Henrico County School Board v. Bohle

421 S.E.2d 8, 14 Va. App. 801, 9 Va. Law Rep. 4, 1992 Va. App. LEXIS 195

Opinions

Opinion

WILLIS, J.

Sharon J. Bohle was injured in a job-related accident for which her employer, Henrico County School Board, accepted workers’ compensation liability. The Workers’ Compensation Commission

* entered an appropriate award. Thereafter, Ms. Bohle recovered $1,100,000 from the third-party tortfeasor who caused her job-related injuries. In doing so, she incurred attorney’s fees of $275,000 (twenty-five percent) and expenses of $4,911.24.

Prior to the third-party settlement, the employer had paid $514,545.34 in benefits, for which it claimed a lien. Upon disbursement of the third-party recovery, the attorney’s fees and miscellaneous expenses were paid in full. The employer received $383,600.72 ($514,545.34 less the proportion of attorney’s fees and expenses attributable to that recovery). Ms. Bohle received $424,532.41 ($585,454.66 less the proportion of attorney’s fees and expenses attributable to that recovery).

By letter of December 8, 1989, counsel for Ms. Bohle, with a copy to counsel for the employer, notified the commission of the amount and distribution of the third-party recovery, and requested an award suspending further compensation payments by the employer until Ms. Bohle had incurred and satisfied out of her funds compensation benefits equaling $318,399.31 (seventy-five percent of $424,532.41). On December 27, 1989, the commission entered an order to that effect. By letter dated December 29, 1989, with a copy to counsel for Ms. Bohle, counsel for the employer agreed that a suspension should be ordered, but asserted that it should continue until the entire net proceeds in Ms. Bohle’s hands had been offset. By letter dated January 8, 1990, counsel for the employer sought full commission review of the December 27, 1989 order and requested oral argument. Upon briefs submitted by the parties, but without taking evidence or hearing oral argument, the commission, by order dated April 23, 1990, affirmed the decision of the deputy commissioner and ordered that “no further compensation benefits or medical expense would be due until such time as the entitlement under compensation exceeds $318,399.31.”

On appeal, the employer contends (1) that the commission erred in denying to the employer a hearing regarding the entry of an order suspending the payment of compensation benefits to the claimant, and (2) that the commission erred in suspending payment of compensation benefits to Ms. Bohle only until future benefits exceeded seventy-five percent of her actual net cash recovery. We find that the commission acted properly in deciding the case without further hearing. However, we find that it erred in calculating the amount of indemnity to which the employer was entitled and in determining the method by which that indemnity should be realized. On those grounds, we reverse and remand the case to the commission.

I.

The employer first contends that the commission erred in denying it the opportunity to present evidence and advance oral argument. The evidentiary record submitted to the commission was plain and complete. The facts were not in dispute. Neither party requested an evidentiary hearing.

Upholding the denial of oral argument on a briefed point of law, the Supreme Court has said:

Where a question of law is all that needs to be resolved it has often been held that the requirements of procedural due process are met where the party seeking review has the opportunity to state his views in writing.

* * * *

All [the appellant] lost was the chance to restate that which was already adequately stated in his letter and other written communications to the Commission.

James v. Arlington County Bd. of Supervisors, 226 Va. 284, 290, 307 S.E.2d 900, 903 (1983). We find no error in the commission’s decision of this case based on the parties’ briefs, without oral argument.

II.

The employer next argues that by limiting the suspension of its liability for further payments to an offset equal to three-fourths of the net amount of third-party settlement proceeds received by Ms. Bohle, the commission denied to it its full indemnity entitlement and effected a double recovery to Ms. Bohle. We agree. In reaching this conclusion, we analyze the authorities controlling the employer’s right to indemnity and its liability for proportionate costs of recovery, the application of those authorities in determining the amount of indemnity to which the employer is entitled, and the application of those authorities in determining the manner in which the employer should realize that indemnity.

A. THE CONTROLLING AUTHORITIES

A claim against an employer under this title for . . . benefits shall operate as an assignment to the employer of any right to recover damages which the injured employee . . . may have against any other party for such injury . . . , and such employer shall be subrogated to any such right. . . .

Code § 65.1-41.¹

In any action, or claim for damages, by an employee, ... if a recovery is effected, . . . the reasonable expenses and reasonable attorney’s fees . . . shall be apportioned pro rata between the employer and the employee, ... as their respective interests may appear.

Code § 65.1-43.²

Until recently, there has been no Virginia appellate authority concerning the identification of the respective interests which govern the assessment of attorney’s fees and costs under the foregoing statutes. However, in Sheris v. Travelers Insurance Co., 491 F.2d 603 (4th Cir.), cert. denied, 419 U.S. 831 (1974), a federal court applied Virginia law to a workers’ compensation death award which exceeded a third-party recovery. Judge Butzner wrote:

Several courts . . . have interpreted apportionment statutes similar, though not identical, to Virginia’s. They have ruled that apportionment must be based on the full liability of the employer — the compensation it has paid in the past and the amount that it would be required to pay in the future were it not for the employee’s successful suit.

The reasoning of these cases is sound. It rests on the conclusion that there is no rational distinction between the benefit an employer enjoys from being reimbursed for compensation payments already made and the benefit of being released from the obligation to make future compensation payments. Therefore, as one court has pointed out, it is reasonable to assume that the legislature intended the attorney’s fee to be prorated to the extent of the benefits the employer received from the recovery against the wrongdoer. Stated negatively, there is nothing to indicate that when the Virginia legislature directed proration of the fees as the interests of the parties may appear, it intended that only part of the interest of the compensation carrier should be taken into account.

Id. at 606 (footnotes omitted).

In Circuit City Stores, Inc. v. Bower, 243 Va. 183, 413 S.E.2d 55 (1992), the Virginia Supreme Court considered the apportionment of attorney’s fees and expenses with respect to a death claim. The workers’ compensation award was $344 per week for a period of five hundred weeks, a total of $172,000. There was a third-party recovery having a present value of $1,900,000. At the time of the third-party recovery, the employer had paid compensation benefits totaling $48,034.44, for which it asserted a lien. It sought reimbursement of this amount, less pro rata attorney’s fees attributable thereto, in the distribution of the third-party recovery. Upholding the trial court’s apportionment of attorney’s fees based on the employer’s exoneration from its full potential liability, the Supreme Court adopted with approval the reasoning in Sheris that no rational distinction can be made between the benefit of being reimbursed for payments made and the benefit of being released from the obligation to make future payments.

The foregoing authorities make plain the following principles which govern our decision in this case. The employer is entitled to be indemnified out of the third-party recovery to the extent that it has made or will make payments of compensation to or for the claimant. The amount received by the employer in indemnity is to be reduced by attorney’s fees and expenses incurred by the claimant in effecting the third-party recovery, in the proportion which the amount of indemnity bears to the total third-party recovery. So much of the third-party recovery as is not required to indemnify the employer is the property of the claimant, and remains so until it becomes liable for indemnity. The claimant must pay from his share the pro rata attorney’s fees and costs attributable to that part of the third-party recovery that is not liable for indemnity.

B. THE AMOUNT OF OFFSET

We agree with the employer that in calculating the future offset to which the employer is entitled, and hence the point at which the suspension of benefits would terminate, the commission effected a double recovery to the claimant. The commission set this figure at $318,399.31 (three-quarters of $424,532.41). It ordered that when future benefits in this amount had accrued and been satisfied by the claimant out of the net third-party proceeds in her hands, full compensation benefits should resume. Simple mathematical calculations demonstrate the error in the commission’s award.

If, at the time of distribution of the third-party recovery, the employer had already paid benefits equaling or exceeding $1,100,000, it would have been entitled to receive in indemnity the full $1,100,000, less $279,911.24 attorney’s fees and expenses. Thus it would have recovered in indemnity $820,088.76. Under the commission’s order, when $1,100,000 of compensation benefits have accrued, the employer will have been indemnified only $702,000.03, realized as follows:

Net Recovery on Third-Party Distribution $ 514,545.34

Less 25% Attorney’s Fee & Pro Rata Costs 130,944.62

Net from Third Party Settlement $ 383,600.72

Suspension from Liability for Benefits + 318,399.31

Total $ 702,000.03

Correspondingly, under the commission’s calculation, when compensation benefits totaling $1,100,000 have accrued and been satisfied, the claimant will have received $1,206,133.10, realized as follows:

Amount Paid before Third-Party Recovery $ 514,545.34

Net Proceeds Received from Distribution of Third-Party Recovery 424,532.41

Benefits Received by Resumption of Payments 267,055.35

Total $1,206,133.10

The sum of $424,532.41, which came net into the claimant’s hands upon distribution of the third-party recovery, was after payment of all attorney’s fees and expenses. It was a net sum to which the claimant was entitled, free from any further attorney’s fees or expenses. Likewise, it was a net sum liable for indemnity to the employer, free from further attorney’s fees and expenses. Limiting the employer’s right of indemnity to that net amount, rather than to the $585,454.66 of which it was originally a part, imposes thereby on the employer liability for the attorney’s fees and expenses incurred in connection with that recovery. Therefore,³ the commission should have fixed the point at which the suspension of further benefits would terminate at the accrual of an additional $424,532.41 in compensation entitlements, at which point the employer’s liability for payments would resume.

C. METHOD OF OFFSET

Sheris and Bower both concerned death awards. While in each case there was a possibility that the beneficiaries of those awards could become ineligible to receive them, those prospects were remote. Each award represented a fixed, readily calculable amount that was more than covered by the third-party recovery. There was no possibility of the workers’ compensation liability exceeding the amount of the third-party recovery. By attributing to the employers in those cases total exoneration of their compensation liability, and by calculating and charging them their pro rata attorney’s fees and costs at the outset, the courts laid to rest all the issues between those parties.

This case is economically different from Sheris and Bower. The benefits in this case extend during Ms. Bohle’s disability, a condition that may be terminated by recovery or death. The employer’s total liability is not subject to reliable calculation. Furthermore, the net proceeds in Ms. Bohle’s hands are her property until the employer has a further right of indemnity, and then cease to be her property only to the extent that the employer is entitled to indemnity.

Under the method of indemnity ordered by the commission, even if the correct suspension cutoff point is fixed, the employer will receive dollar for dollar indemnity until the cutoff point is reached. During that time it will suffer no liability for pro rata attorney’s fees and expenses. Only after the suspension is terminated and the employer resumes payment, will it begin to pay back to Ms. Bohle its pro rata share of the attorney’s fees and expenses incurred by her in effecting the third-party recovery. It will not complete that reimbursement until the point at which $1,100,000 of benefits have been incurred and paid. Given the uncertain nature of Ms. Bohle’s right to further compensation, the employer may thereby escape responsibility for its pro rata share of attorney’s fees and costs.

In Hunter v. Midwest Coast Transport, Inc., 400 Mass. 779, 511 N.E.2d 615 (1987), the Supreme Court of Massachusetts confronted this issue. Declaring that there were two ways allocation to the employer of its pro rata share of fees could be effected, it said:

One is to compute the insurer’s offset by deducting the plaintiff’s attorney’s fees and costs from the statutory excess so that the offset equals the plaintiff’s net recovery. Under that approach, the insurer here would not be required to make any payments until the plaintiff’s future claims (claims after the third-party recovery) reach $1,846,420.79, if indeed they ever do. If and when that point is reached, the insurer will be obliged to pay further compensation claims in full. The other alternative is to require the insurer to pay a percentage of each claim as it is submitted equal to the ratio the total attorney’s fee and costs bears to the total third-party recovery. In that way, the share of the attorney’s fee and costs paid by the insurer is proportionate to the benefit it receives. The first approach clearly favors the insurer since, under that approach, the insurer has the use of the money for the attorney’s fees and costs until the future compensation claims equal the third-party net recovery. Furthermore, if the plaintiff dies before that figure is reached, the insurer will entirely escape having to pay legal fees.

The defendants argue that the second approach is unfair to insurers, that it increases the probability of a double recovery to the employee or his estate, and that it creates a costly and unnecessary administrative burden for insurers. We recognize that the second approach may in some circumstances yield a result that is less than perfect, but we are persuaded that it is preferable to the first approach. Regardless of which approach we adopt, insurers will be required to keep records of the diminution of their offset as claims are submitted. The additional simple arithmetic required by the second approach does not impose an undue burden on insurers. Also, we perceive no possibility that an employee will receive a double recovery as a result of the second approach. What the defendants characterize as a double recovery is nothing more than the employee’s being relieved of the burden of attorney’s fees for that part of a third-party recovery which ultimately redounds to the benefit of the insurer. Nor is there unfairness to an insurer in a system that reimburses the insurer for benefits paid before a third-party recovery has been effected, and credits it with an offset against subsequent claims, but requires it to pay the legal freight for the benefits it realizes. Under the first approach, that result will not be attained except when the entire statutory excess is exhausted. The over-all balance of equities is not shifted by the fact that the employee receives the third-party recovery “up front,” while the benefit to the insurer from the third-party action accrues over time.

Id. at 784-85, 511 N.E.2d at 618-19.

The correct disposition of this case is for the employer to pay to the claimant twenty-five percent of each increment of further compensation entitlement as it accrues until such time as accrued post settlement benefits equal $585,454.66. At that time, a total of $1,100,000 in compensation benefits will have accrued and will have been realized by Ms. Bohle as follows:

Benefits Paid before Third-Party Settlement $514,545.34

Net Proceeds Received from Third-Party Settlement 424,532.41

Resumed Compensation 160,922.25

Total $1,100,000.00

This result complies with the requirements of the statutes and with the rules set forth in Sheris and Hunter.

We recognize that the method of indemnity that we require here differs from that approved in Bower. However, we believe that the factual differences between this case and Bower make this method appropriate.

While not disagreeing with the foregoing analysis, the dissent contends that we should choose between the positions of the parties. While this is a generally accepted standard of appellate review, we do not believe that allegiance to that standard requires us to adopt an erroneous rule, unfair to the parties and contrary to the expressed intention of the legislature.

We affirm the judgment of the commission denying a hearing and considering the case on the record and briefs. We reverse its judgment in the calculation and structure of the order suspending benefits. This case is remanded to it for the entry of an order in accord with the rule set forth in this opinion.

Reversed and remanded.

Moon, J., concurred.

Formerly the Industrial Commission of Virginia. Effective October 1, 1991, Title 65.1 was recodified as Title 65.2. All references in this opinoin are to Title 65.1, in effect at the time the Commission’s decision was rendered in this case.

1 Now Code § 65.2-309(A).

2 Now Code § 65.2-311.

3 Assuming this method of offset was correct, a matter we address in the next section.