St. Paul Fire & Marine Ins. Co. v. Wood Et Al , 242 Ark. 879 ( 1967 )

CoNley Byed, Justice.

This appeal calls for construction of § 40 of the Workmen’s Compensation Act (Ark. Stat. Ann. § 81-1340 [Repl. 1960]) to determine whether an employee can settle his common law cause of action in negligence against a tort feasor free of any claims of his employer’s Workmen’s Compensation carrier, where the settlement documents specifically preserve all rights of the carrier.

The facts giving rise to this litigation show that on November 17, 1964, appellee Hershel Wayne Wood was injured while employed as a truck driver by Southern Farmers Association when a hydraulically operated auger on his truck came into contact with a high voltage line maintained by appellee First Electric Cooperative Corporation. As a result of the injury Wood was horribly and terribly burned, shocked, and injured; both feet have been amputated; and a hole was burned in his skull, with undetermined effects on his mind. Appellant St. Paul Fire & Marine Insurance Company, the Workmen ’s Compensation carrier for Southern Farmers Association, has expended in weekly benefits and medical payments through May 4, 1966, the sum of $26,116.68. In its pleading, St. Paul estimates that its expenditures will reach $50,000.

Following the injury, Wood filed an action against First Electric Cooperative Corporation for the sum of $500,000, alleging negligence on its part in the construetion and maintenance of its power lines in many respects. Appellee, Employers Mntnals of Wansan, is the liability carrier of First Electric and as such is the real party in interest as between it and First Electric.

Appellant St. Paul Fire & Marine Insurance Company intervened in Wood’s suit against First Electric under § 40 of the Workmen’s Compensation Act, seeking a lien in accordance with the act upon any recovery by Wood for compensation paid and to be paid him.

Before trial of Wood’s suit against First Electric, Wood and First Electric agreed on a figure which to their minds represented a fair settlement of the Wood phase of the case, but First Electric and St. Paul were unable to agree on a fair settlement of St. Paul’s subrogation claim. It was and is St. Paul’s position that it is entitled to receive, after payment of litigation costs and counsel fees, two thirds of any amount Wood might receive, up to the amount of St. Paul’s obligations under the Workmen’s Compensation Act.

The figure which Wood was willing to receive and Employers Mutuals was willing to pay for Wood’s end of the case was $78,000, provided Wood did not have to repay to St. Paul the Workmen’s Compensation benefits paid, and provided further that this would not affect his right to further compensation. Employers Mutuals was willing to pay said amount to Wood provided such payment would not make it automatically liable to St. Paul for compensation paid.

In an attempt to accomplish this purpose, Wood, First Electric and Employers Mutuals entered into an escrow agreement pursuant to which Employers Mutuals deposited with a bank at Batesville as Escrow Agent the sum of $78,000, and Wood deposited with the Escrow Agent his Release in the form hereinafter mentioned. The agreement provided in substance that, when it was determined by Wood and his attorney that Wood could receive this sum without being required to reimburse St. Paul for compensation paid and to be paid, then tbe Escrow Agent would deliver tbe $78,000 plus accrued interest to Wood, and tbe Belease to First Electric and its carrier. But if it be determined that Wood could not accept tbe money and deliver tbe Belease free of St. Paul’s claim, then tbe Escrow Agent would deliver tbe money plus interest back to First Electric and its carrier, and tbe Belease to Wood.

It was further provided in tbe Escrow Agreement that if it were determined that the effect of the proposed transaction would be to subject First Electric to liability to St. Paul for compensation paid or to be paid, without regard to negligence on tbe part of First Electric — that is, automatically — then the Escrow Agent would deliver tbe money plus accrued interest to Employers Mutuals and the Belease to Wood. It was also agreed that if these various determinations were not made until after the statute of limitations bad barred another suit by Wood against First Electric, then First Electric and its carrier, Employers Mutuals, would waive the defense of limitations; that .if the settlement was consummated, Wood would dismiss bis suit without prejudice, and such dismissal would not prejudice St. Paul’s right to pursue its claim against First Electric; that nothing in the agreement was intended to or should affect St. Paul’s right to do so, and that nothing in the agreement should constitute an admission of liability on the part of First Electric.

Finally, it was agreed that in any suit by Southern Farmers Association or St. Paul against First Electric to recover on its subrogation right under the Arkansas Workmen’s Compensation Act, First Electric would not plead as a defense the Belease referred to, except as it might be necessary to do so in order to avoid a recovery of more than had been and would be expended by St. Paul.

The proposed Belease is in conventional form, except that it contains recitals to the effect that the rights of Southern Farmers Association or St. Paul, which it may have by way of subrogation against First Electric, spe-eifically including all the rights given under § 40 of the Act, shall not be affected by the Release, and it recites the intention of the parties to leave unimpaired St. Paul’s right to litigate against First Electric in order to recover all Workmen’s Compensation benefits, past, present and future, paid to or for the benefit of Wood in discharge of its obligation under the Compensation Act.

Wood, to determine his rights under the escrow agreement, filed a cross-complaint, in the pending action, against St. Paul for a declaratory judgment. In this proceeding Wood sought to determine whether he could receive the settlement free of any claims of St. Paul; whether it would affect his rights to receive Workmen’s Compensation benefits in the future; and whether St. Paul would he free to assert its own cause of action against First Electric for compensation paid and to be paid.

The case was submitted upon a stipulation of the parties reciting, inter alia, the foregoing facts and also reciting that St. Paul took the position outlined in its letter of October 21, 1965, to the Workmen’s Compensation Commission, that there was a controversy between the parties as to the legal effect of the proposed settlement. St. Paul’s position in said letter was that it understood the case had been settled for $78,000; it claimed a lien thereon under the Act, for compensation paid and payable; and it requested permission to suspend payment of future compensation and future medical. The settlement, of course, has not as yet been consummated, but it is St. Paul’s position that if Wood accepts the money and executes the proposed Release, he will have to repay it for compensation paid and payable.

It was also stipulated that First Electric recognized St. Paul’s right to pursue its own statutory cause of action against First Electric as provided by law, and that if St. Paul did so, First Electric would not plead in bar of said cause, or as a defense thereto, the release from Wood, except as it might be necessary to prevent recovery for a sum in excess of compensation paid and to be paid. First Electric and Employers Mutuals acknowledge that the proposed settlement, if consummated, will not prejudice or impair such cause of action by St. Paul.

First Electric and Employers Mutuals by stipulation are parties plaintiffs to the cross-complaint filed by Wood against St. Paul.

Upon the pleadings and the stipulations, the trial court approved the proposed settlement as fair and reasonable and entered a declaratory judgment as prayed for.

For reversal, St. Paul relies on one point — i.e., the court should have denied the action of plaintiff for a declaratory judgment and granted St. Paul’s statutory lien against the settlement proceeds.

Section 40 of the Workmen’s Compensation Act (Ark. Stat. Ann. § 81-1340 [Repl. 1960]) provides:

“Third party liability. — (a) Liability imaffected.

(1) The making of a claim for compensation against any employer or carrier for the injury or death of an employee shall not affect the right of the employee, or his dependents, to make claim or maintain an action in court against any third party for such injury, but the employer or his carrier shall be entitled to reasonable notice and opportunity to join in such action. If they, or either of them, join in such action they shall be entitled to a first lien upon two-thirds [%] of the net proceeds RECOVERED in such action that remain after the payment of-the reasonable costs of collection, for the payment to them of the amount paid and to be paid by them as compensation to the injured employee or his dependents.

“(2) The commencement of an action by an employee or his dependents against a third party for damages by® reason of an injury, tw which this act [§§. 81-1301 — 81-1349] is applicable, or the adjustment of any such claim shall not affect the rights of the injured employee or his dependents to recover compensation, but any amount RECOVERED by the injured employee or his dependents from a third party shall be applied as follows: Reasonable costs of collection shall be deducted; then one-third [%] of the remainder shall, in every case, belong to the injured employee or his dependents, as the case may be; the remainder., or so much thereof as is necessary to discharge the actual amount of the liability of the employer and the carrier; and any excess shall belong to the injured employee or his dependents.

“ (b) Subrogation. An employer or carrier liable for compensation under this act [§§ 81-1301 — 81-1349] for the injury or death of an employee shall have the right to maintain an action in tort against any third party responsible for such injury or death. After reasonable notice and opportunity to be represented in such action has been given to the compensation beneficiary, the liability of the third party to the compensation beneficiary shall be determined in such action as well as the third party’s liability to the employer and carrier. After RECOVERY shall be had against such third party, by suit or otherwise, the compensation beneficiary shall be entitled to any amount recovered over and above the amount that the employer and carrier have paid or are liable for in compensation, after deducting reasonable costs of collection, and in no event shall the compensation beneficiary be entitled to less than one-third [%3 of the amount RECOVERED from the the third party, after deducting the reasonable cost of collection.

“(c) Settlement of claims. Settlement of such claims under subsections (a) and (b) of this section must have the approval of the Court or of the Commission, except that the distribution of that portion of the settlement which represents the compensation payable under this act [§§ 81-1301 — 81-1349] must have the approval of the Commission. Where liability is admitted to the injured employee or his dependents by the employer or carrier, no cost of collection shall be deducted from that portion of the settlement under subsections (a) or (b) of this section, representing compensation, except upon direction and approval of the Commission. [Init. Meas. 1948, No. 4, § 40, Acts 1949, p. 1420.]” (Emphasis ours.)

Section 40(a) (1) recognizes the employee’s common law tort action against third persons. It gives the compensation carrier a first lien upon two-thirds of the net proceeds “RECOVERED” in such action. Likewise, § 40(a) (2) provides that the employee’s commencement or adjustment of any such action against a third party shall not affect the rights of the injured employee to compensation benefits, but that any amount “RECOVERED” by the injured employee, after the reasonable costs of collection, shall be divided one-third and two-thirds to the employee and the carrier respectively, up to the amount paid or to be paid by the carrier.

Section 40(b) gives the compensation carrier the right to maintain an action in tort against any third party responsible for an injury to an employee. In doing so it provides that after “RECOVERY” shall be had against such third party “by suit or otherwise” the employee shall (after deducting the reasonable costs of collection) be entitled to any amount recovered over and above any amount paid or payable by the carrier. Furthermore it provides that in any event the injured employee is entitled to one-third of the amount “RECOVERED” from the third party after the deduction of the reasonable costs of collection.

Section 40(c) was before us in Winfrey & Carlile v. Nickles, 223 Ark. 894, 270 S. W. 2d 923 (1954). There a recovery was had upon a suit brought pursuant to § 40(a), and the issue was whether an attorney’s fee could be allowed upon the net recovery as determined by the circuit court or whether its allowance was prohibited by the second sentence of subsection (c) as determined by the Workmen’s Compensation Commission. We there held that subsection (c) applied only to compromise settlements and that the prohibition on the allowance of a fee therein did not apply to a recovery under subsection (a) (1).

It is observed that when dealing with the rights of the compensation carrier under subsections? (a) and (b), the statute uses the words “RECOVERED” and “RECOVERY.” “RECOVERY” is defined in Black’s Law Dictionary (3rd ed.) as follows: “In its most extensive sense, a recovery is the restoration or vindication of a right existing in a person, by the formal judgment or decree of a competent court, at his instance and suit, . . . ” Therefore by applying this 'technical definition to “RECOVERED” and “RECOVERY,” except where they are specifically qualified in subsection (b) by the use of the prepositional phrase “by suit or otherwise,” we can reach not only a practical construction of the statute, but one consonant with our prior decisions.

In Barth v. Liberty Mutual Insurance Co., 212 Ark. 942, 208 S. W. 2d 455 (1948), we had before us a consent judgment releasing in full the third party wherein the money had been paid into the registry of the court. Under the technical definition of the word “RECOVERED” above set out, the distribution of the funds in accordance with the provisions of subsection (a) was proper.

In Winfrey & Carlile v. Nickles, supra, we made the distinction of a compromise settlement under subsection (c) and a “RECOVERY” under subsection (a). The distribution there made is consonant with the technical definition of “RECOVERY.”

In Maxcy v. John F. Beasley Construction Co., 228 Ark. 253, 306 S. W. 2d 849 (1957), a compromise settlement fully releasing the third party had been reached after a suit, pursuant to subsection (a), bad been filed in federal court. Tbe matter came to tbis court from an order of tbe Workmen’s Compensation Commission distributing tbe proceeds wbicb first deducted tbe reasonable costs of collection and distributed tbe balance, one-tbird to tbe injured employee and tbe remaining two-tbirds to the compensation carrier. We pointed out tbe Commission’s authority to make the distribution of a compromise settlement under subsection (c), and approved as correct a distribution made in accordance with tbe statutory scheme authorized in subsections (a) and (b). Since the compromise extinguished tbe rights of tbe compensation carrier, it was tantamount to a recovery, and tbe Commission, under such circumstances in approving tbe same, properly followed tbe statutory scheme of distribution; but in so bolding, it does not follow that every compromise settlement is a “RECOVERY” within tbe meaning of subsections (a) and (b).

It is the policy of tbe law to encourage compromise settlements. If we should accept appellant’s construction of tbe statute, we would be discouraging them in many instances. In discussing tbe problem in Lang v. Williams Bros. Boiler & Mfg. Co., 250 Minn. 521, 85 N. W. 2d 412 (1957), it was said:

“Tbe vice of preventing settlement at all without tbe consent of tbe employer or his insurer is that tbe employee may then be put in a position where, against his will, be must face tbe uncertainties of a trial. While both employer and employee face tbe risk that tbe result of the trial will not equal the amounts offered in settlement or tbe amount wbicb must be paid in compensation, tbe employee’s burden probably is greater than that of tbe employer in that ordinarily tbe employee has no great resources upon which to rely if the gamble of a trial fails, whereas the insurer not only has greater resources but tbe case as to it is only one of many.”

Therefore the most reasonable and practicable construction of subsections (a) and (b) of § 40 is that the mandatory provisions thereof control where the action is prosecuted to judgment and that subsection (c) is controlling where there is any type of termination prior to the rendition of a judgment against the third party.

While § 40 recognizes that either the injured employee or the compensation carrier may initiate a tort suit against a third party, it requires that reasonable notice of the initiation of such cause of action be given to the other party. Thus there is but one cause of action. In this situation, can we hold that the rule against splitting a cause of action prohibits the compromise settlement here proposed by Wood and First Electric? The answer is that the rule against splitting a cause of action is for the benefit of the defendant to protect him against a multiplicity of suits, and in this instance First Electric and its insurance carrier have specifically agreed to a splitting of the cause of action between St. Paul and Wood.

It is observed that Wood, as an employee, is not obligated under § 40 to further pursue the present action. Nothing therein prevents him from taking a voluntary non-suit, nor would such action on his part affect his right to continue to receive compensation benefits.

In conclusion, we hold that St. Paul, as the compensation carrier, has no lien upon the proceeds of the compromise settlement here, negotiated. Under the terms of the proposed compromise, St. Paul has all of the right of subrogation against First Electric that was given to it by law and that it would have had if Wood had taken no action whatsoever. It follows that the trial court properly approved the proposed settlement between Wood and First Electric upon the terms and conditions there set out. To interpret § 40 in the manner suggested by appellants would require us to hold that the statute gives the employer or his compensation carrier a first lien upon RECEIPTS OF ANY MONIES RECEIVED FROM THE THIRD PARTY BY SUIT OR OTHERWISE. The statute does not so read.

Therefore the judgment appealed from is affirmed.

George Rose Smith, J., concurs. HaeRis, C. J., and Brown & Jones, JJ., dissent.