Sherry Hendrickson v. ica/continental/travelers

SUPREME COURT OF ARIZONA
En Banc

SHERRY HENDRICKSON, ) Arizona Supreme Court
) No. CV-00-0375-PR
Petitioner Employee, )
) Court of Appeals
v. ) Division Two
) No. 2 CA-IC 98-0042
THE INDUSTRIAL COMMISSION OF )
ARIZONA, ) Industrial Commission
) of Arizona
Respondent, ) No. 0000P-102928
)
CONTINENTAL AIRLINES, ) Insurer No. 48846-11076
)
Respondent Employer, )
)
) O P I N I O N
TRAVELERS INSURANCE COMPANY, )
)
Respondent Insurer. )
)
____________________________________)

Industrial Commission of Arizona
Gary M. Israel, Administrative Law Judge
AWARD VACATED; REMANDED

__________________________________________________________________

Court of Appeals, Division Two
MEMORANDUM DECISION
No. 2 CA-IC 98-0042
VACATED

__________________________________________________________________

Tretschok & McNamara, P.C.
By Patrick R. McNamara Tucson
Attorney for Sherry Hendrickson
The Industrial Commission of Arizona
Anita R. Valainis, Chief Counsel Phoenix

Long, Lundmark & Poppe P.A.
By R. Todd Lundmark Phoenix
Attorney for Continental Airlines
and Travelers Insurance Company
__________________________________________________________________

M c G R E G O R, Vice Chief Justice

¶1 We granted review to consider again the effect of a

workers’ compensation claimant’s failure to obtain written approval

for settlement of an action against a third party. We hold that,

under the facts of this case, the forfeiture rule of Hornback v.

Industrial Commission, 106 Ariz. 216, 474 P.2d 807 (1970), does not

apply. Instead, we apply the equitable approach of Bohn v.

Industrial Commission, 196 Ariz. 424, 999 P.2d 180 (2000).

I.

¶2 In 1982, while working as a flight attendant for

Continental Airlines, Sherry Hendrickson sustained an injury to both

of her temporomandibular joints. She filed a workers’ compensation

claim and began receiving benefits from employer Continental

Airlines’ carrier, the predecessor of Travelers Insurance. In 1984,

John Wenaas, D.D.S., treated Hendrickson by implanting Proplast

joints that Vitek, Inc. had manufactured from materials made by E.I.

DuPont de Nemours & Co. Within four years, the implants failed.

¶3 In 1988, Hendrickson filed a civil action against Dr.

Wenaas, Vitek, and DuPont. That action subsequently became

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consolidated with approximately one hundred other Arizona lawsuits

involving failed Proplast implants. Several years into the

litigation, Vitek sought bankruptcy relief. Hendrickson received a

distribution from the bankruptcy proceedings, and the court

dismissed Vitek from the Proplast action. In 1992, the court

dismissed Dr. Wenaas from the action, pursuant to a stipulation

between Hendrickson and Dr. Wenaas. Hendrickson did not seek

Travelers’ approval to settle the claim against Dr. Wenaas, a

failure that Travelers argues violated Arizona Revised Statutes

(A.R.S.) section 23-1023.C.1

¶4 DuPont, which had successfully defended many similar

Proplast lawsuits in other states, received summary judgment in its

favor in 1995. In exchange for a promise not to pursue a $78,000

costs judgment in its favor, DuPont offered Hendrickson and the

other plaintiffs a settlement of $750 each. Without obtaining

Travelers’ written approval, Hendrickson accepted DuPont’s

settlement offer.

¶5 In September 1996, Travelers sought to close

Hendrickson’s compensation claim with no determination as to

permanent impairment or the need for supportive care. Hendrickson

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Section 23-1023.C provides, in pertinent part, that
“[c]ompromise of any claim by the employee or his dependents at an
amount less than the compensation and medical, surgical and
hospital benefits provided for shall be made only with written
approval of the compensation fund, or of the person liable to pay
the claim.”

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opposed the closure, and a hearing before the Industrial Commission

(the Commission) followed. The administrative law judge, relying

on Hornback, held that Hendrickson’s failure to comply with section

23-1023.C resulted in her forfeiture of any additional workers’

compensation benefits. The judge affirmed this award on review,

and Hendrickson filed a statutory special action in the Court of

Appeals.

¶6 The Court of Appeals held that because Hendrickson’s

acceptance of the settlement payment from DuPont acted as a

compromise of her claim within the purview of section 23-1023.C,

Hornback required the forfeiture of future benefits. Hendrickson

v. Indus. Comm’n, No. CA-IC 98-0042, slip op. at 5 ¶ 9 (Sept. 28,

2000). We granted review to determine the effect of Hendrickson’s

failure to obtain Travelers’ prior written approval of her

settlement with DuPont and her agreement to dismiss Dr. Wenaas. We

exercise jurisdiction pursuant to Arizona Constitution Article VI,

Section 5.3 and Rule 23 of the Arizona Rules of Civil Appellate

Procedure.

II.

¶7 An employee injured in the course of his employment by a

third party may pursue a civil remedy against that third party,

even if the employee also seeks benefits through the workers’

compensation system. A.R.S. § 23-1023.A (1995). If the employee

recovers against a third party, the carrier or other party liable

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to pay workers’ compensation benefits obtains a lien on the

recovery equal to the compensation award, thereby preventing double

recovery for the claimant. A.R.S. § 23-1023.C. If the employee

compromises his claim against the third party, he can substantially

affect the carrier’s rights. By compromising his claim, he “not

only releases the third party from further liability but he also

cuts off the insurance carrier’s subrogation rights against the

third party.” Hornback, 106 Ariz. at 219, 474 P.2d at 810. To

protect the carrier from the effect of an employee’s decision to

compromise a third-party claim for less than its value, the statute

requires the claimant to obtain written approval from the person

liable to pay workers’ compensation benefits prior to compromising

a third-party claim “at an amount less than the compensation . . .

benefits.” A.R.S. § 23-1023.C. Although section 23-1023.C

requires that a workers’ compensation claimant receive written

approval prior to settling a claim against a third party, the

statute does not specify the penalty that attaches to a failure to

comply with the approval requirement.

¶8 We have previously been asked to fashion an enforcement

mechanism to encourage compliance with section 23-1023.C. In

Hornback, we concluded that an employee who failed to obtain

approval was not entitled to reopen his compensation claim, which

effectively resulted in a forfeiture of his right to future

benefits. 106 Ariz. at 218, 474 P.2d at 809.

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¶9 After our decision in Hornback, other jurisdictions with

statutes similar to section 23-1023.C adopted varying approaches to

resolve the questions related to a claimant’s failure to obtain

approval of a third-party settlement. Some states held, as we did

in Hornback, that an injured employee forfeits compensation

benefits if he settles a tort action without the knowledge or

approval of his employer or its insurer. See, e.g., Peterkin v.

Curtis, Inc., 729 P.2d 977, 981 (Colo. 1986)(relying on Hornback);

Vincent v. Geneva Pizza Inc., 602 N.Y.S.2d 220, 221 (App. Div.

1993); Safety-Kleen Corp. v. Van Hoy, 300 S.E.2d 750, 753 (Va.

1983). Other states have rejected the argument that an

unauthorized settlement requires an employee to forfeit his

benefits. See, e.g., Cook v. A.H. Davis & Son, Inc., 567 A.2d 29,

31 (Del. Super. Ct. 1989); Ankney v. Franch, 652 A.2d 1138, 1150-51

(Md. Ct. Spec. App. 1995), rev’d on other grounds 670 A.2d 951 (Md.

Ct. App. 1996)(holding that when an employee settles a third-party

action after filing a workers’ compensation claim and receiving

compensation benefits, forfeiture is not the proper remedy unless

the employer can show that it suffered material prejudice as a

result of the settlement). Still other states have held that

unauthorized settlement agreements result in invalidation of the

settlement rather than forfeiture of workers’ compensation

benefits. See Nelson v. Dep’t of Natural Res., 305 N.W.2d 317, 319

(Minn. 1981); Fogleman v. D & J Equip. Rental, Inc., 431 S.E.2d

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849, 852 (N.C. Ct. App. 1993).

¶10 During the years since we decided Hornback, its holding

has determined the outcome of many actions before the Industrial

Commission and Court of Appeals, although the factual situations in

those actions may have been less extreme than that in Hornback. We

recently considered, therefore, whether the Hornback result applies

to all cases in which a claimant fails to obtain the authorization

required by statute. In Bohn, we held that the claimant, who had

been denied workers’ compensation benefits and who later settled

with a third party without approval, did not forfeit all future

benefits. 196 Ariz. at 426 ¶¶ 13-14, 999 P.2d at 182 ¶¶ 13-14.

¶11 The facts underlying Bohn’s claim varied considerably

from those of Hornback’s claim. Although we did not limit the

Hornback holding to situations in which the claimant acted in a

clearly unreasonable manner, we intimated that forfeiture was

warranted because Hornback purposefully waited to reopen his claim

until after he had settled the third-party action. See Hornback,

106 Ariz. at 221, 474 P.2d at 812. Hornback had received benefits

and the Commission had closed his case without a finding of

permanent disability. Id. at 218, 474 P.2d at 809. He then

experienced additional injuries allegedly related to his claim.

Rather than immediately seek to reopen his claim, he pursued a

third-party action and obtained a sizeable settlement. Id. Only

then did he seek to reopen his claim, basing his request on the

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same injuries for which he had recovered in the third-party action.

Id. at 218-19, 474 P.2d at 809-10. He thus cut off the carrier’s

subrogation rights before seeking additional workers’ compensation

benefits. Under those circumstances, we held that the Commission

justifiably refused to reopen his claim. Id. at 221, 474 P.2d at

812.

¶12 In Bohn, we noted that forfeiture is not the only

possible remedy for a violation of section 23-1023.C. 196 Ariz. at

426 ¶ 9, 999 P.2d at 182 ¶ 9. Bohn, whose claim for benefits had

been denied, entered into an unapproved third-party settlement

agreement. Id. at 424-25 ¶ 2, 999 P.2d at 180-81 ¶ 2. Although he

eventually received workers’ compensation benefits, at the time he

settled the third-party action he was unable to return to his

former job and desperate to obtain financial assistance. Id. at

426 ¶ 11, 999 P.2d at 182 ¶ 11.

¶13 Under those circumstances, rather than approve the

forfeiture of his benefits, we applied an equitable solution that

allowed the injured employee to receive compensation while ensuring

that the carrier was not prejudiced by the unauthorized settlement.

Id. at 426-27 ¶¶ 14-16, 999 P.2d at 182-83 ¶¶ 14-16. We held that

a claimant who compromises a third-party claim without prior

authorization bears the burden of showing that the settlement was

reasonable. Id. If the claimant cannot prove he settled for a

reasonable amount, the carrier’s credit increases to the amount of

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a reasonable settlement. Id. at 427 ¶ 16, 999 P.2d at 183 ¶ 16.

That approach does not impair the carrier’s subrogation rights

because the carrier receives the full benefit of a reasonable

settlement amount. At the same time, the claimant retains access

to those workers’ compensation benefits to which he is entitled,

but does not receive a double recovery.

III.

¶14 We turn now to the proper penalty for Hendrickson’s

failure to obtain Travelers’ approval prior to accepting DuPont’s

settlement offer and stipulating to Dr. Wenaas’s dismissal from the

third-party action. We conclude that forfeiture is inappropriate

and apply the approach we approved in Bohn.

¶15 The facts underlying Hendrickson’s compensation claim and

third-party action fall somewhere between Hornback and Bohn.

Hendrickson, unlike Bohn, had not been denied benefits when she

compromised her third-party claim. But, unlike Hornback, she did

not first resolve her third-party claim and then attempt to reopen

her compensation claim. Rather, when she settled with DuPont, she

was receiving benefits for the same injuries that were the subject

of the third-party action. In addition, she recovered a minimal

amount from her third-party action, particularly when compared to

the substantial amount of compensation benefits to which she may be

entitled. Under these circumstances, we conclude that requiring

Hendrickson to forfeit her compensation benefits would be contrary

9
to the remedial purpose of our workers’ compensation law.

Moreover, Travelers does not face any loss of the value of its

subrogation rights. If Hendrickson accepted an unreasonably low

amount to settle her third-party action, Travelers’ credit will be

increased to the reasonable settlement amount.

IV.

¶16 Hendrickson also challenges the administrative law

judge’s conclusion that section 23-1023.C required her to obtain

approval before agreeing to dismiss her claim against Dr. Wenaas,

arguing that dismissal of a claim is not a “compromise” under the

terms of the statute. We find no reason to exempt the agreement

with Dr. Wenaas from the statutory approval requirement.

¶17 Dr. Wenaas was dismissed from the Proplast action not

because Hendrickson had failed to state a claim against him,2 but

rather pursuant to a stipulation with Hendrickson. We have defined

a compromise as an “agreement between two or more persons who, for

the purpose of preventing or putting an end to a lawsuit, adjust

their differences by mutual consent in the manner which they agree

on.” Brecht v. Hammons, 35 Ariz. 383, 389, 278 P. 381, 383 (1929),

disapproved on other grounds by Ariz. Pub. Serv. Co. v. S. Union

Gas Co., 76 Ariz. 373, 382, 265 P.2d. 435 (1954). Certainly a

stipulation to dismiss an action embodies an agreement for purposes

2
See Arizona Rules of Civil Procedure 12(b)(6).

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of putting an end to a legal action. According to testimony during

the administrative proceedings, Hendrickson agreed to dismiss the

action against Wenaas in exchange for his agreement to provide

favorable testimony in the action against DuPont and Vitek. The

agreement thus involved a detriment to Hendickson and a benefit to

Dr. Wenaas. Moreover, Hendickson’s stipulation to dismiss Dr.

Wenaas ended Travelers’ subrogation rights against him. The

stipulation to dismiss Dr. Wenaas thus worked a “compromise” of a

third-party claim.

¶18 The administrative law judge did not consider whether

Hendrickson reached a reasonable compromise of her claims against

DuPont and Dr. Wenaas. On rehearing, the judge should consider

whether, in light of the circumstances involved, an agreement to

accept $750 from DuPont and to dismiss Dr. Wenaas without payment

of any amount constituted reasonable settlements of the third-party

claims. If the amounts are less than reasonable, Travelers will

receive additional credit.

V.

¶19 Our holding today emphatically does not alter the duty of

a workers’ compensation claimant or his attorney to comply with

section 23-1023.C and seek written approval prior to compromising

a third-party claim. The fact that a claimant may suffer no

financial impact from disregarding the direction of the statute

does not lessen his lawyer’s obligation to follow the law as set

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out in section 23-1023.C. In addition, although many, perhaps

most, factual circumstances will require that the effect of an

unauthorized compromise of a third-party claim will be determined

by the Bohn approach, egregious situations like that considered in

Hornback may result in the forfeiture of workers’ compensation

benefits.

VI.

¶20 For the foregoing reasons, we vacate the decisions of the

Industrial Commision and of the Court of Appeals. We remand to the

Industrial Commission for further proceedings consistent with this

opinion.

_______________________________________
Ruth V. McGregor, Vice Chief Justice

CONCURRING:

___________________________________
Charles E. Jones, Chief Justice

____________________________________
Stanley G. Feldman, Justice

____________________________________
Thomas A. Zlaket, Justice (Retired)

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