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Medical Collections: The Continuing Controversy Of Whether California Welfare & Institutions Code § 17401
Prohibits Charging Interest

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A. OVERVIEW OF THE ISSUE

If you attended the CAC’s 2002 Legal & Legislative Conference, you probably heard me briefly address the issue of lawsuits being filed against agencies who perform medical collections on behalf of county hospitals. The issue is whether one sentence buried in the middle of California Welfare & Institutions Code § 17401 prohibits any county hospital -- and, hence, their outside collectors -- from charging interest on outstanding or overdue accounts. The question -- seemingly absurd on its face -- becomes more complex when the above-referenced sentence is taken out of the surrounding statute and is reviewed by itself; the problematic sentence of section 17401 reads:

No interest or carrying charge shall be charged in connection with any debt incurred for county hospital care.

My firm has represented two prominent California collection agencies over the last two years in lawsuits which had been filed as class actions where the interpretation and effect of section 17401 on the collection of interest was at issue. We successfully defended the two suits, one of which filed in the Superior Court in Bakersfield, and the other filed in the Federal District Court for the Northern District of California. In both cases, the courts found that when the legislative history of section 17401 is examined, and when the sentence is read in context, both county hospitals (and, therefore, collection agencies) normally possess the right to charge interest when collecting overdue hospital bills.

Rather, the courts found the section 17401 prohibition is only applicable where (in return for providing medical treatment to a person who qualifies as an “indigent”) a “lien” is taken against the patient’s house as security for repayment of the money expended for treatment. Interest may not be added to this lien amount, but, otherwise, it is appropriate. Thus, in both of our cases, the court’s ultimately ruled the agency’s assertion of interest was legal, and it dismissed the two potential class actions.

Recently, however, in another case, another agency was sued in Santa Clara Superior Court on the same issue. The agency’s capable attorneys (not from my firm) moved to have the suit dismissed by way of summary judgment. Shockingly, the trial court refused to grant the agency’s motion so as to dismiss the case. Rather, the court took the problematic sentence at face value, and the court seemingly believed the sentence clearly and unambiguously prohibited interest on all debts owed to county hospitals for medical services rendered. The court rejected the analytical approach of the other courts, at least for purposes of summary dismissal, and set the case for trial. To my understanding, the agency settled the case for a nominal amount immediately prior to trial.

Nonetheless, it is obvious the issue of the proper interpretation of Welfare & Institutions § 17401 is still alive, and, therefore, I want to familiarize those of you who handle medical collections for county hospitals with the legal issues in more detail.

B. THE LANGUAGE OF THE RELEVANT STATUTES

The statute which has created all the mischief is Welfare & Institutions Code § 17401, which provides, in pertinent part, as follows:

No lien taken by a county pursuant to Section 17109 for care provided to a person in a county hospital shall be enforced against the home of that person (1) during his lifetime or that of his spouse, or (2) during the minority of his children if they reside in the home, or (3) during the lifetime of any dependent adult child who resides in the home and who is incapable of self-support because of mental or physical disability.

Any lien taken by a county for county hospital care shall be released immediately when the amount owing the county for that care is paid. The county shall render to a person to whom care has been provided in a county hospital a statement setting forth the charges upon which its claim for reimbursement is based.

No interest or carrying charge shall be charged in connection with any debt incurred for county hospital care. (Emphasis added)

It is the last underlined sentence upon which creates the issue as to whether interest can be charged on an otherwise undisputed debt.

Section 17401 specifically references Welfare & Institutions Code § 17109 which clarifies the reach of section 17401 in that it explains when the liens are permissible in return for medical services rendered at a county hospital:

As a condition to the grant or continuance of aid to an indigent, the Board of Supervisors may require, as security for the monies so expended, that the applicant transfer or grant to it such property or interest in property as the applicant has, or such portion thereof or estate therein or lien thereon as the Board specifies.

C. TWO SEPARATE COURTS HAVE HELD INTEREST MAY NORMALLY BE CHARGED ON OVERDUE AMOUNTS OWED FOR MEDICAL TREATMENT TO COUNTY HOSPITALS

In the first case where we dealt with this question, the trial court had already issued an adverse ruling against the agency, holding section 17401 prohibited the charging of interest. The court reached this conclusion, notwithstanding that it was undisputed the person, Mr. Espinoza, who had incurred the debt was neither “medically indigent”, nor had a medical lien filed against his house in return for receiving medical treatment at the county hospital. My firm was brought in to handle the appeal by the agency and to defend the related class action of Espinoza v. FCN.

With the assistance of the agency’s capable collection attorneys, and the invaluable assistance of CAC’s general counsel, Ronald Sargis, we took the position that the two Code sections referenced above, when read in conjunction, demonstrated that the provisions of section 17401 applied only in situations where:

(1) liens are taken by the county for medical services rendered (2) against the home of the recipient
(3) as security for money so expended.

Therefore, we asserted the plain language of section 17401 addressed only the situation where a county had taken a lien, and was not per these code sections, permitted to add interest to those liens.

We further argued that the debtor/patient was attempting to apply the sentence out of context; and, in any event, the statute really did not apply to Mr. Espinoza since he was not indigent and no lien had been taken.

The lawyers for the patient/debtor made several arguments, the strongest of which was that the language of the challenged sentence was unambiguous and, therefore, there was no need to “interpret” the otherwise plain language and, likewise, there was no basis to review the legislative history of that particular code section.

The appellate court rejected the patient/debtor’s arguments by noting that focusing solely on the one sentence, without more, would lead to an illogical result not consistent with the language of the rest of the statute. Indeed, the court found the statute ambiguous when it wrote:

The ambiguity exists from the fact that the code section as a whole addresses liens taken by a county pursuant to Welfare and Institutions Code section 17109. There is no language in the Code section dealing with debts other than those subject to lien except for the broad language in the sentence under scrutiny. The code section itself is found in Chapter V of the Welfare and Institutions Code, which is entitled “Termination and Recovery of Assistance”. Under these circumstances, it is impossible to determine the meaning of the sentence in question without a contextual analysis of the Code section as a whole and a view of its legislative history. (Emphasis added.)


Consequently, the court reviewed the legislative history in order to adequately determine whether the sentence was to be read as prohibiting all interest on all debts incurred at county hospitals for medical treatment, or only applied to prohibit interest accruing on liens taken against the homes of persons (indigents) who could not otherwise afford to pay for the medical treatment. The court found the legislative history clarified that the interest prohibition should be construed narrowly to apply only to those patients against whom liens were imposed in return for treatment. The court wrote:

In the supplemental record on appeal, we find the Office of Legislative Counsel’s analysis of Assembly Bill No. 175, which added Section 2601.5 of the Welfare & Institutions Code (later to become section 17401 of the Code). The analysis contains the following paragraph: "Requires that lien for county hospital care be released immediately when amount owing county is paid, and requires county to render patient statement setting forth charges upon which its claim for reimbursement is based. Prohibits interest or carrying charges on any such debt."

A review of the legislative history amply demonstrates that the whole purpose of the enactment of AB175 was to deal with liens asserted for medically indigent adults against their homes, and to provide certain protections for those people who ended up indebted to hospitals because of their indigency and pressing medical need.

The court also referred to the rule of statutory construction that: “The words of the statute must be construed in context, keeping in mind the statutory purpose. . .”. Dyna-Med, Inc. v. Fair Employment & Housing Comm. (1987) 43 Cal.3d 1379, 1387. The court concluded:

The result successfully urged by [the debtor/patient] before the trial court has the effect of taking the sentence in question out of context and applying it to all debts incurred by people who receive services from a county hospital. Nothing in the legislative history as applied to this Court demonstrates that was the intent of the Legislature when it passed AB 175, nor of the governor when he signed the bill.

Consequently, the appellate court reversed the trial court’s ruling in favor of Mr. Espinoza and, instead, ruled the agency had lawfully charged interest in the collection of this county hospital debt. While it may be self serving to say this was undoubtedly the correct result, the upshot was that the class action was dismissed.

Last year, we were again asked to represent a different agency which had been sued in a class action under the FDCPA and under California’s Unfair Competition Law (Business & Professions Code § 17200, et seq.) for purported unlawful business practices in charging interest in county hospital collections. Agreeing with our analysis, the federal district court threw the plaintiff’s claims out of court, dismissed the action, and entered judgment for the agency. Again, this was an unpublished decision with no formal precedential effect as to other judges or courts.

Consequently, in two separate cases, unfortunately through unpublished rulings, courts in California have ruled in favor of collection agencies who collect on behalf of county hospital debts, and the courts have found agencies may collect interest where no medical indigent lien is involved.

D. ONE COURT HAS TENTATIVELY RULED THAT
SECTION 17401 UNAMBIGUOUSLY PROHIBITS THE CHARGING OF INTEREST IN ALL CASES.

Notwithstanding the rulings discussed above, earlier this year, the Santa Clara Superior Court was asked to address the same issue of whether section 17401 prohibited the charging of interest in all cases. There, the agency moved for summary judgment, asking the court to dismiss the action as a matter of law on the same grounds which had been argued in the above cases. Indeed, both Ron Sargis and I provided assistance to the agency’s attorneys.

Contrary to the rulings discussed above, the Superior Court judge there refused to summarily dismiss the debtor’s action as a matter of law in the way the prior courts had. Rather, the court tentatively rejected the holding of the earlier Espinoza case, in part because it was unpublished (and, hence, not binding), but, more importantly, because the court found the statute unambiguously prohibited the charging of interest in any situation. The court framed the issue as follows:

The motion presents one, central issue: whether the apparent prohibition on interest charges contained in that sentence in Section 17401 of the Welfare and Institutions Code (1) applies to “any debt incurred for county hospital care” as it states, or (2) only applies to debts for which the County takes a lien? An added factor in this motion, compared to the demurrer, is a review of the legislative history. This is presented by a Declaration of Ronald H. Sargis, an attorney with background testifying before the legislature on collection issues. Although the declaration of Sargis actually could be seen as presenting legal argument in his analysis of the attached legislative history materials from the State Archives, the archives materials can be analyzed on their own. Many of the legislative reports on the relevant precursor bill do appear to summarize the statute as generally concerning restrictions on liens. . . Plaintiff relies on the plain language of the sentence in Section 17401 which states “No interest or carrying charge shall be charged in connection with any debt incurred for county hospital care”. The Espinoza decision found, and defendants purport to find, an ambiguity in the incurred for hospital care”. It does not say any “such” debt.

The Santa Clara Court reviewed case law standards for construing statutes with the use of legislative history and quoted from one decision that cautioned against excessive reliance on legislative history:

The real problem, . . .is that reading the tea leaves of legislative history is often no easy matter. Even assuming there is such a thing as meaningful collective intent, courts can get it wrong when what they have before them is a motley collection of authors’ statements, committee reports, internal memoranda and lobbyist letters. Related to this problem are the facts that legislators are often “blissfully unaware of the existence” of the issue with which the court must grapple, and, as mentioned above, ambiguity may be the deliberate outcome of the legislative process. In light of these factors, the wisest course is to rely on legislative history only when that history itself is unambiguous. (Citations.). . .[] . . .A clear statement of intent allows a court to reasonably indulge the inference that the individual members of the Legislature may have given at least a little thought to that statement before voting on the bill.

Id. (emphasis added) (quoting J.A. Jones Construction Co. v. Superior Court (1994) 27 Cal.App.4th 1568, 1576-84).

The court believed that while the wording of the interest prohibition appeared clear, the legislative history was, in fact, not. Thus, the court wrote:

There is no statement [in the legislative history] that the prohibition on interest only was intended to apply to debts secured by liens. [] One can gather from the statute that the Legislature was primarily concerned with patients with County medical liens against their houses not be charged interest that would eventually lead to the County taking their house. Yet, the Legislature did not limit the sentence with the restriction on interest just to people with liens. Perhaps this was the result of a conscious plan or political bargain which reasoned that those who lack property on which to place a lien should be treated no worse than those who had properly liens. (Emphasis in original, and some added.)

Consequently, the court ruled:

Therefore, the motion is denied. The sentence in Welfare and Institutions Code § 17401 is not ambiguous on its face. The legislative history is inconclusive and does not convince the court that a simple declarative sentence should be interpreted with reference to other facts or assumptions.

The court did note in passing that:

The wording of the sentence with the Legislature passed into law, if it is a mistake, can certainly be corrected by the Legislature. “It is for the Legislature, not the courts, to pass upon the social wisdom of such an enactment. And, if there is a flaw in the statutory scheme, it is up to the Legislature, not the courts, to correct it”. Neighbours v. Buzz Oates Enterprises (1990) 217 Cal.App.3d 325, 334. Both county hospitals and collection firms have means and access to legislators to bring this error to their attention, if it is an error.

This ruling, like the ones discussed above, was not published and, fortunately, has no precedential effect.

E. CONCLUSION

Obviously, the courts that have considered the issue of how to interpret the scope of Welfare & Institutions Code § 17401 have reached diametrically opposed conclusions. Frankly, if one is intellectually honest, then it must be conceded the reasoning that supports each position has some persuasive force. Nonetheless, when the sentence is read in the context of the entire statutory scheme, and when common sense is applied, it is difficult to believe the California Legislature intended to relieve, for example, wealthy patients, or those with medical insurance, from the obligation of paying interest when they fail to timely pay for their treatment.

Obviously, the ability to charge interest in conjunction with county hospital collections is a significant issue for many CAC members. The ultimate outcome of how this issue will be resolved by the courts is unknown at this time. We need a favorable published decision and cases raising this issue should be communicated to the CAC, Ron Sargis, and/or myself. Consideration of a potential legislative solution may be in order so as to provide certainty.

This article is not to be considered legal advice by the author or Ellis Law Group LLP. Any person or agency with specific legal questions must consult with the legal counsel of their choice.

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