The Passive Beneficiary: When Can an Applicant’s Attorney Be Paid From a Lien Claimant’s Recovery in California?

The Passive Beneficiary: When Can an Applicant’s Attorney Be Paid From a Lien Claimant’s Recovery in California?

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There are many disputed cases where an applicant’s attorney may be successful in proving that an industrial injury occurred or that an employment relationship existed. This in turn will often result in a defendant having to pay, adjust or litigate outstanding lien claims. Where the lien claimant did not participate in the underlying proceedings, the applicant’s attorney may be left asking, “Why should the lien claimant directly benefit from my services without having to pay me?”

Indeed, whether an applicant’s attorney can be paid from a lien claimant’s recovery is an interesting question. In Tapia v. Media News Group, Inc., 2011 Cal. Wrk. Comp. P.D. LEXIS 557, a WCAB panel addressed whether the applicant’s attorney was entitled to an attorney’s fee from a $1.1 million dollar lien settlement between a defendant and Medi-Cal (DHS).

The facts in Tapia were that, after applicant’s counsel successfully litigated an employment issue, a Compromise and Release Agreement settled the case for $5,000,000 less $28,300.48 payable to applicant's attorney for costs, less $1,100,000 to DHS for its medical lien and less $774,339.00 to applicant's attorney as an attorney's fee. The applicant's attorney's lien against DHS was deferred with jurisdiction reserved.

At subsequent proceedings, the issue for determination was whether the applicant’s attorney was entitled to an attorney’s fee from the recovery of DHS. In analyzing the issue, the WCAB panel, which adopted and incorporated the WCJ’s Report, noted:

Where there are two representatives in the proceeding, two distinct approaches developed in the case law. One approach is to determine whether there is, in fact, a passive beneficiary. This is set forth in Kavanaugh v. City of Sunnyvale (1991) 233 Cal. App. 3d 903, 56 Cal. Comp. Cases 542. The Court opined the relative contributions by each counsel should not be weighed in determining whether an attorney's fee should be awarded believing it would "likely lead to inconsistent and unfair results."

The WCAB further noted:

The other approach is whether there was active participation. Kindt v. Otis Elevator (1995) 32 Cal. App. 4th 452, 60 Cal. Comp. Cases 84; Gapusan v. Jay (1998) 66 Cal. App. 4th 734, 63 Cal. Comp. Cases 1144; Hartwig v. Zacky Farms (1992) 2 Cal. App.4th 1550, 57 Cal. Comp. Cases 28 In these cases, a showing of the nature of the participation must be made to prevent an attorney's fee from being assessed against an intervenor or, in this case, a lien claimant.

The WCAB placed particular reliance on Hartwig, supra. In Hartwig, the Court reasoned:

If the lienholder desires to avoid apportionment, it must provide the trial court with sufficient factual detail to establish that its activities constituted a conscientious effort in the circumstances to address the substantive issues encompassed by the lienholder's case. (See Walsh I, supra, 133 Cal. App, 3d at p. 768, fn. 1.) Whether the showing by the lienholder in any one instance constitutes substantial evidence of active participation will necessarily turn upon the particular facts and events involved in the action.

In finding that DHS was not merely a passive beneficiary and in ultimately denying applicant’s counsel’s attorney fee request, the WCJ noted:

Based on the appearances noted in the case file, lien claimant's Declaration and the settlement documents in this case, I find Medi-Cal was not a passive beneficiary of a fund created by the efforts of applicant's counsel. The number of actual appearances set forth in the case file and its appearance at the Mediation represent more than a token appearance. Further, the fund from which the attorney's fee is being sought was the product of negotiations between Medical and defendant and not between defendant and applicant. Where there is participation by two separate counsels, the attorney's fee for each counsel is determined by the amount of recovery for each respective party. In this case, the attorney's fee awarded is payable from the applicant's settlement and the lien claimant representative fee would be from the negotiated settlement or separate agreement with lien claimant. In Draper v. Aceto (2001) 26 Cal. 4th 1086.1986) 187 Cal. App. 3d 1273, the Court held the question of active participation was a question of fact and wrote "Where such active participation is demonstrated, sound policy reasons (prolonged litigation and likely duplicative efforts) militate against efforts to weigh the relative contributions of counsel in an attempt to avoid liability for the other party's attorney's fees."

When the underlying case involves a “threshold” issue, such as injury or employment, if there are liens involved, there is the potential for the applicant’s attorney to argue that the lien claimant was a “passive” beneficiary to his services. If the applicant’s attorney can establish that the lien claimant was a “passive” beneficiary, the applicant’s attorney may be entitled to an attorney’s fee from the lien claimant’s recovery. Whether the lien in question is a Medi-Cal lien, an EDD lien, or a million dollar treatment lien, the analysis applied by the WCAB in Tapia provides an excellent guide for analyzing an applicant’s attorney’s entitlement to an attorney’s fee from a lien claimant’s recovery.

Reminder: Be sure to check the subsequent history of a case before citing to it.

© Copyright 2012 LexisNexis. All rights reserved. This article will appear in an upcoming issue of California WCAB Noteworthy Panel Decisions Reporter.

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