Ales v. T.A. Loving Co., 2004 WL 502900 (N.C. App., March 16, 2004)

The North Carolina Court of Appeals further limited the discretion of trial courts to extinguish subrogation liens under the state’s workers compensation statute when it held that trial courts cannot limit or extinguish subrogation liens when the settlement agreements between the injured worker and the tortfeasor are contingent upon the liens being extinguished.

In the Ales matter, the workers’ compensation claimant sued a set of alleged tortfeasors in connection with injuries he sustained while working at his place of employment. Upon reaching a settlement agreement with these third-party defendants, the claimant filed a motion asking the trial court to waive the carrier’s workers compensation subrogation lien against the settlement proceeds, based upon N.C.Gen.Stat. §97-10.2(j).[i] The trial court granted the motion, extinguishing the subrogation lien entirely, and the workers compensation carrier appealed.

N.C.Gen.Stat. §97-10.2 is the North Carolina statute governing the rights of workers compensation claimants, employers and their insurance carriers against third-party tortfeasors. Subsection (j) of the statute provides the trial judge with discretion to determine “the amount, if any, of the employer’s lien,” where “a judgment is obtained by the employee” or “a settlement has been agreed upon” by the employee and a third-party defendant. This provision has been interpreted by North Carolina courts as providing trial judges with discretion to reduce, or even extinguish, subrogation liens held by the employer or its workers compensation carrier. In recent years, the Court of Appeals has acted to limit that discretion to avoid abuses by the trial courts.

In the Ales case, the trial court concluded that the statutorily required “settlement had been agreed upon,” and thus the court could exercise its discretion to extinguish or otherwise limit the lien. On appeal, the Court of Appeals closely scrutinized the settlement agreement between the claimant and the third-party tortfeasors, explaining that the trial court could only exercise its discretion under the statute to extinguish the lien if indeed a settlement agreement actually existed. The court approached the issue from the perspective that a settlement agreement is a contract, and therefore contract law principles were applicable to determine whether “a settlement has been agreed upon” as required under subsection (j) of the statute.

The only evidence of a settlement agreement was a letter from the claimant’s attorney to the defense attorney, memorializing their agreement to settle the case for a certain amount, BUT noting that it would only apply if the trial court waived the subrogation lien. The appellate court held that the subrogation lien being extinguished was a necessary condition that was not met, and therefore no settlement agreement existed before the court took any action. Because no settlement agreement existed, the trial court did not have authority or jurisdiction under the statute to extinguish the lien. The decision of the trial court was therefore vacated by the Court of Appeals, and the matter was sent back to the trial court for further proceedings to properly resolve the dispute.

Practice Tips:

1. As with many areas of the law, astute recovery professional should stay informed as to the law on points such as these in the jurisdictions where they oversee subrogation efforts. Workers compensation subrogation laws, for example, vary throughout the country as to the strength of a lien and the obligation to make the carrier or the claimant whole first from any settlement proceeds. Without this information at hand, a recovery professional is not well situated to take the proper steps to protect any lien, and/or to evaluate the proper settlement value of a recovery claim.

2. In North Carolina, and similar jurisdictions that provide limited respect to the workers compensation subrogation lienholder, carriers should take steps early on in litigation involving a third-party tortfeasor to obtain an agreement from the claimant/employee (and in some instances the third-party tortfeasor) regarding distribution of settlement proceeds (or a judgment amount) between the claimant/employee and the workers’ compensation carrier. This will avoid the possibility of the employee/claimant and the third-party tortfeasor settling “out from under” the carrier, and then moving for the lien to be extinguished.

3. Simply because a North Carolina trial court has the discretion to extinguish a lien under certain circumstances, the carrier need not simply “lay down and die.”

a. A carrier suffering a workers compensation loss in that jurisdiction should strongly assert its lien at every opportunity to the claimant and the third-party defendants so that all are on notice that the carrier intends to fight for that lien in settlement negotiations and in court if it has to, and in turn that the lien should be factored in some fashion into any settlement discussion. This aggressive attitude will garner respect, while complacency will probably produce no respect for the lien and in turn far less potential for full or partial recovery.

b. In the face of a motion (or a threat of a motion) to limit or extinguish a subrogation lien, a carrier should understand that there are factors that can be argued in its favor based upon principles of equity and fairness, and legal arguments, such as the one respected by the court in this matter to oppose an extinguishment of the lien.

c. Everything is negotiable. As noted in Tip #2 above, a pro rata or apportionment agreement should be a goal when practicing in jurisdictions like North Carolina. Claimants and their attorneys can be “incentivized” to agree to such arrangements if the carrier is both aggressive and if the carrier offers a financial benefit as well, such as agreeing to finance or advance the funding of the litigation against the third-party defendants, or access to competent experts in furtherance of such litigation claims.