Why Personal Injury Attorneys, Both Plaintiff And Defense, Should Read The U.C.C.

by Judith Ann Kostura

On May 16, 2014, the Texas Supreme Court issued its opinion in McAllen Hosps., LP v. State Farm County Mut. Ins. Co., (Tex. 2014) No. 12-0983. The Court held that a release given to a liability insurer by an injured accident victim is invalid when that accident victim does not pay a hospital lien. The Court refused, however, to shed much light on the remedy available to the scorned hospital.

Two injured people, Jose Gil and Melinda Hernandez, settled with the tortfeasor, Carlos Benavidez, insured by State Farm, after a collision. Gil and Hernandez incurred hospital bills of $53,564 and $1,281, respectively, but settled for only $5,200 and $2,100. State Farm, aware of the hospital lien, named the injured plaintiff and McAllen Hospital on each of the settlement checks. The injured claimants endorsed and deposited the checks without obtaining the hospital’s endorsement and without paying the hospital bills. After the hospital was stiffed by each patient, the hospital sued State Farm to recover payment up to the amounts of the settlement checks; the carrier refused to pay again, arguing that it had already protected the hospital (and therefore itself) by naming the hospital as a payee.

The trial court sided with State Farm on summary judgment, which the appeals court affirmed, but the Supreme Court reversed and remanded. Justice Lehrmann, writing for the majority, held that the release of the tortfeasor (and therefore of State Farm) was invalid due to the rather clear provisions of the Property Code:

“section 55.007 of the Hospital Lien Statute forms the crux of the parties’ dispute. That section, which addresses the effect of a hospital lien on the validity of a release of the underlying cause of action to which the lien has attached, provides in pertinent part: (a) A release of a cause of action … to which a lien under this chapter may attach is not valid unless: (1) the charges of the hospital or emergency medical services provider claiming the lien were paid in full before the execution and delivery of the release; (2) the charges of the hospital or emergency medical services provider claiming the lien were paid before the execution and delivery of the release to the extent of any full and true consideration paid to the injured individual by or on behalf of the other parties to the release; or (3) the hospital or emergency medical services provider claiming the lien is a party to the release. Id. § 55.007(a).

The Court looked to the Uniform Commercial Code, TEX. BUS. & COM. CODE § 3.102, and case law to determine whether the check to the injured plaintiff and the hospital constituted payment. The Court, citing Benchmark Bank v. State Farm Lloyds, 893 S.W.2d 649 (Tex. App.—Dallas 1994, no writ), held that “… State Farm’s delivery of the drafts to Gil and Hernandez constitutes constructive delivery of the drafts to the other copayee, the Hospital. TEX. BUS. & COM. CODE § 3.420 cmt. 1. However, that does not end our analysis.” The Court then looked to other states’ and commentators’ interpretation of the UCC and held: “when a draft is issued to nonalternative copayees, one copayee acting alone is not entitled to enforce, and thus may not discharge, the instrument.”

State Farm argued that the hospital should look to the bank that paid the partially endorsed checks, not to State Farm, for payment. The Court agreed only that the hospital had that option, but not that such option was the hospital’s exclusive remedy: “While the Hospital could have attempted to pursue the payor bank for relief directly, its failure to do so does not affect State Farm’s obligations under the UCC. That more efficient avenues of recovery may exist for a wronged copayee does not alter our analysis of whether the Hospital was ‘paid’ in accordance with the UCC and the Hospital Lien Statute.”

So what remedy is available to McAllen Hospital? The Court refused to answer because that issue was not raised by either party at the trial court level or on appeal. The Court questioned an earlier holding in Baylor University Medical Center v. Borders, 581 S.W.2d 731, 733 (Tex. Civ. App.—Dallas 1979, writ ref’d n.r.e.), wherein the court of appeals allowed hospitals to sue to enforce a hospital lien:

The Hospital Lien Statute’s language, however, calls the Borders court’s conclusion into question. See Prairie View A & M Univ. v. Chatha, 381 S.W.3d 500, 507 (Tex. 2012) (“The plain language of a statute is the surest guide to the Legislature’s intent.”).

The Hospital Lien Statute does not expressly create a cause of action against third parties to enforce a lien. But section 55.007 does delineate the consequence when a hospital with a valid lien is not properly paid out of the proceeds of a patient’s settlement with a third party. Specifically, as discussed above, the statute invalidates the release of a cause of action “to which a lien under this chapter may attach,” i.e., the patient’s cause of action against the person whose negligence caused the accident that necessitated treatment. See Daughters of Charity Health Servs. of Waco v. Linnstaedter, 226 S.W.3d 409, 411 (Tex. 2007). As a result, the patient’s cause of action, previously settled, is revived, and the hospital retains its lien on that cause of action. TEX. PROP. CODE § 55.007(a).

The Court refused, thus far, to either read a cause of action by the hospital into being, nor to negate such a remedy. (And deliciously left open the question of whether Gil, who settled for a mere 10% of the total hospital bill of $53,564 could seek more than his earlier $5,200 in settlement because, after all, the release of the cause of action to which the release attached was invalid.) Neither did the Court, nor the parties apparently, debated whether Gil or Hernandez was actually admitted to the hospital or whether an ER visit was sufficient to validate the hospital lien, nor whether the hospital’s charges were the regular and reasonable amount, another condition of the hospital lien statute. The court simply “reverse[d] the court of appeals’ judgment and remand[ed] the case to the trial court for further proceedings consistent with this opinion.” Stay tuned.