Alvarado v. Kiewit Pacific Co.

Citations: 993 P.2d 558; 92 Haw. 524Docket: 19984

Court: Hawaii Intermediate Court of Appeals; May 12, 1998; Hawaii; State Appellate Court

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The case involves Marcelo Alvarado, who was injured in a work-related accident while employed by Kiewit Pacific Company (Kiewit) and subsequently pursued a third-party action against Hygrade Electric Company. The court addressed how to distribute a judgment or settlement amount recovered by an injured employee when the employer has also provided workers' compensation benefits. According to Hawai'i Revised Statutes (HRS) 386-8, the distribution process starts with the total judgment or settlement amount, deducting reasonable litigation expenses and attorneys' fees incurred solely by the employee's attorney, and then deducting the employer's compensation expenditure, adjusted for the employer's share of expenses and fees.

The circuit court failed to reduce Kiewit's workers' compensation expenditure by its share of expenses and attorneys' fees in its earlier rulings, leading the appellate court to vacate part of the previous orders and remand for further proceedings in accordance with this interpretation. Alvarado had accepted a $110,000 Offer of Judgment from Hygrade, and Kiewit, which had paid $110,773.06 in workers' compensation benefits, sought reimbursement through a lien. The court initially denied Kiewit’s motion for reimbursement but later granted it, resulting in a final judgment favoring Kiewit for $72,310.25, which Alvarado appealed.

Alvarado challenges two issues on appeal: the timeliness of Kiewit's intervention and the circuit court's application of HRS 386-8 regarding the $72,310.25 awarded to Kiewit as partial satisfaction of its lien. 

Regarding Kiewit's intervention, the court examined whether the trial court abused its discretion in allowing Kiewit to join the case. Under HRS 386-8, an employer must receive written notice of an employee's action against a third party and can join as a party plaintiff before the trial. Alvarado contends that the doctrine of laches should prevent Kiewit from intervening after nearly two years and post-acceptance of a settlement offer. However, since Kiewit intervened before any trial, the circuit court's decision to allow intervention was not an abuse of discretion.

On the issue of the judgment's calculation, Alvarado argues that the circuit court mistakenly awarded Kiewit without deducting its share of attorneys' fees and expenses from the compensation amount. The court agrees and remands for further proceedings, asserting that HRS 386-8 clearly states that the employer's expenditure for compensation must be reduced by its share of expenses and fees before applying the lien against the judgment or settlement amounts. The interpretation of HRS 386-8 emphasizes the need to give effect to the statute's plain language and legislative intent, confirming that Kiewit's position is incorrect.

When an employee independently pursues a third-party action for a judgment or settlement, the calculation of their proceeds involves several deductions: (1) the total judgment or settlement amount, minus (2) reasonable litigation expenses and attorneys' fees incurred solely for the employee's recovery, and (3) the employer's compensation expenditure, reduced by the employer's share of expenses and fees. The remaining amount constitutes the employee's net recovery. Under HRS 386-8, an employer is entitled to a lien for the amount of workers' compensation paid, adjusted for their share of attorneys' fees and expenses.

The 1973 amendment to HRS 386-8 clarified this process, mandating that employers share in the payment of attorney's fees and costs when an injured employee secures a recovery that benefits both parties. Thus, employees can deduct their costs and fees before reimbursing the employer for compensation outlays. The intent is to ensure fairness, allowing employees to retain a greater portion of third-party recoveries.

The statute does not define the employer's "share" of attorneys' fees and expenses, leaving it to the trial court's discretion. However, it is proposed that the employer's share should correspond to both the benefits already paid and any future benefits avoided due to the settlement. This approach is grounded in equity, suggesting that the employer's share should reflect a percentage of the workers' compensation already disbursed, thereby aligning with the employer's interest in the outcome of the third-party action.

An equitable basis for calculating an employer's share of attorneys' fees and expenses in workers' compensation cases cannot rely on the amount of recovery by the employee or the attorneys' fees charged to the employee. Instead, the calculation should be based on the total workers' compensation benefits already paid to the employee. After an employee recovers from a third party, the employer is entitled to reimbursement for its compensation payments and benefits from being relieved of future compensation obligations, as outlined in HRS 386-8. This statute states that the employer's liability is reduced by the amount of the settlement or judgment after deducting attorneys' fees and expenses. Relevant case law, including Takahashi v. Loomis Armored Car Serv. and Teller v. Major Sales, Inc., supports that the employer's share of attorneys' fees should reflect the total compensation liability, not just the payments made up to that point. The rationale behind this approach is to ensure fairness, preventing employees from bearing the full burden of legal costs while the employer benefits from the recovery.

The employer's responsibility for attorney's fees in employee third-party recoveries is based on the benefits the employer gains from the employee's recovery, which offsets the employer's compensation liabilities. Employers benefit not only from reimbursement for past compensation but also from reduced future liabilities. Courts typically calculate the employer's equitable share of attorney's fees based on total potential liability rather than solely on past payments. In applying HRS 386-8, calculations for a $120,000 judgment would show $40,000 for employee attorney fees, $8,000 for employer reimbursement, and a net recovery of $64,000 for the employee. For a case involving a $110,000 settlement, the calculation yields a subtotal of $72,310.25 after deducting the employee's reasonable attorney fees. However, the court could not finalize the employer's reimbursement as the exact amount (X) for the employer's share of attorney fees was undetermined. Kiewit's counsel argued that the court lacks discretion to reduce the lien amount, which the circuit court accepted, leading to a determination that Alvarado must pay Kiewit the remaining balance of $72,310.25 from the judgment proceeds.

The circuit court failed to account for Kiewit's share of attorneys' fees and expenses when determining the reimbursement amount for its workers' compensation expenditures. Consequently, the August 4, 1995 Reimbursement Order and the July 9, 1996 Judgment are vacated and remanded for the circuit court to calculate Kiewit's share of these expenses, which will reduce the total recoverable amount. 

Two scenarios arise upon remand: 

1. If Kiewit's share is one-third of the expenditures or less (up to $37,102.13), the calculation results in Kiewit being entitled to $72,310.25 reimbursement against its statutory lien, with no net benefit for Alvarado. Kiewit would not be relieved from future benefits.

2. If Kiewit's share exceeds one-third (e.g., one-half at $55,653.20), the calculation yields a net recovery of $16,657.05 for Alvarado, indicating potential relief for Kiewit from future benefits. The circuit court must then determine if Kiewit is relieved from future benefit payments and, if so, quantify those benefits. 

For instance, if Kiewit is relieved of $16,000 in future benefits, and its share of costs is $8,000, the final calculation provides Alvarado with $24,657.05. 

The conclusion reiterates that when an employee independently pursues a third-party action, the employer's entitlement is limited to the amount of workers' compensation paid minus the employer’s share of attorneys' fees and expenses, calculated from both the compensation paid and any future benefits the employer is relieved from due to the third-party action's outcome. The court vacates the previous orders to ensure this calculation is performed.

An employee prosecuting an action independently is entitled to recover reasonable litigation expenses and attorney’s fees from the judgment amount or settlement, with these fees based solely on the employee's attorney's services benefiting both the employee and the employer. After deducting these expenses and fees, the employer can claim a first lien against the judgment or settlement for the amount they spent on workers' compensation, minus their share of the expenses and fees. In the case of Plaintiff-Appellant Marcelo Alvarado, he failed to obtain the required written consent from Intervenor-Appellee Kiewit Pacific Company as mandated by HRS. 386-8. At the judgment's entry, the total workers' compensation expended was $111,306.40, and the circuit court reduced Alvarado's $110,000 judgment by $37,689.75 for attorney's fees and costs, awarding Kiewit and Aetna Casualty and Surety Company the remaining $72,310.25 in partial satisfaction of Kiewit's lien. The term "lien" used by the parties refers to the total workers’ compensation expenses, which is inconsistent with HRS. 386-8, which specifies the lien as the employer's expenditure for compensation minus their share of fees and expenses. The cited cases by Alvarado do not involve similar statutory provisions, rendering them unpersuasive. Additionally, while Kiewit did not contest that Alvarado prosecuted the action "alone," any argument suggesting otherwise would be unconvincing, as Kiewit's participation did not meet the active involvement threshold necessary to alter this classification.

Reasonable litigation expenses and attorneys' fees are determined based on services rendered by the employee's attorney in recovering benefits for both the employee and employer, specifically in the context of the total action leading to a judgment or settlement. According to HRS. 386-8, the employer's reimbursement equals the benefits already paid minus the employer's share of attorneys' fees. Kiewit contends that reducing its total workers' compensation expenditures by its share of attorneys' fees constitutes a "double assessment" of attorneys' fees, arguing that the statute allows for only one deduction from settlement proceeds. However, this argument is refuted as both parties—employer and employee—are responsible for their own attorneys' fees and expenses, thus eliminating the possibility of double assessment. The statute indicates that after deducting both parties' expenses, the employer's compensation expenditure is also reduced by its share of fees. An illustrative calculation demonstrates that Kiewit's concern is unfounded, as seen in the breakdown of the judgment and the distribution of fees and expenses. Furthermore, if an employer is relieved from future benefit payments due to a settlement, its reimbursement amount is further reduced by its share of attorneys' fees for those future benefits. This adjustment increases the employee's net recovery while maintaining an absence of double fee assessment, ensuring that the total financial outcome properly aligns with the initial settlement amount.

Judgment was entered on July 9, 1996, in favor of Kiewit against Alvarado for $72,310.25, representing partial satisfaction of Kiewit's workers' compensation lien from a prior judgment against Hygrade. Alvarado is permitted to deduct reasonable attorneys' fees of $36,666.66 and litigation expenses of $1,023.09 from the gross proceeds of the earlier judgment against Hygrade. After these deductions, Alvarado must pay Kiewit the remaining balance of $72,310.25 in satisfaction of the lien. The judgment indicates that the judge failed to properly reduce Kiewit's reimbursement amount by its share of attorneys' fees and costs. An earlier order from August 4, 1995, clarifies that HRS § 386-8 does not require such a reduction. The gross judgment proceeds payable to Alvarado from Hygrade total $110,000, while Kiewit's workers' compensation lien amounts to $111,306.40. HRS § 386-8 allows employees to deduct reasonable attorneys' fees and costs from settlement proceeds before the employer is reimbursed for its lien. Even if the reimbursement exhausts the settlement proceeds, the employer retains a contingent obligation to pay ongoing workers' compensation benefits, which must be settled by the Department of Labor and Industrial Relations, without affecting the distribution of the settlement proceeds. The court has the authority to determine reasonable litigation expenses and attorneys' fees under HRS § 386-8.

The Court determined that Alvarado incurred reasonable litigation expenses totaling $1,023.09 and approved an attorney's fee of $36,666.66, which is one-third of the gross judgment proceeds. Kiewit's Motion for Reimbursement of Workers' Compensation Lien was granted. Under HRS § 386-8, Alvarado may deduct the approved attorneys' fees and litigation expenses from the gross judgment of $110,000.00, resulting in a payment of $72,310.25 to Kiewit in partial satisfaction of its workers' compensation lien. The Court's order clarifies that HRS § 386-8 does not require Kiewit's total workers' compensation expenditures to be reduced by its share of attorneys' fees and expenses, nor does it consider future benefits in calculating Kiewit's reimbursement. Specifically, Kiewit is entitled to recover $47,653.20 from its total expenditure of $111,306.40 for workers' compensation benefits, with $55,653.20 representing Kiewit's share of attorneys' fees based on compensation already paid, and $8,000 reflecting Kiewit's share based on future benefits it is no longer liable to pay due to the settlement.