Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-94-03178/USCOURTS-ca10-94-03178-0/pdf.json

Parties Involved:
Estate of Katherine Washington
Appellant
United States of America
Appellee

Document Text:

PUBLISH FILED 

Ualted States Coart ol Appeab UNITED STATES COURT OF APPEALS Tenth Circuit 

TENTH CIRCUIT 

ESTATE OF KATHERINE WASHINGTON 

by KENNETH WASHINGTON, 

ADMINISTRATOR, 

Plaintiff-Appellant, 

vs. 

THE UNITED STATES OF AMERICA, 

SECRETARY OF HEALTH & HUMAN 

SERVICES, 

Defendant-Appellee. 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

MAY 0 2 1995 

PATRICK FISHER 

Clerk 

No. 94-3178 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF KANSAS 

(D.C. No. 93-1348-MLB) 

Kenneth M. Clark, Young, Bogle, McCausland, Wells & Clark, 

Wichita, Kansas, for Plaintiff-Appellant. 

Paul D. Scott, Attorney, Appellate Staff Civil Division, 

Department of Justice, Washington, D.C. (Frank W. Hunger, 

Assistant Attorney General, Washington, D.C., Randall K. Rathbun, 

United states Attorney, Wichita, Kansas, and Anthony J. 

Steinmeyer, Attorney, Appellate staff Civil Division, Department 

of Justice, Washington, D.C., with him on the brief) for 

Defendant-Appellee. 

Before EBEL and KELLY, Circuit Judges, and BRATTON, District 

Judge. t 

KELLY, Circuit Judge. 

t The Honorable Howard c. Bratton, Senior United States 

District Judge for the District of New Mexico, sitting by designation. 

Appellate Case: 94-3178 Document: 01019287625 Date Filed: 05/02/1995 Page: 1 
Plaintiff-Appellant Estate of Katherine Washington ("the 

Estate") appeals the district court's granting of a motion for 

judgment on the pleadings, Fed. R. Civ. P. 12(c), in favor of 

Defendant-Appellee Secretary of Health and Human Services. Our 

jurisdiction arises under 28 U.S.C. § 1291 and we vacate the 

district court's judgment and render judgment as hereinafter set 

forth. 

Background 

Katherine Washington, a Medicare beneficiary, was seriously 

injured in a 1987 automobile accident. The Health Care Financing 

Administration ("HCFA"), an agency of the Department of Health and 

Human Services ("HHS"), subsequently paid a total of $48,142 in 

conditional Medicare payments on her behalf. In addition, Ms. 

Washington settled with her liability insurer, and received 

$199,449 for her injuries. This recovery represented slightly 

less than 25% of the $800,000 in damages she suffered. 

In January 1990, Ms. Washington received notice that under 

the Medicare Secondary Payer Statute ("the MSP Statute"), 42 

U.S.C. § 1395y(b) {2) (B), she was obligated to reimburse the 

government for the $48,142 in conditional Medicare payments, out 

of the proceeds received from the insurance settlement. The 

appendix does not reflect, but we assume that this insurance 

settlement specifically reimbursed Ms. Washington for her medical 

expenses. Ms. Washington requested, and was denied, a waiver of 

this repayment obligation. She was notified several more times of 

her obligation, but never repaid HCFA for its Medicare outlays. 

-2-

Appellate Case: 94-3178 Document: 01019287625 Date Filed: 05/02/1995 Page: 2 
Ms. Washington passed away in February 1991. Subsequently, 

her estate received notice of HCFA's outstanding claim for 

reimbursement. In accordance with 42 C.F.R. § 411.37(c), the government reduced its demand to $31,410.60 to reflect its share of 

the attorneys fees and expenses associated with the insurance 

settlement. Disputing its obligations to repay this amount in 

full, the Estate contended that because Ms. Washington had 

recovered only a portion of her total damages from the insurer, 

HCFA was entitled to receive only a like proportion of its 

Medicare expenditures. The government rejected this position, 

based on its reading of § 1395y(b) (2) of the MSP Statute, and on 

cases from other jurisdictions finding that this provision allows 

HCFA to recover the full extent of its Medicare payments from a 

beneficiary's insurance settlement (minus a proportion of attorney 

fees and costs). See, e.g., United States v. Sosnowski, 822 F. 

Supp. 570, 574 (W.D. Wis. 1993); St. Agnes Hosp. v. Jaeckel, 616 

F. Supp. 426, 428 (E.D. Wis. 1985). The government, however, did 

not inform the Estate of the existence of these authorities. 

In September 1993, the Estate filed a complaint, seeking a 

declaratory judgment determining whether the government was 

entitled to recover, and if so in what amount, the conditional 

Medicare payments made on behalf of Ms. Washington. The 

government then filed an answer and counterclaim, seeking judgment 

for $48,142, the full amount of the conditional Medicare payments. 

In January 1994, HHS moved for judgment on the pleadings pursuant 

to Fed. R. Civ. P. 12(c}, arguing that the plain language of the 

MSP Statute and of 42 C.F.R. § 411.37, a regulation implementing 

-3-

Appellate Case: 94-3178 Document: 01019287625 Date Filed: 05/02/1995 Page: 3 
the MSP Statute, as well as previously undisclosed authorities 

from other jurisdictions, was fatal to the Estate's 

proportionality theory. The district court granted the motion and 

awarded the government $48,142, plus post-judgment interest. This 

appeal followed. 

Discussion 

A. 42 C.F.R. § 411.37 

When a party has moved to dismiss and a judgment has been 

granted on the pleadings pursuant to Fed. R. Civ. P. 12(c), our 

review is de novo. See McHenry v. Utah Valley Hosp., 927 F.2d 

1125, 1126 (lOth Cir.), cert. denied, 502 U.S. 894 (1991); Doyle 

v. Oklahoma Bar Ass'n, 998 F.2d 1559, 1566 (lOth Cir. 1993). On 

appeal, the Estate does not dispute that the MSP Statute mandates 

a full, rather than a proportional, recovery of conditional 

Medicare payments. Instead, the Estate challenges the district 

court's implicit application of 42 C.F.R. § 411.37(e) in assessing 

the amount of reimbursement owed to HCFA, once the court had 

rejected the Estate's proportionality theory. 

As a regulation implementing the MSP Statute, C.F.R. § 411.37 

sets forth the formulae for determining the amount of 

reimbursement the government can recover through suit against a 

Medicare beneficiary who has received a third party payment from a 

judgment or settlement. The regulation generally provides that 

HCFA will reduce its recovery to account for the procurement costs 

associated with the judgment or settlement over a disputed claim 

against a third party. 42 C.F.R. § 411.37(a) (1). When the 

-4-

Appellate Case: 94-3178 Document: 01019287625 Date Filed: 05/02/1995 Page: 4 
judgment or settlement amount exceeds the Medicare payment amount, 

HCFA's recovery against the beneficiary is computed to be the 

Medicare payment amount minus a share of the procurement costs 

associated with the judgment or settlement. 42 C.F.R. § 

411.37(c). This partial deduction for procurement costs is 

determined by figuring the ratio of the procurement costs to the 

total judgment or settlement payment, and then multiplying the 

total Medicare payments by this ratio. The product of this 

multiplication represents HCFA's share of the procurement costs, 

which is then subtracted from the Medicare payment total to arrive 

at the amount HCFA may recover from the beneficiary. Id. These 

computations are undeniably complex, but for our purposes it is 

only necessary to understand that application of these general 

provisions of § 411.37 would result in the Estate owing $31,410.60 

to the government. 

As a special rule, however, if HHS "must bring suit 

against the [Medicare beneficiary who] received payment because 

that party opposes HCFA's recovery, the recovery amount is the 

lower of the following: (1) Medicare payment. (2) The total 

judgment or settlement amount, minus the [Medicare beneficiary] 's 

total procurement costs." 42 C.F.R. § 411.37(a) (2); 42 C.F.R. § 

411.37(e). Under application of this subsection, the amount of 

reimbursement owed by the Estate to the government grows to 

$48,142. 

The Estate contends that because it only questioned the 

amount of reimbursement owed and only instituted a declaratory 

judgment action, the general rule of § 411.37(a) (1) and 

-5-

Appellate Case: 94-3178 Document: 01019287625 Date Filed: 05/02/1995 Page: 5 
§ 411.37(c) should apply, and not the special rule of § 411.37(e). 

We agree. 

Our analysis boils down to an inquiry of whether the 

declaratory judgment action initiated in this case constitutes 

opposition to HCFA's recovery such that the Estate falls within 

the ambit of § 411.37(e). The sparse legislative history 

pertaining to this regulation is of no help in this regard, and 

there is no case authority remotely on point. Thus, we must 

consider on our own whether it makes sense to equate the sort of 

declaratory judgment relief sought by the Estate with an 

opposition to recovery. 

It does not. In Abbott Labs. v. Gardner, the Supreme Court 

recognized that a declaratory judgment action, 28 U.S.C. § 2201 

(1994), provides a means by which a party may avoid being placed 

on the horns of a regulatory dilemma. 387 U.S. 136, 152 (1967). 

To deem the Estate's declaratory judgment action, seeking only to 

discover how much it owed to HCFA, as "oppos[ing] recovery" would 

turn the purpose underlying such an action on its head, for we 

would be placing the Estate on the very horns of the dilemma it 

'' 

was seeking to avoid. Unde~ such a broad reading of § 411.37(e) 's 

language, the Estate would be forced to choose between two 

unsatisfactory alternatives: (1) give up its proportional 

recovery theory and the possibility of reducing the amount owed to 

HCFA; or (2) pursue its declaratory judgment action and lose any 

possible reduction for the government's share of attorneys fees 

and expenses. To allow the Estate to avoid such an unnecessary 

quandary by ascertaining its rights without fear of essentially 

-6-

Appellate Case: 94-3178 Document: 01019287625 Date Filed: 05/02/1995 Page: 6 
being penalized, and thereby realizing the intended benefits of a 

declaratory judgment action, we hold that the declaratory relief 

sought by the Estate in this case does not constitute "oppos[ing] 

HCFA's recovery," for purposes of § 411.37(e). 

Of course, such declaratory relief must be sought in good 

faith and not be frivolous. Declaratory judgment actions, like 

any other judicial process, are susceptible of being misused. If 

misused by a claimant, such an action could trigger the penalties 

contemplated by § 411.37(e). There is no suggestion, however, of 

misuse in this record. 

Given the conclusion that § 411.37(e) does not apply, the 

amount that HCFA may recover from the Estate is governed by the 

general provisions of § 411.37(a) & § 411.37(c). The Estate 

therefore owes the government $ 31,410.60. 

This result may well have been reached far earlier, and at 

far less cost, if the government had been more forthcoming about 

the authority supporting its rejection of the Estate's 

proportionality theory. Rule 11 of the Federal Rules of Civil 

Procedure and Rule 3.3 of the Model Rules of Professional Conduct 

focus, respectively, on a movant's burden of "reasonable inquiry," 

Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990), and a 

lawyer's duty to disclose adverse controlling authority, as a 

means of protecting the judiciary's efficiency and integrity. 

Unfortunately, these rules do not protect lawyers from one 

another. Nevertheless, we think that counsel in the future would 

be well-advised to remember the spirit of the general standards 

enunciated in Canon 1 of the A.B.A. Model Code of Professional 

-7-

Appellate Case: 94-3178 Document: 01019287625 Date Filed: 05/02/1995 Page: 7 
• 

Responsibility ("A lawyer should assist in maintaining the 

integrity and competence of the legal profession."), and Model 

Code of Professional Responsibility DR 1-102 (A) {5) (a lawyer shall 

not engage in "conduct that is prejudicial to the administration 

of justice"). 

B. Costs 

HHS argues that the Estate should pay the costs and attorney 

fees incurred by the government on appeal pursuant to Fed. R. App. 

P. 38. It further contends that the Estate should be barred from 

paying unpaid legal fees relating to both the declaratory judgment 

action and the present appeal until HCFA first has been reimbursed 

for its conditional Medicare expenditures. Neither of these 

arguments is persuasive. 

Rule 38 of the Federal Rules of Appellate Procedure provides 

that "[i]f a court of appeals shall determine that an appeal is 

frivolous, it may award just damages and single or double costs to 

the appellee." An appeal is considered "frivolous" when "the 

result is obvious, or the appellant's arguments of error are 

wholly without merit." Braley v. Campbell, 832 F.2d 1504, 1510 

(lOth Cir. 1987) (internal quotation omitted). To our mind, the 

present appeal is not "frivolous." The Estate has posited fair 

questions regarding the applicability and interpretation of 

§ 411.37, and answering these question most certainly has not been 

a waste of our time. 

We likewise refuse to compensate the government for its 

litigation costs by sanctioning the Estate's attorneys under 28 

-8-

Appellate Case: 94-3178 Document: 01019287625 Date Filed: 05/02/1995 Page: 8 
' 

• 

U.S.C. § 1927. Their conduct does not rise to the level of 

recklessness or indifference that this Circuit has required to 

sanction an attorney under § 1927. Braley, 832 F.2d at 1511. 

Indeed, we find the government's charge that the Estate has 

multiplied proceedings unreasonably and vexatiously to be highly 

ironic, given its own reluctance to disclose to the Estate the 

existence of cases that might well have shortened, or even 

avoided, the underlying litigation. 

The government's request that we bar the Estate from paying 

legal fees until it has reimbursed HCFA for Medicare expenditures 

is based solely on the idea that to allow the Estate to give 

priority to these fees would be to lessen the likelihood of full 

HCFA reimbursement. This is a tautology, not an argument, and we 

see no reason to interfere with a priority of payment issue more 

properly left to a probate court. 

We VACATE the district court's judgment and render judgment 

in favor of HHS in the amount of $31,410.60. 

-9-

Appellate Case: 94-3178 Document: 01019287625 Date Filed: 05/02/1995 Page: 9