Lien satisfaction isn't a condition precedent to settlement payments

Under federal law, Medicare's "super lien" attaches to any settlement payment to a plaintiff for an injury that Medicare paid to treat. If the settlement proceeds are not used to reimburse Medicare, counsel who have held the settlement funds, as well as the insurance company that paid them, may be liable to Medicare if the lien is not paid. It is no defense that the insurance company has already reimbursed the plaintiff. In fact, if Medicare takes legal action, it may recover twice the amount against counsel or insurance carrier. 42 C.F.R. Section 411.24 (c) (2); see also 42 U.S.C. Section 1395y(b)(2)(B) (iii).

In light of this draconian nature of Medicare law, shouldn't public policy preclude the court from enforcing a settlement agreement that fails to insure payment of Medicare's lien before a plaintiff receives settlement proceeds? Or, at least require that the settlement check reflect Medicare as a co-payee? Evidently not, according to a recent Court of Appeal decision, Karpinski v. Smitty's Bar Inc., 2016 DJDAR 3528 (Apr. 12, 2016).

Keith Karpinski was beat up by drunk patrons at Smitty's Bar in Sausalito. He sued the patrons for assault and battery and Smitty's for negligence. Karpinski and Smitty's engaged in mediation where they reached a settlement for $40,000 and signed an initial written settlement agreement. Following the mediation, a more formal "Settlement Agreement and Release of All Claims" was prepared and signed by Karpinski and his attorney. The settlement proceeds were subject to outstanding statutory liens in favor of Medicare and the California Victims of Crime Program that arose by virtue of the assault on Karpinski and his resultant medical care.

Apparently, a dispute subsequently arose regarding payment of the settlement proceeds and satisfaction of the liens. Karpinski brought a motion to enforce the settlement agreement under Code of Civil Procedure Section 664.6. In its opposition to the motion, Smitty's stated that it was prepared to pay immediately if Karpinski would accept a check made payable to him and both lien holders. Alternatively, Smitty's explained that it required specific written instructions from Medicare and the California Victims of Crime program before it would issue separate checks to Karpinski and each lien claimant.

Notwithstanding Smitty's objection, the trail court granted the motion forcing Smitty's insurance company (Crusader Insurance Company) to pay the settlement proceeds to Karpinski before payment of the Medicare lien. The trial court reasoned that the terms of the settlement agreement required Karpinski and his counsel to "negotiate, satisfy, and dispose of all liens," and "to hold [Smitty's], its attorneys, and [Crusader] Insurance Company harmless with respect to any lien claims." The settlement agreement did not require Karpinski to satisfy the liens before receipt of the settlement payment, nor that the lien claimants be made co-payees on the settlement check.

Smitty's timely appealed, and the 1st District Court of Appeal affirmed. Acknowledging the statutory nature of both liens, and reviewing the Medicare Secondary Payer Act (42 U.S.C Section 1395y), and Medicare's rights to recover payment from the "primary payer" (Crusader), the court noted the hold harmless provisions in the settlement agreement. Conspicuously absent in the agreement was any provision that expressly or impliedly required Karpinski to satisfy the liens before he received the settlement proceeds. From a contractual analysis, the settlement agreement did not require satisfaction of the liens as a condition precedent to payment.

The appellate court went on to address Smitty's concern that it could be required to pay the settlement twice (or thrice) if Karpinski failed to satisfy the Medicare lien. Finding no cited California case on the issue, the court observed: "We find persuasive the reasoning of the Georgia Court of Appeals, in which a similar case concluded that public policy does not preclude a court from enforcing a settlement that does not include Medicare as a co-payee on a settlement check where the plaintiff signed a release acknowledging his responsibility to pay any Medicare claim and/or agreeing to indemnify the released parties."

This theoretical remedy may prove cold comfort to an insurance company that is required to reimburse Medicare after paying settlement proceeds to a plaintiff. After all, any indemnity and hold harmless agreement is only as good as the indemnitor. What if the plaintiff fails to satisfy the Medicare lien, spends the settlement proceeds, and is judgment-proof?

Such is a cautionary tale to defense counsel drafting a settlement agreement at the conclusion of a successful mediation. As the Court of Appeal noted, Smitty's and Crusader could have negotiated the terms of the settlement agreement to require satisfaction of the liens as a condition precedent to payment, or that the lien holders be included as co-payees on the settlement check. Since they did neither, the court would not require it.

Of course, in many cases, this may be a solution in search of a problem. As most settlement payments are made directly to plaintiff's counsel, Medicare may also seek payment from him or her as an attorney "that has received primary payment." Therefore, such counsel will be motivated to negotiate and pay the lien before dispersing the settlement proceeds to the plaintiff.

As a practical matter, defense counsel and insurance carriers may have a sufficient comfort level with competent plaintiff's counsel with whom they have previously worked, or enjoy a professional working relationship. In such cases, they may be more flexible in allowing payment to be made to plaintiff counsel's client trust account for satisfaction of the liens before disbursement to plaintiff.

Plaintiff's counsel can assist the mediation process by having preliminary discussions with the lien holders before the mediation, and bringing to the mediation the most up-to-date lien payoff information and demand. If the lien claimant representatives are available, lien payoff amounts can be negotiated by phone during the course of the mediation.

In short, the terms of a written settlement agreement should always address the timing and manner of the settlement payment as well as satisfaction of outstanding liens. The Karpinski opinion reminds us that the courts will not do this for us.

Steven H. Kruis has mediated thousands of cases throughout Southern California since 1993. He is with the San Diego Office of ADR Services Inc., and can be reached at skruis@adrservices.org.