Liens and the 5th Amendment

An interesting conflict has arisen with regards to California's handling of its lien issues under SB 863.

The massive reform bill instituted new fees for the filing of liens. The presumption was that many liens would simply go idle and their owners would not seek enforcement because they did not want to pay either the $150 filing fee, or for liens already in the system, the $100 activation fee.

But the government has plans to use this income to offset employer assessments.

So far, according to Christine Baker at the California Coalition on Workers’ Compensation's 11th annual Conference, the Division of Workers' Compensation has collected more than $15 million.

The total amount of money that the DIR collected from employers in 2013 was $391.4 million, and a $15 million reduction would result in a 3.8% reduction in the overall assessment. If the pace of lien filing and activation fee payments remains constant, there will be $30 million for offset, or a 7.6% reduction in charges.

Thereafter, DWC expects that lien filing/activation fees will taper off to represent about $7 million per year.

Baker said about 44,000 liens were filed each month in 2012, but that has fallen to about 4,000 liens a month since the start of the year. Projected throughout 12 months, that would be about 48,000 liens, which at a cost of $150 each, would generate $7.2 million.

So we can't count on lien fees to offset employer assessments for much into the future - this may actually be a one time event.

But I'm curious whether the reverse will be true if there is a challenge to the automatic dismissal of liens that have not been activated by Jan 1, 2014.

There is word in town that some who will have standing as of that date will challenge the new law on the Constitutional ground of an impermissible taking of property.

The Fifth Amendment to the US Constitution provides that private property shall not be taken without just compensation.

Case law through the years is ambivalent on this issue.

Doug Linder, Professor of Law at University of Missouri-Kansas City School of Law writes:

"It is clear that when the government physically seizes property (as for a highway or a park, for example) that it will have to pay just compensation. It is also clear that serious, sustained physical invasions of property (as in the case of low overflying aircraft, for example) require payment of compensation equal to the difference between the market value before and after the invasion. The difficult cases are generally those where government regulations, enacted to secure some sort of public benefit, fall disproportionately on some property owners and cause significant diminution of property value."

The best we're going to get on this topic is looking at cases regarding property liens filed by those who perform work on property, also known sometimes as mechanic's liens.

The US Supreme Court in 1960 found that shipbuilder contractors whose liens were unenforceable when the government took over uncompleted boats and materials on hand for their construction when the general defaulted constituted a taking under the 5th Amendment.

In Armstrong v. United States, 364 U.S. 40 (1960), a shipbuilder defaulted on its contract to construct certain boats for the United States, so the Government, exercising an option under the contract, required the shipbuilder to transfer to the Government title to the uncompleted boats and the materials on hand for their construction. This made it impossible for the lien claimants to enforce their materialmen's liens which had attached under state law to the boats and materials when the materials were furnished to the shipbuilder. Petitioners sued for compensation for the taking of their liens by the Government. Held: Petitioners are entitled to recover whatever value their liens had when the Government took title to the boats and materials.

The court said:

"The total destruction by the Government of all value of these liens, which constitute compensable property, has every possible element of a Fifth Amendment "taking" and is not a mere "consequential incidence" of a valid regulatory measure. Before the liens were destroyed, the lienholders admittedly had compensable property. Immediately afterwards, they had none. This was not because their property vanished into thin air. It was because the Government for its own advantage destroyed the value of the liens, something that the Government could do because its property was not subject to suit, but which no private purchaser could have done. Since this acquisition was for a public use, however accomplished, whether with an intent and purpose of extinguishing the liens or not, the Government's action did destroy them and in the circumstances of this case did thereby take the property value of those liens within the meaning of the Fifth Amendment. Neither the boats' immunity, after being acquired by the Government, from enforcement of the liens nor the use of a contract to take title relieves the Government from its constitutional obligation to pay just compensation for the value of the liens the petitioners lost and of which loss the Government was the direct, positive beneficiary."

In United States v. Security Industrial Bank, 459 U.S. 70 (1982) the US Supreme Court found that a provision of the Bankruptcy Reform Act of 1978, 11 U.S.C. 522(f)(2) (1976 ed., Supp. V), which permits individual debtors in bankruptcy proceedings to avoid nonpossessory, nonpurchase-money liens on certain property, including household furnishings and appliances, did not apply retroactively to liens already in place.

This of course is just a cursory look at the taking argument. I'm not a Constitutional Law scholar and I don't have the time to thoroughly research or vet this issue. 

All I'm saying is that DWC, employers and insurers should not get smug about the lien filing/activation fee statutes or estimated savings upon automatic termination of liens on Jan 1.

Assuming some lien claimants are successful in a fight against the Jan 1 automatic dismissal, then there is going to be quite a bit of pain to spread around within the California work comp market.

DWC has estimated hundreds of millions of dollars in "savings" when all of these liens vaporize. Add to that the filing fees that may become invalidated on the same grounds - there may be a sizable obligation to meet.

It will be years before we get to this point. By then, workers' compensation in California will be facing some new crisis.

For instance, another panel at the CCWC Conference warned that SB 863 has several litigation time bombs that may increase friction costs.

The changes to utilization review time limits to accommodate Independent Medical Review will trip up claims processors. And the panel said that employers should expect to see litigation over provisions in SB 863 that say an injured worker can’t use sleep, sex or psych disorders to increase their impairment ratings.

And we can be certain that unscrupulous vendors are already strategizing on how to trump new fee schedules and restrictions on interpreters and copy services.

The old colloquialism "it ain't over until the fat lady sings," certainly applies. The problem the comp community has is, we don't know who the fat lady is...