Holbrook v. Andersen Corporation ( 1993 )


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  •                 UNITED STATES COURT OF APPEALS
    FOR THE FIRST CIRCUIT
    No. 92-1902
    MARY A. HOLBROOK, MARY E. HOLBROOK,
    INDIVIDUALLY AND AS MOTHER AND
    NEXT FRIEND OF DANIEL M. HOLBROOK,
    Plaintiffs, Appellants,
    v.
    ANDERSEN CORPORATION, ET AL.,
    Defendants, Appellees.
    APPEAL FROM THE UNITED STATES DISTRICT COURT
    FOR THE DISTRICT OF MAINE
    [Hon. Gene Carter, U.S. District Judge]
    Before
    Boudin, Circuit Judge,
    Campbell, Senior Circuit Judge,
    and Stahl, Circuit Judge.
    James  M. Campbell  with  whom  Michelle I.  Schaffer,  Ronald  M.
    Davids and Campbell & Associates were on brief for appellants.
    Margaret  D.  McGaughey, Assistant  United  States  Attorney, with
    whom  Richard S. Cohen, United  States Attorney, and  Paula D. Silsby,
    Senior Litigation Counsel, were on brief for appellees.
    June 30, 1993
    BOUDIN, Circuit Judge.   The Holbrooks'  two-and-a-half-
    year-old son, Daniel Holbrook, sustained severe and permanent
    injuries after  falling through a second-floor  window of the
    Holbrooks'  apartment.   Because plaintiff Mark  Holbrook was
    employed  by  the  United States  Navy  at  the  time of  the
    accident, the United States  paid 80 percent of the  costs of
    Daniel's medical treatment under the Dependent's Medical Care
    Act,  10 U.S.C.   1071 (the "Dependent's Act").  The Holbooks
    then  sued  Andersen  Corporation,  the  manufacturer of  the
    window and screen, alleging negligence and product liability.
    The Holbrooks notified the United States of the initiation of
    the suit, but the United States did not intervene.
    Three  days before  trial,  the  Holbrooks and  Andersen
    settled the suit  for $725,000.1   This amount  was far  less
    than  the complaint  had  sought, and  the amount  presumably
    reflected the parties' judgment about likelihood  of success;
    Daniel Holbrook  had  been unsupervised  at the  time of  the
    accident, and there were no witnesses.  The United States was
    not  a  party  to  the  settlement, nor  did  the  settlement
    agreement provide that  any money should be paid  by Andersen
    to the United States in respect of the medical costs that the
    government  had  incurred.    The  settlement  agreement  did
    1Attorneys'  fees and expenses  absorbed a large portion
    of this amount ($391,505.50).  Of the balance,  the Holbrooks
    were allotted  a portion  ($50,000) for direct  expenses with
    the remainder to be held in trust for Daniel.
    -2-
    provide, however, that the Holbrooks would indemnify Andersen
    if the latter were held liable to the United States.
    In  its order  approving  the settlement,  the  district
    court  sua sponte  ordered  that $139,028  of the  settlement
    proceeds be placed in an  escrow account to satisfy potential
    liens of the United States or others.2   Six months later the
    United States moved to compel disbursement to it of the funds
    held  in escrow,  and  shortly thereafter  the United  States
    formally  moved to  intervene  in the  action; the  Holbrooks
    opposed  both motions.    The court  ultimately granted  both
    motions and after a  recalculation of the government's actual
    payments  ordered   disbursement  to  the  United  States  of
    $122,834.   The  balance of  the escrow  was remitted  to the
    Holbrooks.     The  Holbrooks   appeal,  arguing   that  this
    disbursement was not authorized by law.
    In  claiming  a right  to  a portion  of  the Holbrooks'
    settlement, the  United States  relies solely on  the Federal
    Medical Care  Recovery Act, 42  U.S.C.   2651  ("the Recovery
    Act").   This  statute grants  to the  government a  right to
    recover from a third-party tortfeasor the reasonable value of
    medical services that the  government has furnished under the
    2Local rules required  court approval of  settlements of
    claims brought  on behalf  of minor  children.   The  court's
    escrow  order  may  have  been  prompted  by  the  Holbrooks'
    statement  in   their  motion  for  court   approval  of  the
    settlement that the Navy  had paid 80 percent of  the medical
    bills  and  that  the  total  medical  expenses  amounted  to
    $139,028.
    -3-
    Dependent's   Act  (or   under   other   similar   statutes).
    Specifically, the Recovery Act provides:
    In  any  action  in  which  the  United  States  is
    authorized or required by  law to furnish hospital,
    medical, surgical, or dental care and treatment . .
    .  to a person who is injured or suffers a disease,
    after  the   effective  date  of  this  Act,  under
    circumstances creating a  tort liability upon  some
    third person  . . .  to pay  damages therefor,  the
    United States  shall have  a right to  recover from
    said third person the  reasonable value of the care
    and treatment  so furnished or to  be furnished and
    shall, as to this right be subrogated  to any right
    or  claim that the injured person . . . has against
    such third  person to the extent  of the reasonable
    value of the care and  treatment so furnished or to
    be furnished.
    42  U.S.C.   2651(a).  The statute then sets forth procedures
    for the  government's enforcement of this  right of recovery.
    The United States  may "intervene  or join in  any action  or
    proceeding brought by the injured  or diseased person" or, if
    such an  action  is  not  commenced within  six  months,  may
    "institute and prosecute legal proceedings against  the third
    person  who  is liable  for the  injury or  disease."   Id.
    2651(b).
    The parties direct their  arguments in this case chiefly
    at the procedural component  of the statute, section 2651(b).
    The  Holbrooks  argue  that  the  United  States'  motion  to
    intervene came too late, because it was not filed until after
    the   Holbrooks'  suit  against   Andersen  was  resolved  by
    settlement.   The United States responds  by pointing to case
    law  providing  that  the  procedural devices  set  forth  in
    -4-
    section  2651(b)  are  not exclusive  and  that  a motion  to
    intervene may be  filed "at  any time," even  after entry  of
    judgment.  United  States v.  Merrigan, 
    389 F.2d 21
    , 25  (3d
    Cir. 1968); see  also United  States v. York,  
    398 F.2d 582
    ,
    585-86 (6th Cir. 1968).  We  think that the crucial issue  is
    not  when the government may intervene but rather whom it may
    proceed against once it makes an appearance in the case.
    The statute  grants  to the  United  States a  right  to
    recover "from [the] third  person" who is liable in  tort for
    the injury.  It  makes no provision for the  United States to
    recover   against   the   injured   party   or   from   funds
    unconditionally paid to the  injured party by the tortfeasor.
    Moreover,  the  United States'  right  to  recover under  the
    statute  is contingent  upon "circumstances  creating a  tort
    liability  upon some  third  party."   42  U.S.C.    2651(a);
    Thomas  v.  Shelton,  
    740 F.2d 478
    ,  481  (7th  Cir.  1984)
    (tortfeasors' "liability under the Medical Care Recovery  Act
    depends on their being found liable  . . . under the tort law
    of the pertinent state"); United States  v. Trammel, 
    899 F.2d 1483
    ,  1488 (6th Cir.  1990) (same).  There  has been no such
    determination in this case.
    "All  courts  which have  considered  the  question have
    agreed  that   the  statute   gives  the  United   States  an
    independent right of recovery against the tortfeasor . . . ."
    United  States v.  Housing Authority  of Bremerton,  415 F.2d
    -5-
    239, 241 (9th Cir 1969).  Thus, the government's right is not
    extinguished  by the injured  person's settlement and release
    with the tortfeasor.  See,  e.g., United States v. Theriaque,
    
    674 F. Supp. 395
      (D. Mass. 1987).  Indeed,  the government's
    right against  the tortfeasor under  the Recovery Act  is not
    defeated  even by  certain  restrictions that  might bar  the
    injured  person's own recovery.3   There is thus no necessity
    for  the  United  States  to  look  to  the  injured  party's
    settlement for compensation.
    If the United States  wishes to invoke the  Recovery Act
    to recover its medical  payments in this case, we  think that
    under  the plain  language  of the  statute  it must  proceed
    against  Andersen  and  seek  to  establish  Andersen's  tort
    liability.   The language of  the statute does  not authorize
    the government to  collect under  the Recovery Act  out of  a
    settlement negotiated  between  the injured  person  and  the
    tortfeasor.  Nor  is there any case  law that permits such  a
    recovery  absent  an express  agreement  designating for  the
    government a portion of the settlement.
    This  case  does  not  involve  the  peculiar  facts  of
    Cockerham  v. Garvin,  
    768 F.2d 784
    ,  787  (6th Cir.  1985).
    3See Heusle v. National  Mutual Ins. Co., 
    628 F.2d 833
    ,
    837 (3d Cir. 1980)  (procedural restrictions); United  States
    v. Moore, 
    469 F.2d 788
    , 790 (3d Cir. 1972) (state doctrine of
    interspousal immunity),  cert. denied,  
    411 U.S. 905
     (1973);
    United  States v. Gera, 
    409 F.2d 117
    , 119-20  (3d Cir. 1969)
    (state statute of limitations).
    -6-
    There the  Sixth Circuit  allowed recovery out  of settlement
    proceeds   where  "[t]he  [injured   person]  and  tortfeasor
    specifically agreed that part  of the money paid over  to the
    [injured person] would be  held in escrow pending a  claim by
    the [United  States] for specific medical bills . . . ."  The
    court   treated  the   escrow   as   giving  the   government
    "beneficiary" status akin to  that enjoyed by the third-party
    beneficiary of a contract.   See id. at 784.  The  court also
    decided  that  on  remand   the  government's  share  of  the
    settlement    should    be    determined     by    "equitable
    considerations," taking account of any  discounted settlement
    accepted by the victim and the litigation costs he had borne.
    Id. at 787.  The government does not argue that  in this case
    there was  any third-part  beneficiary agreement  between the
    Holbrooks and Andersen.
    Rather, the  United States  says that its  present claim
    has  been  misunderstood.    It argues  that  its  attempt to
    recover  from the escrow is not a claim against the Holbrooks
    but  rather,  consistent with  the Recovery  Act, is  a claim
    against Andersen, which supplied  the funds.  This is  a word
    game  that does  not reflect  the reality  of the  situation:
    Andersen has  paid the settlement amount to  the Holbrooks in
    exchange  for  a release  of claims  against  it.   The money
    belongs to the Holbrooks and  their son quite as much  as Mr.
    -7-
    Holbrook's salary paid to him by the Navy belongs  to him and
    not to the Navy which is the source of the funds.
    The  best argument  for the  United States  is based  on
    policy considerations.   Andersen's payment to  the Holbrooks
    is not technically  an admission of liability,  Fed. R. Evid.
    408, but  in reality the  settlement reflects  a judgment  by
    Andersen that there is a risk of liability and that the  case
    is worth  that  much  to  settle.   But  to  the  extent  the
    tortfeasor  is liable  to  the Holbrooks  under tort  law--an
    issue  mooted  by the  settlement--it is  also liable  to the
    United States for any medical costs paid by the latter.
    Of course the  United States  still has a  right to  sue
    independently and, if it can prove liability, to collect  its
    full  medical expenses  with no  settlement discount  at all.
    But  everyone  knows  that  if  fault  is  debatable and  the
    tortfeasor settles  with the  injured party, the  chances for
    the United States to recover may be much reduced.  Any lawyer
    would prefer to try a tort case in which the co-plaintiff  is
    an   injured  two-and-a-half-year  old,  especially  where  a
    verdict for the child virtually requires an award for the co-
    litigant.
    What is  even more troubling is that  the tortfeasor has
    an  incentive in  such  a  case  to  pay  the  injured  party
    something extra in settlement  precisely in order to uncouple
    the two claims.   Once the United States is  left to litigate
    -8-
    on its own, it not only has no sympathetic victim to take the
    lead before  the  jury  but  must  bear  its  own  litigation
    expenses.   And, if (as  here) the alleged  tortfeasor has an
    indemnity  agreement  with  the  victim,  making  the  latter
    responsible for any award to the United States, the victim or
    witnesses  associated with  the victim  now have  an economic
    incentive to minimize the  tortfeasor's fault when the United
    States sues.
    These policy concerns are  not overwhelming:  the United
    States is not without  litigation resources, in this  case it
    has the  benefit  of  much  discovery  already  done  by  the
    Holbrooks, and perjury laws  cabin the witnesses'  testimony.
    Had  it anticipated  the  problem, Congress  might well  have
    provided  a  legislative  solution  along the  lines  of  the
    Cockerham case:  The Recovery Act could easily have said that
    if the tortfeasor  and victim settle,  the United States  can
    claim for  its  medical costs  an  "equitable" share  of  the
    settlement to be determined  by the court.  But  Congress did
    not  to so--it  cannot anticipate  every problem--and  so the
    question posed  is whether  the courts should  do the  repair
    work themselves.
    The answer here, we think, is  no.  The statute does not
    literally forbid this "equitable share" solution, but neither
    do the provisions of this reasonably detailed statute provide
    for any such  recovery against the  victim or the  settlement
    -9-
    fund.   Nor can we  be certain  that Congress  would wish  to
    impose an "equitable share" solution; perhaps it might pick a
    quite different solution or no solution  at all.  There is no
    magic formula to say when courts should do patch-work repairs
    to legislation, but in our view this is not such a  case.  If
    Congress wants a  solution, it is best  for it to tailor  its
    own.
    The judgment of the district court is reversed.
    -10-