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PA District Court: DPW Not Entitled to Full Amount of Lien Against Settlement Between Plaintiff and Philadelphia Housing Authority

In a memorandum opinion, the District Court for the Eastern District of Pennsylvania held that the PA Department of Public Welfare ("DPW") was not entitled to the full amount of its lien against the settlement between a plaintiff and the Philadelphia Housing Authority.

The case involved a minor plaintiff who suffered injuries as the result of the presence of mold in a subsidized home, which triggered an asthma attack resulting in permanent brain damage. The case settled for $11,913,000.00 prior to trial. DPW paid $1,265,896.00 for plaintiff's medical treatment as a result of the injuries sustained. Plaintiff's counsel reached out to DPW a number of times in an effort to negotiate the lien to no avail. The Court approved the settlement on June 15, 2010 and the parties placed $1,267,611.41 in escrow, which represented more than the total DPW lien. DPW filed a motion to vacate the settlement or in the alternative to intervene and attempted to assert a lien for the full amount. The Court denied the motion to vacate, however, it granted the motion to intervene and a hearing to determine the amount DPW may collect was held on August 5, 2010.

Plaintiff argued that DPW could only collect a limited amount of its lien based on its "ratio theory." The true value of plaintiff's claim was over $45 million and the $11.9 million settlement represented less than a third of that value. Thus, the amount DPW would be entitled to receive would be one third of the settlement minus costs and fees, which in this case was approximately $200,000.00.

DPW admits that its recovery for reimbursement is limited in that it cannot exceed one half of the beneficiary's recovery after deducting fees and costs (and any medical expenses paid by the beneficiary). DPW argued that Pennsylvania law establishes a presumption that half of a plaintiff's settlement is properly attributed to compensation for medical expenses and therefore, DPW can lawfully collect its full lien because that amount does not exceed half the total settlement.

The Court disagreed with both arguments. Plaintiff's "ratio theory" would require the Court to hold mini-trials to determine the true value of a claim and would seriously undermine the economy of settlement. In addition, the Court noted that DPW's argument ignores the compromise that is involved with a settlement. "When parties settle, everyone sacrifices. DPW's suggestion that it does not need to sacrifice (unless its lien is for more than half of a plaintiff's total recovery) ignores this reality."

Instead, the Court determined that the proper approach was for the trial judge to assess the factors that would have influenced the parties' settlement positions and to make an ultimate determination of what portion of the settlement represented compensation for past medical expenses. In the case at hand, the Court considered each side's potential arguments at trial and determined that the plaintiff settled for two-thirds the value of the claim, and therefore, DPW was entitled to two-thirds of its $1,265,896.00 lien (minus fees and costs) which amounted to $537,448.43.


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