RICHARD R. SNYDER, Employee/Appellant, v. YELLOW FREIGHT SYS., SELF-INSURED, Employer.

WORKERS= COMPENSATION COURT OF APPEALS

MARCH 1, 2004

HEADNOTES

CREDITS AND OFFSETS - SUBROGATION INTEREST; STATUTES CONSTRUED - Minn. Stat. § 176.061, subd. 6.  Where the employee recovered payment from a third-party action, in which the self-insured employer has a subrogation interest, and where the employer is due reimbursement of benefits already paid to the employee, the compensation judge did not err in concluding that, once the employer=s credit has been calculated pursuant to Minn. Stat. ' 176.061, including a reduction of the credit to account for the employer=s share of the cost of collection, the employer may take a dollar-for-dollar offset of benefits until it has recovered its full credit for past payments under Minn. Stat. ' 176.061.

CREDITS AND OFFSETS - SUBROGATION INTEREST; STATUTES CONSTRUED - Minn. Stat. § 176.061, subd. 6.  Where the employee recovered payment from a third-party action, in which the self-insured employer has a subrogation interest, and where the employer is due a future credit for benefits payable in the future, once the employer=s credit has been calculated pursuant to Minn. Stat. ' 176.061, the employer shall continue to make payments to the employee, for any benefits that the employer is obligated to make in the future, at the rate of $.335 for each dollar owed, to cover the cost of collection, and then shall reduce its credit by $1.00, until it has recovered its full future credit.

Affirmed in part and reversed in part.

Determined by: Rykken, J., Wilson, J., Pederson, J.

Compensation Judge:  Nancy Olson

Attorneys:  Raymond R. Peterson, McCoy, Peterson & Jorstad, Minneapolis, MN, for the Appellant.  Michael J. Patera, Attorney at Law, Buffalo, MN for the Respondents. 

OPINION

MIRIAM P. RYKKEN, Judge

The employee appeals from the compensation judge=s application of the  future credit due to the self-insured employer as reimbursement of its subrogation interest resulting from the employee=s recovery from a third-party action.  We affirm in part and reverse in part.

BACKGROUND

On August 3, 1998, Richard R. Snyder, the employee, sustained an admitted work injury while employed with Yellow Freight System, the self-insured employer.  The employee was 50 years old at the time of his injury and earned a weekly wage of $1053.36.  As a result of that injury, the employer paid 104 weeks of temporary total disability benefits, related medical expenses, permanency benefits based on a rating of 22 percent permanent partial disability to the body as a whole, and expenses for vocational rehabilitation assistance.  The parties have now stipulated that the employee is permanently totally disabled as a result of his work injury.  They agree that the employer has an overpayment credit based on having initially paid the employee=s permanent total disability benefits as temporary total disability benefits.  The employee has been receiving social security disability benefits (SSDI) and, having paid $25,000.00 in permanent total disability benefits,  the employer is entitled to an offset of those benefits pursuant to Minn. Stat. ' 176.101, subd. 4.

In addition to receiving workers= compensation benefits, the employee brought a third-party claim, in the nature of a medical malpractice action, to recover damages incurred as a result of his work-related injury.  That claim has been resolved; the employee settled that claim in exchange for payment of $900,000.  The parties have stipulated that the employer is entitled to a total future credit of $339,056.97 from the resolution of the employee=s third party action, to be applied against payment of ongoing permanent total disability benefits due the employee.  That dollar amount includes an agreed-upon reduction of $60,000 for partial reimbursement of workers= compensation benefits already paid by the employer.^[1]  Although the parties reached agreement on the amount of credit to which the employer is entitled, they did not agree on the method or rate at which the employer would take its credit.  In order to obtain an adjudication of the method for applying the credit, the employer filed a petition for determination of future credit with the Office of Administrative Hearings.  An evidentiary hearing was held before a compensation judge on April 9, 2003, to address the issue of how the future credit and overpayment credit should be applied against the employee=s ongoing permanent total disability benefits.  At hearing, the parties stipulated to the following:

1.  The employer has a future credit of $339,056.97 from the resolution of the employee=s third-party action related to the injury of August 3, 1998.

2.  The attorney fees and costs for the third-party action were 33.5 percent of the total recovery.  This percentage is the cost of collection for the third-party proceeds. [$300,000 in attorney fees + $1,414.55 in costs = 33.5% of the total settlement of $900,000.]

3.  The employee has been permanently and totally disabled since August 3, 1998, and the employee is entitled to payment of his permanent total disability benefits at the maximum rate.

4.  The employer has an overpayment credit against permanent total disability benefits payable based on having initially paid the employee=s workers= compensation permanent total benefits as temporary total disability benefits.  The employee has been receiving social security benefits.  Pursuant to Minn. Stat. ' 176.101, subd. 4, the employer would have been allowed to offset the employee=s social security benefits against his permanent total benefits, once the employee was paid $25,000 in permanent total disability benefits.  The employee did not stipulate to the amount of this credit.

5.  The employer is entitled to a $60,000 lump sum payment from third-party malpractice suit proceeds.

As noted above, the parties reached agreement whereby the employer would accept a lump sum payment of $60,000 as partial reimbursement of workers= compensation benefits already paid, and the remaining credit for past payments, in the amount of $85,007.77, would be taken as a future credit.^[2]  However, the parties disputed the method to be used by the employer to recover the remainder of the future credit.

The question posed to the compensation judge concerning the third-party action credit was how that future credit should be applied against the employee=s future benefits.  At hearing, the employee claimed that the employer should pay the employee 33.5% of the benefits he would be entitled to under the workers= compensation law, on an ongoing basis, in order to cover the cost of collection incurred in his third-party case.  The employee argues that for every dollar of future compensation liability, the employer would actually pay the employee 33.5 cents, retain 66.5 cents, and reduce its credit by one dollar.  By contrast, the employer asserted that the employer=s future credit must first be reduced by the cost of collection, and then be applied on a dollar-for-dollar basis against the ongoing permanent total disability benefits, until the employer has recovered its entire future credit. 

In her findings and order, the compensation judge first addressed the reimbursement due to the employer for its overpayment of permanent total disability benefits.  She found that the employer is allowed to offset the employee=s permanent total disability benefits based on social security benefits received, and thereafter is allowed to take a 20% overpayment credit pursuant to Minn. Stat. ' 176.179, to recover the overpayment accumulated due to the employer paying the employee=s permanent total disability benefits as temporary total disability benefits. No appeal was taken from that finding.^[3]

As to the future credit due to the employer as a result of the employee=s third-party action, the compensation judge separately addressed the credit due for benefits already paid and the future credit due for benefits payable in the future.  At Finding No. 3, the compensation judge determined that

Although the employer=s credit for benefits paid to date was $145,007.77, the employer chose to only be paid $60,000.00 at this time and to recover the remaining $85,007.77 from future benefits.  This amount has already been reduced by the cost of collection.  The employer is allowed to recover $85,007.77 of benefits payable to the employee on a dollar for dollar basis and have dollar for dollar subtracted from the future credit of $339,056.97.

(Citations omitted.)  The employee originally appealed from that finding.  However, at oral argument, counsel for the parties advised this court that no dispute exists over the application of the dollar-for-dollar offset allowed by the compensation judge for reimbursement of the past benefits paid.

As to the remaining future credit due to the employer, in the amount of $254,049.20 ($339,056.97 minus $85,007.77), the compensation judge found that the employer is required to reduce that amount by the cost of collection, 33.5%, resulting in a future credit of $168,942.72, and that this future credit can be taken on a dollar-for-dollar basis, until the credit is entirely recovered.  The compensation judge found that the employee is not entitled to payment of any ongoing permanent total disability or additional permanent partial disability benefits due until there has been entitlement to payment of an additional $168,942.72 in permanent total disability benefits and/or permanent partial disability benefits, and therefore until the employer has recovered its full credit from the third-party action.^[4]  The employee appeals from the judge=s application of the future credit on a dollar-for-dollar basis.^[5] 

STANDARD OF REVIEW

"[A] decision which rests upon the application of a statute or rule to essentially undisputed facts generally involves a question of law which [the Workers' Compensation Court of Appeals] may consider de novo."  Krovchuk v. Koch Oil Refinery, 48 W.C.D. 607, 608 (W.C.C.A. 1993).

DECISION

If an injured employee has pursued a third-party action against a separate tortfeasor who is liable for the employee=s injuries and if the employee recovers damages from that action, either adjudicated damages or settlement proceeds, the employer or its workers= compensation insurer has a right to recover a portion of those damages in order to recoup workers= compensation benefits paid or payable in the future.  Minn. Stat. ' 176.061, subd. 6, outlines the calculation method for dividing the proceeds received by an employee in a third-party action between the employee and the employer and its workers= compensation insurer.  The statute allows for a reasonable cost of collection to be deducted from the amounts payable to the employee.  It also  allows for 1/3 of the remainder to be paid to the injured employee without being subject to any right of subrogation, and states that

any balance remaining shall be paid to the employee or the employee=s dependents, and shall be a credit to the employer or the special compensation fund for any benefits which the employer or the special compensation fund is obligated to pay, but has not paid, and for any benefits that the employer or the special compensation fund is obligated to make in the future.

The compensation judge determined that the employer has a credit for past payment of benefits and also has a future credit to be offset from payment of future benefits.  She concluded that both credits are to be recovered on a dollar-for-dollar basis until entirely exhausted. 

Recovery of Credit for Past Benefit Payments

The employer has a credit of $85,007.77, for reimbursement of benefits already paid to the employee by the time of his third-party settlement.  That amount has already been reduced by the cost of collection.  The compensation judge found that the employer is allowed to recover $85,007.77 of benefits payable to the employee on a dollar-for-dollar basis and to  have that amount subtracted from the future credit of $339,056.97.  Although the employee originally appealed from that finding, the parties have since advised this court that no dispute exists over the application of the dollar-for-dollar offset allowed by the compensation judge for reimbursement of the past benefits paid.  We therefore affirm that finding.^[6] 

Recovery of Future Credit

As previously outlined, the compensation judge applied the statutory formula and calculated the future credit due to the employer to be $254,049.20, after the employer has been reimbursed for past benefits paid.  The judge found that the employer is required to reduce the $254,049.20 future credit by the cost of collection in order to calculate the amount of future credit that the employer may take as an offset against future benefits.  That calculation results in a future credit of $168,942.72.  The compensation judge then determined that, as a matter of law, the employer is entitled to a direct dollar-for-dollar recoupment of $168,942.72 (the amount reduced for the cost of collection) from permanent total and permanent partial disability benefits payable to the employee in the future.  She rejected the employee=s position that the employer must pay 33.5% of the ongoing permanent total disability benefit, at the same interval that permanent total disability benefits would be paid, as well as 33.5% of any additional permanent partial disability benefits due to the employee.  The employee appeals, arguing that the employer=s future credit must be taken on a proportionate basis, and not on a direct dollar-for-dollar basis.

The procedure advocated by the employee for payment of ongoing benefits would require the employer to pay its proportionate share of the cost of collection on an ongoing basis, by  paying the employee permanent total disability benefits at a rate of 33.5% of the amount due and retaining the remaining 66.5%.  For every dollar of future compensation liability, the employer would actually pay the employee 33.5 cents, retain 66.5 cents, and reduce its credit by one dollar.  The employee argues that this approach allows the employer to meet its obligation to reimburse the employee for the cost of collection in the third-party action by paying the employee a portion of his ongoing benefits.   The employee argues that to pay the employee no portion of his ongoing benefits until the full credit has been exhausted inequitably favors the employer and gives a priority to the employer that is not contemplated or provided for in the workers= compensation statute or related case law.  The employee argues that his calculation and payment method reflects a logical interpretation of the case law, in that it allows the employer to recoup its credit on an ongoing basis while meeting its obligation for the costs of collection. 

The employer, on the other hand, argues that the future credit is recovered by a total offset of ongoing benefits and is not applied on a partial basis as advocated by the employee.  The employer argues that the statute does not provide for a proration of the future credit.  It argues that once the future credit due to the employer from settlement of the third-party action has been reduced for the costs of collection, the remainder can be directly applied or taken as a credit against future benefits payable to the employee, on a dollar-for-dollar basis, until that credit has been exhausted.

The workers= compensation statute is silent on the issue of how an employer can recoup the future credit.  That issue was addressed by the Minnesota Supreme Court in Cronen v. Wegdahl Cooperative, 278 N.W.2d 102, 31 W.C.D. 535 (Minn. 1979), wherein the supreme court determined that when an employer is due a future credit for workers= compensation benefits as a result of a third-party action, and where continuing benefits are provided, the cost of collection continues with the employer and insurer for future benefits paid.  In that case, the supreme court determined that since the employer had benefitted by the recovery from the third-party, not only by reimbursement for compensation already paid but also by credit against any future liability, the employer must equitably share in the cost of obtaining the recovery.  Cronen, 278 N.W.2d 102, 31 W.C.D. 535.  The supreme court again addressed this issue in Kealy v. St. Paul Housing and Redevelopment Auth., 303 N.W.2d 468, 33 W.C.D. 388 (Minn. 1981), and reiterated its holding from Cronen that the employer must share the cost of collection, both  for benefits already paid and for benefits payable in the future.

Neither Cronen nor Kealy specifically direct how the credit must be taken.    In Kealy, the supreme court held that for every dollar of benefits paid in the future, the credit would be reduced by the cost of collection, and that once the total credit has been taken, the employer then would be Aliable for 100% of all workers= compensation benefits payable thereafter.@  Id.  In her memorandum, the compensation judge stated that she believed the Kealy decision Arequires that the credit be reduced by the cost of collection and that the reduced credit be recovered in full before benefits are payable to the employee.@  The compensation judge determined that this interpretation of Kealy is consistent with the statutory language which indicates that the future credit shall be a credit Afor any benefits which the employer or the special compensation fund is obligated to pay.@  The judge concluded that to require ongoing partial payment as propounded by the employee could result in an employer paying the employee benefits before that employer has recovered any significant portion of its third-party credit, and as such could result in an excessive recovery for the employee.

We disagree, and conclude that the compensation judge=s interpretation of Kealy and the related method for recouping the credit on a dollar-for-dollar basis do not apply to the employer=s future credit.  The judge=s focus in this case somehow suggests that the employer has an interest in the balance remaining under Minn. Stat. ' 176.061, subd. 6(d), before its obligation to pay benefits in the future is realized.  To the contrary, we believe the employer=s right to a credit arises when it is required to pay a benefit to the employee.  At that time, the employer also incurs a corresponding obligation to share in the costs of collection, already fronted by the employee.  To allow the employer a dollar-for-dollar offset is to require the employee to front the entire cost of collection, with the possibility that the employer will never be required to pay its proportionate share.  Such a result would contravene the supreme court=s directive in Cronen and Kealy.  In addition, the total future credit allowed the employer, and consequently, its share of the costs of collection, cannot be determined except on an ongoing basis.  To calculate the costs of collection before the employer=s future liability can be determined is premature.

Based upon the wording of the statute and the case law interpreting that statute, we conclude that the compensation judge erred by concluding that the employer=s future credit can be taken on a dollar-for-dollar basis until that credit has been exhausted.  Although we have affirmed the compensation judge=s finding that the employer initially may take a dollar-for-dollar offset for its credit of $85,007.77 for past payment of benefits, as that credit has been reduced by the cost of collection, we reverse her finding that the future credit be taken on that same dollar-for-dollar basis.  Payments for the employer=s share of the cost of collection for that future credit must be made on a proportionate basis.  In this case, once the employer has recouped its credit for past payment of benefits on a dollar-for dollar basis, it may recoup its future credit on a proportionate basis.  In this case, that future credit is $254,049.20, as opposed to the reduced amount of $168,942.72 as calculated by the compensation judge by subtracting the cost of collection up front.  The employer must pay 33.5% of any benefits that the employer is obligated to make in the future, and take a credit for 100% of the benefits paid.  Stated otherwise, for each dollar of ongoing benefits due, the employer will pay $.335 and will recover a $1.00 credit.^[7]  Once the employer has recovered its future credit due from the proceeds of the employee=s third-party action, the employer then must resume payment of the employee=s benefits at the full entitlement level.