Liens can consume clients’ recovery and decrease their willingness to settle, and the law governing them changes often. Here’s a fresh look at this important; and potentially perilous; issue.
By Edward W. McNabola and Kevin E. O’Reilly
Illinois law governing liens is constantly changing and often confusing. Liens create a particularly sticky situation when a client’s lien-related expenses exceed the amount he or she will recover. Thus, you must make yourself aware of any lien that could reduce your client’s recovery, and you must stay alert to changes in this dynamic area of law.
Most liens affecting civil tort practice are governed by statute. Many statutes address healthcare provider liens, such as the Physicians Lien Act, the Hospital Lien Act, the Clinical Psychologists Lien Act, and the Optometrists Lien Act. Others affect additional tort-related liens ; workers’ compensation, Medicare, Medicaid, and the like; that can substantially reduce your client’s recovery. For their part, attorney liens and recovery doctrines can have a significant financial impact on lawyer and client alike.
This article summarizes the law and cites important holdings governing many of the liens that tort lawyers commonly encounter.
I. Healthcare Provider Liens
Healthcare provider liens often play a role in tort actions because they involve, for example, a doctor’s or hospital’s right to payment of medical expenses from the tortfeasor. Numerous statutes grant liens to healthcare providers of various kinds (see sidebar).
Treatment must be connected. To recover from a third-party tortfeasor, a healthcare provider has the burden of proving that the treatment is causally connected to the tortfeasor’s conduct.2
Liens and contract rights. Construing the Hospital Lien Act in N.C. v A.W.,3 the court held that a hospital had no lien rights against a patient when his debt to the hospital was paid pursuant to a contract between his insurer and the hospital. This case involved the payment of the hospital bill by the plaintiff’s insurer at an agreed reduced rate under a contract between the insurer and the hospital. The contract satisfied his debt to the hospital, and the court held that the hospital could not recover the deficiency from the plaintiff pursuant to a lien.
Lien rights nonassignable. In In re Petry,4 a hospital assigned its lien rights to a third party, but the court held that such a third party did not have a valid right of recovery. In interpreting the Hospital Lien Act, the court held that rights under the Act are not assignable.
Limited to one-third of recovery per act. Remarkably, the maximum one-third recovery provisions under the various healthcare provider lien acts are calculated separately under each. In Burrell v Southern Truss,5 the Illinois Supreme Court interpreted the Hospital Lien Act and Physicians Lien Act and held that the aggregate amount of the liens under each particular act, not the aggregate of all liens, is limited to one-third of the plaintiff’s recovery.
In Burrell, the plaintiff settled for $8,500. A lien was filed by the hospital under the Hospital Lien Act for $913.65, and by two physicians under the Physicians Lien Act for $473 and $1,529. The trial court proportionately reduced the aggregate amount of all of the liens to one-third, or $2,833.33. The hospital and physicians appealed, claiming that the liens should not have been reduced because the one-third provisions in the respective acts only apply to the liens filed under the particular act and not to liens filed under a separate act. The supreme court found for the hospital and physicians.
II. Workers’ Compensation Liens
An employer has a lien to the extent of Workers’ Compensation benefits paid or payable.6 However, the employer must pay a pro rata share of costs based upon its recovery as well as attorney fees of 25 percent of the employer’s gross recovery.7 As a general matter, liens, including attorney liens, are not enforceable against a workers’ compensation lien.8
Kotecki limitation not an affirmative defense. In Kim v Alvey, Inc.,9 the court determined that the limitation of the amount of set-off of a workers’ compensation lien pursuant to Kotecki v Cyclops Welding Corp.10 is not an affirmative defense. Therefore, an employer may even raise and waive its lien after trial.11
Contingent-fee contracts. The Illinois Supreme Court held recently in In re Estate of Dierkes12 that under the Workers’ Compensation Act an employer who has paid benefits is entitled to the full amount of the employee’s third-party recovery. Additionally, a one-third contingent-fee contract between the employee and his or her attorney will not reduce the Workers’ Compensation lien more than the 25 percent for attorney fees allowed under the Act.
Consequently, when the lien exceeds the settlement, the employer is entitled to 75 percent of the plaintiff employee’s total recovery, notwithstanding the attorney lien of 33 1/3 percent. If the attorney wants to recover the remaining 8 1/3 percent of the contractual fee, he or she must obtain it directly from the client.
In In re Estate of Glenn,13 the fifth district reviewed the Dierkes decision and found that the attorney is entitled to the full amount of his or her contractual one-third fee when the amount of the third-party settlement is enough to cover both the workers’ compensation lien and the one-third attorney fee. The Glenn court also held that an attorney should not be allowed to recover both a one-third fee on the full amount of the third-party settlement and the statutory 25 percent fee on that portion of the settlement that constitutes the workers’ compensation lien reimbursement.
On January 25, however, the supreme court reversed and remanded the case to the circuit court.14 The high court found that because the lower court had not heard testimony or taken evidence on the question, there was not enough information to apply the Dierkes analysis.
Agreements to release liens. In Romack v Gingerich Co.,15 the court considered the validity of a settlement agreement in which the employer, through its workers’ compensation insurer, waived enforcement of its worker’s compensation lien against the parties to the settlement but not against an alleged joint tortfeasor. The court held that a settlement agreement is not lacking in good faith simply because an employer or its insurer does not agree to release its liens as part of the settlement agreement. The court upheld the trial court’s judgment that the settlement was made in good faith because there was adequate consideration for it when the employee received cash from the defendants in excess of the workers’ compensation benefits upon which the lien was based.
III. Medicare “Super” Liens
The Medical Care Recovery Act16 provides for what is commonly called the “Medicare lien” or the “super lien.” It is not really a lien but a right of subrogation granted the government for the expense of medical care it provides to anyone injured under circumstances from which tort liability of a third party arises. This subrogation right exists regardless of whether the government has given notice to the affected parties. Also, Medicare’s recovery has priority over all other subrogation interests and liens.17
Moreover, under Zinman v Shalala,18 Medicare does not have to reduce its reimbursement demand when the personal-injury settlement does not fully cover medical expenses or fully compensate the plaintiff. However, Medicare will pay a proportionate share of attorney fees and costs based upon its recovery. Also, once a hospital accepts a payment from Medicare, the provider cannot collect any further sums against the plaintiff.19
In addition, Medicare is entitled to the entire amount of a patient’s recovery from a third-party tortfeasor even if the funds of the recovery are allocated to noneconomic damages. In Share Health Plan of Illinois, Inc. v Alderson,20 the patient received a nonitemized settlement from a third party. The plaintiff claimed that the settlement was not for medical expenses but for pain and suffering. Medicare claimed it had a lien over the entire third-party recovery regardless of its allocation.
The first district held that Medicare was entitled to the full amount of the recovery and the allocation of funds could not defeat or diminish the lien. The court further held that Medicare was required to pay its pro rata share of attorney fees and expenses in procuring the recovery.
IV. Public Aid Liens
The Illinois Department of Public Aid has a lien on all personal injury settlements or judgments in favor of a public aid recipient for medical expenses and possibly other benefits.21 This statute also provides that the circuit court has equitable authority to reduce or negate a public aid lien.22
As a matter of course, IDPA will voluntarily reduce its gross lien under the “common fund doctrine” (see below). Once a healthcare provider accepts a payment from public aid, that provider cannot collect further sums against the plaintiff.23
V. Common Fund Doctrine
The court held in Scholtens v Schneider24 that the common fund doctrine allows a party who creates, preserves, or increases the value of a fund in which others have an ownership interest to be reimbursed from that fund for litigation expenses incurred, including attorney fees. The common fund doctrine is based upon the equitable concept that an attorney who performs services in creating a fund should be compensated out of the whole fund from those who seek to benefit from its creation.25
To recover under this doctrine, an attorney must show that (1) the fund was created as the result of legal services performed by the attorney, (2) the subrogee did not participate in the creation of the fund, and (3) the subrogee benefited from the fund.26 However, a plaintiff may not recover attorney fees under this doctrine.27
ERISA and FEHBA liens. In Scholtens, the court found that the common fund doctrine generally applies to ERISA liens except where the plan explicitly provides otherwise. The ERISA plan representatives in Scholtens argued that the common fund doctrine is preempted by ERISA, a federal statute. The court rejected this argument. The Illinois Supreme Court interpreted both ERISA and the common fund doctrine in holding that the common fund doctrine applies to ERISA subrogation liens.
Scholtens served as the basis for the Illinois Supreme Court’s January 25 decision in Bishop v Burgard,28 holding that the common fund doctrine applies to ERISA liens even when the plan explicitly provides for attorney fees and costs to be the responsibility of the plan beneficiary.
In Bishop, the court reasoned that an action for attorney fees, even in the form of a motion for adjudication of lien, is an independent action by the attorney that is not related to the benefit plan and does not alter the contractual relationship of the party to the plan.29 Consequently, Bishop’s action under the common fund doctrine was not preempted by ERISA.
Federal courts lack jurisdiction to adjudicate ERISA liens unless the ERISA plan seeks to enforce its lien under the ERISA contract.30
The common fund doctrine also applies to Federal Employee Health Benefits Act (FEHBA) subrogation liens. LikeScholtens, the court in Hillenbrand v Meyer Medical Group, S.C.,31 held that the common fund doctrine is not preempted by FEHBA.
Insurer “meaningful participation” in fund creation. Likewise, the court found in Taylor v American Family Ins. Group32that the common fund doctrine applies to an insurance subrogation lien unless the insurer engages in “meaningful participation” in the creation of the settlement fund. A letter requesting that the plaintiff’s attorney not pursue a recovery on behalf of the insurer for the medical expenses paid by the insurer and engaging in arbitration proceedings is not enough to amount to meaningful participation, the court found.
The Taylor court held that the plaintiff’s attorney was entitled to one-third of the total medical subrogation claim paid to plaintiff’s insurer despite the insurer’s written request prior to suit that the plaintiff’s attorney not represent the insurer’s interest or deal with defendant’s insurer regarding the medical bills paid by the plaintiff’s insurer. The insurer also filed a petition for arbitration and proceeded to hearing but did not intervene in the plaintiff’s lawsuit or participate in discovery, and the plaintiff’s attorney negotiated the settlement fund. Therefore, the fifth district held that the common fund doctrine applied to reduce the insurer’s subrogation lien despite the plaintiff’s insurer’s request and arbitration award.
Not limited to insurance subrogation. The common fund doctrine is not limited to insurance subrogation cases and class actions.33 The existence of a full, segregated fund within the court’s control is not a universal prerequisite to the application of the common fund doctrine. Rather, the doctrine may be applied where a fund has been created for the benefit of others for practical purposes. This is true even when the court does not have the fund under its control.34
Attorney fee claims. The Kitzman court also found that an attorney may assert a claim for attorney fees under the common fund doctrine. The plaintiff, an attorney, represented a decedent’s estate in a wrongful death action. Just prior to settling the case, the decedent’s parents hired their own counsel and were awarded a percentage of the recovery. The fifth district held that the plaintiff, the attorney who created the settlement fund, was entitled to maintain a cause of action under the common fund doctrine.
Not applicable to statutory healthcare provider liens. The common fund doctrine does not apply to statutory healthcare provider liens.35 Indeed, it is well-established that since the common fund doctrine does not apply to such liens, they are not reduced by a pro rata share of the attorney fees and expenses.
Arbitration awards. In Johnson v State Farm Mutual Automobile Insurance Co., the fifth district considered whether an attorney was entitled to fees under the common fund doctrine following an arbitration award of $22,000 from which the insurer was allowed a $5,000 set-off of its previous medical payment.36 The court held that the arbitrators were authorized under the policy to make such an award but that the attorney did not create a fund out of which the insurer reimbursed itself or benefited. Therefore, the attorney was not entitled to recover fees under the common fund doctrine.
VI. Attorney Liens
Attorney liens are governed by 770 ILCS 5/1 et seq. An attorney lien includes litigation costs and expenses.37 Attorney liens take priority over healthcare provider liens such as a hospital lien.38 Attorneys must give proper notice of an attorney lien prior to the discharge of an attorney.39 For this reason, it is critical that an attorney provide proper notice of a lien as soon as possible.
Suing a new attorney. A discharged attorney cannot recover for tortious interference with contract against a referring attorney and a new attorney, but may retain an action for tortious interference with prospective economic advantage. InCanel and Hale, Ltd. v Tobin,40 a discharged attorney who was representing a plaintiff in a medical malpractice action filed a complaint for tortious interference with a contract and conspiracy against the referring attorney and the new attorney along with a claim for breach of fiduciary duty against the referring attorney.
The court ruled that a discharged attorney could not maintain an action for tortious interference with contract because it was an “at will” contract terminable at any time. The court stated that the appropriate cause of action would be tortious interference with prospective economic advantage. Moreover, the discharged attorney could not maintain his claim for breach of a fiduciary relationship because a mere fee-sharing agreement did not amount to a joint venture that would give rise to a fiduciary relationship.
Retaining liens over client files. The court held in Twin Sewer and Water, Inc. v Midwest Bank and Trust Co.41 that a retaining lien over a former client’s file may be adjudicated only if the former client institutes proceedings to compel the production of the file. A “retaining,” “possessory,” or “common law” lien only attaches to the former client’s file and a “charging,” “special,” or “statutory” lien only attaches to the proceeds of a recovery.42 The court held that where an attorney who withdraws for cause or is terminated exercises a retaining or common law lien, the attorney cannot adjudicate the lien until the former client institutes proceedings to return the file.
In Twin Sewer, the court distinguished a “retaining,” “possessory,” or “common law” lien from a “charging,” “special,” or “statutory” lien. The former applies when the prior attorney retains the file of the client, and it only attaches to the file. The latter attaches only to the proceeds of a recovery from a suit, claim, demand, or cause of action. In addition, the court stated in dicta that a retaining lien is extinguished if the attorney surrenders possession of the file or property.
Equitable liens. A deceased attorney’s estate may assert an equitable lien for attorney fees. The court in Lewsader v Wal-Mart Stores, Inc.43 held that because an attorney died before a settlement was reached in a case for which he was engaged as counsel, his estate was not precluded from asserting an equitable lien in the case. Additionally, the court held that the amount of the equitable lien would be determined by the deceased’s contribution to the settlement.
Quantum meruit. A discharged attorney’s lien for fees is based upon quantum meruit for the work performed for the benefit of the client prior to the termination of the contingent fee contract. In Anderson v Anchor Organization for Health Maintenance,44 the court held that a discharged attorney retains a lien for fees based upon quantum meruit despite the existence of a contingency contract.
Moreover, the court held, an attorney who has been discharged is not entitled to fees for his or her efforts in protecting an attorney lien or the right to recover fees. Rather, he or she is only entitled to fees for services that benefit the client’s case. Also, the court held that a notice of attorney lien served after an attorney’s discharge is invalid.
VII. Liens on Minor’s Claims
Subrogation liens against the recovery of a minor are not valid.45 An insurer has no right of subrogation against a minor’s recovery. The court reasoned that because the minor’s parents are responsible for the payment of the medical expenses incurred on behalf of the minor and benefits paid for the minor’s medical expenses are deemed to be for the benefit of the parents, an insurer has no subrogation rights against the minor’s recovery.
Conversely, a minor’s parents may be held responsible for medical expenses if they contracted to pursue a recovery against a third party for them. In Klem v Mann,46 the parents signed a subrogation agreement to pursue a claim against the tortfeasor for the amount of the benefits paid. Subsequently, the parents assigned their right of recovery of medical expenses to the minor. The court held that the insurer had a valid breach of contract claim against the minor’s parents since the insurance contract under which benefits were paid to the minor required the parents to pursue a claim for the amount of benefits paid and the parents previously signed a separate reimbursement agreement.
VIII. Notice of Lien Requirements
While most liens have notice requirements, the Illinois Supreme Court held in Cirrincione v Johnson47 that strict compliance with the statutory lien notice provisions are not required where the party receiving the lien had actual notice of the information not contained in the notice of lien. Specifically, the court held that strict compliance with the notice requirement in the Physician Lien Act is not required when the plaintiff’s attorney has acknowledged receipt of the lien and confirmed payment to the lienholder.
In Cirrincione, a chiropractor sent a notice of lien that was technically deficient under the terms of the Physicians Lien Act. The court held that strict compliance is unnecessary and the attorney’s acknowledgment of the lien waives any technical defects in the notice.
IX. Liability for Liens
A lien not properly paid from the settlement proceeds raises additional problems for the litigants and their counsel. InCirrincione v Johnson,48 the court also held that a lienholder making a claim for conversion of funds rather than breach of contract may recover punitive damages. The court stated that no contract exists between a lienholder and an attorney for an award recipient.
Also, an attorney who fails to satisfy subrogation liens out of the settlement proceeds prior to distribution of the funds to the plaintiff may be liable to the lienholder for conversion. In Western States Ins. Co. v Louis E. Olivero & Assoc.49 an insurance company had a subrogation lien on settlement proceeds paid to the attorney’s client. The attorney acknowledged the lien and promised to pay the insurance company after they signed and returned the settlement check, which was made payable to the insurance company, the client, and the law firm.
Despite this agreement, the attorney disbursed the settlement proceeds to the client without paying the insurance company. The client later filed for bankruptcy. In this case, the court held that the attorney was liable for conversion of property and ordered that he reimburse the insurance company for its lien.
Since Illinois lien law can be a minefield of problems for the practitioner, the potential impact of a lien must be considered before any settlement is reached. Clients have to be reminded of their lien obligations and how they diminish net settlement proceeds. Otherwise, liens can derail the resolution of the case in the homestretch.
- 301 Ill App 3d 680, 705 NE2d 113 (2d D 1998).
- Anderson v Dept. of Mental Health and Developmental Disabilities, 305 Ill App 3d 262, 711 NE2d 1170 (1st D 1999).
- 305 Ill App 3d 773, 713 NE2d 775 (2d D 1999).
- 224 BR 899 (Bankr CD Ill 1998).
- 176 Ill 2d 171, 679 NE2d 1230 (1997).
- 820 ILCS 305/5(b).
- 820 ILCS 305/21.
- 322 Ill App 3d 657, 749 NE2d 368 (1st D 2001).
- 146 Ill 2d 155, 585 NE2d 1023 (1991).
- 749 NE2d at 377.
- 191 Ill 2d 326, 730 NE2d 1101 (2000).
- 319 Ill App 3d 625, 745 NE2d 1261 (5th D 2001).
- Glenn v Johnson, No 91305, 2002 WL 93132 (Ill Jan. 25, 2002).
- 314 Ill App 3d 1065, 734 NE2d 29 (3d D 2000).
- 42 USCA Â§ 2651.
- United States v Geier, 816 F Supp 1332 (WD Wis 1993).
- 835 F Supp 1163 (ND Cal 1993).
- Rybicki v Hartley, 792 F2d 260 (1st Cir 1986).
- 285 Ill App 3d 489, 674 NE2d 69 (1st D 1996).
- 305 ILCS 5/11-22.
- Evanston Hospital v Hauck, 1 F3d 540 (7th Cir 1993). See also 305 ILCS 5/11-13 (Medicaid payment constitutes full payment for goods and services covered thereby).
- 173 Ill 2d 375, 671 NE2d 657 (1996).
- Johnson v State Farm Mutual Automobile Insurance Co., 323 Ill App 3d 376, 752 NE2d 449 (5th D 2001).
- Id, 752 NE2d at 455.
- No 90742, 2002 WL 93124 (Ill Jan. 25, 2002).
- See Estate of Jay v Associates’ Health and Welfare Plan, 102 F Supp 2d 978 (ND Ill 2000). But see Great West Life and Annuity Insurance Co. v Moore, 133 F Supp 2d 677 (ND Ill 2001) (Scholtens not controlling because the case involved the proper construction and application of the plan’s provisions, which the court gave full effect to, thus finding that the common fund doctrine was inapplicable).
- Blackburn v Sundstrand Corp., 115 F3d 493 (7th Cir 1997). See also Speciale v Seybold, 147 F3d 612 (7th Cir 1998) (ERISA does not preempt adversarial claims to settlement fund between ERISA plan and healthcare providers, thus there was no federal jurisdiction). Cf Administrative Committee v Gauf, 188 F3d 767 (7th Cir 1999) (ERISA plan’s contract enforcement claim was equitable, rather than legal, thus providing federal jurisdiction over administrator’s action under ERISA’s civil enforcement provisions).
- 308 Ill App 3d 381, 720 NE2d 287 (1st D 1999).
- 311 Ill App 3d 1034, 725 NE2d 816 (5th D 2000).
- Morris B. Chapman & Associates, Ltd. v Kitzman, 193 Ill 2d 560, 739 NE2d 1263 (2000).
- Id; see also Wolff v Ampacet Corp., 284 Ill App 3d 824, 673 NE2d 745 (1st D 1996) and City of Chicago v Korshak, 276 Ill App 3d 597, 658 NE2d 1165 (1st D 1995).
- See, e.g., Wheaton v Dept. of Public Aid, 92 Ill App 3d 1084, 416 NE2d 780 (2d D 1981).
- 752 NE2d at 451.
- Carlson v Powers, 225 Ill App 3d 410, 587 NE2d 1240 (2d D 1992).
- Triskett Illinois, Inc. v Dixon, 163 BR140 (Bankr ND Ill 1994), relying on Rhoades v Norfolk & W. Ry., 78 Ill 2d 217, 399 NE2d 969 (1979).
- 304 Ill App 3d 906, 710 NE2d 861 (1st D 1999).
- 308 Ill App 3d 662, 720 NE2d 636 (1st D 1999).
- 296 Ill App 3d 169, 694 NE2d 191 (4th D 1998).
- 274 Ill App 3d 1001, 654 NE2d 675 (1st D 1995).
- Kelleher v Hood, 238 Ill App 3d 842, 605 NE2d 1018 (2d D 1992).
- 279 Ill App 3d 735, 665 NE2d 514 (1st D 1996).
- 184 Ill 2d 109, 703 NE2d 67 (1998).
- 283 Ill App 3d 307, 670 NE2d 333 (3d D 1996).
Healthcare provider liens
The following statutes give liens to healthcare providers.
- Hospital Lien Act, 770 ILCS 35/1 et seq
- Physicians Lien Act, 770 ILCS 80/1 et seq
- Clinical Psychologists Lien Act, 770 ILCS 10/1 et seq
- Dentists Lien Act, 770 ILCS 20/1 et seq
- Emergency Medical Services Personnel Lien Act, 770 ILCS 22/1 et seq
- Home Health Agency Lien Act, 770 ILCS 25/1 et seq
- Optometrists Lien Act, 770 ILCS 72/1 et seq
- Physical Therapist Lien Act, 770 ILCS 75/1 et seq
More About Medicare Liens
Medicare liens were the topic in a recent exchange on the ISBA general e-mail discussion group, where participants offered a number of helpful tips, including the following. ISBA members can join discussion groups at https://central.isba.org/home.
- Joan M. Zanzola, an assistant regional counsel for the U.S. Department of Health and Human Services, posted to the list to offer assistance. She says that attorneys seeking Medicare payment information should first contact the Medicare Coordination of Benefits Contractor at P.O. Box 5041, New York, N.Y. 10274-0660, ph (800)999-1118. Those who have consulted the contractor but still need help can contact Zanzola at the Office of the General Counsel, U.S. D.H.H.S., 233 North Michigan Avenue, Suite 700, Chicago, IL 60601, ph (312) 886-1698, fax (312) 886-1718, e-mail email@example.com.
More on liens from the Journal
G. Patrick Murphy, A Plaintiff’s Lawyer’s Guide to Settlement Offers and Liens, 86 Ill Bar J 91 (February 1998)
A primer on the implications of liens for personal injury settlements, with a special look at ERISA subrogation.
Joseph B. McDonnell, Health Care Liens and Burrell v Southern Truss: A Wrong Turn by the High Court, 85 Ill Bar J 308 (July 1997)
In Burrell, the Illinois Supreme Court refused to limit the total amount of liens by medical providers in personal injury cases. The author argues that the decision ignores the history of the lien acts, produces an unjust result, and frustrates the policy of the law in encouraging settlement.
ABOUT THE AUTHORS
Edward “Ted” McNabola firstname.lastname@example.org is an associate at Cogan & McNabola, P.C. where he concentrates in medical malpractice, personal injury, product liability and class actions. Mr. McNabola received his law degree and a master’s in political science from Loyola University of Chicago. He is a member of the ISBA Assembly and is adjunct professor of trial advocacy at Loyola University of Chicago.
Kevin E. O’Reilly email@example.com is a principal with the Law Offices of Kevin E. O’Reilly where he concentrates in wrongful death, personal injury, product liability and medical malpractice. Mr. O’Reilly received his law degree from IIT-Chicago Kent where he currently serves on the Law School Alumnae Board. He is a member of the ISBA Assembly and Tort Law Section Council where he is co-editor of Tort Trends.
© Copyright 2009 by Edward W. McNabola and Kevin E. O’Reilly. All rights reserved.