Houghton v. Department of Health, 20001103.

Decision Date18 October 2002
Docket NumberNo. 20001103.,20001103.
Citation2002 UT 101,2002 Utah 101,57 P.3d 1067
PartiesPaul HOUGHTON, Billie Henderson, individually and each as representative of a class, Damian Henderson, Wayne Rubens, Ron Roes and Susan Roes, who are other members of these classes, similarly situated, Plaintiffs and Appellants, v. DEPARTMENT OF HEALTH, the Office of Recovery Services, the Department of Human Services and the State of Utah (the "State Defendants"), et al., Defendants and Appellees.
CourtUtah Supreme Court

Robert B. Sykes, Salt Lake City, for plaintiff.

Mark L. Shurtleff, Att'y Gen., Reed M. Stringham III, Steve A. Combe, Brent A. Burnett, Asst. Att'ys Gen., Salt Lake City, for defendants. DURRANT, Associate Chief Justice.

¶ 1 This appeal concerns priority liens and attorney fees related to Medicaid recipients' settlements with third parties. In this class action lawsuit, the district court certified two classes of plaintiffs, both of which contend on appeal that the State's priority lien on plaintiffs' settlement proceeds violates federal law and that the district court erred in granting the State's motion for judgment on the pleadings on this issue. One class ("Class II plaintiffs"), whose members retained attorneys, also argues that the district court incorrectly granted the State's motion for summary judgment on the issue of attorney fees. We affirm the district court's approval of the State's priority lien, but reverse its grant of summary judgment on the attorney fees claim brought by Class II plaintiffs and remand for further proceedings consistent with this opinion.

BACKGROUND

¶ 2 In reviewing a grant of a motion for judgment on the pleadings, we accept "the factual allegations in the complaint as true" and "consider such allegations and all reasonable inferences drawn therefrom in a light most favorable to the plaintiff." Healthcare Servs. Group v. Utah Dep't of Health, 2002 UT 5, ¶ 3, 40 P.3d 591 (internal quotation and citation omitted). Additionally, "[i]n reviewing a grant of summary judgment, we review the facts and all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party." Regal Ins. Co. v. Bott, 2001 UT 71, ¶ 2, 31 P.3d 524. We recite the facts accordingly.

¶ 3 Pursuant to section 26-19-5(1)(b) of the Utah Code,1 the State of Utah placed priority liens on proceeds from settlements that Medicaid recipients ("plaintiffs") had negotiated with the third parties who had injured them. On October 27, 1995, plaintiffs brought a class action suit against the State, claiming, among other things, that section 26-19-5(1)(b) was inconsistent with federal law prohibiting liens against Medicaid recipients' property and therefore invalid. The district court certified two classes of plaintiffs, Class I and Class II.2 Both classes were composed of Medicaid recipients on whose settlement proceeds the State had placed a priority lien. Only Class II, however, included members who had retained counsel, both for making claims against liable third parties and negotiating lien payments with the State. Class II plaintiffs claimed that the State did not offset from its recovery the attorney fees Class II plaintiffs had incurred in negotiating their settlements and demanded reimbursement.

¶ 4 On October 27, 1999, the State moved for judgment on the pleadings, arguing that our decisions in S.S. v. State, 972 P.2d 439, 442 (Utah 1998), and Wallace v. Estate of Jackson, 972 P.2d 446, 448 (Utah 1998), which upheld the validity of liens on third-party Medicaid settlements, nullified plaintiffs' claims. The district court granted the motion with respect to the priority lien issue, ruling that S.S. and Wallace rendered plaintiffs' attack on the priority lien invalid, but denied the motion with respect to attorney fees on the ground that those decisions did not address that issue.

¶ 5 On May 24, 2000, the State moved for summary judgment on the remaining issue of attorney fees, submitting affidavits claiming that Class II's named members had either not incurred attorney fees or had already received their offset. In response, Class II plaintiffs submitted the affidavit of an attorney stating that he represented two individuals entitled to attorney fees related to their settlements with third parties and that the State had refused to allow offset of those fees. On June 21, 2000, Class II plaintiffs filed a "First Request for Production of Documents," seeking evidence regarding Medicaid recipients who had incurred attorney fees in retaining attorneys to help them negotiate their third-party settlements. The State refused the request, claiming that the language used in the discovery request was overly broad, and moved for a protective order against producing the documents plaintiffs had requested. On July 25, 2000, plaintiffs moved to compel production of evidence,3 but on November 13, 2000, the district court granted the State's motion for summary judgment and dismissed plaintiffs' claim with prejudice, reasoning that the claims of all plaintiffs, named and unnamed, failed on the merits because the named plaintiffs either had not retained attorneys or had already received their offset from the State.

¶ 6 Plaintiffs appeal, and we have jurisdiction pursuant to Utah Code Ann. § 78-2-2(3) (Supp.2001). On appeal, both classes of plaintiffs abandon their argument that subsection 26-19-5(1)(b) is invalid under federal law prohibiting liens against Medicaid recipients' property and instead maintain that the priority of the State's lien has the effect of violating federal law. Class II plaintiffs further maintain that the failure of the named plaintiffs' claims for attorney fees does not moot the claims of the unnamed class members.

ANALYSIS

I. STANDARD OF REVIEW

¶ 7 Because both a judgment on the pleadings and a summary judgment involve questions of law, we review both for correctness and accord the district court's decision no deference. In re Estate of West, 948 P.2d 351, 353 (Utah 1997).

II. LEGALITY OF THE PRIORITY LIEN

¶ 8 It is well settled in Utah that liens against third-party settlement proceeds do not violate federal law because settlement payments do not become a recipient's property until Medicaid is reimbursed.4 S.S., 972 P.2d at 442 (Utah 1998) ("Payments made by a third party do not legally become the property of the recipient until after a valid settlement, which necessarily must include reimbursement to Medicaid.") (emphasis added); State v. McCoy, 2000 UT 39, ¶ 10, 999 P.2d 572; Wallace, 972 P.2d at 448. Plaintiffs concede that the State's lien itself does not violate federal law, but argue that the lien's priority status gives it an illegal effect. Specifically, plaintiffs contend that because the priority of the State's lien allows the State to reimburse itself completely and before Medicaid recipients can use the settlement proceeds to satisfy their claims, the lien could result in a seizure of the recipient's property. They argue that this could occur because, after the State takes its share of settlement proceeds, there may be nothing left with which Medicaid recipients can be compensated for their nonmedical claims, and nonmedical claims are a Medicaid recipient's property. We disagree.

¶ 9 The federal statute requires only that a lien not encumber a Medicaid recipient's property and places no additional restrictions on the priority of otherwise valid liens. We have already held on three occasions that liens against third-party settlement proceeds are valid because those proceeds do not become a Medicaid recipient's property until Medicaid is reimbursed, see McCoy, 2000 UT 39

at ¶ 10, 999 P.2d 572,

S.S., 972 P.2d at 442,

Wallace, 972 P.2d at 448; thus, a priority lien on a recipient's third-party settlement proceeds does not encumber the recipient's property, even if those proceeds include compensation for nonmedical claims. Accordingly, the district court correctly concluded that the State's priority lien on Medicaid recipients' third-party settlement proceeds did not violate federal law prohibiting liens against Medicaid recipients' property.5

III. ATTORNEY FEES

¶ 10 Having concluded that the State's priority lien against Medicaid recipients' third-party settlements is permissible under federal law, we next examine Class II plaintiffs' argument that the district court erred in granting the State's motion for summary judgment and dismissing their claims for attorney fees with prejudice. The State concedes that the district court erred in dismissing Class II plaintiffs' claims with prejudice, but maintains that the error was harmless because Class II plaintiffs received no notice of either the class action or its dismissal and so are not bound by the district court's decision. The parties therefore agree that the district court erred with respect to the attorney fees issue; they differ only in the remedies they propose. Class II plaintiffs ask us to reverse the district court's grant of summary judgment, while the State asks us to simply modify the district court's dismissal so as to be without prejudice, thereby allowing unnamed Class II plaintiffs to reconstitute and begin anew their action for attorney fees. Because reversing the district court's grant of summary judgment and remanding for further discovery places Class II plaintiffs in the same position as if we modified the dismissal so as to be without prejudice, only without the additional steps of reconstituting and refiling, we are persuaded, on judicial economy grounds, to accept Class II plaintiffs' proposal. We therefore reverse the district court on the issue of attorney fees and remand for further discovery.

CONCLUSION

¶ 11 We affirm the district court's ruling approving the State's priority lien on plaintiffs' third-party settlement proceeds. We reverse the district court's grant of the State's motion for summary judgment on Class II plaintiffs' attorney fees claim. We therefore remand for further...

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