Nacino v. DHS, 101 Hawaii 466 (2003) lien limited to special damages

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Nacino v. Koller (DHS), 101 Hawaii 466 (2003)

Pursuant to Hawai
i Rules of Appellate Procedure Rule 43(c)(1),
Lillian Koller, the current Director of the Department of Human Services, has
been substituted for Susan M. Chandler, the Director at the time this case was
decided by the first circuit court.
GERRY NACINO, Petitioner/Appellant-Appellee
Director, Department of Human Services,
State of Hawai
i, Respondent/Appellee-Appellant
NO. 23572
(CIV. NO. 99-3297)
JUNE 30, 2003
On October 21, 2002, this court granted the petition of
Petitioner/Appellant-Appellee Gerry Nacino (Petitioner) for a
writ of certiorari to review the decision by the Intermediate

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Associate Judge Corinne K.A. Watanabe authored the opinion and was
joined by Chief Judge James S. Burns and Associate Judge Daniel R. Foley.
The Honorable Allene R. Suemori presided.
Court of Appeals
(ICA) in Nacino v. Chandler, No. 23572 (Haw.
Ct. App. Sept. 11, 2002) (ICA opinion). Therein, the ICA
partially reversed the final judgment of the first circuit court
that reduced the medical lien amount of the Department of Human
Service (DHS or State) on Petitioner's tort recovery and held
that DHS is entitled to recover the full amount of its lien for
medical assistance payments made on Petitioner's behalf. We set
forth our decision in order to clarify the law regarding Hawai
Revised Statutes (HRS) § 346-37, the statute involved. See State
v. Hanson, 97 Hawai
i 71, 73, 34 P.3d 1, 3 (2001) (affirming ICA
opinion, but granting certiorari "[i]n light of Defendant's
objections, . . . to clarify the basis for upholding airport
security searches"); Korsak v. Hawaii Permanente Med. Group, 94
i 297, 300, 12 P.3d 1238, 1241 (2000) (granting certiorari
"to clarify several aspects of the ICA opinion").
The facts are relatively undisputed. On March 15,
1996, Petitioner, while a passenger on a Honda moped, collided
into a pick-up truck owned by the City and County of Honolulu

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At some point the guardian ad litem order was set aside as
Petitioner made a partial recovery and was capable of making decisions on his
own behalf.
The assignment of rights agreement provided, in part, that:
ASSIGNMENT OF RIGHTS: I understand that as a condition of
eligibility for financial assistance, I am assigning to the
State of Hawaii any rights to child support that I may have
from another person, for myself or any person for whom I am
applying or receiving assistance. This assignment includes
rights to support from previous as well as present and
future support. Such payments will be used to reimburse the
State up to the amount of assistance granted. As a
condition of eligibility for financial assistance I
understand that by applying, I am assigning to the State of
Hawaii my rights to any third party payments for medical
care. I will cooperate in obtaining third party payments.
HRS § 346-37(c) states:
If the department has provided medical assistance or
burial payment to a person who was injured, suffered a
disease, or died under circumstances creating a tort or
other liability against a third person, the department shall
have a right to recover from the third person an amount not
to exceed the costs of medical assistance or burial payment
furnished or to be furnished by the department. The
department shall as to this right be subrogated to any right
or claim that a claimant, defined in subsection (k), has
against the third person for special damages to the extent
of the costs of medical assistance or burial payment
furnished or to be furnished by the department.
To enforce its rights, the department may intervene or
join in any action or proceeding brought by a claimant
against the third person who is liable. If the action or
proceeding is not commenced within six months after the
first day on which medical assistance or burial payment is
furnished by the department in connection with the injury,
disease, or death involved, the department may institute and
prosecute legal proceedings against the third person who is
(the City). Petitioner suffered severe permanent orthopedic
injuries and serious brain damage.
On Petitioner's behalf, a guardian ad litem
for assistance from DHS. Petitioner's application for DHS
assistance included an assignment of rights,
as required under
HRS § 346-37(c) (Supp. 1997).
DHS paid for all of Petitioner's

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liable for the injury, disease, or death, in a state court,
either alone (in its own name or in the name of a claimant)
or in conjunction with the claimant.
(Emphases added.)
According to Petitioner, Mr. Sunio failed to respond to all
notices regarding the litigation. Thereafter, all litigation and settlement
efforts were directed towards the City.
medical care and treatment arising out of the damages from the
accident. The medical lien applied by the State for expenses
arising out of this medical care totaled $141,422.19.
A lawsuit was filed on Petitioner's behalf against the
City and the driver of the moped, Troy Sunio.
The State of
i chose not to participate in the suit, even though it had
a right to intervene pursuant to HRS § 346-37(c). It did
transmit letters informing all the parties that the State held an
assignment of rights in any recovery and it would seek
reimbursement if any recovery was made.
Prior to trial, Petitioner's counsel hired many experts
and apparently expended a substantial amount of money in
discovery attempts. According to Petitioner, "[t]here [were]
significant weaknesses in [Petitioner's] case against the City."
ICA opinion at 4; see also Petition at 2 ("liability was weak or
non-existent"). The only witnesses to the accident were the
driver and the passenger in the City pick-up truck, who both
maintained that the moped was on the wrong side of the road and
was speeding. Petitioner was unable to fully rebut these claims

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HRS § 346-37(g) states as follows:
In the event that there is a dispute between the
claimant, the claimant's agent, or the claimant's attorney,
and the department concerning the existence of the lien or
the amount of the lien, the claimant, the claimant's agent,
or the claimant's attorney may request in writing a hearing
on the dispute. After receipt by the department of such a
written request, the department shall conduct an
administrative hearing within a reasonable period of time.
The provisions of chapter 91 shall apply to such a hearing.
Funds sufficient to extinguish the lien rights of the
as his memory of the incident was limited, due to his injuries,
and the driver of the moped had disappeared.
On March 6, 12 & 24, 1998, Petitioner's counsel sent
letters to the Attorney General's office attempting to negotiate
a waiver or a reduction of the amount of DHS's lien. The thrust
of these letters was that reduction "might well make the
difference between my client's agreement to settlement at the
figure suggested by the City, or his decision to "groll the dice'
and go to trial, even though our chances of doing as well or
better than the City's offer are slim." On March 25, 1998,
Deputy Attorney General Michael S. Vincent drafted a letter in
response and stated that federal regulations prevented the State
from reducing or waiving a lien.
Thereafter, Petitioner accepted a $600,000.00
settlement offer from the City and placed the lien amount of
$141,422.19 into an interest-bearing account. On June 25, 1998,
Petitioner requested an administrative hearing, pursuant to HRS
§ 346-37(g) (1993),
to resolve the dispute over the amount owed

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department shall be either retained by the person or entity
served with the notice of lien, or shall be paid to the
department pending its decision.
to the State. The administrative hearings officer eventually
ruled that he lacked "equity jurisdiction" to reduce the amount
owed to DHS and awarded the full amount of the lien to the State.
The facts show that the State established a Medicaid lien
pursuant to [HRS §] 346-37 in the amount of $141,422.19 for
medical assistance provided [Petitioner] for his injuries
suffered in the March 15, 1996 accident which he received
$600,000.00 from the [City] to settle a personal injury law
suit. DHS rules and statutes do not require that the State
discount its Medicaid lien the same percent that
[Petitioner] discounted the value of his personal injury
lawsuit and settled for which was significantly less than
his actual damages because of liability problems. Even if
it would be fair and equitable for DHS to discount its
Medicaid lien, a DHS hearing officer does not have equity
jurisdiction to make such a determination.
(Emphasis added.)
On August 31, 1999, Petitioner filed a notice of appeal
to the court. After hearing oral arguments, on February 7, 2000,
the court ordered the case remanded to the DHS hearings officer
so that an evidentiary hearing can take place and findings
of fact drafted on whether or not special damages were
awarded. If special damages were awarded, [DHS] would still
have a right of reimbursement from [the City] under the
doctrine of subrogation.
On February 16, 2000, Petitioner and DHS filed a joint motion for
reconsideration of the February 7, 2000 order, in which they
stated that remand was not necessary, it was undisputed that no
portion of the $600,000.00 was denominated special damages, and
the court should decide the amount payable to the State:
[The settlement] provides that the case settled for 600
thousand dollars; and that there was no portion of the 600

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thousand dollars that was denominated special damages.
While no portion of the settlement has been identified as
special damages, there is no dispute that the DHS lien is to
be satisfied from the settlement proceeds. Rather the
dispute is as to the amount DHS should be reimbursed or is
otherwise entitled.
Both parties agree that this court can and should decide
now, without remand, the substantive issues briefed and
argued by the parties, the bottom line of which is whether
the State is entitled to receive any portion of the
settlement, and if so, how much.
(Emphases added.)
On April 14, 2000, the court granted the motion for
reconsideration and held that the total damages suffered was four
million dollars, of which the settlement constituted fifteen
percent of the total damages. The court then ordered that the
State should recover only fifteen percent of its lien, or
On appeal, the ICA held that the court erred when it
reduced DHS's lien. See ICA opinion at 28. Thus, the ICA
vacated that portion of the court's July 7, 2000 final judgment
that concluded that DHS shall be reimbursed a reduced amount and
remanded the case for entry of an amended final judgment for the
entire amount of the lien.
The issues raised by Petitioner in his application for
a writ of certiorari are not substantially different from those
which he raised before the ICA. Petitioner argues that the ICA
erred in holding that DHS has a priority in payment, i.e., that

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DHS may be reimbursed completely to the extent of its medical
lien before Petitioner may be compensated for his damages. In
addition, he contends that the assignment of rights to DHS was an
adhesionary contract, and thus invalid.
HRS § 346-37(e) (Supp. 1997) provides that DHS "shall
have a lien in the amount of the costs of medical assistance
. . . against the proceeds from special damages or burial payment
made against the proceeds from special damages awarded in a suit
or settlement." (Emphases added.) In addition, the assignment
of rights provides that Petitioner assigns his "rights to any
third party payments for medical care." (Emphasis added.)
Accordingly, it was seemingly necessary to establish the amount
of "special damages" and the payments made by the State for
"medical care."
Relying upon this court's decision in Peters v
Weatherwax, 69 Haw. 21, 731 P.2d 157 (1987), the ICA concluded
that it was unnecessary to determine the amount of special
damages. In Peters, the plaintiff was involved in an automobile
accident. See id. at 23, 731 P.2d at 159. The State paid for
the plaintiff's medical expenses, similar to the case at hand.
See id. Thereafter, the plaintiff sued another party for damages
arising out of the accident. See id. The State moved to

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See supra note 6.
intervene, but before the court would allow it to be a party to
the proceedings, the parties reached a settlement and executed a
"Release and Indemnity Agreement[.]" Id. at 24-25, 731 P.2d at
160. The settlement expressly stated that the sum of $255,000
given "represent[ed] GENERAL DAMAGES only." Id.
On appeal, this court looked to the meaning of the word
"subrogated" as it is used in HRS § 346-37(c)
. See id. at 26-
27, 731 P.2d at 161. In common law, this court found subrogation
to be "'gthe substitution of another person in the place of a
creditor in relation to the debt.'" Id. (quoting Kapena v.
Kaleleonalani, 6 Haw. 579, 583 (1885)). It was concluded that
"[t]he substitute is put in all respects in the place of the
party to whose rights he [or she] is subrogated." Id. In light
of the DHS's right of subrogation, this court held that a party
such as a plaintiff may not waive the right to special damages,
thus avoiding a DHS lien, simply by designating an entire
settlement as representing general damages. See id. at 28, 731
P.2d at 162. Also, this court held that under the common law
theory of restitution, a court has the authority to prevent the
unjust enrichment that would result in favor of the defendants
from such a waiver.
Unjust enrichment in this instance could only be prevented
if the State is allowed to assert its claim for special
damages. Otherwise, the defendants may have discharged
their tort liability for less than what was just in the

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In addition, the legislative history of HRS § 346-29 suggests that
the legislature found the distinction between special and general damages
Your Committee agrees with the intent of the bill that
the department be subrogated to any right or claim that a
claimant has against a third person to the extent of the
amount of medical assistance or burial payment furnished by
the department.
However, your Committee feels that such subrogation
should be limited to rights or claims for special damages
and not include rights or claims for general damages.
Your Committee finds that the nature of the claims for
medical assistance or burial payments are as a special
damages and that it would be inequitable to allow the
department to be subrogated to the extent of claims for
general damages. General damages include damages for pain
circumstances at the expense of the State; and it would then
be unjust for them to retain the benefit of the State's
assumption of the obligation to pay the accident victim's
medical bills.
Id. (emphasis added).
Citing Peters, the ICA reasoned that, "since settlement
of a claim by a medical assistance recipient for "general
damages' only was held in Peters not to defeat DHS's statutory
lien under HRS § 346-37, we fail to see how settlement by
[Petitioner] of his claim for damages, without specifying whether
the damages are general or special, can operate to defeat DHS's
lien." ICA's opinion at 28.
It is arguable that the ICA erred in this
determination. See HRS § 346-37(c) ("[t]he department shall have
a right to recover from the third person an amount not to exceed
the costs of medical assistance" and the department shall have a
right to subrogation against a third person for "special
(emphasis added)). The import of Peters is that a

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and suffering, loss of limbs and physical disability
incurred, while special damages would include medical
payments and burial payments made. Your Committee feels
that such subrogation should be limited to similar claims
against third parties as are reflected in special damage
Sen. Stand. Comm. Rep. No. 894-80, in 1980 Senate Journal, at 1449 (emphasis
determination as to whether "the defendants . . . have discharged
their tort liability[, including liability for special damages,]
for less than what was just in the circumstances at the expense
of the State[,]" 69 Haw. at 29, 731 P.2d at 162, may be necessary
to ascertain what is due and owing to DHS. However, any error in
this regard is harmless under the particular circumstances of
this case, inasmuch as Petitioner waived the requirement that the
proportion of the settlement attributable to special damages be
ascertained on remand.
For, following the court's order to remand to the
hearings officer for further findings, Petitioner and DHS filed a
joint motion for reconsideration expressly stating that remand
was not necessary, and that, "[w]hile no portion of the
settlement has been identified as special damages, there is no
dispute that the DHS lien is to be satisfied from the settlement
proceeds. Rather the dispute is as to the amount DHS should be
reimbursed or is otherwise entitled." (Emphasis added.) Thus,
Petitioner conceded that the State's lien might be satisfied from
the settlement amount in general. Hence, the ICA's conclusion

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The language cited by the Commercial Union court, 28 U.S.C. §
2651(a), states:
[T]he United States shall have a right to recover from
[third parties] the reasonable value of the care and
treatment [paid for by the Government] and shall as to this
right be subrogated to any right or claim that the injured
that a designation of special damages was unnecessary was not
error under the conditions agreed to in the parties' motion for
The heart of Petitioner's argument is that, under
principles of equity, the State should receive only a pro rata
share of the recovery from a third-party tortfeasor. In support
of this argument, Petitioner cites to several cases analyzing the
Federal Medical Care Recovery Act (FMCRA), 42 U.S.C.A. § 2651
(Supp. 1998), which contains several provisions similar to HRS
§ 346-37. See, e.g., Commercial Union Ins. Co. v. United States,
999 F.2d 581, 589 (D.C. Cir. 1993); Cockerham v. Garvin, 768 F.2d
784, 787 (6th Cir. 1985). For instance, in Commercial Union, the
court held that the governmental claim in recovering its expenses
does not have priority over the injured party's claim. See 999
F.2d at 586. The Commercial Union court explained that "there is
nothing in [FMCRA's] language to suggest that the Government's
claim has a priority over the employee's."
Id. Moreover,

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or diseased person . . . has against such third person to
the extent of the reasonable value of the care and treatment
so furnished or to be furnished.
Commercial Union, 999 F.2d at 586 (emphases in original).
section 2652(c), which is substantially similar to HRS § 46-
37(j), states that "[n]o action taken by the United States in
connection with the rights afforded under this legislation shall
operate to deny to the injured person the recovery for that
portion of his [or her] damage not covered hereunder."
The ICA observed, however, that the FMCRA does not
contain a provision similar to HRS § 346-37(e), which grants to
the State "a lien in the amount of the costs of medical
assistance . . . made against the proceeds from special damages
awarded in a suit or settlement" to the injured party. Also, the
FMCRA does not contain a provision requiring that a settling
third party satisfy the lien before distributing settlement
If a notice of lien is properly served upon the third person
under subsection (c), the third person's agent or attorney,
or upon the third person's insurance company, as provided in
subsection (f), it shall be the responsibility of the third
person to satisfy the lien prior to disbursing any of the
proceeds to the claimant's attorney.
HRS § 346-37(e) (emphasis added). The ICA, thus, distinguished
the cases cited by Petitioner on the ground that, "[u]nlike the
FMCRA, the clear and unambiguous language of HRS § 346-37, when
construed as a whole and in conjunction with 42 U.S.C. § 1396 et.

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HRS § 346-37(e) also provides that "regardless of who institutes
legal proceedings or seeks other means of recovering, the department shall
have a lien in the amount of the costs of medical assistance or burial
payment[.]" (Emphasis added.) HRS § 346-37(f) provides that the notice of
lien shall state that "the claimant's attorney shall pay the amount of the
lien from the proceeds of any judgment, settlement, or compromise based on the
incident or accident[.]" (Emphasis added.) Personal liability is imposed on
any "person failing to satisfy the lien as required . . . although able to do
so from the proceeds of the suit or settlement." HRS § 346-37(i).
seq., establishes a priority that the medical assistance lien be
paid to DHS before the recipient of the medical assistance is
reimbursed." ICA opinion at 28.
Petitioner argues that the ICA's decision would render
HRS § 346-37(j) a nullity because DHS would be allowed to recover
its lien in full, potentially leaving a claimant with nothing.
HRS § 346-37(j) states that "[n]o action taken by [DHS] in
connection with the rights under this section shall deny to the
claimant the recovery for that portion of the claimant's damage
not covered under this section." It appears, and Petitioner does
not contend otherwise, that "section" refers to HRS § 346-37 in
its entirety, as subsection (j) is otherwise silent.
In our view, HRS § 346-37(j) prohibits DHS's action
with respect to any portion of the claimant's damages that is
"not covered under this section[,]" i.e., HRS § 346-37. This
means that DHS cannot interfere with a claimant's rights of
recovery unless HRS § 346-37 allows otherwise. In that regard,
HRS § 346-37 permits the DHS to recover its costs for medical
assistance through a lien on special damages. See HRS 346-37(e)

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Whether this was dictated by federal statute or otherwise is not
conclusively established in the record.
("the department shall have a lien in the amount of the costs of
medical assistance . . . [from] proceeds from special damages
awarded in a suit or settlement"). So construed, HRS § 346-37(j)
grants the State recovery of its costs for medical assistance
from special damages and does not limit the State to accepting a
pro rata share of Petitioner's recovery. We note further,
however, that while HRS § 346-37 does not obligate DHS to agree
to a pro rata reduction of its lien for medical assistance
payments, HRS § 346-37(e) permits the DHS discretion to settle or
compromise its subrogation or lien rights under HRS § 346-37.
("This section is not intended to restrict or diminish the right
of the department to settle or compromise its subrogation or lien
rights provided herein."). In this case, DHS apparently decided
to forego such a course.
To the extent the ICA's
interpretation regarding priority of payments conflicts with this
view, we clarify it. Accordingly, as Peters held, a settling
plaintiff cannot waive recovery of special damages, but the State
is entitled to and may recover its medical assistance expenses
from the special damages obtained.
Finally, Petitioner argues that, under Peters, this

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court stated that the State "steps into the shoes" of a claimant
and accordingly the State cannot collect a larger percentage of
the total potential damages than what Petitioner collects, i.e.,
if a petitioner receives fifteen percent of his or her damages in
a settlement, then correspondingly the State can only receive
fifteen percent of its lien. Petitioner's argument, however, is
inconsistent with the reasoning applied in Peters. The "steps
into the shoes"statement meant that a party could not waive its
rights to special damages, as such action would deprive the State
of its statutory right to subrogation. Similarly, here,
Petitioner could not have chosen to reduce the State's lien by
accepting a reduced settlement. There is no indication from the
holding in Peters, or in HRS § 346-37, that such a result was
contemplated or intended.
Petitioner also argues that the assignment of rights is
an adhesion contract and thus unenforceable. This court has held
that an adhesion contract "is a form contract created by the
stronger of the contracting parties" and the terms "unexpectedly
or unconscionably limit the obligations and liability" of the
weaker party. Leong v. Kaiser Found. Hosp., 71 Haw. 240, 247,
788 P.2d 164, 168 (1990) (quoting Robin v. Blue Cross Hosp.
Serv., Inc., 637 S.W.2d 695, 697 (Mo. 1982) (citations omitted));

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see also Brown v. KFC Nat'l Mgmt. Co., 82 Hawai
i 226, 247, 921
P.2d 146, 167 (1996). Here, the assignment of rights does not
unfairly advantage the State, as the intent of the assignment is
to merely recover expenses paid for medical damages. As the ICA
noted, Petitioner
was not forced to apply for medical assistance benefits from
DHS. Moreover, he paid nothing in order to receive such
benefits. Since his medical assistance benefits were paid
for by the federal and state taxpayers, Congress and the
legislature clearly had a significant interest in ensuring
that the public fisc [sic] be reimbursed if [Petitioner]
were able to collect damages from a third party for the
injuries that led to [Petitioner's] need for medical
assistance benefits from DHS.
ICA opinion at 10.
Moreover, the assignment of rights appears to track the
language of HRS § 346-37, as it allows the State to recover money
only "up to the amount of assistance granted." It is
questionable whether voiding the assignment of rights contract
would have any impact upon the State's right to collect pursuant
to HRS § 346-37, inasmuch as the statute must be deemed to be
With the foregoing clarification, we affirm the ICA's
September 11, 2002 opinion.
Howard Glickstein for
appellee, on the writ.
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