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Analysis: What Landmark Covenant Case Means for Michigan PIP Claims

John Cahalan and Alexander Baum
June 23, 2017

The talk of the no-fault world has been the Michigan Supreme Court’s decision in Medical Provider CovanentCovenant Medical Center, Inc. v. State Farm Mutual Automobile Ins. Co., 2017 WL 2303337 (Mich. May 25, 2017), eliminating medical providers’ independent cause of action against no-fault insurers for the payment of Michigan no-fault benefits. 

The decision has left a great deal of uncertainty regarding what is next or what a no-fault insurer can expect as these providers will not go quietly. Some issues we are now seeing in the post-Covenant era:

Is the Covenant Decision Retroactive?

Short answer – yes. The opinion is silent on retroactive or prospective application. The general rule is full retroactive application, unless prospective application is somehow justified. It is likely the decision will apply to all pending cases in which the issue is presented. This would include cases on appeal. When a court finds that a cause of action is no longer valid, it would be nonsensical to apply the decision on a prospective basis only. To do so, the appellate court would allow both litigation and a transfer of property through a cause of action, which the court has already recognized is invalid.

Further, it is highly doubtful that cases already resolved could be resurrected under MCR 2.612 motion (motion for relief from judgment) where both the ruling and the monies paid under the previous case law would be reversed and returned, respectively.

Providers Arguing Third-Party Beneficiary

This issue has yet to gain steam as medical providers would have quite an uphill battle arguing they are an intended third-party beneficiary of the no-fault insurance contract between the insurer and the claimant. In many cases, there is no policy of no-fault insurance to which the claimant is a party – resident relative, vehicle occupants, pedestrians, and the Michigan Assigned Claims Plan. In these cases, the claimant receives benefits by virtue of the No-Fault Act, MCL 500.3101 et. seq., rather than any policy. There is simply no contract of which the provider can claim to be an intended beneficiary.

A possible third-party beneficiary argument could be made by a policy-holding insured who received treatment from a medical provider. Even then, it will be difficult. MCL 600.1405 governs third-party beneficiary law in Michigan, and reads:

Any person for whose benefit a promise is made by way of contract, as hereinafter defined, has the same right to enforce said promise that he would have had if the said promise had been made directly to him as the promisee.

(1) A promise shall be construed to have been made for the benefit of a person whenever the promisor of said promise had undertaken to give or to do or refrain from doing something directly to or for said person.
(2) (a) The rights of a person for whose benefit a promise has been made, as defined in (1), shall be deemed to have become vested, subject always to such express or implied conditions, limitations, or infirmities of the contract to which the rights of the promisee or the promise are subject, without any act or knowledge on his part, the moment the promise becomes legally binding on the promisor, unless there is some stipulation, agreement or understanding in the contract to the contrary.
(b) If such person is not in being or ascertainable at the time the promise becomes legally binding on the promise or then his rights shall become vested the moment he comes into being or becomes as certainable if the promise has not been discharged by agreement between the promisor and the promisee in the meantime.
(c) If the promisee is indebted or otherwise obligated to the person for whose benefit the promise was made and the promise in question is intended when performed to discharge that debt or obligation, then the promisor and the promisee may, by mutual agreement, divest said person of his rights, if this is done without intent to hinder, delay or defraud said person in the collection or enforcement of the said debt or other obligation which the promisee owes him and before he has taken any legal steps to enforce said promise made for his benefit.
(3) Nothing herein contained shall beheld to abridge, impair or destroy the rights which the promisee of a promise made for the benefit of another person would otherwise have as a result of such promise.
(4) The provisions of this section shall be construed to be applicable to contracts made prior to its enactment as well as to those made subsequent thereto, unless such construction is held to be unconstitutional, in which case they shall be held to be applicable only to contracts made subsequent to its enactment.

Reading the statute, the insured would be the “intended beneficiary,” not the medical provider as an “incidental beneficiary.” Therefore, the medical provider would not have action under MCL 600.1405.The Michigan Supreme Court has touched upon this in Schmalfeldt v. North Pointe Ins. Co., 469 Mich. 422 670 N.W.2d 651 (2003), holding that only intended beneficiaries, not merely incidental, are permitted to bring action under the contract.

Medical Providers Now Claiming Assignment

A large number of providers have been alleging that they have received assignments from injured parties to pursue payment for treatment rendered on behalf of the injured party. The question then becomes whether this “assignment” is valid and whether the provider may bring action under same.

Elements Required for an Assignment to be Valid

Under Michigan law, as a general rule, contract rights are assignable. To make an assignment, the assignor must clearly manifest an intent to transfer to the assignee a present right in the thing assigned. See Burkhardt v. Bailey, 260 Mich App 636, 652, 680 NW2d 453 (2004); First American Title Ins Co v Pazdzierz (In re Pazdierz), 459 BR 254 (ED Mich 2011); In re Jackson, 311 BR 195 (Bankr WD Mich 2004); Restatement (Second) of Contracts §317(1). The assignee’s subjective intent is not relevant to the establishment of an assignment. Burkhardt, 260 Mich App at 655–656.

The consequence of an assignment is that the assignor’s entitlement to the right is extinguished in whole, or in part, and the assignee’s right to performance is created. Restatement (Second) of Contracts §317(1). An assignee stands in the position of the assignor and possesses the same rights and is subject to the same defenses. Burkhardt, 260 Mich App at 652–653

No particular words are required for an effective assignment, provided the intent of the assignor is clear. Merchants’ Nat’l Bank v. Gregg, 107 Mich 146, 64 NW 1052 (1895); see also Burkhardt v. Bailey, 260 Mich App 636, 654, 680 NW2d 453 (2004) (even poorly drafted written instrument can create assignment if it clearly reflects intent of assignor to presently transfer right to assignee). An assignment may be made either orally or in writing unless a statute or the contract requires otherwise. Craig v. Brown, 171 Mich 256, 137 NW 126 (1912). It is essential to an assignment that the promisee manifests an intention to transfer the assigned right to another person without further action or manifestation of intention by the promisee. Restatement (Second) of Contracts §324. Although it is generally not necessary that the assignment be in writing, good practice, certain statutes (such as the statute of frauds), or certain transactions may require the assignment to be written.

An assignment must immediately terminate or modify the assignor’s right to receive performance and create in the assignee a right to that performance. See Burkhardt v. Bailey, 260 Mich App 636, 654, 680 NW2d 453 (2004) (assignment must clearly reflect intent to presently transfer thing to assignee). An assignment is not effective if the parties intend to transfer the rights to performance at a future date. Grand Rapids Trust Co v. Reliable Coal & Mining Co, 238 Mich 248, 213 NW 100 (1927); Restatement (Second) of Contracts §330. However, the parties may make a present transfer of future performance.

The assignment must also create in the assignee an immediate right to obtain performance at the time that performance is due under the original contract. If the promisee orders the promisor to pay a debt to a third person, there is no assignment within the context of this chapter because, even though payment in accordance with these instructions may discharge the obligation, the third person receiving the right to payment may not compel the promisor to make immediate payment since there is no intent to transfer those rights. Rather, the parties simply have contractual rights against each other. E. Allan Farnsworth, Contracts §11.3 at 69–70 (2d ed 1990); 3 Samuel Williston, A Treatise on the Law of Contracts §425 (3d ed 1959).

Although it may seem frivolous to go through the process to assign a contract but not tell the other party to the contract, notice does not seem to be an absolute requirement, but it certainly goes to the issue of intent. An assignment is more likely to be deemed to have occurred when a written order directing performance by the promisor to the assignee is delivered to the assignee, who can then present the order to the promisor. E. Allan Farnsworth, Contracts §11.3 at 70 (2d ed 1990). Before the adoption of the Michigan UCC, the rule in Michigan was that the giving of a check, as between the drawer (i.e., the promisee) and the payee (i.e., the promisor), did not operate as an assignment of the fund. White Truck Sales of Saginaw, Inc v. Citizens Commercial & Sav Bank, 348 Mich 110, 82 NW2d 518 (1957) (citing former Comp Laws 1948, §439.191). The UCC continued this rule in the provisions governing negotiable instruments: “A check or other draft does not of itself operate as an assignment of any funds in the hands of the drawee available for its payment.” UCC 3-408.

Finally, an assignment does not need to be supported by consideration to be effective between the assignor and the assignee. Hickman v. Chaney, 155 Mich 217, 118 NW 993 (1908); Restatement (Second) of Contracts §332(5). However, the existence of consideration or an assignment as security for the partial or total satisfaction of a preexisting debt makes the assignment binding on the parties. Restatement (Second) of Contracts §332(5). An assignment that is not supported by consideration is often referred to as a “gratuitous assignment,” as in Restatement (Second) of Contracts §332, or more commonly as a gift. A gratuitous assignment is effective between the parties, but the assignee’s rights may be terminated under certain circumstances.

What About MCL 500.3143?

MCL 500.3143 is implicated when dealing with an assignment that simply provides “[a]n agreement for assignment of a right to benefits payable in the future is void.” The question then becomes when has the benefit been “incurred” by the insured or claimant? If the injured party assigns the provider the right to collect payment on his behalf prior to the treatment, under MCL 500.3143, the assignment is void. It is anticipated this will be a litigated issued over the course of the next several months.

Further, several no-fault policies have prohibition against assignments written in their policies. Is this prohibition valid? For purposes of medical providers suing insurers for monies owed – most likely not.

The right to assign contractual rights may be, and often is, limited by agreement. UCC 2-210(2); Restatement (Second) of Contracts §317(2)(c). Frequently, parties will mutually elect to include nonassignment provisions in agreements, although parties in such instances are usually far more interested in limiting the ability to delegate duties. The distinction between assignment and delegation is often not addressed, but rather, both are considered under “assignment clauses.”

Few cases specifically address the effect of a contractual provision limiting assignment. In In re Jackson, 311 BR 195, 201 (Bankr WD Mich 2004), the bankruptcy court noted that the modern trend is to narrowly interpret contractual prohibitions on assignments as barring only the delegation of duties and not necessarily as precluding the assignment of rights from the assignor to the assignee. See also UCC 2-210(3); Restatement (Second) of Contracts §322(1). The rationale behind the modern trend is the recognition that an obligor does not suffer any harm by a mere assignment of payments under a contract. Suggs v General American Life Ins Co, No 05-60023, 2006 US Dist LEXIS 29459 (ED Mich Apr 24, 2006). The trial court in Jackson also stated that once a party to a contract performs its obligations to the point that the contract is no longer executory, its right to enforce the other party’s liability under the contract may be assigned without the other party’s consent. Thus, a party could assign rights to receive payment under a settlement agreement despite the agreement’s nonassignment clause because the assignor’s contractual obligations were fully performed. Jackson, 311 BR at 201

In ISRA Vision, AG v Burton Indus, 654 F Supp 2d 638 (ED Mich 2009), the trial court refused to apply the nonassignment clause in a cooperation agreement between defendant Burton and the Spanish company Dimatec to a Burton-Dimatec purchase order. The cooperation agreement was merely “the first phase of the two companies’ working agreement,” establishing their relationship as global partners, and, therefore, the court held that the nonassignment clause in the agreement did not apply to “any one purchase order.” In addition, pursuant to MCL 440.2207, the nonassignment clause did not become a part of the contract because it “materially alter[ed] it” by imposing substantial hardship on Dimatec by limiting the flexibility of the contract and decreasing its value. Finally, MCL440.2210 did not prohibit the assignment of the purchase order, because the assignment did not increase the burden or risk on the obligor, but rather merely required the defendant to pay a different entity the same amount of money.

Will Providers Now Sue Their Patients?

While some attorneys claim this will be the next step, we have yet to see how this will play out. In doing so, the plaintiff’s bar has “re-invoked” the language from a 1992 bulletin issued by the Michigan Commissioner of Insurance. The language of the bulletin can be found here:

http://www.michigan.gov/difs/0,5269,7-303-12900_13376_13380_14567-30266--,00.html

The plaintiff’s bar, in theory, will file suit against the insured claimant, and will rely upon the above language of the Insurance Commissioner in an attempt to force the insurer to come to the defense of their own insured. This would, in effect, circumvent the holding of Covenant in its entirety, and the courts will likely be reluctant to come to such a result.

What the Courts are Doing

To start, all cases must be looked at on a case-by-case basis. The outcome of any motions may hinge upon what is being plead by the plaintiff provider: Do they simply rely upon MCL 500.3112 as the law existed prior to the new Covenant decision, or is their claim based upon assignment or third-party beneficiary law? Each court is handling Covenant differently.

The week following the decision, Judge Joseph F. Burke of the 15th District Court (Ann Arbor) issued a general order dismissing all provider suits pursuant to Covenant/MCR 2.116(C)(8). Any provider wishing to be heard as to why their case should not be dismissed must file a motion prior to July 31, 2017. If no motion is filed, their case will be dismissed as of Sept. 6, 2017. After initially taking this tactic, Judge Burke has now changed his approach and will be handling each case individually. However, the general order issued on May 31, 2017 remains in effect.

Judge Gene Hunt of the 19th District Court (Dearborn) followed similar action in setting a return pretrial date for all provider suits for July 27, 2017. If defendants wish to file a motion for summary disposition, they are to set the hearing date for July 27.

In the 44th District Court (Royal Oak), Judges Derek Meineke and James L. Wittenberg have set mass hearing dates for motions for summary disposition, without any firm rules prohibiting or allowing amendments to the pleadings.

Wayne County Circuit Court remains unclear. While the judges have precluded intervention from providers and dismissed all MCL 500.3112 motions, they have yet to issue any type of order relative to how they will be handling these cases moving forward. It appears they will be assessing each case on a case-by-case basis.

The Next Steps

  • Filing motions for summary disposition under MCR2.116(C)(8) as providers now lack standing to bring action under the no-fault statute.
  • If needed, amend affirmative defenses so that lack of standing can be plead as well as pleading anti-assignment clauses.
  • Should these motions be denied, sending carefully tailored discovery to these providers relative to whether a valid assignment was secured from the claimant.
  • Further, responding to plaintiffs’ inevitable motions to amend complaints, arguing that any such amendment would be futile
  • Rejecting all case evaluation awards on provider matters and advising panels that they are to be issuing a non-unanimous award so as not to subject the rejecting party to sanctions

Plunkett Cooney’s Transportation Law Practice Group is prepared to handle all potential tactics brought by these medical providers in their efforts to keep these actions alive.

This article is distributed by the firm of Plunkett Cooney. Any questions or comments concerning the matters reported may be addressed to Michael K. Sheehy, Mary Catherine Rentz or any other members of the practice group. The brevity of this article prevents comprehensive treatment of all legal issues, and the information contained herein should not be taken as legal advice. Advice for specific matters should be sought directly from legal counsel. Copyright © 2017. All rights reserved PLUNKETT COONEY, P.C.

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