Twin City v. Leija

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

TWIN CITY FIRE INSURANCE COMPANY,
Plaintiff/Counter-Defendant/Appellee,

v.

GRACIELA LEIJA,
Defendant/Counter-Claimant/Appellant.

No. 1 CA-CV 16-0174
FILED 8-31-2017

Appeal from the Superior Court in Maricopa County
No. CV2012-004506
The Honorable Michael J. Herrod, Judge
The Honorable J. Richard Gama, Judge, Retired

AFFIRMED IN PART, REVERSED AND REMANDED IN PART

COUNSEL

Jones, Skelton & Hochuli, PLC, Phoenix
By Donald L. Myles, Jr., Jefferson T. Collins, Lori L. Voepel
Counsel for Plaintiff/Counter-Defendant/Appellee

Robbins & Curtin, PLLC, Phoenix
By Joel B. Robbins, Anne E. Findling
Co-Counsel for Defendant/Counter-Claimant/Appellant

Ahwatukee Legal Office, PC, Phoenix
By David L. Abney
Co-Counsel for Defendant/Counter-Claimant/Appellant
 TWIN CITY v. LEIJA
Opinion of the Court

OPINION

Presiding Judge Diane M. Johnsen delivered the opinion of the Court, in
which Judge Patricia K. Norris and Judge Jay M. Polk joined.1

J O H N S E N, Judge:

¶1 Under Arizona law, an injured worker who accepts workers'
compensation benefits cannot sue the employer. The worker may sue
others responsible for his or her injuries, but the law grants the employer's
insurance carrier a lien against any recovery. We hold in this case that when
a worker settles a claim against a third party for less than the limits of the
third party's insurance, the worker may obtain a judicial determination of
whether the carrier's lien should be reduced to account for the employer's
comparative fault.

FACTS AND PROCEDURAL BACKGROUND

¶2 Victor Leija was a window washer. He plunged three stories
to his death when a scaffold he was trying to erect atop a three-story
building collapsed and fell to the ground. His employer's workers'
compensation carrier, Twin City Fire Insurance Company, accepted the
claim and pays monthly benefits of $1,857 to Leija's widow and children.
Over time, those payments will total some $575,000.

¶3 Leija's family sued several third parties, including the City of
Glendale, which owns the building from which Leija fell; the building's
property manager and maintenance company; the company that furnished
the scaffold; and the company that fabricated it. The Leijas alleged
negligence by each of the defendants caused the scaffold to fall; in the case
of the City, they alleged breach of a duty to provide anchors to secure the
scaffold to the roof of the building. The City and the other defendants
identified Leija's employer as a nonparty at fault. As evidence, they pointed
to citations the state Division of Occupational Safety and Health issued the
employer for failing to repair a defect in the scaffold, failing to properly

1 The Honorable Patricia K. Norris, Retired Judge of Court of Appeals,
Division One, and the Honorable Jay M. Polk, Judge of the Arizona
Superior Court, have been authorized to sit in this matter pursuant to
Article VI, Section 3 of the Arizona Constitution.

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Opinion of the Court

secure the scaffold to the building and failing to make sure Leija wore a
safety harness.

¶4 The Leijas eventually settled with all the defendants and
recovered a total of $1,600,000. All but one paid the limits of their insurance
coverage. The exception was the City of Glendale, which was an additional
insured on two of the other defendants' policies. The City settled the Leijas'
claim without having to draw on its own insurance coverage, which was
ample. Twin City did not object to any of the settlements, but asserted a
right to fully enforce its lien against the settlement proceeds. It sought
reimbursement for what it had paid the Leijas already and full credit
against future payments. The Leijas rejected Twin City's demand, arguing
the carrier's lien should be reduced due to the employer's comparative fault
in the accident.

¶5 After negotiations failed, Twin City filed a complaint for
"enforcement of lien." The Leijas counterclaimed, alleging Twin City
breached its duty of good faith and fair dealing by refusing to reduce its
lien to account for employer fault. They also alleged Twin City breached a
promise to reevaluate the lien amount after all the settlements were
finalized. In the alternative, the Leijas asked the superior court to set a trial
to establish the amount of the lien.

¶6 Both sides eventually moved for summary judgment. The
court rejected the Leijas' contention that a workers' compensation carrier
owes a duty of good faith to compromise its lien to account for the
employer's comparative fault, but found there was a genuine issue of
material fact about whether Twin City breached a promise to consider
compromising its lien. The court also ruled that "a separate action after
compromise of the third-party claim is not the appropriate vehicle to
allocate fault to the workers['] compensation carrier's insured."

¶7 After further discovery, Twin City once again moved for
summary judgment. This time, the superior court granted the motion,
finding no proof that Twin City promised to compromise its lien. The court
also denied the Leijas' motion for leave to add claims against Twin City's
parent company, The Hartford Financial Services Group, Inc.

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Opinion of the Court

¶8 We have jurisdiction of the Leijas' timely appeal pursuant to
Arizona Revised Statutes ("A.R.S.") sections 12-2101(A)(1) (2017) and
-120.21(A)(1) (2017).2

DISCUSSION

A. Workers' Compensation Liens and Equitable Apportionment.

¶9 Under A.R.S. § 23-1023(A) (2017), a worker injured on the job
may sue a third party whose "negligence or wrong" contributed to the
worker's injury. In the event the worker is killed, the worker's dependents
may sue. Id. The worker or the dependents must notify the employer's
workers' compensation insurance carrier of the suit, and the carrier may
intervene to protect its interests. A.R.S. § 23-1023(C). The statute further
grants a lien to the carrier "on the amount actually collectable from the
[third-party defendant] to the extent of such compensation and medical,
surgical and hospital benefits paid." A.R.S. § 23-1023(D). Finally, the carrier
must approve any proposed settlement in an amount less than the benefits
the carrier has paid. Id.

¶10 When joint-and-several liability was the general rule in
Arizona, § 23-1023 did not impair the purpose of the statutory workers'
compensation scheme, which is to protect injured workers. Aitken v. Indus.
Comm'n, 183 Ariz. 387, 390 (1995). "Those who paid compensation obtained
liens on 'total' recoveries from third party tortfeasors who were, under the
law existing at the time, responsible for all damages regardless of how big
or small their respective portions of liability might have been." Id. Even
after satisfying the carrier's lien, an injured worker "received a full measure
of damages from third parties whose conduct contributed to the result." Id.

¶11 As Aitken pointed out, however, after Arizona largely
abrogated joint-and-several liability in favor of comparative fault, the lien
statute "may work an injustice" on injured workers. Id. Under A.R.S. § 12-
2506(B) (2017), defendants sued by an injured worker can name the
worker's employer as a nonparty at fault, with the result that even before
application of the lien, the worker's damages may be reduced to account for
the employer's comparative fault. Aitken, 183 Ariz. at 390. Because a
worker who elects to receive worker's compensation benefits cannot sue the
employer, literal application of § 23-1023(D) in such a situation unfairly
penalizes the worker: "[W]ithout an equitable adjustment or

2 Absent material revision after the relevant date, we cite a statute's
current version.

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apportionment, employers and their carriers will continue to obtain full
liens against third party recoveries even where those awards have been
effectively reduced by virtue of the employers' own fault." Aitken, 183 Ariz.
at 190.

¶12 Aitken was such a case: An injured worker sued a third party
and prevailed, but the worker's recovery was reduced because the jury
found the employer was 25 percent at fault. Id. at 388-89. Pursuant to
statute, an administrative law judge ruled the employer's carrier was
entitled to be reimbursed from the judgment for the full amount of its lien,
and the court of appeals affirmed. Id. at 389. In reversing, the supreme
court pointed out that the purpose of § 23-1023 is "to promote fairness
among all parties," a "goal [that] is not served by allowing 'an employer to
benefit from his own wrong, at the expense of the injured worker,' nor is
such a scenario 'consistent with the principles of comparative fault.'" Aitken,
183 Ariz. at 392 (quoting Clark v. Pacificorp, 822 P.2d 162, 174 (Wash. 1991)).
The court further explained:

There is no indication that [§ 23-1023] was intended to result
in a windfall for any party, be it the employee, employer, or
insurance carrier. We should therefore continue to interpret
it in a manner that achieves the legislative objectives of
distributing responsibility according to fault and avoiding
double recovery while ensuring full and fair recompense.
Because any other interpretation "would be at the expense of
the injured workman," we conclude that the lien and any
future credit should apply only to the extent that
compensation benefits paid exceed the negligent employer's
proportionate share of the total damages awarded in the third
party action. In other words, the employee should not be
forced to endure the combined effect of first having his or her
award reduced by reason of the employer's fault, and
thereafter having to satisfy a lien against this diminished
recovery in favor of the employer and its carrier to the full
extent of compensation benefits provided.

Id. (citation omitted) (quoting Taylor v. Delgarno, 667 P.2d 445, 450 (N.M.
1983) (Payne, C.J., & Sosa, J., dissenting)).

¶13 Less than a year after Aitken, the supreme court again
addressed equitable apportionment of a workers' compensation lien. In
Grijalva v. Arizona State Compensation Fund, 185 Ariz. 74, 75 (1996), an
injured worker accepted benefits, then sued two third parties for his

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injuries. He settled with one, agreeing to entry of judgment in that
defendant's favor. Id. at 75. After the other defendant offered to settle and
the carrier declined to compromise its lien, the superior court ruled that the
lien attached "only to funds from culpable third parties whose conduct
actually caused or contributed to the worker's injuries." Id. at 76. The
superior court then conducted a "summary trial," after which it found the
employer was 100 percent at fault and ruled the carrier had no lien against
the settlements. Id. at 75-76.

¶14 The supreme court reversed, rejecting the superior court's
ruling and the outcome of the summary trial, which effectively exonerated
defendants that had paid substantial sums in settlement. Id. at 77
("[C]ommon sense tells us that the defendants would not have paid
hundreds of thousands of dollars in settlement if a favorable outcome could
have been unerringly predicted."). Acknowledging that "Aitken did not
address rules governing the compromise of disputed third party claims,"
the supreme court rejected the procedure the parties had constructed as an
"artful contrivance" intended "to reduce or extinguish legitimate lien
rights." Id.

¶15 Another settlement was at issue in Stout v. State Comp. Fund
(Stout I), 197 Ariz. 238, 239-40, ¶ 3 (App. 2000). There, a defendant agreed
to pay its insurance policy limits to the widow of a deceased worker. The
employer's carrier was willing to forego a portion of its lien against sums it
had already paid, but maintained it was entitled to full credit against future
payments. The widow asked the court to allow her to settle over the
carrier's objection; she also asked the court to reduce the carrier's lien. Id.
at 240, ¶ 4. After the superior court granted summary judgment to the
carrier, this court affirmed. Citing Boy v. Fremont Indemnity Co., 154 Ariz.
334 (App. 1987), we held that when an injured worker settles a claim with
a third party, the workers' compensation carrier owes no duty to offer to
compromise its lien against the settlement to account for the employer's
comparative fault. Stout I, 197 Ariz. at 242-43, ¶ 21. We noted Aitken held
that a carrier may enforce its lien "only to the extent that" it has paid more
than "the employer's proportionate share of the total damages fixed by
verdict in the action." Id. at 241, ¶ 11 (quoting Aitken, 183 Ariz. at 392). We
concluded the "policy concerns of Aitken" do not apply when a worker
settles his or her claim "at [insurance] policy limits and there is no evidence
that employer fault affected the offer to settle at policy limits." 197 Ariz. at
242, ¶ 15.

¶16 While the appeal in Stout I was pending, the worker's widow
and the third-party defendant entered into a high/low settlement

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agreement for less than the defendant's policy limits and agreed to have the
superior court try damages and the employer's comparative fault in a
summary trial. Stout v. State Comp. Fund (Stout II), 202 Ariz. 300, 301-02, ¶¶
2-3 (App. 2002). After hearing a few hours of evidence, the superior court
found the employer 25 percent at fault. Id. at 302, ¶ 4. Only after judgment
was entered did the parties inform the carrier of their high/low agreement,
the trial and the judgment. Id. at ¶ 5. On appeal from summary judgment
in favor of the carrier in a subsequent declaratory judgment proceeding, the
carrier argued the high/low agreement and the stipulated summary trial
were an "artful contrivance" of the sort that Grijalva had rejected. Id. at ¶ 6.

¶17 Addressing the parties' respective contentions, we observed
that Aitken did not lay out a clear path for an injured worker in such a
situation:

We recognize that the Stouts' attorneys had a dilemma here.
Aitken provides claimants with certain rights, and the Aitken
issue in this case is of enormous consequence to the Stouts,
but Arizona law provides no rules for how a claimant and the
carrier are to resolve an Aitken issue when that is the major or
only issue in dispute.

The Stouts had reason to believe that the [carrier's] lien would
be extinguished by proper application of the Aitken rule, and
they tried to litigate the matter of employer fault, with the
cooperation of [the settling defendant]. There was nothing
wrong with that objective. But where the Stouts went
inexcusably wrong, in our opinion, was in hiding their efforts
from the [carrier] until they thought it was too late for the
[carrier] to contest those efforts. If the Stouts had given
candid and timely notice to the [carrier] of the high/low
agreement and the trial, they would have had a much better
argument that the result of the trial should be binding on the
[carrier], whether it chose to participate or not.

Until the legislature provides specific guidance on how to
resolve an Aitken issue that is the major or only issue in
dispute, counsel will have no specific direction on how to
proceed in a case such as this. They do, however, have
general direction from the following recent pronouncement
by the Arizona Supreme Court: "We hold today, as strongly
as possible, that any agreement that has the potential of
affecting the manner in which a case is tried is one that may

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encourage wrongdoing and must therefore be disclosed to the
trial judge and all litigants in the case."

Id. at 304, ¶¶ 18-20 (alteration in original) (citations omitted) (quoting In re
Alcorn & Feola, 202 Ariz. 62, 70, ¶ 28 (2002)). Because the summary trial the
superior court had conducted at the request of the settling parties was
"obviously not a true contest as regards employer fault," we affirmed the
judgment in favor of the carrier, holding it was entitled to reimbursement
to the full extent of its lien. 202 Ariz. at 304, 305, ¶¶ 17, 24.

¶18 After Stout II, however, we made clear that a carrier's lien on
a settlement may be apportioned under Aitken as long as the worker's
damages and the employer's comparative fault are determined in a fair
proceeding. In Weber v. Tucson Electric Power Co., 202 Ariz. 504, 504 (App.
2002), an injured worker settled with one defendant but went to trial against
another. Using the jury's damage verdict and finding of the employer's
comparative fault, the superior court reduced the carrier's lien against the
proceeds of the settlement with the defendant that did not go to trial. Id. at
505, ¶ 3. We affirmed, noting that the carrier did not argue the trial "was a
sham or collusive proceeding." Id. at 506-07, ¶ 10.

¶19 Here, in contrast to the circumstances in Grijalva and Stout II,
the Leijas did not settle their claims over the carrier's objection, nor do they
seek to reduce the lien based on the outcome of a sham proceeding
contrived to increase the employer's comparative fault. Moreover, unlike
in Stout I, the settlements the Leijas negotiated did not exhaust the
applicable insurance (several layers of the City of Glendale's policies were
left untouched). Given the safety citations issued to the employer after the
scaffold's collapse, supra ¶ 3, estimations of the employer's comparative
fault undoubtedly affected the amount the Leijas were able to recover in
settlement.

¶20 In these circumstances, the fact that the Leijas settled their
claims rather than try them to a verdict does not preclude equitable
apportionment under Aitken. Twin City cites language from that case
holding that a carrier may enforce its lien "only to the extent that the
compensation benefits paid exceed the employer's proportionate share of
the total damages fixed by verdict in the action." Aitken, 183 Ariz. at 392
(emphasis added). But we do not read the supreme court's reference to a
jury verdict in the quoted passage as limiting application of the equitable
principles that underlay that decision to cases in which the worker tries his
or her claims to a verdict. The rule of Aitken is derived from the purpose of
the worker's compensation lien, which the supreme court stated is to

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Opinion of the Court

"promote fairness among all parties." Id. "We should therefore continue to
interpret it in a manner that achieves the legislative objectives of
distributing responsibility according to fault and avoiding double recovery
while ensuring full and fair recompense." Id. When the benefits payable by
the carrier do not exceed the employer's proportionate share of the
damages, application of § 23-1023(D) works the same injustice on a worker
who settles his or her claim as it does on a worker who tries the claim to a
jury verdict. See Aitken, 183 Ariz. at 390. In both situations, the worker is
entitled to "the fullest available recovery without double recovery." Id. at
393.

¶21 Nor does Stout I preclude application of equitable
apportionment to any settlement by an injured worker. See Weber, 202 Ariz.
at 506-07, ¶ 10; supra ¶ 18. There was no evidence in Stout I that the
settlement there had taken the employer's comparative fault into account;
as negotiated, the defendant would have paid its policy limits. 197 Ariz. at
242, ¶ 15. That is not true here, where the settlement with Glendale did not
touch multiple layers of coverage and the record contains significant
evidence of employer fault. See id. at 241, ¶ 14 ("The goal of the equitable
apportionment rule is to allow a fair recovery for an employee whose award
against a third party is reduced by both the proportion of employer fault
and the carrier's lien.").

¶22 Implicitly acknowledging the case authorities barring use of
a sham proceeding to determine the amount by which a carrier's lien should
be reduced under Aitken, the Leijas urge this court to direct the superior
court to set a trial "for the purpose of establishing damages and employer
fault" so that Twin City's lien can be equitably apportioned. Twin City
argues such a trial necessarily would be a sham because the Leijas, who
sought to minimize the employer's comparative fault in their case against
the third parties, would take the opposite position in an apportionment
proceeding. See Aitken, 183 Ariz. at 392. We see no logic in Twin City's
contention that the change in the Leijas' litigation position concerning
employer fault would render the trial an impermissible "artful contrivance"
like those in Grijalva and Stout II. On remand, Twin City will be free to offer
otherwise admissible evidence aimed at minimizing the employer's
comparative fault, presumably including, inter alia, evidence disclosed in
the Leijas' litigation with the third parties. So long as properly motivated
parties are accorded a fair adversarial proceeding conducted in accordance
with due process, the concerns of a sham proceeding are avoided.

¶23 For these reasons, the superior court erred by denying the
Leijas' request for a trial to equitably apportion Twin City's lien. Because

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Opinion of the Court

the parties did not address the specifics of such a proceeding (including, for
example, whether damages and the employer's comparative fault should
be determined by the court or by a jury), we do not address those issues,
and leave them to be resolved by the superior court on remand.

B. Claims for Breach of the Covenant of Good Faith and Fair Dealing
and Breach of Contract.

¶24 The Leijas also appeal the superior court's entry of summary
judgment in favor of Twin City on their claims for breach of the covenant
of good faith and fair dealing and breach of contract.

¶25 We review de novo the grant of a motion for summary
judgment, Tierra Ranchos Homeowners Ass'n v. Kitchukov, 216 Ariz. 195, 199,
¶ 15 (App. 2007), viewing the facts and inferences in a light most favorable
to the party against whom summary judgment was entered, Prince v. City
of Apache Junction, 185 Ariz. 43, 45 (App. 1996). Summary judgment is
appropriate when "there is no genuine dispute as to any material fact and
the moving party is entitled to judgment as a matter of law." Ariz. R. Civ.
P. 56(a).

1. Alleged breach of the covenant of good faith and fair
dealing.

¶26 The Leijas argue the court erred by granting summary
judgment on their claim that Twin City had a good-faith obligation to
negotiate a compromise of its lien against the settlement proceeds.

¶27 In Arizona, an insurance contract imposes on an insurer the
obligation to act in good faith for the benefit of its insured; breach of that
duty "may give rise to a claim for the tort of bad faith." Sobieski v. Am.
Standard Ins. Co. of Wis., 240 Ariz. 531, 534, ¶ 10 (App. 2016). The duty of
good faith requires a workers' compensation carrier to "give equal
consideration" to its own interests and those of the injured worker. Boy, 154
Ariz. at 337; see Mendoza v. McDonald's Corp., 222 Ariz. 139, 149, ¶ 32 (App.
2009). An insurer may be held liable when it "seeks to gain unfair financial
advantage of its insured through conduct that invades the insured's right
to honest and fair treatment." Zilisch v. State Farm Mut. Auto. Ins. Co., 196
Ariz. 234, 237-38, ¶ 20 (2000) (quoting Rawlings v. Apodaca, 151 Ariz. 149,
156 (1986)). To establish the tort of bad faith, a party must prove an insurer
"acted unreasonably and either knew its conduct was unreasonable or acted
with such reckless disregard that knowledge of unreasonableness may be
imputed to it." Sobieski, 240 Ariz. at 534, ¶ 11.

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Opinion of the Court

¶28 The Leijas contend that although a workers' compensation
carrier may not always be required to compromise its lien, it has a duty to
fairly value the lien to begin with, which, under Aitken, requires
consideration of employer fault. Under Boy and Stout I, however, we are
compelled to conclude that at the time at issue here, absent a fair
adjudication of damages and employer comparative fault, a workers'
compensation carrier owed an injured worker no duty to compromise or
reduce the lien that § 23-1023 grants the carrier. We recognize that it was
eight years before the supreme court decided Aitken that we held in Boy that
"no reasonable person would consider [the carrier's] compromise of its lien
to be a benefit that [the worker] had the right to expect from the contractual
relationship." Boy, 154 Ariz. at 337. But we reaffirmed that principle after
Aitken in Stout I, 197 Ariz. at 242-43, ¶ 21. Particularly because we have
ruled that the Leijas have a right to a trial by which Twin City's lien may be
apportioned, we have no need to reconsider that principle.3

2. Alleged breach of contract.

¶29 The Leijas also appeal the superior court's grant of Twin City's
motion for summary judgment on their claim that Twin City breached a
contract by inducing them to settle with the defendants by promising to
reevaluate the lien and then refusing to do so. But on appeal, the Leijas do
not cite evidence to support that promise, and instead argue simply that the
carrier "said it would resolve the issue at a later date and induced [the
Leijas] to resolve the case." The evidence in the record is that Twin City
consistently warned the Leijas it was unwilling to reduce its lien based on
employer comparative fault. For this reason, the superior court did not err
in granting summary judgment on this claim.

C. Motion to Amend.

¶30 Finally, the Leijas appeal the superior court's denial of their
motion to amend their counterclaim to add Twin City's parent company,
The Hartford, as a party. We review the denial of a motion to amend for an
abuse of discretion. Timmons v. Ross Dress For Less, Inc., 234 Ariz. 569, 572,
¶ 17 (App. 2014). "Motions to amend should be granted unless the court
finds specific cause, such as futility, to deny the amendment." Id.

3 For this reason, we need not resolve the Leijas' contention that the
superior court erred by denying their motion to compel production of
communications between Twin City and its outside counsel concerning
whether to agree to compromise the lien.

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¶31 The Leijas moved to amend three years into this litigation,
nine months after their discovery of The Hartford's purported role in Twin
City's consideration of their claim and eight months after the close of
discovery. In denying the motion, the superior court cited undue delay and
dilatory action on the part of the Leijas, as well as futility. The court also
found Twin City is the proper party in this action and ruled that allowing
the proposed amendment would prejudice Twin City because it would
expand the scope of litigation.

¶32 The superior court did not abuse its discretion in denying the
motion to amend. Although mere delay may not justify denial of leave to
amend, "[n]otice and substantial prejudice to the opposing party are critical
factors in determining whether an amendment should be granted." Owen
v. Superior Court, 133 Ariz. 75, 79 (1982) (quoting Hageman v. Signal L. P. Gas,
Inc., 486 F.2d 479, 484 (6th Cir. 1973)). "[P]rejudice is 'the inconvenience and
delay suffered when the amendment raises new issues or inserts new
parties into the litigation.'" Spitz v. Bache & Co., Inc., 122 Ariz. 530, 531 (1979)
(quoting Romo v. Reyes, 26 Ariz. App. 374, 376 (1976)).

CONCLUSION

¶33 We reverse the superior court's denial of the Leijas' request
for a trial on their damages and the employer's comparative fault and
remand for determination of equitable apportionment of Twin City's
workers' compensation lien under Aitken. We affirm the superior court's
entry of summary judgment in favor of Twin City on the Leijas' claims for
breach of the covenant of good faith and fair dealing and breach of contract,
and the court's denial of the Leijas' motion to amend their counterclaim. We
grant the Liejas their costs on appeal, upon compliance with Arizona Rule
of Civil Appellate Procedure 21.

AMY M. WOOD • Clerk of the Court
FILED: AA

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