Qualified Settlement Fund: An often overlooked and underutilized tool to ensure final resolution and client protection from third-party lien holders

Written by: Ryan M. Donihue, Esq.

Defense attorneys in medical malpractice or catastrophic injury cases often overlook and do not utilize the important and available tool of a Qualified Settlement Fund in order to ensure full protection for a client when there is a third-party lien holder, and the Plaintiff is threatening to walk away from the agreed upon settlement due to unresolved/disputed liens. While the best practice remains to have final lien letters from all potential/claimed third-party lien holders in your possession before entering into any type of settlement (yes, this means you should have the final letters before attending the mediation) and incorporate this information into the agreement as to when and how those liens will be resolved, it is not uncommon that this is not done for one reason or another and the parties proceed to enter into an agreement without having full knowledge as to final resolution of the liens.

Once the settlement has been reached, Plaintiff attorneys typically proceed to negotiate down the third-party liens in order for their clients to receive the maximum amount of payment from the settlement. However, in some instances, the third-party lien holders may take a hardline approach wanting all, or substantially most, of the reimbursement of the liens and will not agree to a reduction. Inevitably, the phone call is made to Defense counsel advising that the settlement may be in jeopardy due to the position being taken by the third-party lien holders. Rather than just conceding that the settlement is void, take a moment to see if you can enforce the settlement agreement and then use a Qualified Settlement Fund to fully protect your client from the third-party lien holders. This action may very well be in the best interest of your client who wanted the case resolved with finality.

Historically, the Qualified Settlement Fund (also called “468B Settlement Fund” or “468B Settlement Trust”) was established under Section 468B of the Internal Revenue Code  and originally lobbied for by the insurance industry as a way to enable a Defendant in a civil lawsuit to settle the case by depositing money directly into a central and protected fund thereby permitting the Defendant to walk away from the settlement without the fear of being held responsible for any third-party liens. The Qualified Settlement Fund was also created to benefit the Defendant in that there would be a federal tax deduction with the Internal Revenue Service for the entire settlement amount that was paid into the Qualified Settlement Fund (for the tax year that the Qualified Settlement Fund was actually funded).

A Qualified Settlement Fund does not exist for an unlimited period of time and is absolutely not meant to be a trust to the Plaintiff for a lengthy period of time. This is the reason Qualified Settlement Funds are commonly referred to as a “temporary holding tank for litigation settlement proceedings.” Instead, the Qualified Settlement Fund is only there to exist for as long as there are real allocation issues pertaining to the underlying settlement, most importantly with regard to any third-party claims being made by creditors, lienholders, and the Centers for Medicare & Medicaid Services.

Defense attorneys should be placing that portion of the settlement amount into a Qualified Settlement Fund when there has been no final lien letter issued; the amount of liens is in dispute; and/or it is reasonable to presume that there will be a challenge as to the amount of the liens for past medical expenses and related liens. This means that the entire amount of money that is in dispute with the third-party lien holders would be paid directly into the Qualified Settlement Fund. It should be noted that Plaintiff attorneys should not balk at proceeding with a Qualified Settlement Fund as they are still receiving their contingency fee and reimbursement for expenses immediately out of the settlement as it is only the amount of the disputed liens which would be placed into the Qualified Settlement Fund.

In most jurisdictions, any court could establish the Qualified Settlement Fund. This would allow the trial court in which the case was pending to have the authority to establish and approve the Qualified Settlement Fund. However, it may be just as prudent to have the probate court establish the Qualified Settlement Fund in those situations where the settlement needs to be approved by the probate court as the case involved a minor, incompetent, or the estate of a deceased. When proceeding with having the Qualified Settlement Fund established by either the trial court or probate court it is extremely important to ensure that the state and federal requirements for establishing the fund are met in order to ensure that the Defendant gets the immediate benefit of the Internal Revenue Service tax deduction.

Once the Qualified Settlement Fund has been approved and then established by the court, the full amount in dispute should be transferred directly into the Qualified Settlement Fund (in accordance with the timing of payment agreed to in the General Release and Agreement). With the payment made, the Defendant is now fully released and protected from liability associated with any and all third-party claims made by the creditors, lienholders, Centers for Medicare & Medicaid Services, healthcare provider, and/or private healthcare insurance carriers. At this juncture, the dispute over the potential/claimed third-party liens (for which the full amount of the liens is being held in the Qualified Settlement Fund) will be strictly a battle between the Plaintiff and the creditors, lienholders, healthcare providers, and/or Centers for Medicare & Medicaid Services. With the payment into the Qualified Settlement Fund, the Defendant can now walk away from the case knowing that there has been finality without concerns of future action being taken by the third-party lien holders.

In order to ensure that you are providing the client with excellent representation, a Qualified Settlement Fund should be considered and then discussed when there is even the slightest possibility that third-party liens may result in the agreed upon settlement falling apart. It is simply not enough to assume that the liens will be resolved by the Plaintiffs or that the third-party lien holders will not pursue full payment of the liens. Affirmative action must be taken by the Defense attorney to ensure that the settlement will be enforced, and that full protection has been provided to the client from any third-party lien holders. The Qualified Settlement Fund can, and will, provide such protection and allow the client with the added benefit of a federal tax deduction. No longer should Defense attorneys passively go along with Plaintiff attorneys who advise them that the agreed upon settlement no longer exists due to the amount being sought by the third-party lien holders or the representation that “these liens will be taken care of.” Take an aggressive stand to enforce the settlement agreement and then utilize the Qualified Settlement Fund to protect your client from the third-party lien holders and ensure finality to the case.