FOL Attorneys Score Big Victory in Subrogation Case at Court of Appeals

FO&L trial and appellate counsel Jessica MacCarty and Kevin Poteete secured an important appellate decision upholding every carrier’s inalienable subrogation right to “first money” recovery from third-party cases before the Dallas Court of Appeals in Hartford Accident & Indemnity Co. v. Francois, No. 05-21-00981-CV, Tex. App.—Dallas, May 23, 2023.

Claimant Francois sustained a work-related injury in 2015. Hartford paid Francois $356,669.73 in medical and indemnity benefits under her employer’s workers’ compensation policy. Francois sued the owner and operator of the building where she sustained her injury, and settled that claim for $150,000. Hartford then intervened in the lawsuit and asserted its subrogation rights. Hartford and Francois disagreed on how the $150,000 settlement should be allocated in relation to the workers’ compensation lien. At the center of the dispute was the parties’ disagreement of how to calculate “the net amount recovered” by Francois under Section 417.002(a) of Texas WC Act. That subsection provides that “[t]he net amount recovered by a claimant in a third-party action shall be used to reimburse the insurance carrier for benefits, including medical benefits, that have been paid for the compensable injury.”

At trial before the Dallas district court, Francois’s counsel maintained the “net recovery” is determined after counsel’s 40% contingency fee is taken out of the gross settlement. Using this framework, Francois calculated the “net recovery” to be $85,206.03 as follows:

$150,000 (𝑔𝑟𝑜𝑠𝑠 𝑠𝑒𝑡𝑡𝑙𝑒𝑚𝑒𝑛𝑡)
− $60,000 (40% 𝑐𝑜𝑛𝑡𝑖𝑛𝑔𝑒𝑛𝑐𝑦 𝑓𝑒𝑒)
−$4,793.97 (𝑝𝑟𝑜 𝑟𝑎𝑡𝑎 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠)
$85,206.03 (𝑛𝑒𝑡 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦)

Francois’s attorney next argued the trial court could award him additional attorney’s fees under section 417.003 because Hartford did not participate in the lawsuit against the owner/operator of the building. He concluded he was entitled to an award of $28,117.98 as Sec. 417.003 attorney’s fees, which was one-third of the net recovery of $85,206.03. By subtracting those fees from the net recovery, Francois’s counsel argued Hartford’s recovery should be $58,088.05:

$85,206.03 (𝑛𝑒𝑡 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦)
−$28,117.99 (§ 417.003 𝑓𝑒𝑒𝑠)
$58,088.04 (𝐻𝑎𝑟𝑡𝑓𝑜𝑟𝑑′𝑠 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦)

Finally, Francois’s counsel argued he was entitled to attorney’s fees of $10,000 for defending the intervention and participating in the bench trial. He sought those fees under Sec. 37.009 of the Texas Civil Practice and Remedies Code and maintained he was entitled to such fees because Hartford refused to negotiate a lesser recovery. Francois characterized Hartford’s unwillingness to negotiate a lower subrogation lien as an improper tactic and intentional failure to follow established law.

Hartford, in contrast, argued that under the “first money” rule, Hartford’s recovery is calculated by subtracting Sec. 417.003 fees and expenses from the gross settlement. Hartford’s calculation was simple:

$150,000 (𝑔𝑟𝑜𝑠𝑠 𝑠𝑒𝑡𝑡𝑙𝑒𝑚𝑒𝑛𝑡)
−$50,000 (§ 417.003 𝑓𝑒𝑒𝑠)
−$4,793.97 (𝑝𝑟𝑜 𝑟𝑎𝑡𝑎 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠)
$95,206.03 (𝐻𝑎𝑟𝑡𝑓𝑜𝑟𝑑′𝑠 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦)

The trial court adopted claimant’s proposed allocation. Following a bench trial, the trial court awarded $57,088.04 of the settlement to Hartford, and $92,911.96 to Francois and her counsel. The $92,911.96 awarded to Francois and her counsel was comprised of the following: (1) attorney’s fees of $60,000, which was 40% of the gross settlement, (2) reasonable and necessary expenses of $4,793.97, and (3) Sec. 417.003 fees of $28,117.99, which was one-third of the “net recovery” calculated by the court. The trial court also awarded Francois’s counsel additional attorney’s fees of $10,000 based on his calculation as explained above.

In its first issue on appeal, Hartford argued the trial court’s settlement allocation failed to award it the statutorily-required “first money” from Francois’s third-party settlement. Hartford maintained it should have recovered $95,206.03, not $57,088.04 as awarded in the judgment. Citing the Act itself and Supreme Court of Texas authority, the court noted that “[i]t is well-established that an insurance carrier is entitled to recover all benefits paid to an injured worker out of the ‘first money’ the worker recovers from a liable third party,” and that “until a carrier is reimbursed in full, ‘the employee or his representatives have no right to any of such funds.’” First money reimbursement “is essential to the workers’ compensation system because it reduces costs to the carrier and, thus, to the employer and the public.”

At the same time, citing Sec. 417.003, the court conceded that “first money” recovery “does not always result in an insurer recovering the full amount of the settlement. Rather, the subrogation amount must be calculated in accordance with section 417.003, which provides that the employee’s attorney may recover certain attorney’s fees and ‘a proportionate share of expenses’ as compensation for pursuing the third-party action.”

The Court of Appeals expressly agreed with Hartford’s methodology, noting that although Chapter 417 of the Labor Code does not define “net amount recovered,” two other Texas appellate  courts have defined “net amount recovered” as Hartford did in this case.

In both cases cited from the other appellate courts, the subrogation lien exceeded the third-party settlement. Under those circumstances, the “net amount recovered” was calculated by subtracting the fees and proportionate expenses permitted under Sec. 417.003 from the total settlement amount. In the present case, the Dallas court agreed with this approach.

The Fifth Court of Appeals therefore held that Hartford was entitled to the first money Francois recovered in the settlement, and she had no right to the settlement money until Hartford was paid in full. In this case, the settlement amount ($150,000.00) did not exceed the amount of Hartford’s subrogation interest ($356,669.73). Consequently the carrier is entitled to the full amount of the settlement minus payment of attorney’s fees and expenses that the carrier must pay to the claimant’s counsel pursuant to Sec. 417.003.

The Court concluded the trial court erred by using a “net amount recovered” that was less than the total settlement to allocate the settlement under Chapter 417, and the trial court abused its discretion by awarding Francois’s counsel’s attorney’s fees in excess of one-third of the total settlement. They reiterated that Sec. 417.003 caps any fees awarded to a claimant’s attorney at “one-third of the insurance carrier’s recovery.” As discussed above, Hartford’s recovery for the purposes of Sec. 417.003 would be the total settlement of $150,000. The trial court’s award of $88,117.99 in fees is 58.7% of the total settlement and therefore, in excess of what is permitted under the statute. The court therefore concluded Hartford was entitled to recover $95,206.03, which is the full amount of the $150,000 settlement minus Sec. 417.003 fees of $50,000 and proportionate expenses of $4,793.97 properly awarded to Francois and her counsel.

Hartford’s second point on appeal targeted the $10,000 in additional fees awarded to claimant’s counsel by the trial court under Sec. 37.009 of the Texas Civil Practice and Remedies Code. The court of appeals ultimately agreed with Hartford that this award was inequitable and unjust for two reasons.

First, the court of appeals indicated the award of additional fees to Francois was in direct contravention of the limit on fees imposed by Sec. 417.003 and constituted a windfall for Francois. By awarding the additional fees, the amount of fees awarded to Francois’s attorneys exceeded one-third of the net amount recovered (in this case, the full settlement amount) and therefore violated the Labor Code.

Second, the Court concluded that claimant and her attorney provided no basis for such an award, nor any reason why such an award was equitable and just. Francois’s counsel argued at trial that additional fees should be awarded because Hartford “deliberately refused to agree to a three-way split” of the settlement. The Court noted that neither the prior cases cited by claimant nor Chapter 417 required Hartford to accept any payment less than the total amount of its subrogation lien. On the contrary, Hartford had a statutory right to recover the entirety of the lien.

The court of appeals specifically noted that Hartford and its counsel “consistently cited to binding Texas Supreme Court authority…persuasive appellate court cases, and the plain language of the statute to support its arguments concerning the proper allocation of the settlement… Hartford was well within its rights to seek the full amount of reimbursement permitted under Chapter 417.” The court concluded the trial court abused its discretion by awarding Francois additional attorney’s fees of $10,000, and reversed the trial court’s award of those fees.

Ultimately, the Dallas Court of Appeals rendered judgment for carrier and specifically held that Hartford recover $95,206.03, and Francois recover attorney’s fees of $50,000 and pro rata expenses of $4,793.97