Court Opinion

ID: 9758544
Source: CourtListenerOpinion
Date Created: 2023-08-28 23:35:36.368315+00
Date Added: 2024-06-11T07:28:52.785293
License: Public Domain

The opinion of the court was delivered by
Pashman, J.
The single question in this case is whether the State’s right of subrogation under the New Jersey Medical Assistance and Health Services Program (Medicaid), pursuant to N. J. S. A. 30:4D-7(j), is governed by equitable principles. The State asserts that principles of equitable subrogation normally applied to private insurance carriers are inapplicable under the instant statute. Accordingly, it argues that in seeking reimbursement from a Medicaid recipient who has been successful in obtaining a recovery from a third party tortfeasor, it need not pay its pro rata share of that person’s counsel fees.
I
The New Jersey Medicaid statute is an outgrowth of Title XIX of the Eederal Social Security Act, which provides grants to states for such medical assistance programs. 42 U. S. C. A. § 1396 et seq. As such, the state plan is designed to provide “all benefits for medical assistance provided by the [federal 'act]” to persons who would otherwise be without sufficient resources to obtain such funds. N. J. S. A. 30:4D-2. It is also required by the federal legislation to contain certain mandatory provisions, among which is 42 U. S. C. A. § 1396a(a) (25), which provides in pertinent part, “[that] a state plan for medical assistance must”
provide (A) that the State or local agency administering such plan will take all reasonable measures to ascertain the legal liability of third parties to pay for care and services (available under the plan) *365arising out of injury, disease, or disability, * * * and (C) that in any case where such a legal liability is found to exist after medical assistance has been made available on behalf of the individual, the State or local agency will seek reimbursement for such assistance to the extent of such legal liability;
N. J. S. A. 30:4D-7(j) repeats the language of the federal provision, adding that “[i]n any case where such a legal liability is found the department [of institutions and agencies, now human services] shall be subrogated to the rights of the individual for whom medical assistance was made available.”
As we interpret the act, the State has two avenues by which it may seek reimbursement for Medicaid payments: it may either institute an action directly against the tortfeasor who is liable for the medical expenses or seek recovery by way of the Medicaid recipient through a right of subrogation. This conclusion is in harmony with the rights accorded the federal government under the parallel federal provision.1 See United States v. Merrigan, 389 F. 2d 21, 24 (3 Cir. 1968); Maddux v. Cox, 382 F. 2d 119, 124 (8 Cir. 1967); United States v. Greene, 266 F. Supp. 976, 978-79 (N. D. Ill. 1967); Tolliver v. Shumate, 151 W. Va. 105, 150 S. E. 2d 579, 582 (1966). See generally Long, “The Federal Medical Care Recovery Act: A Case Study in the Creation of Federal Common Law,” 18 Vill. L. Rev. 353, 372 (1973); Bernzweig, “Public Law 87-693: An Analysis and Interpretation of the Federal Medical Care Recovery Act,” 64 Colum. L. Rev. 1257, 1265 (1974).
*366'Although the state statute contains no provision expressly referring to an independent right of recovery, as does 42 U. S. C. A. § 2651 in establishing such a federal right, we conclude that the existence of such a right is evident from the language of that section and the legislative history surrounding the passage of N. J. S. A. 30:4D-7.(j). The mandate in 42 U. S. C. A. § 1396a(a) (25) (C), directing the states to “seek reimbursement,” is expressly embodied in our own provision. This language must be read in pari materia with the rights existing under the federal scheme for seeking reimbursement, and more specifically, with the independent right of recovery specified in 42 U. S. C. A. § 2651.
This interpretation of our act comports with the Senate report accompanying the original version of 42 U. S. C. A. § 1396, which stated that “if medical assistance is granted and legal liability of a third party is established later, the State or local agency must seek reimbursement from such party.” The Report of the Committee on Finance to the United States Senate, on the Social Security Amendments of 1967, 90 Cong., 1 Sess., S. R. No. 744 at 184, U. S. Code Cong. & Admin. News 1967, pp. 2834, 3022. The House report contained similar language. Report on Committee of Ways and Means on H. R. 12080, 90 Cong., 1 Sess. H. R. No. 544 at 123. The legislative history of our own statute contains no reference to this independent right of recovery, but the concern for costs of the program voiced by many legislators suggests an unmistakable intent to afford the State every opportunity to recoup its payments from third parties. Public Hearing before Senate and Assembly Committees on Institutions and Welfare on Concurrent Resolution No. 26 (Medicaid) (April 11, April 19 and April 26, 1969) (hereafter “Public Hearing”). Thus we interpret the additional reference to a right of subrogation in N. J. S. A. 30:4D-7(j) as a precautionary measure by the Legislature to clearly define these two routes of recovery by the State.
*367II
In the instant case payments amounting to $481.40 were made under the Medicaid scheme to William Hedgebeth, an infant-pedestrian who was injured on September 10, 1970 when he was struck by a car. The infant’s mother, suing both individually and as guardian ad litem for the child, sought compensation for loss of services and future earnings and for medical expenses resulting from his injuries. Following a jury verdict finding liability by the defendant tortfeasor, Medford, the parties reached a settlement. The trial court’s order embodying the terms of the settlement awarded $3,000 to the infant and $4,500 to the mother, with medical bills, costs and the $1,875 counsel fee to be paid out of the latter amount.
The Division of Medical Assistance and Health Services first learned of the recovery when plaintiffs requested payment of the judgment from the Unsatisfied Claim and Judgment Fund. N. J. S. A. 39:6—61 et seq. Acting on behalf of the Division, the Attorney General filed a cross-motion with the trial court asking for $481.40 out of the judgment as reimbursement for Medicaid payments to Hedgebeth. Although the trial judge initially considered reopening the judgment on the ground that the parties had not been given timely notice of the State’s claim,2 he held that the State’s right to be reimbursed for Medicaid payments under the act was subject to payment of its pro rata share of attorneys’ fees on the amount recovered. 130 N. J. Super. 1, 4 (Law Div. 1974). Accordingly, he ordered plaintiffs to pay the State *368$361.05, the amount of Medicaid payments less the State’s pro rata share of counsel fees, $120.35.
The Appellate Division reversed in a unanimous per curiam decision. 139 N. J. Super. 41 (1976). In rejecting the trial court’s application of the rule governing private insurance contracts, the court emphasized the legislative aim of conserving public funds and the “absence of any specific legislative authorization, federal or state, to deduct a pro rata share of counsel fees from third-party liability recoveries.” Id. at 46. It found support for its result in Fireman’s Fund Indemn. Co. v. Batts, 11 N. J. Super. 242 (App. Div. 1951), which held that a pro rata share of counsel fees need not be deducted where reimbursement was sought pursuant to the workers’ compensation provisions. Additionally, it noted that the infant had technically not incurred any costs in the action because the trial court had ordered his mother to pay counsel fees out of her award; therefore, it concluded, the State would not be obligated to pay a share of counsel fees even if equitable principles were applied.
We granted plaintiffs’ petition for certification nunc pro tunc, 71 N. J. 519 (1976), and allowed the case to be argued solely by the Trial Attorneys of New Jersey and the New Jersey State Bar Association in their capacity as amici curiae. For the reasons discussed below, we reverse the judgment of the Appellate Division and hold that the State’s right to recovery under the Medicaid Act is subject to equitable principles. Accordingly, we find that the State, in seeking to benefit from a Medicaid recipient’s judgment against a third-party tortfeasor, must pay its pro rata share of counsel fees incurred in obtaining that recovery.
Ill
 Initially, we note that this dispute would have been resolved under settled principles if the same language employed in the Medicaid provision in question had appeared instead in a contract by a private insurance carrier. In this *369State a right of subrogation carries with it the equitable requirement of paying a pro rata share of counsel fees. See Breslin v. Liberty Mut. Ins. Co., 125 N. J. Super. 320, 327 (Law Diy. 1973), rev’d on other grounds 69 N. J. 435 (1976); Klacik v. Kovacs, 111 N. J. Super. 307 (App. Div. 1970), certif. den. 57 N. J. 237 (1970). Although earlier eases in other jurisdictions sometimes had refused to follow this rule, see, e. g., Cary v. Phoenix Ins. Co., 83 Conn. 690, 78 A. 426 (1910); Pontiac Mut. County Fire & Lightning Ins. Co. v. Sheibley, 279 Ill. 118, 116 N. E. 644 (1917); Illinois Ins. Exch. Ins. Co. v. Braun, 280 Pa. 550, 124 A. 691 (1921); John Wanamaker, New York, Inc. v. Otis Elevator Co., 228 N. Y. 192, 126 N. E. 718 (1920), it is now clearly accepted. See, e. g., Commercial Stand. Ins. Co. of Ft. Worth v. Combs, 249 Ark. 533, 460 S. W. 2d 770 (1970); General Exch. Ins. Corp. v. Driscoll, 315 Mass. 360, 52 N. E. 2d 970, 973 (1944); National Union Fire Ins. Co. v. Grimes, 278 Minn. 45, 153 N. W. 2d 152, 156 (1967). See generally Appleman, 6A Insurance Law and Practice (1973 ed.), § 4096 at 287, n. 73.35; 8 Insurance Law and Practice (Supp.), § 4935 at 366; Annot., “Attorney’s fee-recovery from insurer,” 2 A. L. R. 3d 1441 (1965).
This rule is based on the equitable .principle that a carrier should not be entitled to enjoy the fruits of the assured’s judgment against a tortfeasor without contributing in any way to the costs or burdens of litigating that claim.3 Breslin v. Liberty Mut. Ins. Co., 69 N. J. 435, 439 (Pashman, J., dissenting) ; Klacik v. Kovacs, supra, 111 N. J. Super. at 312; Brown v. T. W. Phillips Gas & Oil Co., 105 F. Supp. 479 (W. D. Pa. 1952). The fact that an independent action might have been brought in order to obtain reimbursement for *370amounts which had been paid under a policy does not militate in favor of an opposite conclusion since the insurer still would have had to bear the costs of reasonable attorneys’ fees.
The State, however, argues that the equitable principles underlying the subrogation doctrine are inapplicable where a comprehensive statutory scheme is concerned. In support of this proposition it urges the Court to adopt the position taken in eases dealing with workers’ compensation; in particular, it relies heavily on the reasoning in Fireman’s Fund Indemnity Co. v. Batts, supra. Additionally, it argues that payment of a pro rata share of counsel fees would violate N. J. S. A. 52:17A—4, 13, prohibiting the State from retaining private counsel who is not appointed by the Attorney General and approved by the Governor. We do not find these arguments to be persuasive.
The main thrust of the State’s argument is related to the fact that it has an independent right of recovery under the act. Relying upon United States v. Nation, 299 F. Supp. 266 (N. D. Okl. 1969), it argues that since no deduction for plaintiffs’ fees would have been allowed if it had chosen to seek reimbursement directly from the tortfeasor, no distinction should be made where recovery is sought through a right of subrogation. But there is no reason to believe that the existence of an independent right of recovery by the State should affect the equitable nature of the State’s right where it seeks reimbursement through subrogation. Significantly, federal eases considering the parallel federal provisions have emphasized the fact that the two alternative ways of seeking recovery are independent of each other. See ante at 366. At least one court has referred to the government’s right as being “an equitable remedy of subrogation,” United States v. Merrigan, supra, 389 F. 2d at 24; and in United States v. Greene, supra, it was said:
“Subrogation” is a term of legal art which we assume would not be employed by the drafters of the statute unless they intended it to be construed in its normal sense. In legal context, subrogation *371is a derivative right held by one who, while under a legal or equitable obligation to another person, pays that person a debt owed by a third party.
[266 F. Supp. at 979]
Similarly, the Appellate Division predicated its holding on the ground that the Legislature, in the enactment of N. J. S. A. 30:4D-7(j), did not specifically authorize the deduction of the costs and expenses of litigation in effectuating a third party recovery. There is no basis, however, for concluding that the Legislature did not intend by its very careful use of the term “subrogation” to import the equitable incidences of that remedy. As we pointed out, that doctrine is distinctively equitable in nature and is generally understood to mean that a party entitled to the right of subrogation should bear or share the reasonable costs which have been incurred in bringing that right to fruition.
Furthermore, the result reached today should not frustrate the legislative policy inherent in the mandate to seek reimbursement. Although the history of the act indicates a strong legislative desire to minimize the costs of the program, see ant& at 366, we cannot conclude that the Legislature would have intended a needy recipient to subsidize the State’s recovery of medical expenses.
Fireman’s Fund Indemnity Co. v. Batts, supra, is easily distinguishable. Although some courts have characterized a carrier’s right to reimbursement under workers’ compensation as a right to “statutory subrogation,” see Roberts v. All American Engineering Co., 104 N. J. Super. 1, 8 (App. Div. 1968), certif. den. 53 N. J. 351 (1969); Prudential Ins. Co. v. Laval, 131 N. J. Eq. 23, 26 (Ch. Div. 1942), that statute contains no express provision for a right of “subrogation” as does N. J. S. A. 30:4D-7(j). Moreover, Batts was decided under a statute which specifically authorized a carrier to seek reimbursement from an employee if his recovery, after “the expenses of suit and attorney’s fee” were deducted, was equivalent to or greater than the employer’s' liability. L. 1936, c. 162, § 1 at 382. Under the State’s interpretation of *372the Medicaid statute, if the net amount recovered from the tortfeasor after deduction of counsel fees and expenses, is equivalent to, or less than, the amount received in Medicaid payments, the State would be in a position to demand the entire recovery. In such a situation the victim would be left to bear the entire cost of bringing the suit, including counsel fees, even though the entire benefit of the judgment went to the State.
Furthermore, we note that it is difficult to draw any conclusion as to legislative intent from the workers’ compensation experience since immediately following the decision in Batts the Legislature amended that statute to require a carrier seeking reimbursement to deduct the employee’s expenses of suit and attorneys’ fee from its recovery. N. J. S. A. 34:15-40. If anything, this would support amici’s argument that traditional equitable principles should be applied regardless of whether reimbursement is sought pursuant to a statutory scheme.
Our recent decision in Breslin v. Liberty Mut. Ins. Co., supra, is not to the contrary. The Court was concerned solely in that case with whether to apply New York law in deciding whether attorneys’ fees were deductible from a disability insurance carrier’s lien against an employee’s third party fecovery. As the Appellate Division there noted:
The conflict of laws between the two states is clear: New Jersey favors contribution to the costs of suit by the insurer where such insurer has benefited from a third-party recovery; New York law precludes such deductions for attorneys’ fees and costs from the liens of disability insurers.
[134 N. J. Super. 357 at 362.]
Reiterating the fact that the subrogation right had arisen by virtue of the law of a sister state, and not as a matter of private insurance law, the court held:
We consider the distinction to be crucial. * * * In the instant case, . . ., the issue is not what the local law should be, but rather *373whether that law, or a conflicting foreign law, shonld apply. We have concluded that New York law should apply.
[Id. at 366.]
We affirm substantially for the reasons set forth in the Appellate Division opinion, adding that the policy reasons favoring the rule in this State were insufficient to overcome the requirement that foreign law be applied.
 Nor can we accept the State’s argument that a deduction for a pro rata share of counsel fees would be tantamount to the State’s hiring plaintiffs’ counsel, and therefore violative of N. J. S. A. 52:17A-4 or 13. These provisions were not intended to prohibit the State from paying its fair share of counsel fees where no formal relationship exists between the State and private attorneys, and a deduction for fees is specifically authorized under a separate statutory provision. See State v. United States Steel Corp., 22 N. J. 341, 360 (1956) (N. J. S. A. 52:17A-13 did not prevent attorneys from receiving a fee under N. J. S. A. 2A:37-30 and 35); State v. Otis Elevator Co., 12 N. J. 1, 9 (1953) (N. J. S. A. 2:53-23 has the effect of removing other statutory obstacles to payment of fee, such as N. J. S. A. 52:7A-13).
We find the treatment of a similar argument in Furia v. Philadelphia, 180 Pa. Super. 50, 118 A. 2d 236 (Super. Ct. 1955) to be persuasive. In that case the city attempted to exercise a right of subrogation arising out of payments to a public employee under a disability benefits statute. The Court found that requiring the city to pay a pro rata share of counsel fees would not violate the prohibition on hiring private counsel. As under our statute, the relevant inquiry focused on the nature of the relationship between the private attorney and the city. The court explained that there had been no contract, either special or implied, between the city and the attorney.
Finally, we need deal only briefly with the assertion that a deduction for counsel fees is not required because the fees in this case were to be paid entirely out of the mother’s *374recovery. We are satisfied that both awards — to the mother and the infant — should be treated alike for the purposes of the State’s claim. Even if a technical distinction exists between the awards made to the mother and the child, such an argument runs counter to the overriding purpose of the statute. It is logical to assume that since the mother’s recovery was also to be used to pay the child’s medical bills, there was a substantial unity between the two awards.
Accordingly, we conclude that where the State seeks to exercise its right to be subrogated to a Medicaid recipient’s claim against a third party, it must act in accordance with equitable principles. We therefore hold that the State must pay its pro rata share of counsel fees in seeking to obtain reimbursement of the $481.40 paid to Hedgebeth. The judgment of the Appellate Division is reversed. Plaintiffs are hereby directed to pay the State $361.05, which is the amount of the Medicaid payment of $481.40 less the State’s pro rata share of counsel fees, $120.35.

The federal government’s right of subrogation under the act- is governed by state law and may be- exercised only where the Medicaid recipient is entitled to recover from the tortfeasor for medical expenses paid under the act. See United States v. Merrigan, supra, 389 F. 2d at 24. It is clear that such a right exists in this State since it is settled that a tort victim may recover damages even though he has already received payments from a “collateral source.” See, e. g., Patusco v. Prince Macaroni, Inc., 50 N. J. 365, 368 (1967). This conclusion is supported by the express wording of the statute, which provides for a right of subrogation.

Initially, there had been some confusion as to whether James or William Hedgebeth had received payments for medical treatment. Although the State had sent letters to plaintiff on February 26 and March 29, erroneously asserting that James had received the payments, it correctly notified them on April 30, 1974 of its claim for payments made to William. Following the trial court’s decision, no dispute as to this issue arose, and plaintiffs have not asserted that the judgment should be reopened.

It has often been stated that the doctrine of subrogation is equitable in nature. See, e. g., Reese v. AMF-Whitely, 420 F. Supp. 985, 989 (D. Neb. 1976) ; Liberty Mut. Ins. Co. v. Thunderbird Bank, 113 Ariz. 375, 555 P. 2d 333 (1976) ; Restatement of Restitution, § 162 at 653 (1937).