Opinion ID: 2638534
Heading Depth: 4
Heading Rank: 2

Heading: Equitable considerations allow for a pro rata reduction.

Text: Federal and state statutes do not provide a clear answer as to whether the Consortium's statutory health care provider lien can be reduced by a pro rata share of the attorney's fees expended to acquire settlement proceeds; therefore, we follow the approach of Cooper and the New Mexico Supreme Court and apply equitable considerations. Rehbock and Joyner each argue that the Consortium would obtain a windfall if it recovered on its lien but received its legal services at the expense of Warden and E.R. They are thus each making what amounts to an unjust enrichment argument. Under Alaska law, to establish that pro rata reduction of the Consortium's lien is necessary to avoid unjust enrichment, Warden and E.R. must each show that (1) either they or their attorneys conferred a benefit upon the Consortium; (2) the Consortium appreciated the benefit; and (3) it would be inequitable for the Consortium to accept and retain the benefit without paying Rehbock or Warden the value thereof. [36] At times, the Consortium implies that Rehbock and Joyner conferred no benefit upon itall that Rehbock offered the Consortium was the opportunity to litigate the Consortium's lien with him at the same time that Rehbock was defending his claim to have rendered legal services to the Consortium. [The Consortium] only got any money from Joyner by litigating against him. The Consortium points our attention to the fact that after eight months of disputing [the Consortium's] lien, Joyner then claimed to have benefited [the Consortium]. We conclude that the Consortium's argument is misplaced. If the Consortium felt burdened by the litigation dispute over the validity of the lien, it could have moved for Civil Rule 82 attorney's fees once it prevailed on that issue. But the litigation expenses that the Consortium incurred while defending the lien do not negate the labor and funding that Rehbock and Joyner contributed in asserting a cause of action against the third-party tortfeasors. The benefit conferred was that the Consortium did not pay anything for the legal services Rehbock and Joyner rendered in securing the funds that would be used to satisfy the Consortium's lien. Rehbock and Joyner thus each benefited the Consortium, and the Consortium appreciated those benefits. We must next consider whether it would be unjust to allow the Consortium to benefit without paying for its share of the legal fees and costs. As noted above, in Cooper v. Argonaut Insurance Cos., we interpreted a workers' compensation statute with language similar to AS 34.35.475 to allow for a pro rata reduction for attorney's fees and costs. [37] Part of our reasoning was that the Legislature did not intend the employer's compensation carrier to secure a windfall profit at the employee's expense, noting that when the carrier recovers from a third-party tort-feasor as a result of the employee's suit, the recovery is an unexpected return because the premium paid by the employer is normally based on a projected injury loss without regard to possible third-party claims. [38] We declared that requiring an employer or compensation carrier to pay its pro rata share for the recovery of the unexpected funds prevents the entire burden of the litigation [from being] borne by the employee. The carrier would take the benefit of both the employer's premium and the employee's litigation effort. This would result in the carrier's unjust enrichment. [39] We also cited with approval a California Supreme Court decision requir[ing] the passive beneficiaries to bear a fair share of the costs. [40] Rehbock and Joyner each argue that the Consortium should bear its share of the costs to prevent Warden and E.R. from incurring the full cost of recovery and letting the Consortium receive a windfall. The Consortium argues that Cooper is not applicable here. The Consortium maintains that Cooper does not support an attorney's right to claim attorney's fees and costs from a nonparty that is claiming a hospital lien. The Consortium further notes that hospital liens have a different legislative history, purpose, and set of circumstances than workers' compensation. [41] The Consortium's distinctions do not undermine the applicability of the reasoning of Cooper to this case. The issues of preventing a carrier from securing a windfall at the employee's expense, preventing the entire burden of the litigation from being borne by the injured plaintiff, preventing unjust enrichment, and requiring passive beneficiaries to share in the costs of recovery are all equitable considerations that translate well to this case. The fact that the Consortium, unlike the compensation carrier, expects to recover from third parties does not alter the equitable considerations involved in determining whether the Consortium should have to pay its share of the costs of obtaining that recovery. Again, we conclude that the New Mexico Supreme Court decision in Martinez v. St. Joseph Healthcare System is instructive here. As noted above, that court interpreted a statute similar to AS 34.35.475, determined it to be ambiguous, and thus looked to the relevant policy considerations to determine the most equitable result. [42] Instead of following other jurisdictions' decisions, the New Mexico court chose to follow its own analogous rulings and so looked to a workers' compensation decision in which the New Mexico Court of Appeals held that an employer and a worker were to apportion the legal expenses necessary to obtaining a judgment against a third-party tortfeasor, on the grounds of fundamental fairness. [43] The court, therefore, looked to its own version of Cooper. The New Mexico court concluded that in hospital lien cases the `common-fund' doctrine most appropriately defines the duties and liabilities of the parties and provides the most fundamental fairness. [44] The court explained: In hospital lien cases, the hospital's right to assert a lien, and its right to recovery based on that lien, depend by statute on the obtaining of a judgment or settlement. The proceeds of that judgment or settlement operate as a fund, and, without the fund, the hospital has nothing upon which to assert a lien under the Act. By seeking payment from the fund in reliance on the lien, the hospital directly receives the benefits of the work done by the patient's attorney. Further, as in [the Court of Appeals case], the estate bore the initial expenses and risks of litigation. Because of this, it would be fundamentally unfair to allow the Hospital to collect on its lien without paying its prorated share of the legal expenses. [45] The New Mexico court's reasoning is again persuasive and applicable to this case. [46] In the past, we have examined the common fund doctrine and its purpose of preventing unjust enrichment. The doctrine holds that `a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney's fee from the fund as a whole.' [47] The doctrine is implicated any time one litigant's success releases well-defined benefits for a limited and identifiable group of others. [48] An underlying rationale of the doctrine is to prevent unjust enrichment: As explained by the United States Supreme Court, `persons who obtain the benefit of a lawsuit without contributing to its cost are unjustly enriched at the successful litigant's expense.' [49] We determine that application of the common fund doctrine here is appropriate for the same reasons we described in Edwards v. Alaska Pulp Corporation : The primary reasons for applying the common fund doctrine to this case are to prevent unjust enrichment and provide reasonable compensation to class counsel. In this case, the plaintiffs' lawyers created a fund that would not otherwise exist. The fund contains a specified amount, and it benefits a limited community.... Thus the doctrine allows fees to be spread among those benefited by the suit in proportion to the benefits they received. Without application of the doctrine in this case, the fund's beneficiaries would receive a clear benefit from the efforts of the plaintiffs' attorneys whose work created the fund, while those attorneys would not be sufficiently compensated. We conclude that the facts in this case give rise to the unjust enrichment or free rider concerns that the common fund doctrine is intended to address, and that application of the doctrine to this case is appropriate. [50] Other jurisdictions have established notice and intent prerequisites for the application of the common fund doctrine as it relates to pro rata reduction of attorney's fees. [51] We decline to apply these prerequisites to the cases at hand, and instead follow the reasoning adopted by the New Mexico Supreme Court and our previous decision in Edwards. We conclude that it would be unfair to allow the Consortium to collect on its health care provider lien without paying a pro rata share of attorney's fees when, without the common fund created by the plaintiffs' lawyers, the Consortium would have nothing upon which to enforce its lien. The Consortium is ready and willing to take the benefits of the common fund; therefore, it must also pay a fair share of the expenses used to obtain the fund. The Consortium disputes the relevance of the benefit it receives, claiming that both Rehbock and Joyner were officious intermeddler[s] who conferred incidental benefits on the Consortium and thus cannot appeal to claims of unjust enrichment. The Consortium also contends that because no contract existed between it and Rehbock, any benefits he conferred upon the Consortium were gratuitous and do not require restitution. [52] The Consortium maintains that Rehbock did not engage in active representation on the Consortium's behalf, but rather was working for his own client in conducting the settlement as he did, making the Consortium merely an incidental beneficiary. In support of this assertion, the Consortium cites to the Washington Supreme Court decision in Lynch v. Deaconess Medical Center, which held, in part, that the fact that Deaconess eventually recovered this amount [that it was owed] is only an incidental benefit derived from Mr. Lynch's services to his client. [53] We decline to follow the reasoning of the Washington Supreme Court, instead we adopt the approach of the New Mexico Supreme Court in Martinez which also explicitly rejected the hospital's claim that it was merely an incidental beneficiary of the lawyer's services for his client: We do not agree that the benefit the hospital receives from the judgment or settlement is merely incidental. If the attorney for the patient does not secure a judgment or settlement, the hospital has nothing to which it may attach its lien. At that point, the hospital/patient relationship truly is nothing more than a creditor/debtor relationship, and the hospital must use its own legal resources to recover its funds. In contrast, if the patient's attorney secures a judgment or settlement (as the attorney did in this case), the hospital recovers money due without expending its legal resources. If we did not allow division of the legal costs, hospitals would be encouraged to sit back and reap the rewards of another's labor at that party's expense. We do not believe that is consistent with public policy in New Mexico. [54] Distinguishing indirect beneficiaries such as mortgage holders or utility companies that are paid by customers who have secured recoveries, the court observed that providers that have contract assignment, subrogation, or statutory lien rights ... have a recognized interest in the accumulation of a fund from a specific source and receive a direct benefit from the attorney's labor. [55] Again, we conclude that the New Mexico Supreme Court's reasoning is persuasive: The Consortium benefited directly, not incidentally. The final policy argument we consider is the Consortium's allegation that Rehbock and Joyner committed a variety of ethical violations that should prevent them from obtaining a pro rata fee from the Consortium. We conclude that these ethical allegations lack a sound basis in both cases. First, in Warden, the Consortium charges that Ethics Opinion 92-3 requires an attorney in charge of settlement funds containing a specific allocation for a third-party lien to use the amount designated to satisfy the lien. Allstate's check was in payment of medical lien regarding David Warden for treatment provided as a result of accident on 2/15/2000, was in the exact amount of the Consortium's lien, and was made payable to the order of Rehbock Rehbock & Wittenbrader in trust for David Warden, and ALASKA Native Medical Center. The Consortium alleges that Allstate intended the lien to be paid in full. The Consortium further accuses Rehbock of now claiming to be attorney for the Consortium, of being an unethical attorney in segregat[ing] the funds in the settlement to make his own claim to the funds without the nonclient's consent, and of switching sides mid-settlement [to] structure a forced exchange. The Consortium also alleges that there is no evidence that Rehbock's fee agreement with Warden was a fee-sharing arrangement that would allow Rehbock to claim attorney's fees from the Consortium, and thus that Rehbock's attempt to do so crosses the line marked by Rule of Professional Conduct 1.8(f); he is now demanding `compensation for representing [another] client ... other than [the first] client.' The Consortium cites to our previous decisions that once a conflict of interest or ethical violation is established, the attorney is prohibited from collecting fees. [56] The Consortium's claims of ethical violations are without merit. Ethics Opinion 92-3 speaks of a valid assignment or perfected lien and indicates that the attorney is obligated to withhold and segregate those funds in question when disputes arise. Rehbock thus correctly declares that Ethics Opinion 92-3 does not suggest that an attorney must pay the full amount of a lien where there is a dispute regarding the lien's validity, amount, and susceptibility to pro rata reduction for fees, but rather simply directs the attorney to allow the court to decide the dispute. And the superior court did not err in invading the settlement for a reduction for fees as the Consortium alleges. Rehbock recognizes that Rule of Professional Conduct 1.15 clearly calls for him to keep separate the disputed joint check, since the rule directs that if a dispute arises concerning the interests of an attorney and a third-party property that is in the attorney's possession, the attorney should keep the property separate. Rehbock notes that the Allstate check was payable to Warden and ANMC and thus required them to resolve their dispute as to who was entitled to how much of it. We agree with Rehbock that he handled the disputed check in accordance with the Rules of Professional Conduct. None of the Consortium's ethical allegations bear up under scrutiny. Second, in E.R., the Consortium alleges that Joyner had a conflict of interest because he was attempting to claim his own fees from the settlement funds and because an attorney acts unethically in asserting a claim to trust funds for which he or she is trustee after his or her firm has been paid in full. The Consortium also alleges that Joyner's attempt to secure additional fees for himself from the liened funds undercuts the statutory lien and goes against Rule of Professional Conduct 1.8(f), as he is now demanding compensation for representing [another] client ... other than [the first] client. The Consortium asserts that Joyner could have refused to advocate the lien in the settlement or could have negotiated with the Consortium (with E.R.'s consent) for the price of his advocacy, but that [w]aiting until after settlement to claim more money is unethical. The Consortium further maintains that Joyner violated Rule of Professional Conduct 1.15(b) which requires an attorney, upon receiving funds in which a third person has an interest, to promptly notify that person and to promptly deliver to the ... third person any funds or other property that the ... third person is entitled to receive. The Consortium advances an argument similar to the one asserted in Warden, citing to Alaska's general rule that once a conflict of interest or ethical violation is established, the attorney is prohibited from collecting fees. [57] We determine that the Consortium's claims are inaccurate for several reasons. First, Joyner was not attempting to secure more fees for himself, as his fees had already been paid; rather, he was seeking on behalf of his client to require the Consortium to reimburse E.R. for a portion of E.R.'s expenses. Second, the only basis on which the superior court appears to have found a conflict of interest was the fact that Joyner advocated the lien in the settlement and then advocated against its validity afterwards. But Joyner's position on the lien's behalf does not amount to an unethical breach. Third, Joyner properly disclosed the receipt of the funds into his trust account, gave notice that there was a dispute over the amount that the Consortium was entitled to receive, and informed the Consortium that the funds would be held in trust until the dispute was resolved. [58] We conclude, therefore, that the Consortium's ethical allegations against Joyner are unfounded.