. 906.   Eventually, a complaint was filed wherein Kavanaugh’s employer intervened and the case went to trial. Ibid. Through a special jury verdict form, damages of $1,968,629.70 were awarded to Thomas Kavanaugh and $419,179.87 to the employer for its lien. Ibid. Thereafter, Kavanaugh filed a motion under Labor Code section 3856 and the Common Fund Doctrine seeking attorney’s fees out of the employer’s recovery and the trial court awarded 15 percent of the common fund as attorney’s fees. The trial court had found that case involved a substantial amount of time and money devoted by Plaintiff’s counsel. Id. at p. 907. The trial court found that the intervener devoted substantial time, but little money. Ibid.  As a result, the intervener had “a relatively small investment in the case compared to that of plaintiff’s counsel.” Ibid. The appellate court reversed agreeing with Walsh II, and that the trial court should not weigh the relative contributions of counsel to determine whether attorney’s fees should be awarded.  Id. at p. 914; see Walsh v. Woods, supra, 187 Cal.App.3d at p. 1279; see also, Hartwig v. Zacky Farms, supra, 2 Cal.App.4th at p. 1557.

          The Common Fund Doctrine was “not established to reward litigants whose attorneys are more effective, more visible, or who have spent more money in the prosecution of the litigation.  It doesn’t matter which attorney worked the hardest, the test is whether or not the intervener actively participated in the matter. Kindt v. Otis Elevator Co., supra, 32 Cal.App.4th at p. 460., Any attempts to weigh the contributions of attorneys would “likely lead to inconsistent and unfair results.” Kavanaugh v. Sunnyvale, supra, 233 Cal.App.3d at p. 914.   The court questioned the factors or criteria the trial court should apply such as the “quality of counsel’s efforts, or the quantity of actions taken…the amount of money spent…the hours billed…what if counsel’s involvement hinders the chances of obtaining the recovery…what if counsel is active, but not effective…what if counsel’s decision to remain in the background during much of the litigation actually contributed to the creation of the common fund.” Id. at p. 914.

IX.  Conclusion

          Several appellate courts have weighed in on this issue of “active participation.” It is clear that nominal work such as filing a lien or complaint in intervention is not active participation. But as the activity of work goes more into detail and in depth, the line between passive and active becomes blurred.  The First District Court of Appeals in Walsh I and Walsh II, seemed content with a general declaration of counsel regarding the activities he/she spent on the case.  It does not seem to require more. Indeed, a few minutes of deposing a witness seems sufficient. This became known as the minimal participation standard.  On the other side of the spectrum is the Fifth and Fourth District Court of Appeals, in Hartwig and Kindt, respectively, both disagreed with this Walsh I’s and Walsh II’s minimal participation standard. The Fourth and Fifth District Court of Appeals wants activities that amount to more than putting a “warm body” at a deposition, they want a conscientious effort on the part of counsel that is aimed at advancing their client’s interest.  In the middle is Kavanaugh, where the Sixth District Court of Appeals says that attending deposition, doing discovery, designating expert witnesses, and engaging in some questioning during trial is sufficient. The Kavanaugh court did not go into depth as to what was discussed in pretrial settlement conference, what discovery was propounded, or what questions were asked. They simply found the existence of such activity is sufficient. Lastly, the issue is not just “active participation” but whether or not that “active participation” resulted in settlement as explained by the Second District Court in Luque.