New Hampshire Personal Injury Lawyers

ERISA PLANS: SUBROGATION AND REIMBURSEMENT ISSUES - PART 2

C. Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 122 S. Ct. 708 (2002)D.       

The Knudson case decided by the U.S. Supreme Court in January, 2002, for awhile cast doubt on the ability of ERISA Plans to enforce their subrogation claims.

The factual setting derived from a personal injury settlement in a product liability action – one with considerable challenges to establishing liability, and with catastrophic injuries.  The claimant’s insurer (under a stop-loss policy) had paid $411,157, in accident-related medical bills.  The settlement was for $650,000, and allocated $13,828, for past medical bills and $257,745, to a special needs trust for future care.  The insurance was part of an “employee welfare benefit program” within the meaning of ERISA.

The Plan refused to accept the limited amount allocated for past treatment and sued the beneficiary in federal court under Section 502(a)(3) of ERISA, seeking to enforce the reimbursement provision of the Plan.  The Plan wanted reimbursement of the full amount it had paid, which would have amounted to about 63% of the settlement.

ERISA gives a Plan limited civil enforcement remedies. Section 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3), provides that a Plan is entitled to bring a civil action "(A) to enjoin any act or practice which violates any provision of this title or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this title or the terms of the plan."Id.

The Supreme Court affirmed the lower court’s dismissal of the claim, holding that ERISA only allows Plan officials to seek injunctive or “other appropriate equitable relief.”  The Court concluded that, because the claim for reimbursement was deemed an action at law, ERISA did not authorize the action brought by the Plan, and it was properly dismissed.  The Court rejected the Plan’s arguments that it essentially was seeking specific performance of its contract or equitable restitution.

The Court held that, when a Plan files suit to recover amounts that a beneficiary received from a third-party, the Plan is seeking legal relief, not equitable relief. The Court explained that “other appropriate equitable relief” referred to “those categories of relief that were typically available in equity ....”. Id ., 534 US at 210. According to the Court:

. . .not all relief falling under the rubric of restitution is available in equity.  In the days of a divided bench, restitution was available in certain cases at law, and in certain others in equity. [citations omitted] Thus, “restitution is a legal remedy when ordered in a case at law and an equitable remedy. . .when ordered in an equity case,” and whether it is legal or equitable depends on “the basis for [the plaintiff’s] claim” and the nature of the underlying remedies sought. [citation omitted]. . .

. . .[A] plaintiff could seek restitution in equity, ordinarily in the form of a constructive trust or an equitable lien, where money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession. [citation omitted] A court of equity could then order a defendant to transfer title (in the case of a constructive trust) or give a security interest (in the case of an equitable lien) to a plaintiff who was, in the eyes of equity, the true owner.  But where “the property or its proceeds have been dissipated so that no product remains, [the plaintiff’s ] claim is only that of a general creditor,” and the plaintiff, “cannot enforce a constructive trust of or an equitable lien upon other property of the [defendant].”  Thus, for restitution to lie in equity, the action generally must seek not to impose personal liability on the defendant, but to restore to the plaintiff particular funds or property in the defendant’s possession.

Since the Court held that ERISA Section 502(a)(3) does not grant a Plan the right to pursue a claim for legal relief (such as for monetary damages), the Court denied Great-West’s claim.

In the wake of Knudson , there was considerable doubt whether  ERISA  Plans  had any way  to enforce their  right to subrogation and reimbursement.

In response, Plans and their assignee collection agencies sought other means to effectuate reimbursement.  For example, they deny payment until medical payments insurance under an auto policy is exhausted (notwithstanding Insurance Department Bulletin 00-014-AB) or until onerous forms identifying other insurers are completed.  Plan’s often assert a “lien” on settlement proceeds in the hands of the tortfeasor’s liability carrier.  Sometimes, the liability carrier will acknowledge the claimed lien and go so far as to place the name of the Plan on the settlement check.

The majority opinion of Justice Scalia in Knudson concludes by suggesting that the Plan may have other remedies.  He ends by stating that the Court expresses no opinion whether a direct action for breach of contract brought by a plan/insurer may “have been preempted by ERISA.”

The Court in Knudson left open the question of whether a Plan can seek reimbursement in a state court action notwithstanding ERISA’s broad preemption provisions.  Knudson, 534 U.S. at 220.

One state court decision allowed a Plan’s assignee to intervene in a state court personal injury action to recover benefits it had paid out to the plaintiff. Yerby v. United Healthcare Ins. Co., 846 So.2d 1979 (Miss. 2002). In Yerby, the Mississippi Supreme Court also rejected the application of the make whole and common fund doctrines as being incompatible with ERISA.

D. Sereboff v. Mid Atlantic Medical Services, Inc., U.S., 126 S.Ct. 1869 (2006)

In Sereboff ,  the ERISA Plan and their insurance companies gained back most of the ground they lost in Knudson.

The Sereboffs were involved in an automobile accident in California and suffered injuries; Mid Atlantic provided medical benefits to the Sereboffs totaling $74,869.37. Sereboffs filed a lawsuit against the tortfeasors. Mid Atlantic notified Sereboffs' attorney of its asserted a lien on the anticipated proceeds from the suit over the two and a half years the case was pending; however, after the case settled for $750,000, Mid Atlantic was not paid. Mid Atlantic filed a claim as an ERISA fiduciary under ERISA § 502(a)(3) to enforce the terms of the Plan, which gave Mid Atlantic a subrogation right. The Supreme Court distinguished Knudson on the grounds that, in Knudson , the recovery in the underlying tort case was placed directly in a special needs trust, and was never in the hands of the Knudsons. The Court then all but over ruled the holding in Knudson that only equitable causes of action can provide an equitable remedy, stating  that the character of the underlying cause of action does not "prove relief is not equitable [as] that would make § 502(a)(3)(B)(ii) an empty promise." Sereboff , 126 S.Ct. at 1874. The Court relied on a 90 year old case, Barnes v. Alexander , 232 U.S. 117, 34 S.Ct. 276, 58 L.Ed. 530 (1914), for the proposition that equity provides for a rule "that a contract to convey a specific object even before it is acquired will make the contractor a trustee as soon as he gets a title to the thing." Id., at 121, 34 S.Ct. 276. The Court explained that its previous ruling in Knudson -that equity only provided for certain remedies where the specific assets could be traced to specific funds --did not provide a complete list of all available equitable remedies. Writing for a unanimous court, Chief Justice Roberts reasoned that there was no need in Knudson to catalog all the circumstances in which equitable liens were available in equity. “Great-West claimed a right to recover in restitution, and the Court concluded only that equitable restitution was unavailable because the funds sought were not in Knudson's possession.” Sereboff at 1876.

In the wake of Sereboff , a Plan Administrator or ERISA fiduciary can proceed under § 502(a)(3)(B)(ii) to enforce the terms of the Plan to  recover money from a beneficiary  without the need  to trace identifiable funds into the beneficiary’s possession.

If Knudson was not explicitly overruled, what is there left of that decision? Knudson probably has continued viability only where funds are not paid directly to the beneficiary  but are placed in a trust. In such a situation, the Plan could not  recover from the general assets of the beneficiary.  But query: could a Plan seek to have imposed a constructive trust over the trust funds?  Is the annuity contract purchased as part of a “structured settlement” the equivalent of the Special Needs Trust discussed in Knudson?

Lastly, the Court rejected Sereboff's (very reasonable)  argument that any equitable claim by the ERISA fiduciary should be subject to equitable defenses. In a surprising (tortured?) twist, the C.J. wrote as follows:

But Mid Atlantic's claim is not considered equitable because it is a subrogation claim. As explained, Mid Atlantic's action to enforce the "Acts of Third Parties" provision qualifies as an equitable remedy because it is indistinguishable from an action to enforce an equitable lien established by agreement, of the sort epitomized by our decision in Barnes.  See 4 Palmer, Law of Restitution § 23.18(d), at 470 (A subrogation lien "is not an express lien based on agreement, but instead is an equitable lien impressed on moneys on the ground that they ought to go to the insurer"). Mid Atlantic need not characterize its claim as a freestanding action for equitable subrogation. Accordingly, the parcel of equitable defenses the Sereboffs claim accompany any such action are beside the point.

Sereboff, at 1877. Compare Great-West Life & Annuity Ins. Co. v. Knudson , 534 U.S. 204, 218, 122 S. Ct. 708, 151 L. Ed. 2d 635 (2002) (If the plaintiffs seek legal as opposed to equitable relief, "their suit is not authorized by § [1132(a)(3)].")

Then, in footnote 2, the C.J. left the door open to arguments that, a recovery by a Plan fiduciary that does not take into account equitable defenses, such as the made-whole doctrine, may not be an "appropriate" equitable remedy under ERISA § 502(a)(3). That issue was not raised below; so the Court declined to consider it for the first time on appeal.

Accordingly, if plaintiff’s counsel faces a  § 502(a)(3) claim, he/she should raise “a parcel of equitable defenses” by way of contending that granting the ERISA fiduciary’s claim for 100% reimbursement of monies that were paid out by the Plan would not be an “appropriate” equitable remedy in the circumstances.

Two final points about Sereboff : First, because Mid-Atlantic was the prevailing party, it had exercised its option at the District Court to seek an award of fees under § 502(g)(1), which was granted.  Thus, litigation over the validity of the fiduciary’s claim may be costly.

Secondly, the District Court’s decision sets out the provision of the Plan that Mid Atlantic sought to enforce.

ACTS OF THIRD PARTIES

This subrogation provision applies when you are sick or injured as a result of the act or omission of another person or party. Subrogation means the Company's right to recover any payments made to you or your dependent by a third party or any insurer acting in place of, or on behalf of a third party or a third party's insurer, because of an injury or illness caused by a third party. Third party means another person or organization.If you or your dependent receives benefits and have a right to recover damages from a third party, the Company is subrogated to this right. All recoveries from a third party (whether by lawsuit, settlement, or otherwise) must be used to reimburse the Company net of reasonable attorney fees and court costs prorated to reflect that portion of the total recovery which is due the Company for benefits paid. Any remainder will be yours or your dependents. The Company's share of the recovery will not be reduced because you or your dependent has not received the full damages claimed, unless the Company agrees in writing to a reduction.You must promptly advise the Company whenever a claim is made against a third party with respect to any loss for which the Company benefits have been or will be paid. You or your dependent must execute any assignments, liens or other documents and provide information as the Company requests. MLH's benefits may be withheld until documents or information are received. If you need more information about subrogation, the Company will provide you with its subrogation procedures.

Mid Atl. Med. Servs. v. Sereboff, 303 F. Supp. 2d 691, Fn.11, 2004 U.S. Dist. LEXIS 2581 (D. Md., 2004). The Plan in question is more generous than many for it establishes a right in the Plan to a recover all amounts it expended “net of reasonable attorney fees and court costs.” There is nothing in ERISA that requires plan language to include such an off set.  

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