Of Chickens and Eggs: Settlement of Cases with Hospital Liens

A recent opinion from the Supreme Court of Texas, together with the statute it construes, ought to strike terror into the heart of every personal injury defense lawyer. In McAllen Hospitals v. State Farm, decided May 16, the parties settled a case in which there were hospital liens. Knowing of the liens, the careful defense lawyer had made the settlement checks jointly payable to the claimants and the hospital. Unfortunately for his client, however, the claimants cashed the checks without obtaining the hospital’s endorsement. When the hospital found out, it sued – not the claimants, and not the depository bank, but the settling insurance carrier.

Analyzing a 1994 Dallas Court of Appeals case involving a forged hospital endorsement on a settlement check, the high court first agreed that delivery of the checks to one set of co-payees (the claimants) constituted constructive delivery to the other payee (the hospital). So far, so good. But the court, siding instead with a Massachusetts case, refused to agree with the Dallas court that payment to the claimants discharged the instrument and the underlying obligation. Thus the hospital liens remained in effect notwithstanding negotiation of the check.

Turning to the issue of remedy, the court held that a hospital has no direct right of action against a settlement payor under the hospital lien statute. Instead, the court held that the hospital’s remedy under Property Code 55.007(a) is that the release is invalid and the lien on the claimant’s cause of action remains in effect.

Here’s the most terrifying part: the statute provides that a release is invalid unless the hospital’s charges are paid (at least to the extent of the amount of settlement consideration) before execution and delivery of the release, and the McAllen court said the hospital is “paid” only when it gets the money. So that means that the hospital must receive and cash its check before the release is delivered. But just how does one accomplish that? Have the claimant pay the hospital before getting the settlement check? Only wealthy claimants can afford to do that. Deliver a big fat check to the hospital (and make sure the hospital cashes it) before the claimant signs the release? Way too risky. Have opposing counsel hold the signed release until after the hospital cashes its check? Works only if you can trust opposing counsel. Have the hospital become a party to the release? That is cumbersome and time-consuming.

The only truly safe solution is to use an escrow agent, who receives the executed release and two settlement checks (one to the claimant and one to the hospital), delivers the check to the hospital, and only then delivers the release to defense counsel. Can one of the attorneys serve as the escrow agent? Perhaps, but care will have to be taken to ensure that delivery of the release or checks is to the attorney as independent escrow agent for both parties rather than as agent for his client. And does the attorney have a conflict of interest?

Not scared enough yet? Think about this: often large hospital liens are negotiated downward so that the claimant and his attorney get some money out of the deal. The statute says the release is invalid unless the hospital is paid (1) in full or (2) to the full extent of the settlement consideration. There’s no (3) to the extent of an agreed lesser amount. Making the hospital a party to the release is the only safe solution in this instance.