April 01, 2009

Employer Could Not Include Allegations in Workers’ Compensation Subrogation Claim Except for Those Alleged By the Employee

April 01, 2009

Pederson v. Mi-Jack Products, Inc., et al No. 1-07-2327 and 01-07-3228

John Pederson, an employee of Henkels and McCoy, Inc. (Henkels), was injured on March 23, 1999 when a boom jib from a truck-mounted crane fell on him.  Two days prior to the expiration of the two-year statute of limitations, Pederson filed a complaint sounding in negligence and product liability against Mi-Jack Products, Inc. (Mi-Jack), which was the company that leased the crane to Henkels; United Rentals, a company that purchased equipment from Mi-Jack and Terex Corporation (Terex), the alleged manufacturer of the crane. Four months later, after learning that Terex-Ro, Inc. (Terex-Ro), a subsidiary of Terex Aerials, Inc. (a Terex subsidiary) was the actual manufacturer of the boon crane and after the limitations period had expired, an amended complaint named Terex-Ro as an additional defendant.  Based on the limitations argument, the trial court dismissed Terex-Ro from Pederson’s lawsuit.  United Rentals was voluntarily dismissed and Mi-Jack and Terex each filed third party complaints for contributions against Henkels.  Thereafter, the most significant issue in the case concerned the dispute between the plaintiff, Pederson, and Henkels, who was both a third party defendant and Pederson’s employer.

Thereafter, Pederson’s attorney filed a motion for leave to withdraw because an “irreconcilable conflict” had developed.  This “irreconcilable conflict” was the legal malpractice complaint by Pederson against his attorney for failure to timely file suit against Terex-Ro.  Thereafter, Pederson stated he was unable to obtain substitute counsel and proceeded to handle his claim pro se.  Subsequently, Henkels filed an intervenor complaint for its subrogation claim, which complaint sounded in negligence, product liability and breach of warranty.  Mi-Jack filed a motion to dismiss Henkels’ intervenor complaint but after a hearing, the trial court found that Henkels could remain a party plaintiff to protect its lien but would not be permitted to sue in its own right.  Henkels would be required to “stand by the complaint of the plaintiff.”  The trial court also held that Pederson would not be able to settle the case or “do anything that’s going to interfere with the protection of the intervenor’s lien.”  Henkels and Pederson would thereby share joint control over the litigation.

On or about February 7, 2007, Pederson filed a pro se motion to obtain court approval to approve a settlement offer and also to adjudicate the workers’ compensation lien.  Pederson revealed that Mi-Jack had agreed to settle his lawsuit for $50,000, of which he would offer to pay Henkels the sum of $29,404.66 for the workers’ compensation lien.  Henkels refused to accept the terms of this settlement offer.  Consequently, the trial court, over Henkels’ objection, entered an order dismissing all claims with prejudice, the order also providing that Henkels would be compensated out of the proceeds.  Pursuant to the court order, Henkels and Pederson would share joint control over the litigation.

Pederson again moved to dismiss his case and the trial court, over Henkels’ objection, entered an order dismissing all claims with prejudice.  The order explicitly provided that Henkels “will be compensated out of the proceeds of the parties’ settlement in accordance with the Illinois Workers’ Compensation Act to the extent of the available proceeds after payment of all attorneys fees and expenses.”  The order also denied Henkels’ request to maintain a separate action following the dismissal of Pederson’s case.

Pederson refiled a motion seeking adjudication of attorneys fees and expenses as of August 1, 2007.  In his motion, Pederson now sought $46,991.60, of which $34,491.60 was sought for expenses and $12,500 as attorneys fees.  The net distribution to Henkels was now $3,008.40, which Henkels refused to accept, deeming it a “sham.”  On October 16, 2007, the court found that Henkels waived its right to claim any portion of the settlement proceeds, and therefore, waived its workers’ compensation lien.  Accordingly, Pederson was awarded the entire proceeds of the $50,000 settlement.  On appeal, Henkels contended that the court order prevented it from proceeding as a plaintiff in order to protect its workers’ compensation lien contending that the malpractice case created a conflict between it and Pederson and as a result it was denied the protection generally afforded to employers under Section 5(b) of the Act.  The court, by reply, stated:

In most workers’ compensation cases, employees and employers have identical interests in maximizing the recovery an employee receives because the employer receives compensation first from the monetary award the employee receives from a third party; however, courts have recognized that the interests of an employee and an employer may not always align.  Notwithstanding the existence of, or potential for, any conflict of interest between an employer and an employee, it is still the rule that an employer may not intervene and participate as a party plaintiff absent the consent of the employee, because the Act is designed to protect the employee from an employer’s unwanted intrusion.  (Emphasis added)

Henkels asserted that the trial court failed to protect it by court order as required by the Act when it did not consent to the settlement and that the settlement failed to fully indemnify it.  The trial court’s order stated:

Specifically, the court’s order provided that Henkels “will be compensated out of the proceeds of the parties’ settlement, in accordance with the terms of the Illinois Workers’ Compensation Act, to the extent of the available proceeds after payment of all attorneys fees and expenses, if any, in accordance with In re Estate of Dierkes andKleeman v. Fragman Construction Co.”   Accordingly, Henkels was protected by court order as required by section 5(b) of the Act.  See Kleeman v. Fragman Construction Co. (finding that an order providing that the employer “shall be compensated in accordance with the applicable statute” provided adequate protection to the employer as required by the Act.)

Henkels further contended that the trial court ignored the fact that it was to Pederson’s advantage to settle his law suit for a nominal amount in order to circumvent its lien rights and remove an impediment to his pending malpractice case.  The court stated:

There is no evidence that the trial court failed to adequately consider the circumstances surrounding the settlement.  While the settlement amount may have been less than the amount of compensation benefits which Henkels paid to Pederson, the Act does not require a workers’ compensation settlement agreement to fully compensate the employer in order to be valid.  See In re Estate of Dierkes, (recognizing that the compensation that an employer pays may exceed an employee’s recovery from third parties).  Moreover, in detailing the circumstances surrounding the settlement, Henkels ignores the fact that the terms of the settlement resulted from Pederson’s failure to timely bring suit against the manufacturer of the allegedly defective piece of equipment that caused his injury.

Editor’s Note:

Henkels was correct in stating that the settlement for a smaller amount did limit the amount of his subrogation lien on the basis that Henkels had no subrogation rights in the legal malpractice case.  The court did not indicate that it was aware of the possible reason for limitation of the settlement amount other than Pederson had sufficient cause to settle for that amount because he may not have had any recovery possibilities from the manufacturer who was not named within the limitations period.

The language in the decision makes it quite clear that the employer cannot, without the employee’s consent, participate in the method of handling the litigation.  The court noted that Pederson had not filed an action until two days before the two-year limitations statute had expired whereas the employer had refiled the complaint in the three-month period before the limitations period had been reached.  Actually, the conflict described in this case is rather unique and most employers have very few opportunities to file the subrogation action because the plaintiff seldom waits for this milestone to be reached.  Should the employer or its workers’ compensation carrier have filed its subrogation suit 21 months after the accident date if the employee failed to file?  Perhaps so, but often the employer does not have the liability investigation to permit it to do so in a case of this complexity.  Note the employee’s investigation also failed to produce the identity of the prime defendant.

Pederson v. Mi-Jack Products, Inc., et alNos. 1-07-2327 and 01-07-3228(consolidated), decided March 10, 2009

Frank J. Wiedner, Editor Wiedner & McAuliffe, Ltd One North Franklin, 19th Floor Chicago, IL 60606 (312) 855-1105