Roberts v. Total Health Care, Inc.

ELDRIDGE, Judge. This case arose out of the lead poisoning of two minor children in 1987. Specifically, the case involves a dispute regarding the payment of the children’s medical expenses, which were paid by Total Health Care under contract with the State of Maryland through its Medicaid program. Total ⁵⁰³ Health Care has asserted a statutory and equitable subrogation claim against a tort settlement received by the children in connection with the poisoning, to recoup the amount it paid to treat the children.

I. The State of Maryland, through the Department of Health and Mental Hygiene, provides comprehensive medical health care assistance to low-income persons who meet certain eligibility requirements. See Maryland Code (1982, 1994 Repl. Vol., 1997 Supp.), §§ 15-101 through 15-124 of the Health-General Article. Most relevant to this case is the provision that, to be eligible for benefits under the program, recipients are deemed to have assigned to the State any rights to payment for medical care from legally liable third parties.

Section 15-109(d) currently states as follows: “(d) Automatic assignment of benefits.—As a condition of eligibility for medical assistance, a recipient is deemed to have assigned to the Secretary of Health and Mental Hygiene or the Secretary’s designee any rights to payment for medical care services from any third party who has the legal liability to make payments for those services, to the extent of any payments made by the Department on behalf of the recipient.” Additionally, § 15-120 grants the State a right of subrogation to any cause of action which a program recipient has against a third party for payment of medical services. At all times relevant to the resolution of this case, § 15-120 stated as follows: “§ 15-120. Subrogation claims. “(a) In general.—If a Program recipient has a cause of action against a person, the Department shall be subrogated to that cause of action to the extent of any payments made by the Department on behalf of the Program recipient that result from the occurrence that gave rise to the cause of action. “(b) Holding money for Department.—(1) Any Program recipient or attorney, guardian, or personal representative ⁵⁰⁴ of a Program recipient who receives money in settlement of or under a judgment or award in a cause of action in which the Department has a subrogation claim shall, after receiving written notice of the subrogation claim, hold that money, for the benefit of the Department, to the extent required for the subrogation claim, after deducting applicable attorney fees and litigation costs. “(2) A person who, after written notice of a subrogation claim and possible liability under this paragraph, disposes of the money, without the written approval of the Department, is liable to the Department for any amount that, because of the disposition, is not recoverable by the Department. * * Thus, § 15-120(a) grants the Department a right of subrogation to any claim that a program recipient may have against a third party, where the third party’s actions resulted in medical care for which the Department paid. Section 15—120(b)(1) requires the program recipient or the recipient’s attorney to hold funds sufficient to satisfy the Department’s subrogation claim from any judgment or settlement proceeds received, upon receiving notice of the subrogation claim from the Department.

Finally, § 15—120(b)(2) states that, if anyone required by § 15—120(b)(1) to hold the funds disposes of them, that person will become personally liable on the Department’s claim if the Department is later unable to recover the money. Under this section, if after receiving notice of a subrogation claim under § 15-120(a), an attorney releases settlement funds to a client without holding back an amount sufficient to satisfy the subrogation claim, and the Department later is unable to recover the funds from the client, the attorney will be personally liable. Sections 15-109 and 15-120 represent the State of Maryland’s effort to comply with the federal law on medical assistance, which requires states to seek reimbursement for medical assistance payments made where a third party is legally liable for that medical care. See 42 U.S.C. § 1396a(a)(25)(B) (1994) (State plan for medical assistance must provide that “in ⁵⁰⁵ any case where [third party] legal liability is found to exist after medical assistance has been made available on behalf of [a program recipient] and where the amount of reimbursement the State can reasonably expect to recover exceeds the costs of such recovery, the State or local agency will seek reimbursement for such assistance to the extent of such legal liability”); 42 U.S.C. § 1396a(a)(25)(I) (1994) (State plan for medical assistance must provide that “the State has in effect laws under which, to the extent that payment has been made under the State plan for medical assistance for health care items or services furnished to an individual, the State is considered to have acquired the rights of such individual to payment by any other party for such health care items or services”); 42 U.S.C. §§ 1396a(45) and 1396k(a)(l)(A) (1994) (State plan must require a program recipient “to assign the State any rights ... to support (specified as support for the purpose of medical care by a court or administrative order) and to payment for medical care from any third party”); 42 C.F.R. §§'433.135 through 433.154 (1997). 1 As part of its medical assistance program, the Department contracts with Health Maintenance Organizations (HMOs) to ⁵⁰⁶ provide medical services to medical assistance recipients, in exchange for monthly per capita payments to the HMO.

See Code (1982,1994 Repl.Vol., 1997 Supp.) §§ 15-103(b)(2)(i), 15-103(b)(18)(i) of the Health-General Article. The Department entered into such a contract with Total Health Care. 2 The contract between the Department and Total Health Care contained the following provision: “9. Third-party Liability “a. If an enrollee [program recipient] under the terms of this contract has a cause of action against a person, the HMO-MA shall be subrogated to that cause of action to the extent of any payments made, or costs incurred, by the HMO-MA on behalf of the enrollee that result from the occurrence that gave rise to the cause of action.

Costs incurred by the HMO-MA may be considered as including the HMO-MA’s reasonable and customary charges for services furnished by the HMO-MA’s own staff or that of subcontractors. “b. The Department intends hereby to assign to the HMO-MA its right of subrogation under section 15-120, Health-General Article, Annotated Code of Maryland, but only to the extent to which these rights are assignable under the laws of Maryland. The Department accepts no liability for the failure or inability of the HMO-MA to recover sums potentially available to it under the terms of this section.” Thus, the Department intended that Total Health Care would carry out the State’s duty to provide medical care to low-income persons, while also possessing the State’s right of subrogation granted by § 15-120. The amount of the capitation payment that the State would pay Total Health Care for each program recipient was determined on the assumption ⁵⁰⁷ that Total Health Care would have the right to recover any amounts it paid for medical treatment from responsible third parties.

See 8:4 Md. Register 355 (February 20,1981).

II

With this general background in mind, we turn to the facts of this case. Georgette Roberts and her two minor children, Shaneira and Corina Deloatch, were enrolled with Total Health Care under the State’s Medicaid program from 1987 through 1991. In 1987 Shaneira and Corina suffered lead poisoning and required significant medical care which Total Health Care could not provide at its facilities. Therefore, Total Health Care arranged for the two girls to receive treatment at the Kennedy Institute for Handicapped Children, for which Total Health Care paid $59,880.

In 1988, Shaneira and Corina sued their landlord for the injuries they suffered as a result of the lead poisoning. Upon learning of the suit in June 1991, Total Health Care sent a “lien letter” to the children’s attorney asserting its “statutory subrogation lien and rights provided in § 15-120” as assigned to it by the State. This letter requested that the children’s attorney forward a check for $59,880 out of any settlement or judgment received by the children, and stated that “any settlement entered into concerning the matter may be overturned if THC is not consulted or paid.” Total Health Care sent a second letter asserting its “statutory lien under § 15-120” in July 1992. The children’s civil suit was settled for $330,000 in October 1993, at which time Total Health Care made both an oral and a written demand for payment of $59,880 from the settlement proceeds.

When payment was not forthcoming, Total Health Care brought this action in the Circuit Court for Baltimore City, naming both Georgette Roberts and her attorney, Saul E. Kerpelman, as defendants. 3 ⁵⁰⁸ In its complaint, Total Health Care claimed a right to payment of the $59,880 which it had expended for Shaneira and Corina’s medical care based on a statutory subrogation claim under § 15-120 (as assigned to it by the Department), and, alternatively, based on principles of non-statutory equitable subrogation. Total Health Care filed a motion for summary judgment. In opposing the motion, Roberts and Kerpelman argued that § 15-120 violated their due process rights, that the State’s rights under § 15-120 were not assignable to Total Health Care, and that Total Health Care had no right to equitable subrogation. After oral argument, the circuit court granted Total Health Care’s motion for summary judgment.

Roberts and Kerpelman then appealed to the Court of Special Appeals, repeating their arguments that § 15-120 is unconstitutional under due process principles, that the § 15-120 subrogation right was not assignable to Total Health Care, and that Total Health Care had no right of equitable subrogation. The Court of Special Appeals rejected their arguments and affirmed. Roberts v. Total Health Care, Inc., 109 Md. App. 635 , 675 A.2d 995 (1996). Roberts and Kerpelman then filed a petition for a writ of certiorari which this Court granted.

Roberts v. Total Health Care, Inc., 343 Md. 566 , 683 A.2d 178 (1996).

III

The petitioners’ primary argument is that § 15-120 violates principles of procedural due process because the statutory obligation to withhold funds constitutes a lien imposed without the opportunity for a prior hearing. We disagree. A. Both the Due Process Clause of the Fourteenth Amendment and Article 24 of the Maryland Declaration of ⁵⁰⁹ Rights 4 protect interests in life, liberty and property from deprivation or infringement by government without appropriate procedural safeguards. At “[t]he core of due process is the right to notice and a meaningful opportunity to be heard.” LaChance v. Erickson, — U.S.-,-, 118 S.Ct. 753, 756 , 139 L.Ed.2d 695, 700 (1998).

See Blue Cross v. Franklin Sq. Hosp., 277 Md. 93, 101 , 352 A.2d 798, 804 (1976), and cases there cited; Accrocco v. Splawn, 264 Md. 527, 534-535 , 287 A.2d 275, 279-280 (1972). Due process, however, is not a rigid concept. As this Court stated in Department of Transportation v. Armacost, 299 Md. 392, 416 , 474 A.2d 191, 203 (1984), “[d]ue process does not require adherence to any particular procedure.

On the contrary, due process is flexible and calls only for such procedural protections as the particular situation demands.” Thus, in determining what process is due, the Court will “balanc[e] the private and government interests affected.” 299 Md. at 416-420 , 474 A.2d at 203-205 . According to the Supreme Court (Mathews v. Eldridge, 424 U.S. 319, 335 , 96 S.Ct. 893, 903 , 47 L.Ed.2d 18, 33 (1976)): ⁵¹⁰ See also United States v. James Daniel Good Real Property, 510 U.S. 43, 53 , 114 S.Ct. 492, 501 , 126 L.Ed.2d 490, 503 (1993) (discussing application of the balancing test to determine whether predeprivation notice and hearing are required). ⁵⁰⁹ “[I]dentification of the specific dictates of due process generally requires consideration of three distinct factors: First, the private interest that will be affected by the official action; second, the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the Government’s interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.” ⁵¹⁰ Before the protections of due process are implicated requiring the Court to engage in this balancing test, however, two threshold inquiries must be satisfied. As we stated in Golden Sands Club v. Waller, 313 Md. 484 , 488 n. 4, 545 A.2d 1332 ,1334 n. 4 (1988): “[T]o invoke the protections of procedural due process in a property context, the party asserting unconstitutionality must show that (1) State action has been employed (2) to deprive that party of a substantial interest in property. Tulsa Professional Collection Serv. v. Pope, 485 U.S. [478, 485], 108 S.Ct. 1340, 1344-1345 , 99 L.Ed.2d 565, 575 (1988); Memphis Light, Gas & Water Div. v. Craft, 436 U.S. 1, 9 , 98 S.Ct. 1554, 1560 , 56 L.Ed.2d 30, 39 (1978); Department of Transportation v. Armacost, 299 Md. at 416 , 474 A.2d at 203 ; Pitsenberger v. Pitsenberger, 287 Md. [20,] 27, 410 A.2d [1052,] 1056 [ (1980) ]; L. Tribe, American Constitutional Law § 10-8 at 680 (2d. ed.1988).” See also, Barry Properties v. Fick Bros., 277 Md. 15, 22-23 , 353 A.2d 222, 227-228 (1976).

This Court summarized the appropriate inquiry in Riger v. L & B Ltd. Partnership, 278 Md. 281, 288-289 , 363 A.2d 481, 485-486 (1976): “In analyzing any contention that a state is depriving one of his property without due process of law, several issues are logically presented. There must be sufficient governmental involvement in the action complained of to constitute ‘state’ action.... In addition, the government action must result in a ‘deprivation’ of the complainant’s interest____ Moreover, the private interest involved must rise to a ‘property* interest within the meaning of the Due Process Clause____ Finally, if there is state action depriving one of a property interest, the pertinent inquiry then relates to the procedure which is constitutionally required under the circumstances, ⁵¹¹ as the requirements of procedural due process are flexible, involving a balancing of the various interests at stake----” B. Consequently, Roberts and Kerpelman can prevail only if § 15-120 deprives them of a significant property interest. We conclude that it does not.

Kerpelman, as Roberts’s attorney, obviously has no personal claim to the settlement proceeds themselves. Furthermore, his right to receive payment for the legal services which he performed is not affected by § 15-120. Legal fees are deducted from the total amount of the settlement prior to any distribution to satisfy the subrogation claim. See § 15-120(b)(1) (an amount sufficient to satisfy the subrogation claim should be held “after deducting applicable attorney fees and litigation costs”).

Therefore, the fact that § 15-120 requires money to be held from the settlement proceeds does not affect any property interest of Kerpelman. Also, there is no deprivation of a property interest of Roberts or the children resulting from the requirement that the money be held. As mentioned previously, upon accepting medical assistance, Roberts and the children were deemed to have assigned to the State “any rights to payment for medical care services from any third party who has the legal liability to make payments for those services----” § 15-109(d). The effect of an assignment is to transfer all interests in the property from the assignor to the assignee.

See, e.g., Fifield Manor v. Finston, 54 Cal.2d 632, 640 , 7 Cal.Rptr. 377, 382 , 354 P.2d 1073, 1078 (1960) (en banc) (both assignment and subrogation “operate! ] to transfer from one person to another a cause of action against a third”); Bouchard v. People’s Bank, 219 Conn. 465, 473 , 594 A.2d 1, 4-5 (1991) (“Succession by an assignee to exclusive ownership of all or part of the assignor’s rights respecting the subject matter of the assignment, and a corresponding extinguishment of those rights in the assignor, is precisely the effect of a valid assignment”); Vowers & Sons, Inc. v. Strasheim, 248 Neb. 699, 704 , 538 N.W.2d 756 , 760 ⁵¹² (1995) (“An assignment is a transfer vesting in the assignee all the assignor’s rights in property which is the subject of the assignment”); Achrem v. Expressway Plaza Ltd., 112 Nev. 737 , 917 P.2d 447, 450 (1996) (“[Wjhen a client assigns rights to the proceeds of a tort action to a creditor, those proceeds no longer belong to the client”); Romero v. Earl, 111 N.M. 789 , 810 P.2d 808 (1991); Leon v. Martinez, 84 N.Y.2d 83, 88 , 614 N.Y.S.2d 972, 974 , 638 N.E.2d 511, 513 (1994) (to effect an assignment “it is only required that there be a perfected transaction between the assignor and assignee, intended by those parties to vest in the assignee a present right in the things assigned”). Therefore, when Roberts and the children asserted a right to recover for medical expenses, they were asserting a right which belonged to the State to the extent of any payments under the Medicaid program. To the extent that they recovered money in settlement for medical expenses that were paid under the Medicaid program, that recovery did not belong to them, but belonged to the State by virtue of the prior assignment. A similar conclusion was reached recently by the New York Court of Appeals in a Medicaid recoupment context.

Cricchio v. Pennisi, 90 N.Y.2d 296 , 660 N.Y.S.2d 679 , 683 N.E.2d 301 (1997). The question in that case was whether the Department of Social Services could make a claim for recoupment of Medicaid benefits against settlement proceeds despite the fact that “a Medicaid hen ordinarily may not be imposed against the property of any individual prior to his death____” 5 90 ⁵¹³ N.Y.2d at 806, 660 N.Y.S.2d at 682 , 683 N.E.2d at 304 . The court concluded that the recoupment claim could be made because, to the extent that the settlement proceeds were intended to compensate for medical care they were not the property of the recipient. 90 N.Y.2d at 306-307 , 660 N.Y.S.2d at 682-683 , 683 N.E.2d at 304-305 . The court reasoned as follows ( 90 N.Y.2d at 307 , 660 N.Y.S.2d at 682-683 , 683 N.E.2d at 304-305 ): “As the Medicaid recipient’s assignee ..., [the department] obtains all of the rights that the recipient has as against the third party to recover for medical expenses, including the ability to immediately pursue those claims against the third party.

Because the injured Medicaid recipient has assigned its recovery rights to [the department], and [the department] is subrogated to the rights of the beneficiary ..., the settlement proceeds are resources of the third-party tortfeasor that are owed to [the department.] Accordingly, the lien on the settlement proceeds attaches to the property of the third party, and thus does not violate the statutory prohibition against imposing a lien against a beneficiary’s property until after his or her death.... The flaw in plaintiffs’ theory that the lien cannot be satisfied until the recipient’s death is that it fails to appreciate this critical distinction between the assets of a responsible third party and assets belonging to the Medicaid recipient.” We agree with the analysis of the New York court. To the extent that the settlement proceeds received by Roberts and the children represent compensation for medical expenses paid under the medical assistance program, they are not Roberts’s property. They are State property. 6 See also, e.g., Payne v. State, Dept. of Human Resources, 126 N.C.App. 672, 677 , 486 ⁵¹⁴ S.E.2d 469, 471 (1997) (reaching a conclusion similar to that reached by the New York court); Layman v. Woo, 78 Ohio St.3d 485, 488 , 678 N.E.2d 1217, 1219 (1997) (holding that department was “the real party in interest” with respect to recovery of medical expenses).

C. Even if we assume arguendo that a property interest held by Roberts or Kerpelman is involved, the obligation to hold sufficient funds from the settlement proceeds to satisfy the Department’s subrogation claim would not violate due process principles. Relying on this Court’s opinion in Barry Properties v. Fick Bros., supra, 277 Md. 15 , 353 A.2d 222 , Kerpelman and Roberts argue that § 15-120 works a deprivation of their property interests requiring prior notice and hearing because it constitutes a statutory lien. In Barry Properties , the Court struck down portions of Maryland’s mechanics’ lien statute as violative of due process principles after reviewing four cases from the United States Supreme Court. See North Georgia Finishing, Inc. v. Di-Chem, Inc., 419 U.S. 601 , 95 S.Ct. 719 , 42 L.Ed.2d 751 (1975); Mitchell v. W.T. Grant Co., 416 U.S. 600 , 94 S.Ct. 1895 , 40-L.Ed.2d 406 (1974); Fuentes v. Shevin, 407 U.S. 67 , 92 S.Ct. 1983 , 32 L.Ed.2d 556 (1972); Sniadach v. Family Finance Corp., 395 U.S. 337 , 89 S.Ct. 1820 , 23 L.Ed.2d 349 (1969).

This Court held in Barry Properties that the imposition of a lien under the mechanics’ lien statute, prior to notice and a hearing, constituted a deprivation of a significant property interest without due process. Barry Properties v. Fick Bros., supra, 277 Md. at 23-25, 353 A.2d at 227-228 . Under the mechanics’ lien statute at issue in Barry Properties , “there [was] a ‘subsisting lien’ as soon as materials [were] supplied or work [was] performed, ... which constituted] a cloud on the property owner’s title____ [Thus,] he no longer [had] unfettered title [and] his equity [was] diminished to the extent of the Hen.” 277 Md. at 23-24, 353 A.2d at 228 . See also Connecticut v. Doehr, 501 U.S. 1, 11 , 111 S.Ct. 2105, 2113 , ⁵¹⁵ 115 L.Ed.2d 1, 14 (1991) (prejudgment attachment of real property “clouds title; impairs the ability to sell or otherwise alienate the property; taints any credit rating; reduces the chance of obtaining a home equity loan or additional mortgage; and can even place an existing mortgage in technical default where there is an insecurity clause”); North Georgia Finishing, Inc. v. Di-Chem, Inc., supra, 419 U.S. at 606 , 95 S.Ct. at 722 , 42 L.Ed.2d at 757 (“a bank account, surely a form of property, was impounded and, absent a bond, put totally beyond use.... ”); Fuentes v. Shevin, supra, 407 U.S. at 69 , 92 S.Ct. at 1988 , 32 L.Ed.2d at 564 (prejudgment replevin statutes authorized “[t]he issuance of writs ordering state agents to seize a person’s possession.... ”); Sniadach v. Family Finance Corp., supra, 395 U.S. at 338-339 , 89 S.Ct. at 1821 , 23 L.Ed.2d at 352 (under prejudgment garnishment “whereby ... wages are frozen ... the wage earner is deprived of his enjoyment of earned wages ...”).

While the § 15-120 requirement that a portion of the settlement proceeds be held on behalf of the Department may prevent a program recipient from disposing of those proceeds, it is not as significant a deprivation of property as those presented in Barry Properties and the Supreme Court cases cited above. Under § 15-120, the settlement proceeds were not seized but were left in the possession of Kerpelman. Also, no lien existed, nor was any action taken by Total Health Care or the State beyond notifying Kerpelman of the subrogation claim. In United States v. James Daniel Good Real Property, supra, 510 U.S. 43 , 114 S.Ct. 492 , 126 L.Ed.2d 490 , there was a due process challenge to pre-hearing government seizure of a residence subject to forfeiture under 21 U.S.C. § 881 (a)(7) as property used to commit or facilitate the commission of a federal drug offense!

The Supreme Court upheld the challenge, holding that the government could not seize the property without affording the owner prior notice and hearing. United States v. James Daniel Good Real Property, supra, 510 U.S. at 62 , 114 S.Ct. at 505 , 126 L.Ed.2d at 508 . In so holding, however, the Supreme Court specifically endorsed ⁵¹⁶ various governmental means of preventing disposal of property prior to forfeiture judgment as less onerous alternatives to seizure, and indicated that no prior notice and hearing would be required by such action. One such action cited with approval by the Supreme Court was the filing of a notice of lis pendens.

The Supreme Court stated that ( 510 U.S. at 58-59 , 114 S.Ct. at 503-504 , 126 L.Ed.2d at 506-507 ): “The Government’s legitimate interests at the inception of forfeiture proceedings are to ensure that the property not be sold, destroyed, or used for further illegal activity prior to the forfeiture judgment. These legitimate interests can be secured without seizing the subject property. “Sale of the property can be prevented by filing a notice of lis pendens ... There is no