No. 92-623
IN THE SUPREME COURT OF THE STATE OF MONTANA
1993
CLIFFORD BROWN,
Petitioner and Appellant,
v.
RICHARD A. MURPHY, INC.,
Employer,
and
STATE COMPENSATION MUTUAL
INSURANCE FUND,
Defendant and Respondent.
APPEAL FROM: Workers' Compensation Court of the State of
Montana, The Honorable Timothy W. Reardon,
Judge presiding.
COUNSEL OF RECORD:
For Appellant:
John Houtz, Attorney at Law, Forsyth, Montana
For Respondent:
Charles G. Adams, Legal Counsel, State
Compensation Mutual Insurance Fund,
Helena, Montana
Submitted on Briefs: April 30, 1993
Decided: November 2, 1993
Filed:
~usticeTerry N. Trieweiler delivered the opinion of the Court.
Clifford Brown appeals from a decision of the Workers'
compensation Court in which his request to rescind a compromise
settlement that the parties had agreed upon was denied. The court
c~ncluded that Brown was not entitled to reopen the settlement
agreement and that the insurer was not required to provide him with
additional benefits.
We reverse.
The dispositive issue on appeal is whether the Workers'
compensation Court erred when it concluded that there were no
grounds to allow rescission of the compromise settlement agreement.
Claimant Clifford Brown was injured during the course of his
employment on two separate occasions--February 21, 1978, and
December 2, 1985, while employed by Richard A. Murphy, Inc. The
State Compensation Mutual Insurance Fund accepted liability and
paid various benefits.
Following the 1985 injury, the State Fund notified Brown that
it elected not to participate in the cost of a possible third-party
claim for damages, but that, pursuant to 5 39-71-414(2) (c), MCA
(1983), it retained a 50 percent subrogation interest in any
recovery.
Brown did pursue a third-party claim in California and
subsequently settled that claim for $55,000, which was less than
policy limits.
In March 1990, following that settlement, Brown's counsel
approached the State Fund about settling the workers' compensation
claims. At this time, Brown's entitlement to permanent partial
disability benefits had not been determined by either agreement or
adjudication, and there had been no determination of the State
Fund's subrogation interest, if any, in the third-party settlement.
However, based on the settlement amount and the attorney fees and
costs associated with the settlement, the State Fund determined
that the maximum subrogation interest it was entitled to was
$18,666.67.
The parties eventually compromised Brown's claim, as well as
tne State Fundrs subrogation interest. Tne State Fund agreed to
pay to Brown $ 3 0 , 0 0 0 of "new moneyw and, as part of the compromise,
the State Fund waived any subrogation interest in the third-party
settlement. The petition for full and final compromise settlement
which was submitted to the Department of Labor and Industry stated
that Brown agreed to accept $ 3 3 , 6 6 2 . 5 0 , of which $ 3 , 6 6 2 . 5 0 had
already been paid, as a full and final compromise of his claim.
Additionally, the State Fund stated that it waived its subrogation
interest in the amount of $17,382.78. There is no explanation for
the seventeen thousand dollar figure, as opposed to the $ 1 8 , 6 6 6 . 6 7
which the State Fund had previously calculated as its maximum
subrogation interest. This agreement was signed by Brown on
April 7, 1 9 9 0 , and the State Fund on May 1 1 9 9 0 .
,
The department approved this compromise agreement on May 1 0 ,
1990, but altered some of the terms. The final order approving the
compromise settlement stated that Brown was to receive in
settlement of his claims the amount of $52,329.17, less $18,666.67
3
which "is subrogation due the State Fund." After deducting the
amount previously paid to Brown, he was to receive a net settlement
of $30,000. The language added by the department, while not
materially altering the agreement, clarified that the settiement
agreement took into account the subrogation interest that the State
Fund believed it was entitled to receive.
prior to the issuance of this order, however, the State Fund
initiated a second agreement entitled "Compromise Settlement of
Insurer's Subrogation Interest" which Brown signed on April 30,
1990. This agreement purported to settle a controversy regarding
the State Fund's subrogation interest and stated that the insurer
agreed to accept as its subrogation interest "the sum of zero
dollars." This agreement was approved by the Department of Labor
on June 29, 1990.
On June 7, 1990, one month after the Department of tabor's
approval of the settlement agreement, but prior to its approval of
the subrogation "waiver," this Court issued its decision in Zrrcilcr
v. Arneticatl ilwurutzce Conzputly (1990), 243 Mont. 226, 794 P.2d 335. .%tiler
construed the 1983 subrogation provision of the Workers'
Compensation Act, which the parties agree is the controlling
statute in this case. Applying the theory of equitable limitation
on legal subrogation, this Court held that an insurer has no
subrogation rights until a claimant has been made whole for his
entire loss and any costs of recovery, including attorney fees.
Zacher, 794 P.2d at 338.
Approximately a year later, on April 10, 1991, Larry Thomas,
the supervising claims examiner for the State Fund, responded to an
inquiry from Brown's attorney in which the terms of the settlement
agreement were clarified. Thomas explained that Brownis case had
been settled for $52,329.17, and from this the State Fund deducted
its subrogation interest of $18,666.67, and the amounts already
paid out in partial benefits. This left a net settlement of
$30,000 which had been paid to Brown.
On September 3, 1991, Brown submitted a claim to the State
Fund to recoup the $18,666.67 subrogation interest which Brown
claimed was deducted and withheld by the State Fund in the
compromise settlement. He asserted that he had to pay his attorney
fees from the third-party recovery, and therefore, had not been
made whole, which is a prerequisite for subrogation according to
the decision in Zacizer.
The State Fund denied Brown's claim on the basis that it had
expressly waived any subrogation interest in Brown's third-party
settlement and that there was nothing for it to refund.
Brown then petitioned the Workers' Compensation Court in
December 1991, alleging that a subrogation interest in the amount
of $18,666.67 had been "deductedw from the compromise settlement,
and that, pursuant to the Zacher decision, this amount should be
returned to him. Brown contended that the settlement agreement
should be set aside on the basis that the parties were mutually
mistaken regarding the State Fund's right to a subrogation interest
in Brown's third-party recovery when they entered into the
agreement. Brown also added a claim for attorney fees alleging
that the State Fund had acted unreasonably when it refused to pay
his claim.
The Workers' Compensation Court entered its judgment on
December 11, 1992, in which the court accepted the hearing
examiner's findings of fact, conclusions of law, and proposed
judgment. The court determined that Brown was not entitled to
reopen the May 10, 1990, settlement agreement and was not entitled
to further compensatlon or attorney fees. From this judgment,
Brown appeals.
Did the Workers1 Compensation Court err when it concluded that
there were no grounds to allow rescission of the compromise
settlement agreement?
Brown contends that the Workers' Compensation Court erred when
it did not allow rescission of the settlement agreement and did not
order the State Fund to reimburse Brown for the subrogation
interest it retained. He argues on appeal that the Zacher decision
controls the issue of whether the State Fund was entitled to a
subrogation interest. He claims that he was not made whole in the
third-party settlement, and therefore, the State Fund had no
subrogation rights. However, based on the language contained in
the settlement agreement, he asserts that money was deducted from
the amount for which his claim was settled based on the State
Fund's subrogation claim.
The arguments raised before this Court focus on two grounds
for rescission--mutual mistake of fact and unilateral mistake of
law. Brown contends that he is entitled to rescind the settlement
agreement on the grounds of unilateral mistake of law because he
was operating under a misapprehension of the law regarding the
right to subrogation, and the State Fund was aware of his
misapprehension. He claims that the State Fund knew of the
impending decision in Zacher which would forbid a subrogation
interest in this instance, and that is why the second agreement,
which purported to waive any interest in the third-party
settlement, was proffered by the State Fund. He also claims there
was a mutual mistake of fact because, at the time the agreement was
made, both parties were mistaken about the State Fund's right to
subrogation.
The State Fund counters by claiming that the settlement
agreement was an enforceable contract resulting from a compromise
by both parties and the court correctly found no grounds for
rescission. The State Fund insists that it waived its right to
subrogation in the final agreement and this agreement, therefore,
is not in conflict with Zacher. Furthermore, it contends that
because Brown settled his third-party lawsuit for less than policy
limits he was Itmade whole" and Brown has not demonstrated that
Zuchcr would have changed the outcome of the compromise settlement.
The State Fund contends that since Brown failed to prove the
requirements for unilateral mistake of law or mistake of fact, the
court had substantial evidence to conclude that Brown was not
entitled to reopen the settlement and its conclusions should not be
disturbed.
Factual findings by the Workers' Compensation Court are
reviewed to determine whether they are supported by substantial
evidence. Frarm[iclz E: St. Comp. Mut. Ins. Fund (1992), 252 Mont. 215, 827
P.2d 1279. In this instance, the Workersp Compensation Court did
not directly address the allegations of mistake of fact, but found
that Brown had failed to submit evidence of a unilateral mistake of
law to justify reopening the agreement. With respect to an alleged
unilateral mistake of law, we agree with the court's findings that
there was no evidence of fraud, nor that Brown was unilaterally
operating under a misapprehension of the law and the State Fund was
aware of his misapprehension. There is no evidence that the State
Fund knew of the outcome of the Zacher decision prior to the time
that it was issued by this Court, and then allowed Brown to proceed
with negotiations knowing that he misunderstood the status of the
law with respect to subrogation rights.
Also, after considering Brown's arguments regarding mistake of
fact, we conclude the evidence is similarly lacking on this point.
Brown argues that the parties were mistaken about who had the right
to the $18,666.67 subrogation interest. This was not a mistake of
fact, however. Whether or not the State Fund was entitled to a
subrogation interest in that amount is a question of law which,
pursuant to Zudzer, depends on the claimant's status after a
third-party settlement.
We conclude that the controlling issue in this case, which
Brown raised before the Worker's Compensation Court, is whether the
parties consented to the compromise agreement while laboring under
a mutual mistake of law.
This Court has made clear that the law of contracts applies in
construing and determining the validity and enforceability of a
settlement agreement. WolJie v. St. Comp. Mut. Ins. Frcrzd (1992), 251 ~ o n .
t
217, 824 P.2d 240. Section 28-2-1711, MCA, provides that a party
to a contract may rescind the contract if "the consent of the party
rescinding or of any party jointly contracting with him was given
by mistake," and 5 28-2-408, MCA, clarifies that "[mlistake may be
either of fact or law." Section 28-2-410, MCA, defines "mistake of
law" and provides that a mutual mistake of law arises from:
(1) a misapprehension of the law by all parties, all
supposing that they knew and understood it and all making
substantially the same mistake as to the law.
It is evident from the record before us that both parties to
the contract were mistaken about the law regarding subrogation,
each supposing that they knew and understood it and substantially
making the same mistake. Because Brown, as the party seeking to
rescind the agreement, consented to the agreement based on a mutual
mistake of law, we hold that he is entitled to rescind the
settlement agreement.
The Workers' Compensation Court did not directly address the
allegation of mutual mistake of law in its findings and
conclusions, other than to say that neither party had submitted
authority for reopening a contract based on a mistake of law. It
did conclude, however, "that at the time of negotiations and
approval, two experienced counsel were both aware of the law in
affect and negotiated the agreement based on their correct and
mutual understanding of the law at that time." We agree that the
parties entered into the settlement agreement based on a mutual
understanding of the law in existence. We disagree that the
parties' mutual understanding of the law was correct.
The evidence demonstrates that the bargaining process was
based on the parties' belief that the State Fund had a subrogation
right, even though the extent of that right had not been finally
determined. From the face of the various documents, it is apparent
that the $30,000 settlement amount was arrived at after considering
the State Fund's maximum subrogation interest in the amount of
$18,666.67. Furthermore, even though the final document purports
to state that a subrogation interest was waived, the clarification
memo from the State Fund's claims examiner a year later makes clear
that the agreement was premised on an offset for the maximum
subrogation interest against a settlement figure of $52,329.17.
Our conclusion that the settlement agreement was premised on an
understanding that the law entitled the State Fund to a subrogation
interest in the third-party settlement is further confirmed by the
testimony of both the claims examiner for the State Fund and the
10
attorney representing Brown in the settlement negotiations. Even
though the State Fund claims that it "waived" its interest because
it did not receive a portion of the third-party settlement, it is
clear from the evidence presented that the subrogation interest was
considered in the negotiation process.
When this Court decided Zacher in 1990, that decision did not
change the law regarding subrogation rights. That decision
construed the 1983 statute, which is the statute the parties
considered during settlement negotiations. The applicable
provision of the 1983 Workers' Compensation Act provides that an
insurer is entitled to subrogation for all compensation and
benefits paid to an injured worker if a third-party action results
in a judgment in the claimant's favor. Section 39-71-414, MCA
(1983). However, the statute is silent on the issue of whether
this subrogation right can be asserted even if a claimant is not
fully compensated for his injuries. In Zacher, 794 P.2d at 338, we
addressed that question, and held that an insurer has no right to
subrogation until a claimant has been made whole for his entire
loss and any costs of recovery, including attorney fees. This
decision did not change the law; it merely clarified that, pursuant
to the 1983 law, the right to subrogation was subject to the theory
of epitable limitation on legal subrogation. When Brown and the
State Fund were negotiating a settlement agreement, they were
mutually mistaken regarding the law. Neither party understood that
the State Fund's right to subrogation was limited as described by
our decision in Zacher.
In AfcFarlundv. Stil~waterCoutzly (1940), 109 Mont. 544, 98 P.2d 321,
this Court recognized that a mutual mistake of law entitled a
plaintiff to recovery. ~ l s o ,in Hicks v. Stillwater Conniy (1929), 84
Mont. 38, 274 P. 296, we held that a plaintiff was entitled to
relief and that rescission of a contract was warranted because
there had been a mutual mistake of law with regard to the
compensation due a county employee. In this case, we similarly
conclude that Brown is entitled to relief because the parties'
consent to the settlement contract was based on a mutual mistake of
law regarding subrogation rights. Therefore, we conclude that the
court erred in holding that there were no grounds which would allow
Brown to rescind the contract.
Brown urges this Court, as he did the Workers' Compensation
Court, to order the State Fund to refund to him $18,666.67 because
that was the amount "withheld" in the settlement agreement as its
subrogation interest. Brown is entitled to rescind the settlement
agreement on the basis that consent to this agreement was based on
a mutual mistake of law. However, he is not entitled to the
reimbursement of a subrogation interest that has not been finally
determined. If the contract is rescinded, it is rescinded in its
entirety, leaving the issues of Brown's entitlement to benefits and
the State Fund's subrogation interest, if any, to be determined.
Brown also appealed from the court's denial of his request for
attorney fees. Whether or not he is entitled to attorney fees
under § 39-71-611, MCA (1983), depends on a determination by the
Workers' Compensation Court of the benefits to which Brown is
entitled following rescission of his settlement agreement. That
issue will have to be resolved by further proceedings.
We reverse the judgment of the Workers* Compensation Court in
regard to its conclusion that Brown was not entitled to rescind the
contract, and remand for further proceedings consistent with this
opinion.
We concur:
November 2, 1993
CERTIFICATE OF SERVICE
I hereby certify that the following order was sent by United States mail, prepaid, to the following
named:
JOHN HOUTZ
Attorney at Law
P.O. Box 1230
Forsyth, MT 59327
CHARLES G . ADAMS, Legal Counsel
State Compensation Mutual Insurance Fund
P.O. Box 4759
Helena, MT 59604-4759
ED SMITH
CLERK OF THE SUPREME COURT
STATE OF MONTANA