By Billy Shields
The Justice Department is involved in talks with several attorneys for sick smokers in an effort to collect federal income tax and Medicare money from a $580 million trust fund being distributed to members of a disbanded Miami class action, according to confidential memos obtained by the Daily Business Review.
The federal government's interest in the fund has some attorneys scrambling to determine the best way to proceed with distributing the money to sick smokers. Several contend that the fund is not a typical lawsuit judgment and is not subject to federal income tax or Medicare liens.
One of the memos written by a lawyer representing some smokers in negotiations with the federal government said Justice lawyers "are steadfast in their position regarding their right of recovery from these payments," and they don't plan to give any guidance on how much money they will seek until they find out how many Medicare recipients are receiving checks.
The goal of the negotiations is to reach "a fair, global compromise" and set a reimbursement figure that would satisfy Medicare claims in one lump sum, one memo said.
The federal government contends it should be able to recover any money spent providing health care to sick smokers who are recovering money for care they didn't pay for.
But some lawyers for smokers say the fund isn't subject to federal taxes or Medicare liens because the fund is not part of a judgment for monetary damages caused by any illness.
"It's not a duck, and it's not a goose," said fund trustee Miles McGrane III, a name partner with McGrane Nosich & Ganz in Coral Gables, Fla. "We don't know what it is."
Sick Florida smokers sued the nation's five largest cigarette makers in 1994 in a lawsuit that became known as Engle v. Liggett. It produced a $145 billion punitive damage award. Three companies paid the trust fund money in 2001 to avoid a challenge to a new state law drastically lowering their appellate bond obligations. The tobacco companies also agreed that they would have no claim on the fund no matter what happened in the class action.
The record-setting award and class certification ended up being reversed on appeal, leaving Miami-Dade Circuit Judge David C. Miller to determine how to distribute the money. The first checks worth about $9,000 went out last month to smokers covered by the class.
About $30 million was set aside for potential tax issues or other unforeseen circumstances, and that's what federal agencies have their eyes on.
Behind closed doors, plaintiff attorneys representing claimants are in heated discussions among themselves and with federal agencies about the tax and lien issues created by the fund. McGrane's position is that claimants don't owe the federal government anything because of the unique nature of the fund.
The confidential memos outline the position taken Oct. 21 by Justice attorneys "who are now driving this project for the federal government" and a follow-up meeting by two DOJ representatives and smokers' attorneys including McGrane, lead class counsel Stanley and Susan Rosenblatt, Searcy Denney Scarola Barnhart & Shipley attorney David Sales and Matt Garretson, a lien resolution expert from The Garretson Firm in Cincinnati. Garretson authored the memos obtained by the Daily Review.
The Rosenblatts and Garretson did not return calls for comment by deadline. Sales declined comment.
Justice Department spokesman Charles Miller in Washington, D.C., said Thursday he was unaware of any department negotiations regarding the trust fund.
McGrane confirmed meetings have taken place with Justice attorneys. "Their position is that they may be entitled to compensation," he said. "But we're still discussing whether they are. Because the Engle trust fund emanates from a forbearance on the part of the plaintiffs to require the defendants to post a superseding bond, it's not a compensation from a personal injury."
The Medicare and tax issues are riding together.
"Prior to finalizing any agreement with DOJ, we expect that all involved will have to address terms related to taxation" and Medicare, Garretson wrote in one of the memos.
He suggested developing a model taking account of the length of an illness, whether it resulted in the death of a smoker and Medicare reimbursement claim dates to address a compromise. He also raised the issue of "the appropriateness of waiver/compromise given the demographics of this claimant population."
Some -- but not all -- plaintiffs attorneys are holding back some or all of a claimant's check until any Medicare obligations are determined.
Firms in Florida holding back money include Morgan & Morgan in Orlando, Searcy Denney in West Palm Beach and Wilner Block in Jacksonville, sources familiar with the fund have confirmed.
The source of funds could include supplemental checks slated to go out as the claims administrator disqualifies some of the more than 60,000 claimants.
The row over Medicare creates two potential pitfalls for claimants and their attorneys. First, it could place claimant lawyers in a difficult position because they could be professionally liable if they released money prematurely with the Medicare question unsettled. It also creates a potential scenario where claimants who retained counsel to file claims feel punished since other claimants with no lawyers got checks straight from the fund administrator, Seattle-based Garden City Group.
Money from lawsuits is taxable if it includes interest on an award, compensation for lost wages or punitive damages, according to the federal tax code. But fund claims don't neatly fit those categories.
McGrane maintains Medicare has no claim to fund money.
"The position of the trust is that any such liens if subsequently asserted against any of the equal disbursements to former class members would be based on a misunderstanding of the origin and unique nature of the Engle trust fund," he wrote in a statement posted on the fund's Web site.
The fund "was never intended to be and is not compensation for any former class member who is a beneficiary of the fund, and is not compensation for pain and suffering or reimbursement for medical expenses or compensation of any kind."
But some plaintiffs attorneys warned all along that Medicare would come knocking once the money started flowing. When lawyers were debating how to distribute the fund before Miller in April, attorneys like Searcy Denney shareholder Brenda Fulmer and Wilner Block's Norwood "Woody" Wilner warned about the need to settle the Medicare question. Fulmer and Wilner did not return calls seeking comment.
Lurking in the background is the Medicare Secondary Payer Act, which mandates the federal health insurance program for people 65 and older won't be the primary payer for health care if a patient is reimbursed by a another source.
About 8,000 smokers originally covered by the class action have filed individual lawsuits under a schedule set by the Florida Supreme Court when it disbanded the class. Based on the difference between the number of claimants and the number of people who sued, the trust fund is the only chance for most smokers to obtain any money from the tobacco industry.
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