Personal Injury Settlements, Judgments and Liens

Two ways injury money ends up in interpleader

Too many claimants for one policy. After a crash with several injured people, the at-fault driver’s liability coverage may be far smaller than the total claims. If the insurer pays the first claimant to settle, the others may be left with nothing and may accuse the insurer of acting in bad faith. An insurer in that position may deposit its policy limit and ask a court to divide it. The Supreme Court approved that use of interpleader in State Farm Fire & Casualty Co. v. Tashire, a case arising from a 1964 collision between a Greyhound bus and a pickup truck. But it held that interpleader of the policy limit did not let the court force every related claim against the insured, the bus company and others into a single forum. Interpleader “was never intended” to be “an all-purpose ‘bill of peace.’”¹

One fund, many liens. More often, the injured person settles and the money then attracts competing claims. The defendant’s insurer may hesitate to pay until every lien is resolved. Or the injured person’s lawyer, holding the money in a trust account, may face a lienholder demanding payment while the client disputes the amount. Either the insurer or the law firm may interplead the disputed part.

A personal injury lawyer is in a different position from an insurer. A lawyer who holds money that both a client and a third party claim generally has professional obligations to keep the disputed portion separate until the dispute is resolved. Interpleader is one way to resolve it, but not the only one. Many disputes are settled by negotiation with the lienholder, a hearing in the original case, or a state-law procedure for adjudicating liens.

Medicare

Medicare is often a “secondary payer.” When it pays medical bills for an injury that a liability insurer, no-fault insurer or workers’ compensation carrier is responsible for, Medicare’s payment is conditional and must be repaid once that primary payment is made. The Medicare Secondary Payer Act requires reimbursement and gives the United States a right of action against entities responsible for payment and against those who receive it.² The regulations say Medicare may recover “from any entity, including a beneficiary, provider, supplier, physician, attorney, State agency or private insurer that has received a primary payment.”³ That reference to attorneys is one reason law firms are cautious about distributing settlement money while a Medicare claim is open.

Why interpleading Medicare is difficult

Fowler Pickert, LLC v. Glasgow shows the limits. A law firm that had obtained a settlement for a client who also received Medicare benefits filed a Rule 22 interpleader against the client and the Secretary of Health and Human Services. The client was challenging Medicare’s claim through the agency’s appeals process. The court dismissed the case for lack of jurisdiction for two independent reasons:⁴

1. No waiver of sovereign immunity. The firm relied on 28 U.S.C. § 2410(a)(5), which allows the United States to be named in interpleader “with respect to, real or personal property on which the United States has or claims a mortgage or other lien.” The court agreed with the government that “Medicare lien” is a colloquial term. The MSP Act gives the United States a right of action and subrogation rights, but that “does not, by itself, establish a lien” for purposes of § 2410, at least where entitlement is still disputed.
2. Administrative channeling. The Medicare Act bars federal-question suits on claims arising under it until the agency issues a final decision. The firm also had not invoked the interpleader statute, and the United States is not a citizen for diversity purposes.

The practical lesson is that a dispute over the amount Medicare is owed usually has to run through Medicare’s own process first. Settlement money corresponding to Medicare’s claim is commonly held in trust until that process ends.

Medicaid

Federal Medicaid law requires states to seek reimbursement from liable third parties, but it also contains an “anti-lien” provision protecting a beneficiary’s property. Three Supreme Court decisions define the balance:

• Ahlborn (2006). A state may recover only from the part of a settlement that represents payment for medical care. It may not reach the parts that compensate for other damages, such as pain and suffering or lost wages.⁵
• Wos v. E.M.A. (2013). North Carolina’s law set aside up to one-third of any recovery for Medicaid without any way to show that a smaller share was actually for medical expenses. The Court held that the federal anti-lien provision preempted the law to the extent it imposed that irrebuttable allocation.⁶
• Gallardo v. Marstiller (2022). The Medicaid Act permits a state to seek reimbursement from settlement amounts representing future medical expenses, not only past ones.⁷

When a settlement does not allocate damages, how much of it represents medical care is often the central question. Some states set out a hearing procedure for that allocation. When the parties cannot agree, the disputed share may be held back or interpleaded.

Employer health plans (ERISA)

A self-funded employer health plan governed by ERISA usually has a reimbursement or subrogation clause. Three Supreme Court cases shape how it works:

• Sereboff (2006). A plan may sue under ERISA § 502(a)(3) to enforce a reimbursement clause against specifically identifiable settlement funds held by the beneficiary. That is “appropriate equitable relief” in the form of an equitable lien by agreement.⁸
• McCutchen (2013). When the plan’s terms are clear, equitable doctrines such as unjust enrichment or a “double recovery” rule cannot override them. But where the plan says nothing about how the beneficiary’s legal fees are shared, the common-fund doctrine applies and the plan’s recovery is reduced by its share of those fees.⁹
• Montanile (2016). If the beneficiary has spent the settlement on nontraceable items, such as services or consumed goods, the plan cannot enforce its equitable lien against the beneficiary’s general assets.¹⁰

Montanile gives a plan a strong reason to act before the money is distributed, which often means demanding that the disputed amount be held in trust or interpleaded. Insured plans and plans that are not governed by ERISA, such as many government plans, may be subject to state anti-subrogation or made-whole rules instead. See ERISA and federal programs.

Hospital liens

Many states give hospitals a statutory lien on an injured patient’s claim against the person who caused the injury. Texas is a typical example: “A hospital has a lien on a cause of action or claim of an individual who receives hospital services for injuries caused by an accident that is attributed to the negligence of another person,” if the patient was admitted within 72 hours of the accident.¹¹ State statutes differ on what must be filed or recorded, how much the lien can cover, and whether the hospital must accept the patient’s health insurance first. Disputes over whether a hospital lien is valid or reasonable are a common reason a settlement cannot be paid out in full.

Lawyers’ liens and fee disputes

Attorney charging liens

Most states recognize a lawyer’s charging lien on a recovery the lawyer helped create, by statute or common law. Federal tax law gives such a lien priority over a federal tax lien to the extent it covers reasonable compensation for obtaining the judgment or settlement.¹² In State Auto Property & Casualty Insurance Co. v. Ross, an insurer interpleaded property-loss settlement proceeds that were subject to a federal tax lien. The court held that the former lawyer who had obtained the settlement held a “first and prior lien” for reasonable fees under 26 U.S.C. § 6323(b)(8) and Kansas law. It required the lawyer to document the fees before any money was distributed, because the priority extends only to reasonable fees for obtaining the fund.¹³

Successive lawyers

When a client changes lawyers before a case settles, the discharged lawyer may claim a share of the fee, usually measured by the value of the work done (quantum meruit) rather than the full contingency percentage. That raises a second question: does the award come out of the client’s share or the successor lawyer’s fee? In Paddick v. Butt, a federal magistrate judge in Pennsylvania who had already awarded a discharged lawyer a quantum meruit fee on his charging lien ordered that the award be paid from the successor lawyer’s fee, not from the clients’ share of the settlement. The court relied on the successor’s professional obligations to the clients, including her duty to explain how the earlier lawyer’s claim would affect them.¹⁴ It later denied the successor lawyer’s request to stay that order pending appeal.¹⁵ The outcome of that appeal was not verified for this page.

Child support liens

Federal law requires each state to have procedures under which “liens arise by operation of law against real and personal property for amounts of overdue support,” and to give full faith and credit to such liens from other states.¹⁶ Many states use those liens, or data-matching programs with insurers, to intercept personal injury settlements owed to a parent with overdue support. A child support agency may therefore be one of the claimants in a settlement dispute. Where the injured person is a child, any settlement generally needs court approval, and the procedure is set by state law.

Federal tax liens and the United States as a claimant

When the IRS has a recorded tax lien, the United States can be named in an interpleader over the property subject to it, under 28 U.S.C. § 2410(a)(5).¹⁷ Ross is an example. As Fowler Pickert shows, that waiver of immunity depends on the United States having or claiming a lien. A right of reimbursement without a lien may not be enough.

Questions that often decide these cases

• Who is holding the money? A defendant’s insurer, a plaintiff’s lawyer and a court registry each face different rules.
• Is each claim a true lien, a contract right or a statutory right of recovery? The answer affects priority and whether federal court is available.
• How was the settlement allocated? Medicaid, and sometimes other payers, can reach only the medical-expense portion.
• Does a health plan’s language clearly require full reimbursement, and is the plan governed by ERISA?
• Has the money already been spent? Tracing can decide whether a plan can recover at all.
• Was there more than one lawyer, and what did each fee agreement say?

Related

• Other disputed funds
• Federal programs
• Discharge, fees, and interest
• Attorneys’ fees in interpleader
• Statutory versus Rule 22 interpleader

Footnotes

1. State Farm Fire & Casualty Co. v. Tashire, 386 U.S. 523 (1967). Cornell LII. ↩

2. 42 U.S.C. § 1395y(b)(2)(B)(ii)–(iii). Cornell LII. ↩

3. 42 C.F.R. § 411.24(g). eCFR. ↩

4. Fowler Pickert, LLC v. Glasgow, No. 4:19-00319-CV-RK (W.D. Mo. Apr. 23, 2020) (order dismissing for lack of jurisdiction, Doc. 22) (citing 28 U.S.C. § 2410(a)(5) and 42 U.S.C. §§ 405(h), 1395ii). ↩

5. Arkansas Department of Health & Human Services v. Ahlborn, 547 U.S. 268 (2006). Cornell LII. ↩

6. Wos v. E.M.A., 568 U.S. 627 (2013). Cornell LII. ↩

7. Gallardo v. Marstiller, 596 U.S. 420 (2022). Cornell LII. ↩

8. Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006). Cornell LII. ↩

9. US Airways, Inc. v. McCutchen, 569 U.S. 88 (2013). Cornell LII. ↩

10. Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 577 U.S. 136 (2016). Cornell LII. ↩

11. Tex. Prop. Code § 55.002(a). Texas Constitution and Statutes. ↩

12. 26 U.S.C. § 6323(b)(8). Cornell LII. ↩

13. State Auto Property & Casualty Insurance Co. v. Ross, No. 19-02006-CM-TJJ (D. Kan. Oct. 15, 2019) (memorandum and order) (citing Leathers v. Leathers, 856 F.3d 729 (10th Cir. 2017), and Kan. Stat. Ann. § 7-108). ↩

14. Paddick v. Butt, Nos. 09-4285, 13-374 (E.D. Pa. May 24, 2018) (memorandum and opinion, Strawbridge, M.J.). ↩

15. Paddick v. Butt, Nos. 09-4285, 13-374 (E.D. Pa. June 18, 2018) (memorandum and opinion denying stay pending appeal). ↩

16. 42 U.S.C. § 666(a)(4). Cornell LII. ↩

17. 28 U.S.C. § 2410(a)(5). Cornell LII. ↩