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Virginia Supreme Court holds that employer loses its subrogation rights in third party action where petition to ascertain lien is not filed prior to settlement.In the case of Yellow Freight Systems v. Courtaulds Performance Films, Inc., 2003 Va. Lexis 62 (June 6, 2003), the Supreme Court of Virginia held that the employer did not timely protect its subrogation rights in a third party action, where its petition was filed after a settlement was reached but prior to the entry of the final order. The case involved an employee of Yellow Freight Systems who was injured when he was exposed to chemical fumes at a plant operated by Courtaulds Performance Films. Yellow Freight Systems paid $ 56,256.69 in workers' compensation benefits to the employee. After all of the workers’ compensation benefits were paid out, the employee filed a third party tort action against Courtaulds. In letters to the plaintiff’s counsel, the employer asserted a lien or subrogation right against any recovery in the third party action, but the employer did not file a petition with the trial court during this time. A settlement of third party action was reached for $450,000, and a written settlement agreement was signed by the employee releasing Courtaulds from all claims. After the settlement but prior to the dismissal of the lawsuit, the employer filed a petition pursuant to Va. Code § 65.2-310, requesting that the trial court ascertain the amount of the lien and order Courtaulds pay that amount to the employer. The trial court ruled that the petition came too late. The Virginia Supreme Court affirmed this decision. While the Supreme Court acknowledged that the petition had been filed prior to verdict as required by the statute, the Court found that the subrogation rights had been extinguished by virtue of the settlement. As a result, the employer had no enforceable right at the time it filed its petition and the trial court properly dismissed it as untimely. The application of the Yellow Trucking decision is limited to the procedures under the Virginia Workers’ Compensation Act for protection of the employer’s subrogation rights. Because the employee was not receiving workers’ compensation benefits at the time of the settlement, the decision does not address the effect of the settlement has on his entitlement to future benefits. An employee’s right to future benefits is extinguished by virtue of a settlement of the third party action, without the consent of the employer or its workers’ compensation carrier. See Safety-Kleen Corp. v. Van Hoy, 225 Va. 64, 300 S.E.2d 750, 753 (1983). The decision also does address the employer’s right to recover these amounts from the employee in an action for unjust enrichment. See Mich. Mut. Ins. Co. v. Smoot, 149 F. Supp. 2d 229 (E.D. Va. 2001)(holding that the workers’ compensation carrier is entitled to recover the amounts paid for workers’ compensation benefits less a pro rata share of attorney’s fees and costs from the employee in an action for unjust enrichment). In order to perfect its subrogation rights against a third party under the Virginia Workers’ Compensation Act, the employer or carrier must either file an independent action against the third party or file a petition to enforce the lien in the action brought by the employee against the third party prior to settlement. In light of this decision, a prudent employer and carrier would be best served by filing a petition as soon a practicable after learning that the employee has filed a third party action. For further information, contact John H. Carstens, Esq., at (703) 246-0900.
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