Synergy Blog

Beware of “Conscious Ignorance” Exception to Mutual Mistake Challenge to a Contract

September 9, 2021

Rasa Fumagalli JD, MSCC, CMSP-F

The American Bar Association’s Model Rules of Professional Conduct provide a blueprint for attorneys to follow when representing clients. The first Rule and arguably one of the most important ones, outlines a basic expectation in the client-lawyer relationship. Rule 1.1 states: “A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation.” The Comments section of this Rule notes that competent handling of a particular matter includes “inquiry into and analysis of the factual and legal elements of the problem and use of methods and procedures meeting the standards of competent practitioners. It also includes adequate preparation.” American Bar Association (ABA), Model Rules of Professional Conduct, 2020.

An attorney’s failure to make an inquiry into conditional payments is addressed in Forbes v. Benton County Agricultural Society, No. 20-1250, 2021 WL 1907130 (Iowa Ct. App. May 12, 2021). This action came before the Court pursuant to Plaintiff’s appeal of the district court’s order granting a summary judgment to the defendant.  The Court of Appeals affirmed the district court’s order finding that the settlement agreement was valid, and that Plaintiff bore the risk of the mistake that was made in the settlement.

The underlying case involved a negligence action filed by Forbes in 2019 against the Benton County Agricultural Society (hereafter Ag. Society) for his fall that occurred while leaving the fairgrounds in August of 2017. The fall resulted in a head injury that required emergency surgery. During the settlement negotiations, the defense attorney extended an initial settlement offer of $10,000.00 noting Forbes’ excellent recovery. She further advised that Forbes’ actual medical bills totaled $2,732.00, for which Tricare had a subrogation interest. She did not believe that Forbes had any out-of-pocket expenses or that medical providers had any additional charges.

Forbes’ attorney made a counteroffer of $12,500.00 to settle the case noting that he would pay the Tricare lien of $2,732.00 from the settlement. The offer was accepted by the defense attorney on the condition that the negligence action be dismissed with prejudice. She also advised that the settlement releases would include provisions requiring Forbes to “satisfy any subrogation interests and liens.” Since Medicare must be provided with information regarding any settlement with a Medicare beneficiary plaintiff, Forbes’ attorney was asked to complete an insurer information sheet for the reporting. He was also advised to request a final conditional payment demand letter from Centers for Medicare & Medicaid Services (CMS). Shortly thereafter, Forbes’ attorney returned the completed information sheet to the defense, advised that he would “get rolling on the clearance letter from CMS,” and requested that the settlement check be payable to his firm.

Defense followed up with Forbes’ attorney regarding the status of the conditional payments since their Medicare inquiry revealed that Forbes was a current Medicare beneficiary. She also advised that her client required the amount of the final conditional payment demand from CMS before the settlement check was issued. Forbes’ attorney responded several weeks later and advised that CMS had identified $25,482 in conditional payments.  Since he was surprised by this amount, he assumed that the Ag. Society would rather litigate comparative fault rather than reimburse Medicare for the conditional payments.

In response to Forbes’ assumption that the Ag. Society now wished to litigate the matter, the Ag. Society amended its answer to the negligence action to include the affirmative defense of compromise and settlement. A motion for summary judgment to enforce the settlement agreement was also filed.

Forbes’ attorney objected to the enforcement of the settlement agreement arguing that the agreement was voidable based on a mutual mistake. He also argued that there was no “meeting of the minds” since the defense sought a final demand letter from CMS before the settlement check was issued. The defense countered this by claiming the mistake was unilateral and that Forbes could have investigated the conditional payments prior to making a settlement demand in the case.

The district court granted the summary judgment, finding that there had been a meeting of the minds in reaching the settlement agreement. Although the contract was based on a mistaken assumption by Forbes, the settlement agreement was binding and enforceable.

The Court of Appeals agreed with the district court after considering the facts in the light most favorable to Forbes. In considering Forbes attorney’s argument that there was no “meeting of the minds” about the conditional payment terms, the Court reviewed the various communications between the parties. It noted that Forbes’ offer to settle his case for $12,500 was accepted by the defense. The defense’s requests for additional information to ascertain Forbes’ Medicare status and for the conditional payment clearance letter were acknowledged by Forbes when he returned the information and provided the defense with instructions on where to send the settlement check. These exchanges between the parties do not show any genuine material factual dispute about the agreement that could be litigated.

The Court next considered Forbes attorney’s claim that the settlement agreement was voidable because it rested on the erroneous mutual assumption that the only lien in the case belonged to Tricare and was in the amount of $2,732.00. Although the Court agreed that a mutual mistake may allow the party adversely affected to seek an annulment of the contract, it noted the Restatement Second of Contracts § 154 outlines the exceptions to this principle. According to the Restatement, there are three situations when the adversely affected party should bear the risk of the mistake. In this case Forbes‘ attorney met two of the three exceptions. He met the “conscious ignorance” exception in that he was aware when he agreed to the settlement that he had limited knowledge about the potential Medicare payments. Despite this, he went forward with the agreement and assumed the risk of the mistake. Since he had access to his client’s medical records, he could have investigated the existence of conditional payments.

The second exception allows a court to allocate the risk of the mutual mistake to the adversely affected party. The Court found that the district court was reasonable in assigning the risk of the mistake to Forbes’ attorney since he had the opportunity and the burden to inquire about the status of the medical bill payments given the nearly two-year period between the accident and the negligence suit. The $12,500 settlement agreement was found to be binding and enforceable.

Analysis

This case serves to highlight the impact of the Medicare Secondary Payer Act on a settlement involving a Medicare beneficiary plaintiff. 42 U.S.C. § 1395 Y(b)(2)(a). An understanding of the relevant provisions and procedures related to conditional payments would have prevented the parties from negotiating on false assumptions. In this case, an inquiry into the final conditional payment amount could have been made through the Medicare Secondary Payer Recovery Portal within 120 days of settlement. The figure could have also been reviewed in advance of final settlement and disputed. Furthermore, when assessing the known liens or reimbursement claims in a case, an amount that seems artificially low given the nature of the treatment should prompt further inquiry into the existence of other liens.

It is also important to note that a conditional payment demand that exceeds the settlement amount should always be reduced by Medicare. If Medicare does not have to take legal action to recover, Medicare regulations state: “If Medicare payments equal or exceed the judgment or settlement amount, the recovery amount is the total judgment or settlement payment minus the total procurement costs.” 42 C.F.R. 411.37(d). If no procurement costs or attorney’s fees are reflected on the final settlement detail documentation provide to Medicare at the time of settlement, Medicare will not reduce the amount of their conditional payment demand. Attorneys should be aware of this should they seek to reduce or waive their fees. This case may also be one that would benefit from a financial hardship waiver or compromise request to CMS.

If MSP compliance issues fall outside of your area of expertise, Synergy’s team is here to serve your needs. We have a deep team of experts that can help make sure you close your file compliantly.  Let Synergy be your guide to ensure your client is protected and your practice is safeguarded against potentially devastating government-enforced consequences or mistakes such as the one discussed in this blog post.

 

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