CITY AND COUNTY OF SAN FRANCISCO v. SWEET (1995)

I. INTRODUCTION

In this case we hold that a county's hospital lien against an indigent patient's tort recovery from a third party is subject to pro rata reduction commensurate with the patient's attorney fees in the third-party litigation.

The City and County of San Francisco (CCSF) appeals from a judgment against personal injury litigant Robert J. Sweet and his counsel Edwin Train Caldwell reducing CCSF's lien for hospital services provided to Sweet in connection with his injury.   We affirm.

II. BACKGROUND

Sweet, who is indigent, was hit by a car driven by Robin Jones while he was crossing a street in San Francisco.   He sustained serious injuries for which he was treated at two CCSF hospitals.

Pursuant to local ordinance, CCSF's hospitals must admit any person requiring immediate hospitalization because of injury.  (S.F. Health Code, § 115, subd. (5).)  The patient is liable for hospital charges if he or she has the ability to pay.  (S.F. Health Code, § 124;  see Health & Saf.Code, § 1473.)

A county's right to reimbursement for hospital care provided to an indigent is prescribed by statute.   If a third party is liable in tort for the injury, the county may sue the third party to recover the reasonable value of the care and treatment furnished.   If the patient sues the third party, the county's right of action against the third party abates and continues as a first lien against any judgment recovered by the patient.  (Gov.Code, § 23004.1;  see also S.F. Health Code, § 124.)   The county may compromise, settle or waive all or part of the claim “for the convenience of the county” or if “collection would result in undue hardship” to the patient.  (Gov.Code, § 23004.2, subd. (b).) ¹

Sweet, represented by Caldwell, filed a personal injury action against Jones.   CCSF filed a hospital lien for $35,454.60.   Caldwell ultimately settled the case for $175,000, assessing attorney fees at 37.5 percent.   Sweet's net recovery, after deduction of attorney fees and costs, was $100,748.53.

Caldwell asked CCSF to reduce its lien, but it refused to do so.   Thereafter, Caldwell reserved $22,000 from Sweet's net recovery to be available to satisfy the lien.   This amount reflected a reduction commensurate with the attorney fees paid by Sweet.   CCSF sued Sweet and Caldwell (on a constructive trust theory) for full payment on the lien.   While the action was pending, Caldwell released the $22,000 to CCSF.

CCSF relied on Lindsey v. County of Los Angeles (1980) 109 Cal.App.3d 933, 167 Cal.Rptr. 527, which considered the applicability of the “common fund doctrine” in hospital lien cases.

 Under the common fund doctrine, when litigation produces a fund that benefits others as well as the litigant, the litigant may recover attorney fees from the fund or from the other parties enjoying the benefit of the fund.   (Alyeska Pipeline Service Co. v. Wilderness Society (1975) 421 U.S. 240, 257, 95 S.Ct. 1612, 1621, 44 L.Ed.2d 141.)   The rule is rooted in “the historic power of equity.”  (Ibid.;  see Trustees v. Greenough (1881) 105 U.S. 527, 535–536, 26 L.Ed. 1157.)   It requires “those for whose benefit the action or proceeding was taken to bear their share of the expenses of the litigation․”  (Estate of Reade (1948) 31 Cal.2d 669, 672, 191 P.2d 745.)   When the recovery is from a third party (rather than from the fund), it is sometimes called “equitable apportionment.”  (Lindsey v. County of Los Angeles, supra, 109 Cal.App.3d at p. 937, 167 Cal.Rptr. 527;  see Quinn v. State of California (1975) 15 Cal.3d 162, 167, 124 Cal.Rptr. 1, 539 P.2d 761.)

The bases of the common fund doctrine are “fairness to the successful litigant, who might otherwise receive no benefit because his recovery might be consumed by the expenses;  correlative prevention of an unfair advantage to the others who are entitled to share in the fund and who should bear their share of the burden of its recovery;  encouragement of the attorney for the successful litigant, who will be more willing to undertake and diligently prosecute proper litigation for the protection or recovery of the fund if he is assured that he will be promptly and directly compensated should his efforts be successful.”   (Estate of Stauffer (1959) 53 Cal.2d 124, 132, 346 P.2d 748.)

The court in Lindsey discerned three elements of the doctrine:  “(1) without the litigation there would have been no recovery;  (2) the recovery was an available fund out of which the beneficiaries of the litigation would be paid;  and (3) the applicant seeking contribution in respect to costs and attorney fees was the sole ‘active litigant’ and as such obtained the recovery that provided the fund.”  (Lindsey v. County of Los Angeles, supra, 109 Cal.App.3d at p. 936, 167 Cal.Rptr. 527.)

Lindsey held that the common fund doctrine did not apply in that case because the case involved a debtor-creditor relationship (between the litigant and the county) which was not present in the prior common fund cases.   A purpose of the doctrine is to prevent the third party from taking “unfair advantage” of the active litigant.  (Lindsey v. County of Los Angeles, supra, 109 Cal.App.3d at p. 937, 167 Cal.Rptr. 527.)   According to Lindsey, that purpose “does not exist in the matter at bench” because “there is no taking advantage of the active litigant,” since the patient was directly liable to the county “and that liability existed irrespective of the success of the third-party suit.”  (Id. at p. 939, 167 Cal.Rptr. 527.)

The trial court ruled that CCSF was subject to the common fund doctrine and was obligated to reduce the lien in a pro rata amount commensurate with Sweet's attorney fees of 37.5 percent.   In a statement of decision, the court explained that without Sweet's prosecution of the personal injury claim, CCSF would have recovered nothing, and “CCSF should not be permitted to sit idly by and recover fully on its lien when another undertakes the prosecution of the underlying claims.”   The court distinguished Lindsey on two grounds:  First, Lindsey was silent as to liability in the underlying action, whereas Sweet may have been at fault (by jaywalking) and thus his counsel succeeded despite a weak position on liability.   Second, CCSF had previously compromised other liens for less than the amount due, which implicates the equal protection clause of the California Constitution.  (Cal. Const., art. I, § 7, subd. (a).)  The court concluded that the lien of $35,454.60 should be reduced by 37.5 percent to $22,159.12, leaving an unpaid balance of $159.12 after subtraction of the $22,000 payment.

CCSF filed a timely notice of appeal from the judgment ordering Sweet and Caldwell to pay the balance of $159.12.

III. DISCUSSION

A. The Common Fund Doctrine

 CCSF asserts three reasons why we should follow Lindsey and conclude that the common fund doctrine does not apply in hospital lien cases:  First, as stated in Lindsey, there is no taking advantage of the actively litigating patient, because the patient's debt to the county exists regardless of the success of the third-party litigation.   Second, the debtor-creditor relationship invokes an “adverse interest” exception to the common fund doctrine.   Third, the absence of a statutory requirement of lien reduction indicates legislative intent to preclude application of the doctrine.

Caldwell and Sweet contend the trial court correctly distinguished Lindsey on the two grounds set forth in the statement of decision, and in any event Lindsey was wrongly decided.

We conclude that Lindsey was wrong.   Thus, we are unconcerned with the propriety of the trial court's effort to distinguish and avoid Lindsey.

1. The “Taking Advantage” Factor

The rationale of Lindsey is faulty.   According to Lindsey, “the” reason for the common fund rule—to prevent a party from taking advantage by obtaining the benefit of litigation without bearing a fair share of its expense—is not present in hospital lien cases because the patient's liability to the county exists “irrespective of the success of the third-party suit.”  (Lindsey v. County of Los Angeles, supra, 109 Cal.App.3d at p. 939, 167 Cal.Rptr. 527.)   But liability does not necessarily mean recovery.   We are dealing here with patients who are indigent.   Their liability to a county means nothing as a practical matter unless they, or the county, can obtain a judgment or settlement from the third party.   A patient's successful third-party litigation may not create the liability to the county, but it gives the county access to real cash, which is worth far more than a theoretical debt owed by a penniless patient.   Absent equitable apportionment, the county would get this benefit from the third-party litigation without bearing any share of the expense.   And, of course, without the third-party litigation, the county would have to proceed directly against the third party, with attendant litigation costs.   The patient's successful action relieves the county of the cost of direct prosecution, and creates the potential for actual recovery.   For the county not to bear a fair share of litigation expense, which the county would have to incur in a direct action against the third party but for the patient's creation of a fund from which the county might actually recover something, is certainly, in Lindsey's words, “taking advantage of the active litigant.”   (Ibid.)

The New Mexico Supreme Court reached a similar conclusion in Martinez v. St. Joseph Healthcare System (1994) 117 N.M. 357, 871 P.2d 1363, rejecting the argument that hospital lien cases involve a debtor-creditor relationship that is unaffected by action against the third party:  “If the attorney for the patient does not secure a judgment or settlement, the hospital has nothing to which it may attach its lien.   At that point, the hospital/patient relationship truly is nothing more than a creditor/debtor relationship, and the hospital must use its own legal resources to recover its funds.   In contrast, if the patient's attorney secures a judgment or settlement (as the attorney did in this case), the hospital recovers money due without expending its legal resources.   If we did not allow division of the legal costs, hospitals would be encouraged to sit back and reap the rewards of another's labor at that party's expense.”  (Id., 871 P.2d at p. 1367.)   The court concluded that because “the hospital directly receives the benefits of the work done by the patient's attorney ․ it would be fundamentally unfair to allow the [h]ospital to collect on its lien without paying its prorated share of the legal expenses.”  (Id. at pp. 1366–1367.) ²

The present case differs slightly from Martinez in that, in California, the county does not choose to “sit idly by,” as the trial court put it, while the patient prosecutes the underlying claim, but is statutorily required to do so if the patient sues the third party.  (Gov.Code, § 23004.1.)   But that difference does not undermine the key equitable principle, which is that the hospital should not be permitted to share in the benefits of the patient's efforts without bearing a share of the litigation expense.   For purposes of fairness, whether the county chose to sit idly by or was required to do so is irrelevant.

2. The Adverse Interest Exception

CCSF asserts an exception to the common fund doctrine:  it does not apply when the active litigant's ultimate objective is not to secure or preserve a common fund, but to establish an adverse interest in opposition to the fund.   (Gabrielson v. City of Long Beach (1961) 56 Cal.2d 224, 229, 14 Cal.Rptr. 651, 363 P.2d 883;  Stratton v. City of Long Beach (1961) 188 Cal.App.2d 761, 769, 11 Cal.Rptr. 8.)

For example, in Gabrielson, the party attempting to invoke the doctrine had sought, by intervention, to enjoin expenditures of oil and gas revenues from trust-held property for other than trust purposes, but the eventual result was to secure revenues for the state.   The intervenor's ultimate objective had not been to secure or preserve the common fund for the state, but to establish an adverse interest of the trust instead of the state fund.   Under such circumstances, the considerations underlying the common fund doctrine “are not apposite.”  (Gabrielson v. City of Long Beach, supra, 56 Cal.2d at p. 229, 14 Cal.Rptr. 651, 363 P.2d 883.)   One purpose of the doctrine is to provide an incentive to litigate (see Estate of Stauffer, supra, 53 Cal.2d at p. 132, 346 P.2d 748), and “[l]itigation so motivated calls for no added incentive in the form of fees from the common fund should the ultimate objective fail.”   (Gabrielson v. City of Long Beach, supra, 56 Cal.2d at p. 229, 14 Cal.Rptr. 651, 363 P.2d 883.)

Here, in contrast, Sweet sought to create, not oppose, a recovery in which CCSF was entitled to share by virtue of the hospital lien.   Both parties shared a mutual interest in the creation of the common fund.   The only adversity arose from the parties' disagreement as to whether the common fund doctrine required CCSF to bear a pro rata share of Sweet's attorney fees.   This is not the sort of adversity—opposition to the fund itself—that invokes the adverse interest exception.   Under these circumstances, application of the common fund doctrine provides the added incentive to litigate, through entitlement to attorney fees via equitable apportionment, and is thus appropriate.

3. Legislative Intent

 CCSF also argues that because the applicable statutes do not expressly require reduction of hospital liens in accordance with the common fund doctrine, in contrast with codifications of the doctrine in the fields of worker's compensation (Lab.Code, § 3856) and Medi–Cal benefits (Welf. & Inst.Code, § 14124.72), the Legislature must have intended that the doctrine not apply in hospital lien cases.   But it is well settled that if legislation does not expressly purport to alter a long-established principle of common law, the legislation will be construed in light of that principle.  (People v. Cardenas (1982) 31 Cal.3d 897, 913–914, 184 Cal.Rptr. 165, 647 P.2d 569;  Leslie Salt Co. v. San Francisco Bay Conservation etc. Com. (1984) 153 Cal.App.3d 605, 618–619, 200 Cal.Rptr. 575.)   The common fund doctrine is long established, rooted in “the historic power of equity.”  (Alyeska Pipeline Co. v. Wilderness Society, supra, 421 U.S. at p. 257, 95 S.Ct. at p. 1621;  see Trustees v. Greenough, supra, 105 U.S. at pp. 535–536.)   Absent an express statutory departure from that principle, we must conclude there is no legislative intent to preclude its application in hospital lien cases.³

4. Conclusion

We hold that a county's hospital lien against an indigent patient's tort recovery from a third party (Gov.Code, § 23004.1) is subject to pro rata reduction, commensurate with the patient's attorney fees, in accordance with the common fund doctrine.   This is a matter of equity.   Without action by the patient, the county would recover nothing on its lien or would incur litigation expense in proceeding directly against the third party.   Successful action by the patient gives the county a source of recovery.   It is a matter of simple fairness to require the county to bear a share of the expense incurred in producing that recovery.

 As in any common fund case, however, the pro rata reduction must reflect a reasonable attorney fee.  (See Quinn v. State of California, supra, 15 Cal.3d at pp. 169–171, 124 Cal.Rptr. 1, 539 P.2d 761.)   Thus, because this is a matter of equity, the trial court may award a reduction that is reasonable but is less than pro rata if counsel's underlying fee is unreasonably high.   In the present case, the reasonableness of Caldwell's fee to Sweet is unchallenged.  (Cf. Estate of Reade, supra, 31 Cal.2d at p. 672, 191 P.2d 745.)   In the event of such challenge, we believe justice is best served by the trial court's issuance of a written statement of the basis for the reduction decided upon, which may be obtained upon the request of any party for a statement of decision pursuant to Code of Civil Procedure section 632.

Caldwell's representation of Sweet was in the finest tradition of the legal profession, contingent fee representation of an indigent whose claim would otherwise never be pursued.   In representing Sweet, Caldwell risked not only the lack of compensation for his time and services, but the loss of nearly $14,000 in costs advanced on behalf of his client out of his own pocket.   Other professionals may at times provide services knowing there is a risk they will never be paid, but only lawyers take the unique risk of advancing substantial sums of their own money for costs of litigation, knowing that if there is no recovery the client, especially an indigent such as Sweet, will never be able to repay the money advanced.

Surely Caldwell, risking never being reimbursed for the substantial costs he advanced and not being compensated for his services (the reasonable value of which were far in excess of CCSF's claim), as a matter of equity and to avoid unjust enrichment, is entitled to be reasonably compensated for services resulting in a recovery by CCSF which it otherwise never would have received.   CCSF not only did not incur any legal expense to obtain this recovery, it also did not have to risk taxpayer money to advance costs.   The result of our decision is equitable to the parties and counsel, and it is just.   In the vernacular of the day, CCSF must recognize there is no free lunch.

CCSF greatly benefitted from Caldwell's representation of Sweet, not only because Caldwell achieved what appears to be a remarkably good recovery, but because he agreed to represent Sweet despite the fact that Sweet had previously sought representation by other lawyers each of whom saw so little chance of recovery that they declined to accept his case.   Had the rule been as CCSF espouses, Caldwell may very well have declined to take this case of highly questionable liability and substantial injuries, for fear that the only settlement that might be achievable would be close to the lien amount and thus, not only would the client receive nothing, Caldwell would not be compensated for his services in obtaining the recovery.   The losers under the rule CCSF espouses would be not only the victims of the accident, but the county itself which would recover nothing instead of an equitable portion of the lien.   The only winners would be the tortfeasors.   Counsel should not be discouraged from providing legal representation in cases such as this.

Although this sort of personal injury litigation is not the typical type of common fund case, the rationale for equitable apportionment expressed by our Supreme Court in common fund cases applies with equal force.   The salient purposes of the common fund doctrine are “prevention of an unfair advantage to the others who are entitled to share in the fund and who should bear their share of the burden of its recovery,” and “encouragement of the attorney for the successful litigant, who will be more willing to undertake and diligently prosecute proper litigation for the protection or recovery of the fund if he is assured that he will be promptly and directly compensated should his efforts be successful.”  (Estate of Stauffer, supra, 53 Cal.2d at p. 132, 346 P.2d 748;  see also Quinn v. State of California, supra, 15 Cal.3d at p. 168, 124 Cal.Rptr. 1, 539 P.2d 761.)

B. The Statement of Decision

CCSF contends the statement of decision was ambiguous in two respects:  First, although the court found that Sweet “had no funds from which to pay the costs of the medical treatment he received,” he in fact could have paid the charges from the proceeds of the settlement with Jones.   Second, although the court distinguished Lindsey, the court did not decide whether Lindsey applied.   Both these arguments are meritless.   The statement of decision explained that CCSF would have recovered nothing but for Caldwell's efforts in prosecuting the personal injury claim;  this implied that Sweet was able to pay CCSF from the proceeds of the settlement.   By distinguishing Lindsey, the court decided it did not apply.

C. Interest

 Finally, CCSF claims the trial court should have calculated and awarded interest (Civ.Code, § 3287) on $29,468.88 from the date Caldwell received the settlement proceeds.   According to CCSF, the correct amount of the lien was $29,468.88, not $35,454.60 as found by the trial court.   But if that is the case, then by CCSF's own calculations presented below, interest of $4,842.62 accrued on $29,468.88 as of the date Caldwell released the $22,000 to CCSF.   This sum, $34,311.50 (before reduction under the common fund doctrine) is less than the lien amount declared by the trial court.   Thus, any error in this regard inured to CCSF's benefit.   CCSF cannot complain of a purported error in its favor.  (In re Marriage of Moore (1980) 28 Cal.3d 366, 374, 168 Cal.Rptr. 662, 618 P.2d 208.)

IV. DISPOSITION

The judgment is affirmed.

FOOTNOTES

1.   The county may also obtain reimbursement from a responsible relative of the patient (Welf. & Inst.Code, § 17300) or from after-acquired property of the patient (Welf. & Inst.Code, § 17403).

2.   Martinez also distinguished several hospital lien cases from other jurisdictions which held that liens should not be reduced commensurate with legal expenses (see Annot. (1993) 16 A.L.R.5th 262, 343–349), because the lien statutes in those cases limited the lien to a set amount or a percentage of the patient's recovery:  “Because the statutes set some limitations on the amount of the lien in those cases, the courts could determine that the respective legislatures did not intend to further limit the hospitals' recoveries.   We do not, however, have such limitations in our statute.”  (Martinez v. St. Joseph Healthcare System, supra, 871 P.2d at p. 1366.)   Likewise, Government Code section 23004.1 does not include such limitations on hospital recovery, and thus there is no suggestion that our Legislature did not intend further limitation on recovery.

3.   The statutory grant of discretionary authority to compromise, settle, or waive all or part of a hospital lien is based on “the convenience of the county” and “undue hardship” to the patient.   (Gov.Code, § 23004.2, subd. (b).)  The statute does not address common fund considerations (see Estate of Stauffer, supra, 53 Cal.2d at p. 132, 346 P.2d 748) as a basis for lien reduction, and thus cannot reasonably be construed as altering the common fund doctrine.

KING, Associate Justice.

PETERSON, P.J., and HANING, J., concur.