Hospital Liens

Dealing with hospital liens is a common experience for attorneys dealing with insurance companies. This recent Texas Supreme Court is a must read. It is styled McAllen Hospitals v. State Farm. Here is what the case tells us.
To assist hospitals with securing payment for medical services provided to accident victims, Texas Property Code chapter 55 (the Hospital Lien Statute) allows a hospital to file a lien on a patient’s cause of action against a person whose negligence caused the injury that necessitated the patient’s treatment. If the hospital’s charges secured by a proper lien are not “paid” within the meaning of the statute, any release of the patient’s cause of action is invalid. In this case, two patients treated at the petitioner’s hospital settled with the negligent third party. That party’s liability insurer made the settlement checks jointly payable to the patients and the hospital and delivered the checks to the patients, who deposited them without the hospital’s endorsement. The issue presented is whether the hospital’s charges were “paid” under the Hospital Lien Statute and the Uniform Commercial Code even though the hospital never received notice that the settlement funds had been delivered to the patients and were never reimbursed for the treatment costs. This court said no.
Gil and Hernandez settled with Benavidez for $5,200 and $2,100, respectively, and released their claims against him. The Hospital was not a party to the releases, nor was it informed the parties had settled. State Farm, aware of the Hospital’s liens, informed Gil that he was responsible for paying the Hospital for its services out of the settlement funds. State Farm issued Gil’s settlement check payable to “Jose Antonio Gil & Rafaela Balderas, Individually and as husband and wife & McAllen Medical Center,” and issued Hernandez’s check payable to “Melinda De La Garza Hernandez, a Single Individual & McAllen Medical Center.” State Farm sent the checks to Gil and Hernandez without notifying the Hospital. Both Gil and Hernandez deposited their settlement checks without the Hospital’s endorsement. The Hospital’s charges for treating Gil and Hernandez remain outstanding.
The Hospital sued State Farm to enforce its hospital liens, seeking to recover the outstanding treatment costs up to the amount of the settlements. In response, State Farm contended that it met its obligation to pay the Hospital under the Hospital Lien Statute by making the checks payable to the Hospital as a copayee. The trial court granted summary judgment for State Farm.
First, the court 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. However, that does not end the analysis. The UCC instructs that “an instrument is paid to the extent payment is made by or on behalf of a party obliged to pay the instrument, and to a person entitled to enforce the instrument.” And the UCC explains that, when a draft is issued to nonalternative copayees, one copayee acting alone is not entitled to enforce, and thus may not discharge, the instrument. Specifically, the statute provides: “If an instrument is payable to two or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them.” Section 3.110(d). The Comment to this section of the Code further clarifies:
If an instrument is payable to X and Y, neither X nor Y acting alone is the person to whom the instrument is payable. Neither person, acting alone, can be the holder of the instrument. The instrument is “payable to an identified person.” The “identified person” is X and Y acting jointly. . . . Thus, . . . X or Y, acting alone, cannot be the holder or the person entitled to enforce or negotiate the instrument because neither, acting alone, is the identified person stated in the instrument.
The court then entered into a lengthy discussion about what it meant to be “paid” under the statute and went on to say:
Our conclusion that the Hospital’s charges have not been “paid,” and its lien not satisfied, logically leads to the issue of the Hospital’s proper remedy; specifically, whether a hospital may enforce its lien by directly pursuing the negligent third party or that party’s liability insurer. If it can, the Hospital may recover from State Farm. If it cannot, the Hospital has no cause of action against State Farm notwithstanding the invalidity of Gil’s and Hernandez’s releases of their causes of action against State Farm and its insured.
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, 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. As a result, the patient’s cause of action, previously settled, is revived, and the hospital retains its lien on that cause of action.
For the reasons set forth above, the court held that (1) payment of a check to one nonalternative copayee without the endorsement of the other does not constitute payment to a “holder” and thus does not discharge the drawer of either his liability on the instrument or the underlying obligation, (2) the court of appeals erred in holding that the patients’ releases of their causes of action against Benavidez were valid under section 55.007 of the Hospital Lien Statute, and (3) the Hospital’s liens on those causes of action therefore remain intact.
Bottom line – the correct way to handle these hospital liens can be complicated and an experienced Insurance Law Attorney needs to be consulted.