Deffenbaugh Industries, Inc. v. Wilcox, 84,396.

• Decision Date: 29 September 2000
• Docket Number: No. 84,396.,84,396.
• Citation: 28 Kan. App.2d 19,11 P.3d 98
• Parties: DEFFENBAUGH INDUSTRIES, INC., and HARTFORD CASUALTY INSURANCE Co., d/b/a SPECIALTY RISK SERVICES, Appellants, v. WILLIAM E. WILCOX, and DAN LYKINS, Appellees.
• Court: Kansas Court of Appeals

28 Kan. App.2d 19

11 P.3d 98

DEFFENBAUGH INDUSTRIES, INC., and HARTFORD CASUALTY INSURANCE Co., d/b/a SPECIALTY RISK SERVICES, Appellants, v. WILLIAM E. WILCOX, and DAN LYKINS, Appellees.

No. 84,396.

Court of Appeals of Kansas.

Opinion filed September 29, 2000.

Hal E. Pierce, and Michael W. Wharton, of Couch, Pierce, King & Hoffmeister, Chartered, of Overland Park, for appellants.

Dan Lykins, of Bryan, Lykins, Hejtmanek & Fincher, P.A., of Topeka, for appellees.

Before BRAZIL, C.J., GREEN, J., and WILLIAM F. LYLE, JR., District Judge, assigned.

GREEN, J.:

Deffenbaugh Industries, Inc. (Deffenbaugh) and Hartford Casualty Insurance Co. (Hartford) appeal from a declaratory judgment granted to Dan Lykins, a Topeka attorney, and his client William E. Wilcox, in an action to recover attorney fees under K.S.A. 44-504. On appeal, Deffenbaugh and Hartford argue that they are not required to pay a proportionate share of Lykins' attorney fees under K.S.A. 44-504 because Deffenbaugh and Hartford were reimbursed for workers compensation expenses under an indemnity contract and not under statutory subrogation. We agree and reverse.

On October 1, 1997, Wilcox was injured in a work-related accident during the course of his employment with Deffenbaugh. Wilcox was injured when a can of window cleaner manufactured or packaged by Sherwin-Williams exploded in his hand.

On October 10, 1997, Deffenbaugh entered into an indemnity agreement with Sherwin-Williams regarding Wilcox's accident and injury. In that agreement, Sherwin-Williams agreed to reimburse Deffenbaugh and Deffenbaugh's workers compensation insurer, Hartford, for any expenses Deffenbaugh might incur as a result of any workers compensation claim Wilcox might make against Deffenbaugh. Specifically, the indemnity agreement provided in part as follows:

"Sherwin-Williams ... hereby agrees to indemnify Deffenbaugh Industries, Inc. for reasonable out-of-pocket expenses arising out of the work related injury of Mr. Wilcox, including but not limited to temporary disability payments, medical bills, handling charges and other administrative costs associated with handling the compensation claim. Additionally Sherwin-Williams ... agrees to make indemnity payments directly to Hartford ... when billed, providing sufficient backup documentation is provided by Hartford."

On October 22, 1997, Wilcox entered into a contract for legal services with Lykins wherein Lykins agreed to represent Wilcox in his personal injury claim against Sherwin-Williams. The agreement for attorney fees was 33 1/3% of whatever might be recovered on the personal injury claim by settlement without filing a lawsuit. Wilcox was represented by another attorney in Lykins' law firm, Roger D. Fincher, in his workers compensation claim against Deffenbaugh. On October 22, 1997, Lykins sent a letter to Hartford stating that he represented Wilcox's interests. The next day, Deffenbaugh informed Lykins that Sherwin-Williams agreed to reimburse Deffenbaugh for any workers compensation benefits paid as a result of Wilcox's accident.

On November 30, 1998, Wilcox settled his workers compensation claim against Deffenbaugh and Hartford for $27,902.75. Including the settlement amount of $27,902.75, Deffenbaugh and Hartford incurred $50,788.79 in expenses in connection with Wilcox's workers compensation claim. Lykins later negotiated a total settlement with Sherwin-Williams on Wilcox's personal injury claim. Lykins claims he negotiated a settlement for all of Wilcox's claims, including the workers compensation claim. The total settlement was for $275,000. From that amount, $50,788.79 was to be paid to Deffenbaugh and Hartford as reimbursement for their workers compensation expenses, with the remaining $224,211.21 going to Wilcox in satisfaction of his personal injury claim.

However, before Sherwin-Williams reimbursed Deffenbaugh and Hartford for the workers compensation expenses, Lykins notified Sherwin-Williams that under K.S.A. 44-504(b) he had an attorney fees lien on Deffenbaugh and Hartford's workers compensation subrogation claim. Specifically, Lykins claimed attorney fees in the amount of $16,929.60, which was one-third of the reimbursement amount. Instead of getting involved in the attorney fees dispute, Sherwin-Williams sent a check in the amount of $50,788.79 to Lykins. The check was made out to Wilcox, Lykins, Deffenbaugh, and Hartford. Lykins and Wilcox endorsed the check and sent it to Deffenbaugh and Hartford. Lykins enclosed a letter with the check which read:

"As you can see, Mr. Wilcox and I have endorsed the subrogation check and will allow your client to cash the check with the understanding that one-third of the check be deposited in an interest bearing trust account by your office in the amount of $16,929.60 which represents the attorney fee I am claiming regarding the recovery of the workmen's compensation subrogation claim.... I am also enclosing a letter from ... Sherman [sic] Williams ... in which [Sherwin-Williams] request[s] that the workmen's compensation check not be negotiated until the General Release is signed by all of the parties on the signature page of the Release."

Deffenbaugh and Hartford filed a declaratory judgment action against Wilcox and Lykins for a determination of whether Lykins was entitled to attorney fees relating to Sherwin-Williams' indemnification of Deffenbaugh's workers compensation expenses. Both parties moved for summary judgment.

At oral argument on the parties' cross motions for summary judgment, the trial court asked Lykins when he was informed of Deffenbaugh and Hartford's indemnity agreement with Sherwin-Williams. Lykins told the court that he did not learn of the indemnity agreement until "very late" in the process. After hearing arguments, the trial court granted Lykins and Wilcox's summary judgment motion. The trial court ruled that as a matter of law, Lykins was entitled to attorney fees in the amount of $16,929.60. The trial court rationalized:

"I am concerned that by sanctioning the indemnity agreement in this case that we would be encouraging tort defendants to make deals with employers. I do not believe that would be good for the system.... [T]he employer and the employee should be on the same side when there is a third-party tort defendant out there. They should be working together....

"Secondly, Mr. Lykins didn't know whether or not there was a[n] indemnification agreement. That's not a part of the record, but at argument here ... Mr. Lykins said it was late in the processing of the case before he found out. That is a tremendous admission of liability on the part of Sherwin-Williams ... [and] had that admission of liability been disclosed by the employer to Mr. Lykins... maybe the whole situation changes. I mean, he would certainly be in a stronger bargaining position because he's got Sherwin-Williams basically saying I'm liable.... In this case, this type of agreement would eliminate the financial motivation or incentive for Deffenbaugh to investigate liability facts as to injured employees. If you have an indemnity agreement, that incentive is gone."

Instead of basing its decision on K.S.A. 44-504, the trial court used public policy to support its ruling. Moreover, the trial court was apparently persuaded by Lykins' statement that he was informed of the indemnity agreement late in the processing of the case.

After the trial court's ruling, however, Lykins sent a letter to the trial court which stated in pertinent part as follows:

"After I received [the transcript of the hearings on the cross motions for summary judgment], I checked my records and found a memo to the file indicating that on October 23rd, 1997 I spoke with ... an attorney for Deffenbaugh, Inc. and the memo states the follow[ing], '3M [i.e., Sherwin-Williams] did not manufacture the product that caused Mr. Wilcox injuries but it appears they are accepting full responsibility since they have told Deffenbaugh, Inc. that they will pay for all of Mr. Wilcox workmen's compensation payments ....'"

The letter, however, is contradictory because in a later paragraph Lykins stated: "I did not know about the Indemnity Agreement until [an attorney for Deffenbaugh and Hartford] sent it to me when he filed the Petition for Declaratory Relief in February of 1999." Nevertheless, Lykins did not originally provide the trial court with accurate information regarding his knowledge of the indemnity agreement.

On September 29, 1999, Deffenbaugh and Hartford moved to alter or amend the trial court's judgment based on Lykins' admission that he knew of the indemnity agreement early in the processing of the case. Deffenbaugh and Hartford argued that the trial court believed that the date by which Lykins was informed of the indemnity agreement was material to its decision for summary judgment. The trial court denied the motion to alter or amend judgment.

On appeal, Deffenbaugh and...