Court Opinion

ID: 9765768
Source: CourtListenerOpinion
Date Created: 2023-08-29 04:18:40.546331+00
Date Added: 2024-06-11T07:30:15.536377
License: Public Domain

*228DISSENTING OPINION BY
Judge LEADBETTER.
In this ease we are called upon to resolve a conflict between A. C. and S. v. Workmen’s Compensation Appeal Board (Dubil), 151 Pa.Cmwlth.314, 616 A.2d 1085 (1992) and more recent decisions of this court, including Allegheny Beverage Corp. v. Workmen’s Compensation Appeal Board. (Wolfe), 166 Pa.Cmwlth. 646, 646 A.2d 762 (1994) and Mrkich v. Workers’ Compensation Appeal Board (Allegheny County Children & Youth Services), 801 A.2d 668 (Pa.Cmwlth.2002) as to whether, in calculating subrogation payments and credits arising from a claimant’s third-party tort recovery involving an annuity to be paid over a term of years, the attorney fee component is expressed as a percentage of the total guaranteed recovery or of the present or cost value of that recovery. Because I believe not only that it is juris-prudentially sound to follow the published opinions of two recent panels, but also that those opinions were correctly decided, I must respectfully dissent.
The majority correctly notes that Wolfe and Mrkich involved facts which are distinguishable from the case at hand. However, the analysis in those cases did not depend upon those distinguishing facts, but were grounded in basic principles of subrogation law. These general principles were reviewed by this court in Mrkich. There, the court stated:
Pursuant to Section 319 of the Act, 77 P.S. § 671, where the compensable injury is caused in whole or in part by a third party, the employer who has paid compensation benefits to the. injured employee is subrogated to the right of the employee against the third-party tort-feasor. Where suit is brought and a recovery obtained against the tortfeasor, the employer has a past due lien against that recovery in the amount of the past benefits paid. Employer has an absolute right to immediate payment of this past due lien from the recovery fund after payment of attorneys’ fees and litigation expenses. [FN2] Thompson v. Workers’ Comp. Appeal Bd. (USF & G Co.), 566 Pa. 420, 781 A.2d 1146 (2001); Rollins Outdoor Advertising v. Workmen’s Comp. Appeal Bd. (Maas), 506 Pa. 592, 487 A.2d 794 (1985)....
It is now well settled that the “gross method” is the accepted means of calculating payments pursuant to employer’s subrogation interest. P & R Welding & Fabricating v. Workmen’s Comp. Appeal Bd. (Pergola), 549 Pa. 490, 701 A.2d 560 (1997). See also 34 Pa.Code § 121.18; Emanuel v. Workmen’s Comp. Appeal Bd. (Coco Bros., Inc.), 692 A.2d 1182 (Pa.Cmwlth.1997). Under the gross method, after deducting the attorney’s fees and expenses of litigation (collectively, “costs”), employer’s lien is satisfied by payment of the lien amount minus the proportionate share of costs attributable to the lien. [FN3] Whatever remains of the recovery fund is paid to claimant. For purposes of gross method computation, employer is considered to have been paid, in satisfaction of its lien, both the cash it actually received and the proportionate share of costs it constructively paid. Similarly, claimant is considered to have been paid both the cash actually received and the share of costs attributable to that payment. This total amount attributed to claimant is known as the “balance of recovery.” If, by the time the tort recovery is obtained the claimant is no longer disabled, each side will have obtained what it is due and will have paid its proportionate *229share of costs. Where claimant has not fully recovered, however, the employer retains a contingent subrogation interest in the balance of recovery paid to claimant, and receives a credit in this amount toward future compensation benefits to the extent they become payable. Employer is excused from paying future benefits until this credit is exhausted.
This period of time, measured in weeks, is computed by dividing the credit by the weekly compensation benefit amount. The result is known as the “grace period.” Since the balance of recovery attributed to claimant included claimant’s proportionate share of the litigation costs, during each week of the grace period employer must repay the claimant for the litigation costs attributable to the compensation benefit it is excused from paying.
Id. at 674-75 [quoting Budd Co. v. Workers’ Comp. Appeal Bd. (Settembrini), 798 A.2d 866, 868-69 (Pa.Cmwlth.2002)]. In Mrkich, the court further opined that:
Several fundamental principles guide us in our calculations under the gross method. First, at the heart of the gross method is the notion that fees and offsets are not taken until the party charged has received the benefit giving rise to the fee or offset. Thus, employer’s share of counsel fees is deducted or paid incrementally as each subrogation payment or credit is received. It is basically a “pay as you go” system. This is the primary difference between the gross method and the now discredited net method. P & R Welding, 549 Pa. at 496-99, 701 A.2d at 564-66.... Finally, where the recovery takes the form of an annuity, it is the total value of future payments upon which the calculations are to be based, not the present value at the time of settlement. Wolfe II, 646 A.2d at 767-68.
801 A.2d at 675-76 (footnote omitted). Further, an employer continues to have a contingent subrogation right in future annuity payments to the extent a claimant remains disabled and entitled to benefits. Id. at 677.
With respect to the issue at hand, the court in AC. held that the present or cost value of the annuity was the proper figure upon which to determine the percentage the fees and costs bear to the total recovery, while the court in Wolfe and Mrkich held that the total of guaranteed payments should be used. In other words, the attorney fee percentage1 would be calculated under AC. by dividing the fees and costs paid by the cost or present value of the annuity (plus any lump sum cash payment), and under Wolfe and Mrkich by dividing fees and costs by the total guaran*230teed payout. For several reasons, I believe the later cases express the better view.
First, the result in AC. was based solely upon a New Jersey trial court decision, Merendino v. FMC Corp., 181 N.J.Super. 503, 438 A.2d 365 (1981), which did not involve subrogation, nor any other question regarding the calculation of various parties’ respective shares of a given counsel fee. Rather, Merendino considered how large a fee should fairly be allowed and actually paid on a settlement involving, in part, a minor’s wrongful death claim. Moreover, the issue was whether the fee should be based upon the cost of the annuities or upon the present value attributed to them in an expert report, a far different choice than that presented here. The court, in opting to use the actual cost to determine the allowable fee, stated:
[The higher] calculation assumes an 8.5% rate or interest return, whereas the cost of the annuities reflects the actual present value in the marketplace. The marketplace cost is the acid test in a case like this — with fixed, guaranteed, periodic payments not requiring actuarial assumptions as to life expectancy or survivorship — rather than calculations of “value” that involve interest rate estimates for the future.
438 A.2d at 368. To the extent that the analysis in Merendino has any relevance to the present inquiry, its reluctance to rely upon expert assumptions and opinions tends to support the total value approach. While the present case involves an annuity purchased at a known cost at the time of settlement, structured settlements often, as in Wolfe, are provided by the defendant’s insurer and present value can be determined only by expert testimony. See Wolfe, 646 A.2d at 767. Thus, fact-finding and potentially costly hearings would frequently be needed to base calculations on present value, possibly leading to extended litigation. Since the total guaranteed payout is a known figure not subject to dispute, the parties’ counsel can readily do the calculations based upon that amount.
Next, as noted in Mrkich, using the cost or present value of the recovery to determine the counsel fee percentage will inflate that percentage in a way that will sometimes result in more fees being reimbursed than were actually paid by claimant. 810 A.2d at 676 n. 9 This is because, dividing the counsel fee by the lower present value rather than the full amount claimant will ultimately receive will result in a higher percentage rate. If employer pays that higher percentage rate on the full amount of the annuity payout in counsel fee reimbursements (because the annuity has relieved the employer of its compensation obligation), ultimately the fees reimbursed will be greater than the fees paid. This will not be a concern in a case like the present, in which the tort recovery would appear to far exceed the amount of compensation payable over claimant’s lifespan. It will, however, occur whenever the full amount of the recovery does not exceed the amount of employer’s compensation liability over the claimant’s lifetime.2 The *231theory underpinning the gross method is that each side pays his exact pro rata share of the fees and costs as he receives the benefit generated by litigation,3 so that if at the end of the day employer receives the benefit of the entire recovery through the grace period, it will have reimbursed all the fees claimant initially paid. Adjusting the fee percentage so that the reimbursement exceeds the actual fee payment would defeat the intended balance.
Most fundamentally, as explained in Wolfe, none of the other factors involved in traditional subrogation calculations is adjusted to reflect the time value of money. For instance, a grace period is calculated based upon the actual lump sum received by the claimant even though the interest that can be generated on that lump sum will make it last longer than the calculated grace period, i.e., future value of the recovery, although more accurate, is not used in the computation. Wolfe, 646 A.2d at 767-68. Similarly, although satisfaction of a subrogation lien may occur years after compensation payments were made, no interest is allowed on the reimbursement, nor is interest allowed on any of the various offsets and reimbursements allowed under the gross method subrogation scheme. As Wolfe recognizes, present or cost value is the lump sum amount which will generate sufficient interest to combine with that lump sum to fund the full annuity payout. Thus, to increase the counsel fee percentage by basing it upon present value rather than the actual guaranteed payments is, in effect, to build an interest factor into the reimbursement of fees. 646 A.2d at 768. This is inconsistent with the “pay as you go” concept of the gross method, and it is simply inappropriate to treat one component of the computations different from all others in this regard. Id. at 767-68.
Accordingly, I would reverse the order of the Board.
Judge COHN JUBELIRER and Judge LEAVITT join this dissenting opinion.

. These costs of recovery must be paid first. Pennsylvania Mfgs. Ass’n Ins. Co. v. Wolfe, 534 Pa. 68, 626 A.2d 522 (1993)[(Wolfe I)].

. In traditional gross method computation, the proportionate share of costs attributed to the lien is calculated by dividing the hen amount by the total recovery then multiplying this fraction by the to|al amount of costs. The same result may be reached by dividing the cost amount by the total recovery and then multiplying this fraction by. the amount of the past-due hen. The latter approach provides an added measure of flexibility where the calculation becomes more complicated, such as where the tort suit is resolved by a structured settlement rather than a lump sum payment. See Allegheny Beverage Corp. v. Workmen’s Comp. Appeal Bd. (Wolfe), 166 Pa.Cmwlth. 646, 646 A.2d 762 (1994)[(Wolfe II)].

. The percentage being discussed throughout this opinion includes both counsel fees and costs of litigation, but for the sake of simplicity, these combined costs are frequently referred to as fees or counsel fees.

. Take, for example, a settlement which provides for a lump sum payment of $80,000 and an annuity guaranteed to pay $10,000 per year for a period of 10 years. The present or cost value of the annuity is $75,000. Counsel fees and costs amount to $60,000 and employer has an outstanding lien of $20,000, leaving a lump sum balance to claimant of $60,000. Compensation benefits are payable at $8000/ year. The total guaranteed value of the settlement is $180,000, and its present or cost value is $155,000. Dividing the fees by each of these sums yields a fee percentage of 33.3% [actually 1/3] of the total value, and 38.7% on the present or cost value. On the initial lump sum, employer will have paid $6,666.67 of the counsel fees under the total value method and $7,741.94 under the present or cost value *231method. Claimant will have paid $53,333.33, or $52,258.06 respectively. If employer is relieved of a compensation liability throughout the annuity period [10 years at $8000/year = $80,000] and enjoys the subsequent grace period generated by the total of claimant’s share of the lump sum payment [$60,000] plus the additional amount by which the annuity payments exceeded the compensation obligation [$20,000], then at the end of the grace period, under the total value method employer will have reimbursed claimant $53,333.33 [1/3 of $80,000 + $60,000 + $20,000] and directly paid $6,666.67 in fees on its share of the lump sum distribution, for a total fee payment of $60,000. In contrast, under the present or cost value method, employer will have reimbursed claimant $61,920 [38.7% of $80,000 + $60,000 + $20,000] and directly paid $7,741.94, for a total of $69,661.94, significantly more than counsel fees and costs actually paid.

. See, e.g., P & R Welding, 549 Pa. at 496-99, 701 A.2d at 564-66.