New Hampshire Personal Injury Lawyers

ERISA PLANS: SUBROGATION AND REIMBURSEMENT ISSUES - PART 4

F. POST-KNUDSON IN THE FIRST CIRCUIT

1.  Court of Appeals

The First Circuit Court of Appeals has not as yet had to interpret the scope of the Supreme Court’s decision in Knudson. In Watson v Deaconess Waltham Hospital, 298 F.3d 102, 110 n.8 (1st Cir. 2002), the Court did note the diverging trends in the Circuits as to whether a given claim qualifies under Knudson as an equitable claim.

In 2006, the First Circuit again commented about the uncertainty in this area of the law. In Green v. Exxon Mobil Corp., the First Circuit cited Sereboff for the proposition that what forms of relief are considered "equitable" is a matter "in dispute." 470 F.3d 415, 421 n.7 (1st Cir. 2006).

Just prior to Knudson being handed down, The First Circuit  set forth a two-step inquiry to evaluate a cause of action under § 1132(a)(3): "1) is the proposed relief equitable, and 2) if so, is it appropriate?" LaRocca v. Borden, Inc., 276 F.3d 22, 27-28 (1st Cir. 2002). With respect to the first prong, under ERISA, "'equitable relief' includes 'those categories of relief that were typically available in equity (such as injunction, mandamus, and restitution, but not compensatory damages).'" Id. at 28 (quoting Mertens, 508 U.S. at 256). Turning to the second step, the purpose of § 1132(a)(3) is to serve as a "safety net, offering appropriate equitable relief for injuries caused by violations that § [1132] does not elsewhere adequately remedy." Id. (quoting Varity Corp. v. Howe , 516 U.S. 489, 512, 116 S. Ct. 1065, 134 L. Ed. 2d 130 (1996)). Nothing written in Knudson or Serebrof would seem to dictate a different analysis.

2.  Federal District Court for the District of Maine

An appeal from a series of rulings from the Federal District Court in Maine was dropped in September of this year that  could have provided the First Circuit with an opportunity to add color to the very gray areas in the law surrounding ERISA subrogation claims.

The United District Court for the District of Maine issued a four decisions in Mank v. Green et a.  Karen L. Mank is the Plan Administrator for the Hannaford Health Plan.  The Plan, which is self-insured, sought to recover $141,335.75, that was paid by the Plan for accident-related medical expenses incurred by Ellen Green.   Ms. Green was represented by the law firm of Berman and Simmons, PA.  The law firm collected $300,000.00, in liability and UIM benefits for Ms. Green.  The law firm paid itself $160,000.95, in fees and expenses.  The firm distributed some of the net proceeds to Mrs. Green and paid outstanding medical bills with the remainder.

The Plan sought reimbursement from Mrs. Green as well as the law firm.
In the Court’s first decision, dated December 21, 2003, the court granted the Plan’s Motion for a Preliminary Injunction against Mrs. Green.  The court ruled that the Plan Administrator was able to prove the existence of identifiable proceeds from the settlement in Mrs. Green’s bank accounts. Mank, 297 F. Supp. 2d 297 (D. Me. 2003).

By decision dated May 24, 2004, the court held that the Plan Administrator was entitled to Summary Judgment on her claim for recovery under Section 502(a) of ERISA, and on her request for a Constructive Trust on $83,941.00, then held in three separate  bank accounts.  The court held that the interests of equity were served by imposing a Constructive Trust in the funds because the Plan contained express language providing for a right of recovery concerning Third Party Recoveries, because Mrs. Green signed two requests for information that contained clear disclosures of the Plan’s Right-of-Recovery Provision, and because Mrs. Green agreed by signing those forms to abide by the Plan’s  Right-of-Recovery Provision.  The court found that of the settlement proceeds distributed to  Mrs. Green, $83,941.21 were identifiable in  specific bank accounts.  The court ruled that the interest of equity was served by imposing a Constructive Trust on those funds, and ordered the plaintiffs to pay said amount to the Plan within thirty (30) days.

The court, however, denied the Plan’s Motion for Partial Summary Judgment to impose a Constructive Trust in the amount of $57,394.54, on certain assets in the possession of the law firm and/or Attorney Simmons. The court concluded the Plan’s claim against the law firm was for legal and not for equitable restitution, and further that the record failed to demonstrate that there were traceable and identifiable proceeds from the Green settlement in the possession of the law firm. Mank, 323 F. Supp 2d 115, 126 (D. Me. 2004) ( “the funds sought by the plaintiff have become so dissipated that Plaintiff cannot be considered to be seeking particular funds that belong in good consciene to the Plan – that is proceeds from the Green settlement.”).

In addition to bringing it’s claim under ERISA, the Plan brought various State and Federal Common Law claims against the Defendants.  By decision dated December 6, 2004, the court dismissed these claims ruling that they were pre-empted by ERISA. Mank, 350 F. Supp 2d 154 (D. Me. 2004).

By decision dated March 29, 2005, the court denied the Plan’s claim to recover $57,394.54, from the attorney’s fee paid to Mrs. Green’s lawyer and law firm.  The court recited the facts of what Attorney Simmons knew and when he knew it regarding monies paid bv the Plan for accident-related injuries.  The Plan couched its claim in the terms of an equitable accounting for profits.  The Plan contended that the court should order a disgorgement of the profits gained by the attorney’s wrongful conduct in advising his client to violate the terms of the ERISA Plan.  The court seemed to put considerable emphasis on the fact that the Plan never contacted the law firm about its claim before the settlement proceeds were distributed when it clearly knew that the law firm was pursing a claim on Mrs. Green’s behalf. The court concluded:

Under the circumstances, . . . ERISA does not impose any affirmative duty on attorneys representing Plan Beneficiaries to act, to serve the Plan’s interests in opposition to the conflicting interests of the attorney’s own client. The absence of any bad faith conduct that was violative of any duty owed to the Plan, absolves Attorney Simmons and Berman and Simmons of any equitably derived affirmative duty to contact the Health Plan.

Mank v. Green, 368 F. Supp. 2d 102, 112 (D. Me. 2005).

Although the Plan  appealed the court’s adverse rulings to the First Circuit Court of Appeals, that appeal was dropped in September 2005, presumably after a settlement. 

G. Ethical Considerations

The District Court admonished Attorney Simmons for a not having “a more refined, general sense of professional probity” in his refusal to deal with the Plan but ultimately concluded “in the circumstances” that he had “no affirmative duty [when] representing Plan beneficiaries to act to serve the Plan’s interest in opposition to the conflicting interests of the attorney’s own client.”

It is not clear to this reader of the court’s recitation of the facts where there was any lack of “probity,” given the ethical obligation in counsel to act in the sole interest of his client in the adversarial contest over the settlement proceeds.

Also, it is uncertain what the court had in mind by its qualifier “in the circumstances” there was no affirmative duty in counsel. Is the salient circumstance in the court’s analysis  that the Plan never put counsel on notice of its claim for reimbursement before the proceeds were distributed? If it had given notice, would counsel then be required to do something differently and then “deal” with the claim instead of distributing the settlement proceeds and advising the client to dissipate the proceeds to make them untraceable and thus unamenable to having a constructive trust imposed upon them?

ERISA Plans may occupy some favored status in the law, but they do not occupy a similar sovereign status to Medicaid, for example. Federal law does impose an affirmative duty in counsel to come forward and acknowledge the governments lien in settlement proceeds and to satisfy that lien out of the settlement proceeds. See generally, 42 CFR 411.24(g). ERISA imposes no similar requirement.

Relying on the ERISA statutory scheme, the U.S. District Court for the Middle District of Tennessee has held that the lawyer for the injured person has a legal duty to send the portion of settlement funds owed to the Plan under the subrogation clause. Greenwood Mills v. Burris, 2001 WL 92117 (M.D. Tenn. 2001). In this case, the court agreed that a lawyer does not have a fiduciary duty to an ERISA Plan, even though the lawyer is aware of the existence of a subrogation agreement between the Plan and the beneficiary. ERISA, the court concluded, "requires that a fiduciary exercise 'authority or control respecting management or disposition' of Plan assets." Because the settlement funds received by the lawyer did not become 'Plan assets' when he received them, he did not fall within the definition of a fiduciary.

However, the judge found the lawyer and his firm liable for violating the Plan's terms, relying on Tennessee state law provision . Tennessee law provides that a lawyer “will be held civilly liable to a non-client where he knowingly participates in the extinguishment of a subrogation interest of a non-client third party and delivers to his client funds that he knows belong to the third party and knows or should know, that he has already placed the funds beyond the reach of the third party." Based on this provision, the court ruled that the plaintiff's lawyer was liable for failing to honor his client's obligation under the ERISA Plan to pay the subrogation interest.

New Hampshire’s Rules of Professional Responsibility has a provision which probably comes into play when counsel has knowledge of a subrogation/reimbursement claim of a Plan or its insurer. See Rule 1.15 of the Rules of Professional Responsibility.

CLIENT-LAWYER RELATIONSHIP     Rule 1.15. Safekeeping Property

*               *               *               *               *
(f) Upon receiving funds or other property in which a client or third person has            an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and upon request by the client or third person, shall promptly render a full accounting regarding such property.

(g) When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.

Adopted, Effective Jan. 1, 2008

The predecessor to this provision was the subject of an Ethics Committee Formal Opinion (#1998-99/3). The opinion is posited on a factual situation where a  lawyer has in his possession settlement funds that are subject  to a “recognized valid lien “ and a “valid statutory interest in the settlement proceeds.” On those facts, where there is a dispute over the  funds that are claimed by the lienholder,  the Opinion states the lawyer is obligated “to keep the funds separate until the dispute is resolved by agreement or decision.”

If the Opinion is read narrowly to be based on a valid statutorily based lien, e.g., a hospital lien, the Opinion does not define the lawyer’s obligations in the not uncommon situation of a claim by an insurer who provides benefits under an ERISA Plan. The Plan has no such lien.

If the Opinion is read more broadly to cover a lien by agreement (as discussed in ), then the lawyer is in breach of his ethical obligations (in the opinion of the Ethics Committe in Sereboff 1998) if he / she distributes all the net settlement proceeds to the client. What if the insurer does not inform either the lawyer or the client of its claimed interest? Is the lawyer obligated to contact the insurer in the first instance to inquire whether there is a claim to the settlement proceeds?

H. FAIR DEBT COLLECTION ACT

The Fifth Circuit has ruled on whether ERISA plans seeking reimbursement are subject to the FDCA and its limitations on what a debt collector can do in trying to collect on the debt.

In Hamilton v United Healthcare of Louisianna, 310 F3d 385 (5th Cir. 2002), the court ruled that the reimbursement claim was a “debt” within the meaning of the Act. However, in a subsequent appeal, the court ruled that a health insurer or its agent (here Health Care Recoveries, Inc.) was not a “debt collector” within the meaning of the Act and dismissed the plaintiff’s FDCA claim. Hamilton, 2004 U.S. App. LEXIS 13764 (5th Cir. 2004).

These cases may not be the last word on the applicability of FDCA to reimbursement claims. The threat of a FDCA claim mayor may not deter the Plan from persisting in a collection effort.

CONCLUSION

If the subrogation claim is litigated in state court because the Plan is without an equitable remedy, the common fund doctrine and make-whole doctrine of state law presumably would be applicable.  I submit the New Hampshire “make-whole” approach as outlined in Dimick is the fairest resolution.  Under Dimick, the subrogation claimant shares equitably with other claimants to the settlement proceeds.  Despite the language in its plan documents, the health insurer should not be given the priority claim to settlement proceeds.

By seeking such a priority, ERISA Plans got themselves in this situation, where they may well be left, without statutory amendments, with no enforceable claim to settlement proceeds. That is the risk they face post-Knudson. Injured claimants face the risk that a Plan will find the right combination of a equitable remedy and a sympathetic court with the result that the Plan gets paid 100% of what it paid out.

Therefore, we are at a place where there is wisdom in compromise on both sides. I think the ideal solution is to promise such a compromise with the Plan at the outset in exchange for prompt payment of medical bills. The Plan will know it will get reimbursed out of proceeds (if they are sufficient) less a proportionate share of fees and expenses. The client gets the bills paid and avoids the uncertainty of whether the health insurer will come after him or her after settlement. If an agreement is struck at the outset, the claim may well be shielded from collection agents thus eliminating one potential stakeholder.  It remains to be seen whether all insurers will, in the spirit of enlightened self interest, be amenable to compromise.

ERISA CLAIM CHECKLIST

What do you need to negotiate a settlement?          
1.    Get breakdown of payments behind subrogation / reimbursement claim.

a.    Are any of the bills not accident related?
b.    Are any of the bills which are accident related not on breakdown?
c.    As to bills not on the breakdown are they outstanding?

2.    Get Plan documents in effect when payments made.
 
3.    Is Plan self-funded or is there an insurance policy?
 
4.    Does Plan have a reimbursement provision?
 
5.    Does Plan have a recoupment (contractual self-help) provision?
 
6.    What powers does Plan have to enforce its subrogation / reimbursement provisions?
 
7.    Does Plan specifically preclude offset for attorneys fees?
 
8.    Does Plan specifically assert a right to full recovery, attempting to negate “make whole” doctrine?
 
9.    Did client execute a “Reimbursement Agreement?” Did the lawyer?
 
10.   Does the Plan state it does not cover expenses incurred because of the negligent or wrongful act of another?    
 
11.   Where are the funds?  Are they identifiable/traceable?

12.   What equitable defenses are there available?  Is the “make whole” doctrine an equitable counterweight to “unjust enrichment” argument?
 
13.   Who is seeking reimbursement?  The Plan?  Or, the Collection Agency?

14.   Does the Plan have the express authority by the Plan documents to assign its subrogation/reimbursement interests to a collection agent?

A.    If collection agent is getting paid, why should not claimant’s attorney?

15.   Client’s knowing approval.

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