TEXAS LAWYERS' INSURANCE EXCHANGE

Statutory Liens -- An Avoidable Trap for Lawyers
By George W. Shepherd, III - Shareholder, Cruse, Scott, Henderson & Allen, L.L.P. (Houston)

The Trap

Governmental agencies, hospitals, and workers' compensation insurers expend money on behalf of injured persons who become involved in litigation. These institutions frequently seek to recoup this money through the enforcement of statutory liens. An attorney who resolves a case without also resolving applicable liens could become personally liable -- directly or indirectly through liability to the client -- for the amount of the liens. Plaintiff's attorneys are most vulnerable, but defense attorneys are not without risk. This article briefly discusses common statutory liens and ways for attorneys easily to avoid the traps that they create.

The Liens

A. Medicare Liens

The federal government has a statutory lien for medical benefits paid under the Medicare Act. 42 U.S.C. §1395y(b)(2)(B)(ii). The lien, sometimes called a "super lien," gives the government a right of recovery superior to that of all other persons and entities. United States, Health Care Finance Administration, Medicare Intermediary Manual §3418.6; United States v. Geier, 816 F. Supp. 1332, 1334 (W.D. Wis. 1993). The government has a direct-action right of recovery against benefit recipients, their attorneys, and third-party payers. This could include a settling defendant and, perhaps, a settling defendant's attorney if funds are disbursed from the attorney's trust account. If one is aware or "should be aware" of the lien, then it is perfected -- even when no notice of the lien is given. 42 C.F.R. §411.24(l)(2).

Settlement papers cannot avoid a Medicare lien by stating that money is being paid for such things as pain and suffering or loss of consortium -- as opposed to medical expenses. United States, Health Care Finance Administration, Medicare Intermediary Manual §3418.6. Medicare only recognizes allocation of a portion of a recovery to non-medical losses when the court or jury designates the amount of the recovery as such. Id. Although a Medicare lien is superior to attorney fee claims, Medicare will reduce its recovery to allow for the cost of procuring a judgment or settlement. 42 C.F.R. §411.37.

B. Medicaid Liens

Medicaid is a state-administered, federal program designed to provide medical care to the needy. 42 U.S.C. §1396k(a)(2). In Texas, the Medicaid administrator has a direct cause of action to collect unpaid benefits from personal insurance, a person whose wrong caused the injury, and other sources. TEX. HUM. RES. CODE ANN. §32.033(a) & (d). The Medicaid administrator can enforce the lien even without intervening in the injured person's case. Id.

C. Hospital Liens

The Texas Property Code gives a hospital a lien on a claim, judgment, or settlement of an injured party whose hospitalization is attributable to the negligence of another. TEX. PROP. CODE ANN. §§55.002(a) & 55.003(a). For the lien to exist, the admission for the initial hospitalization must be within 72 hours of the accident. Id. If the initial admission occurs within 72 hours of the accident, then the lien exists for all subsequent admissions as a result of injuries sustained in the accident. Baylor University Medical Center v. Travelers Insurance Company, 587 S.W.2d 501 (Tex. Civ. App. - Dallas 1979, writ ref'd n.r.e.).

A hospital must take action to perfect its lien. Before money is paid to the injured person, the hospital must file a notice of the lien with the county clerk of the county in which the hospital services were rendered. TEX. PROP. CODE ANN. §55.005(a) (Vernon's, Supp. 1997). Even when perfected, however, the amount of a hospital lien covers only the first 100 days of hospitalization. TEX. PROP. CODE ANN. §55.004(a). Hospital liens generally do not attach to workers' compensation claims, FELA claims, FLHCA claims, claims against the owner or operator of a railroad that maintains the hospital where services were rendered, or the proceeds of an insurance policy in favor of the injured person -- except public liability insurance. Id. at §55.003(b).

D. Workers' Compensation Liens

Workers' compensation insurers have a lien on first monies collected by an injured employee from a liable third party. TEX. LAB. CODE ANN. §417.001. The third party and the employee are jointly and severally liable to the insurer. Performance Insurance Company v. Frans, 902 S.W.2d 582, 585 (Tex. App. - Houston [1st] 1995, writ denied). The employee's attorney can also be liable for the lien since he receives a portion of any recovery as his fee. Autry v. Dearman, 933 S.W.2d 182, 188 (Tex. App. - Houston [14th] 1996, writ denied). However, when the workers' compensation insurer is not represented by an attorney in the third party action, the employee's attorney's fees and court costs are to be deducted from the third party recovery before reimbursing the insurer. Id. If a third party tortfeasor and its insurer wrongfully pay out to the employee money that belongs to the workers' compensation insurer, the third party tortfeasor and its insurance company are liable for the total amount paid by the insurer. Houston General Insurance Company v. Campbell, 964 S.W.2d 691, 695 (Tex. App. - Corpus Christi 1998, writ denied). A workers' compensation insurer may be able to enforce its lien without intervening in the employee's case. Autry, 933 S.W.2d at 188.

Avoiding The Trap

The trap created by statutory liens can easily be avoided by following a two-step process: (a) identify the existence and amount of the liens; and (b) resolve, or get an agreement from the opposition to resolve, the liens when you resolve the case.

A. Identifying The Existence And Amount Of The Liens

By way of both interrogatory and deposition, the defense lawyer should have the plaintiff identify: (a) the source of all benefits paid on the plaintiff's behalf as a result of the injury; and (b) all hospitals where the plaintiff received treatment as a result of the injury. This should include direct questions concerning Medicare benefits, Medicaid benefits, and insurance benefits. Through requests for production, the defense lawyer should seek documents corroborative of the plaintiff's answers to interrogatory and deposition questions. This should include direct requests for all documents provided to or received from any Medicare administrator, any Medicaid administrator, any insurer, and any hospital.

The plaintiff's attorney should get this same information, on an informal basis, from his client. At a minimum, the plaintiff's attorney should ask in writing the same questions that the defense attorney would ask by interrogatory, deposition, and requests for production. The plaintiff's attorney should have his client answer the questions in writing, and then sign the answers. The plaintiff's attorney could also consider asking his client the pertinent questions on videotape.

After potential liens are identified, verify their existence and amount. With regard to Medicare and Medicaid liens, call or write the administrators and ask for the amount of benefits paid, if any. When requested, the administrators will generally provide written confirmation of the existence and amount of a lien. The administrators will also generally provide written confirmation that they have no record of benefits being paid on behalf of a particular person if no lien exists.

The same practice should be followed with respect to workers' compensation liens. With regard to hospital liens, check the county clerk's records of each county in which the injured person was hospitalized. Some county clerks will provide this information by telephone, but it is better for you or someone from your firm to check the records personally. Of course, you probably could obtain the same information by requesting it directly from the hospital. But this may prompt the hospital to perfect an otherwise unperfected lien. Nevertheless, if the county clerk's records disclose a perfected hospital lien, you should verify its amount directly with the hospital.

B. Resolve The Liens When You Resolve The Case

At or before the time you resolve the case, reach an agreement with the lienholders concerning satisfaction of the liens. The liens should be satisfied with the settlement proceeds. To reduce risk, defense attorneys should not disburse settlement funds in personal injury cases from their trust accounts. The funds should be paid directly from the defendant or his insurer to the plaintiff and his attorney. As part of any settlement, the defense lawyer should have the plaintiff warrant that, upon receipt of the settlement proceeds, no unsatisfied liens will exist and, to the extent that they do, the plaintiff will promptly satisfy them with the settlement funds. From a defense attorney's standpoint, the settlement papers should also include a term stating that the burden of satisfying any outstanding liens is exclusively on the plaintiff and/or his attorney.

The plaintiff's attorney should not disburse any settlement funds from the trust account until the agreements with the lienholders are finalized. Disputes over settlement papers can arise and, if a supposed settlement with the lienholder falls through after settlement funds are disbursed to the plaintiff, the plaintiff's lawyer could be responsible for the lien.

The End

It is easy to avoid the trap. With minimal time, effort, and expense, you and your staff can identify the existence and amount of statutory liens. Then, settle the lien claims at or before the time you settle the case. If you cannot settle the lien claims, and you are as risk averse as you should be, then do not settle the case. If you settle the case without resolving the liens, then you may be the next defendant.

Houston attorney Billy Shepherd engages in general insurance defense practice, emphasizing legal and medical professional liability law. Texas Lawyers' Insurance Exchange gratefully acknowledges his contribution of this enlightening article.

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