Mrkich v. WCAB (CHILD & YOUTH SERV.)

• Decision Date: 28 June 2002
• Citation: 801 A.2d 668
• Court: Pennsylvania Commonwealth Court
• Parties: Diane MRKICH, Petitioner, v. WORKERS' COMPENSATION APPEAL BOARD (ALLEGHENY COUNTY CHILDREN & YOUTH SERVICES), Respondent. Allegheny County Children & Youth Services, Petitioner, v. Workers' Compensation Appeal Board (Mrkich), Respondent.

801 A.2d 668

Diane MRKICH, Petitioner, v. WORKERS' COMPENSATION APPEAL BOARD (ALLEGHENY COUNTY CHILDREN & YOUTH SERVICES), Respondent.

Allegheny County Children & Youth Services, Petitioner, v. Workers' Compensation Appeal Board (Mrkich), Respondent.

Commonwealth Court of Pennsylvania.

Submitted February 9, 2001.

Decided June 28, 2002.

Wendy K. Ligo, Pittsburgh, for petitioner.

Vito S. Bochicchio, Pittsburgh, for respondent.

BEFORE: PELLEGRINI, Judge, LEADBETTER, Judge, and MIRARCHI, Senior Judge.

OPINION BY Judge LEADBETTER.

In this consolidated action, claimant, Diane Mrkich, and her employer, Allegheny County Children & Youth Services, each petition for review from a decision by the Workers' Compensation Appeal Board (Board). At issue is how an employer may enforce its subrogation lien against a claimant who obtains a recovery from a third party tortfeasor. Once again we face the peculiar problems confronted by this court in Allegheny Beverage Corporation v. Workmen's Compensation Appeal Board (Wolfe), 166 Pa.Cmwlth. 646, 646 A.2d 762 (1994) (Wolfe II), which arise from applying traditional formulas to non-traditional settlements that include annuities or other structured payments. For the reasons set forth below, we vacate and remand.

On August 18, 1994, claimant was involved in a work-related auto accident, injuring her neck and arms. After two back operations and other treatment for her back, claimant was unable to return to her position as a clerk and typist with employer. Employer conceded responsibility and pursuant to an Agreement for Compensation began paying claimant workers' compensation benefits of $246.50 per week.

On March 12, 1996, claimant commenced a lawsuit against the motorist who struck her. Shortly thereafter claimant settled, recovering $85,000.00 in cash and an annuity which paid her $918.86 per month for a period of ten years. The cost of the annuity was $85,000.00. Out of the $85,000.00 lump sum, claimant paid her attorney, Mr. Solomon, $70,000.00 in fees. By letter dated November 11, 1997, claimant misinformed employer that her third party action was settled for $85,000.00.

On February 25, 1998, employer filed a petition to seek approval of a compromise and release agreement. Claimant, represented by Scott Klein,¹ sought to surrender her rights to further compensation benefits in exchange for employer surrendering its right to subrogation under Section 319 of the Workers' Compensation Act.² At the time of the attempted compromise and release, employer was aware only of claimant's lump sum payment of $85,000.³ Following a hearing, the Workers' Compensation Judge (WCJ) denied the compromise and release after determining that claimant failed to understand its legal consequences.

Thereafter, on August 20, 1998, employer filed a petition to modify/suspend/review claimant's benefits. In the first of three hearings, claimant appeared unrepresented. On cross-examination, claimant for the first time revealed the full extent of her third party settlement. The WCJ thereafter granted employer's supersedeas request and reduced claimant's benefits by 50 percent to $123.25.

At the second and third hearings, the WCJ sought to determine how to enforce employer's subrogation lien in an equitable manner. Claimant stated in the second hearing that she would be unable to reimburse employer in a lump sum, and further that she was having difficulty finding employment. At the third and final hearing, claimant reiterated these concerns and further testified that she would be unable to support herself without her annuity payments.

Based on the foregoing, the WCJ found in favor of employer, ordering claimant to satisfy immediately employer's subrogation lien in the amount of $52,676.24.⁴ In the event claimant was unable to immediately pay off the lien in full, the WCJ ordered claimant to pay over her monthly annuity checks for 57 months. The WCJ found that employer was entitled to a grace period of 309 and 2/7 weeks, and further that employer must pay its share of claimant's legal fees in the amount of $101.55 per week. Additionally, the WCJ determined that claimant intentionally mislead the court by failing to timely disclose the full extent of the third party settlement, that employer timely asserted its subrogation interest, and that claimant was not prejudiced by any delay. The WCJ further rejected claimant's testimony that she will be unable to support herself if ordered to pay employer's lien in a lump sum payment.

On appeal, the Board affirmed in part and reversed in part the WCJ's order. The Board affirmed the WCJ's calculations of the grace period and the amount of the employer's lien, as well as the order to repay the past due lien immediately.⁵ The Board reversed the WCJ's order that claimant, absent the capacity to repay employer's lien in a lump sum, must pay over to employer her monthly annuity checks.

On appeal to this court, claimant again argues that the doctrine of laches bars enforcement of employer's lien and that the WCJ improperly calculated the employer's accrued lien and grace period.⁶ Employer cross-appeals, arguing that the WCJ properly ordered the annuity payments to be transferred.

Claimant's arguments regarding the doctrine of laches are without merit. The doctrine of laches is an equitable remedy potentially applicable as an affirmative defense to subrogation claims brought by employers under Section 319 of the Act. See Roadway Express, Inc. v. Workmen's Comp. Appeal Bd. (Allen), 152 Pa.Cmwlth. 318, 618 A.2d 1224, 1226 (1992)

; Ward v. Workmen's Comp. Appeal Bd. (Sun Ref. and Mktg. Co.), 143 Pa.Cmwlth. 319, 599 A.2d 1013 (1991); Peeples v. Workmen's Comp. Appeal Bd. (Foster Wheeler Energy Corp.), 133 Pa.Cmwlth. 559, 576 A.2d 1190 (1990). To successfully assert the defense, the claimant must demonstrate first that employer failed to exercise due diligence in exercising its subrogation claim, and second that claimant was prejudiced by the delay. See Roadway Express, 618 A.2d at 1226. Moreover, because laches is an equitable remedy, to succeed claimant must come before the court with clean hands. See Shippenville-Elk Township Volunteer Fire Dep't v. Ladies Auxiliary of the Shippenville-Elk Township Volunteer Fire Dep't, 680 A.2d 923 (Pa.Cmwlth.1996).

In the case at bar, claimant argues that employer unreasonably delayed pursuing its subrogation interest for one year after learning a third party settlement had been reached. Assuming, arguendo, that employer's delay was unreasonable, claimant fails to demonstrate that she was prejudiced thereby. There is no credible evidence in the record to indicate that the delay in any way harmed claimant. Further, the WCJ found as fact that the claimant and her counsel Scott Klein deliberately misled the court regarding the extent of the third party settlement. Claimant therefore has unclean hands and is barred from seeking equitable relief via the doctrine of laches.

To resolve the remaining issues, we must first refer to the general principles of subrogation law. As we noted in Budd Company v. Workers' Compensation Appeal Board (Settembrini), 798 A.2d 866, (Pa.Cmwlth.2002):

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 tortfeasor. 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). To the extent the recovery exceeds the past due lien and litigation costs, the balance is paid to claimant and employer retains a contingent lien against this payment for reimbursement of future compensation benefits which may become payable.

FN2. 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) ].

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 share 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.

FN3. In traditional...