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Please note that Attorney Bruzonsky has been doing this regular “Liens Corner” column since April 2006. His last “Liens Corner” article was for the November/December 2017 issue of The Advocate, having stepped down from this regular column, as he now works part-time (and is part-time retired) exclusively handling large subrogation/lien claims in very large personal injury and medical malpractice cases for other attorneys. However, attorney Bruzonsky may add notes to this website under the subject lien article headers from time to time. (Please keep in mind that this site contains general information for educational purposes only. It is not intended to provide legal advise, which can only come from a qualified attorney who is familiair with all the facts and circumstances of your specific case and relevant law.) 

 

 

2012-01: Beating ERISA Liens in a Pro-Subrogated State: Ways to Minimize and Defeat ERISA Subrogation/Lien Claims (AzTLA Annual Liens Seminar Handout)

June 25th, 2016 11:53:25 am


                                   LAW OFFICES OF STEVEN J. BRUZONSKY                               

                         1152 E. Greenway St., Ste. 5 • Mesa, AZ  85203 • 480-969-3003

                                                                   • Fax: 480-962-5879

 

 

Beating ERISA Liens in a Pro-Subrogated State:         

Ways to Minimize and Defeat  ERISA Subrogation/Lien Claims:

 

Prepared by: Attorney Steven J. Bruzonsky

Date of Last Revision: For AAJ/AzTLA Liens Seminar on 1-27-2012

@2012 by Steven J. Bruzonsky, Esq.

 

 

1.  A Brief History of  ERISA Subrogation/Lien Litigation in the

U.S. Supreme Court:

 

There have been many cases in federal courts involving employer ERISA health plans, and also employer ERISA disability plans, particularly employers seeking to enforce ERISA health plan   

lien/subrogation plan provisions and to obtain reimbursement from their insured’s personal injury claims settlements. Section 502(e)(1) of ERISA, 29 U.S.C. § 1132(e)(1), gives the federal district courts exclusive jurisdiction of civil actions under this subchapter brought by ... [a] fiduciary." Section 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3),provides that a fiduciary may bring a civil action “to enjoin any act or practice which violates - - - the terms of the plan” or “to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce - - - the terms of the plan.”

 

FMC v. Holliday, 498 U.S. 52 (1990):

 

At that time,  the Holliday case made it clear that simply by identifying a plan as “ERISA” did not preclude the application of state law. The Court held: “ - - - (E)mployee benefit plans that are insured are subject to indirect state regulation. An insurance company that insures a plan remains an insurer for the purposes of state laws `purporting to regulate insurance` after  application of the deemer  clause [of ERISA]. The insurance company is therefore not relieved from state insurance regulation. The ERISA plan is consequently bound by state insurance regulations insofar as they apply to the state’s insurer.”

 

Prior to 2002, ERISA, as federal law, preempted  Arizona anti-subrogation case law, and an ERISA plan which had self-paid accident benefits could file a lawsuit in federal court to enforce the lien provision of its benefits plan. See United Food & Commercial Workers & Employers Arizona Health and Welfare Trust v. Pacyga, 801 F.2d 1157 (9th Cir. (Ariz.), 1986); and F.M.C. v. Holliday, 498 U.S. 52, 111 S.Ct. 403 (1990).

 

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

 

The Knudson case made it very difficult if not impossible to enforce ERISA lien claims in Arizona and the Ninth Circuit. In Knudson, plan provisions and a written subrogation agreement signed by the injured party required reimbursement from settlement. By the time suit was brought, the case was settled and settlement funds were already distributed by the attorney, and a Special Needs Trust had been set up under California law as part of the settlement. The U.S.

Supreme Court held that there was no federal court equitable jurisdiction under Section 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3).

 

During the years immediately following  Knudson (2002), although some other federal courts interpreted Knudson narrowly to permit equitable federal court jurisdiction by ERISA plans against plan participants seeking reimbursement from specific funds such as settlement funds held in the attorney’s Trust Account, the Ninth Circuit interpreted Knudson broadly so that there was no federal court jurisdiction for such lawsuits, even though the funds were held in escrow or in an attorney’s trust account, Westaff (USA) Inc. v. Arce, 298 F.3d 1164 (C.A. 9, 2002); Great West v. Berlin, 45 Fed.Appx. 750, 2002 WL 2017076 (C.A.9, 200_); Great West v. Unger, 2002 WL 2012528 (D. Ariz.).

 

Sereboff  v. Mid Atlantic Medical Services, Inc.,547 U.S. 356, 126 S. Ct. 1869 (2006):

 

The “Acts of Third Parties” plan provision provided for a lien for accident-related medical benefits paid against the settlement, and that “[Mid-Atlantic’s] share of the recovery will not be reduced because [the beneficiary] has not received the full damages claimed, unless [Mid-Atlantic] agrees in writing to a reduction.” The plan paid $74,869.37 medical benefits. The case was settled for $750,000.00 and the funds were distributed by the attorney to the Sereboffs. The plan filed suit in Federal District Court under Section 502(a)(3) of ERISA, seeking to collect from the Sereboffs the medical expenses, and also seeking a temporary restraining order and preliminary injunction requiring the couple to retain and set aside $74,869.37 of the settlement funds in an investment account until the court ruled and all appeals were exhausted. The District Court approved a stipulation by the parties under which the Sereboff’s agreed to preserve the $74,869.37 claimed by the ERISA plan in an investment account until the court ruled and all appeals were exhausted. The District Court ordered the Sereboffs to pay the plan $74,869.37, plus interest, with a deduction for the plan’s share of attorney’s fees and court costs. The Fourth Circuit Court of Appeals affirmed in relevant part. [Note that the express plan provisions provided for a prorated deduction for reasonable attorneys fees and costs incurred by beneficiaries in securing the third-party payments. Mid Atlantic Medical Services, LLC v. Sereboff, 407 F.3d 212 (4th Cir., 2005).]

 

A unanimous U.S. Supreme Court held that an ERISA plan’s action to collect medical expenses paid on behalf of the plan beneficiary who obtains a recovery from a third party in connection with the injuries requiring the treatment paid for by the ERISA plan is “equitable relief” under 29 U.S.C. §502(a)(3); and the judgment of the Fourth Circuit was affirmed in relevant part.

The Court distinguished its holding in Knudson: One feature of equitable restitution was that it sought to impose a constructive trust or equitable lien on “particular funds or property in the defendant’s possession.” That requirement wasn’t met in Knudson because the funds were not in Knudson’s possession but had been placed in a Special Needs Trust under California law; and in that case “Great-West did not seek to recover a particular fund from the defendant.”  “There was no need in Knudson to catalog all the circumstances in which equitable liens were available in equity; Great-West claimed a right of recovery in restitution, and the Court concluded only that equitable restitution was unavailable because the funds sought were not in Knudson’s possession.”

 

The Court states that there is no tracing requirement for the funds in this case. Citing Barnes v. Alexander, 232 U.S. 117 (1914), Justice Holmes recited “the familiar rul[e] of equity that a contract to convey a specific object even before it is acquired will make the contractor a trustee as soon as it gets a title to the thing.” Id., at 121. The Sereboffs’ ERISA plan provisions “specifically identified a particular fund, distinct from the Sereboff’s general assets”, and “This rule allowed them to “follow” a portion of the recovery “into the [Sereboffs’] hands” “as soon as [the settlement fund] was identified,” and impose on that portion a constructive trust or equitable lien.” The Court stated that “Barnes confirms that no tracing requirement of the sort asserted by the Sereboffs applies to equitable liens by agreement or assignment.”

 

The Court held that the lower courts did not err in enforcing the third party liability provision of the ERISA plan (that the plan’s share of the recovery will not be reduced because the beneficiary has not received the full damages claimed, unless the plan agrees in writing to a reduction) and in refusing to apply the “made-whole doctrine” (that the plan has no right of reimbursement until the plaintiff has been made whole for his other injuries) and other limitations or defenses that apply to “truly equitable relief grounded in principles of subrogation”.

 

The Court states that the plan’s claim is not considered equitable (for the purpose of applying equitable defenses) because it is a subrogation claim established by agreement as in Barnes,supra,as opposed to a subrogation lien equitably imposed without agreement on the ground that funds ought to go to the insurer. The plan’s claim claim qualifies as an equitable remedy because it is indistinguishable from an action to enforce an equitable lien established by agreement The Court in footnote 2 states that it declined to consider the “made-whole doctrine” because the issue wasn’t considered in the lower courts.

 

At the time, Sereboff was thought to significantly limit the holding in Knudson  to situations where the ERISA plan beneficiary does not have possession or control of the injury recovery (the funds were in a special needs trust in Knudson).

 

Cigna Corp. v. Amara, No. 09-804, 563 U.S. ___  , 130 S. Ct. 1754 (5-16-2011): 

 

In 1998, Cigna changed retirement benefits for its employees when it converted its traditional defined benefit plan to a cash balance plan. Plan participants filed a class action, claiming that Cigna’s notice of the changes was improper, as in some respects the new plan provided them with less generous benefits; and that the Summary Plan Description (SPD) was misleading by providing assurances that the new plan would “significantly enhance” and provide an “overall improvement” in retirement benefits. The district court found that the conversion to a cash balance plan violated ERISA Sections 102 and 204(b) because the SPD and other communications intentionally misrepresented plan terms. Under the authority of  ERISA §502(a)(1)(B), which authorizes relief for the plan participant “to recover benefits due - - - under the terms of the plan”, the district court  reformed the plan to provide for the benefits that had been communicated, so that the higher benefits would be paid. The Second Circuit summarily affirmed the district court’s decision.

 

The U.S. Suprme Court  held that although  ERISA §502(a)(1)(B) did not give the district court authority to reform Cigna’s plan or to give relief to plan participants seeking to enforce misleading language in the SPD which is inconsistent with terms in the Plan Document, that relief was authorized by ERISA §502(a)(3), which authorizes “other appropriate equitable relief” for violations of ERISA, and that the relevant standard of harm would depend on the equitable theory by which the district court provided relief. The Court discussed injunctions, equitable estoppel, reformation, surcharge, and monetary damages. The Court unanimously vacated and remanded the case to the district court for further proceedings.

 

Perhaps most significant for the context of ERISA healthplan lien claims, the U.S. Supreme Court, in the Cigna Corp. v. Amara case,  makes it crystal clear that the Plan Document is the controlling document (and must include the subrogation/lien terms); and that the SPD is merely a plan summary but not a binding document:

 

 “Nor can the Court accept the Solicitor General’s alternative rationale that the District Court enforced the summary plan descriptions and that they are plan terms. That reading cannot be squared with ERISA §102(a), which obliges plan administrators to furnish summary plan descriptions, but does not suggest that information about the plan provided by those disclosures is itself part of the plan. Nothing in §502(a)(1)(B) suggests the contrary. The Solicitor General’s reading also cannot be squared with the statute’s division of authority between a plan’s sponsor – who, like a trust’s settlor, creates the plan’s basic terms and conditions, executes a written agreement containing those terms and conditions, and provides in that instrument a procedure for making amendments – and the plan’s administrator – a trustee-like fiduciary who manages the plan, follows its terms in doing so, and provides participants with the summary plan descriptions. ERISA carefully distinguishes these roles, and there is no reason to believe that the statute

intends to mix the responsibilities by giving the administrator the power to set plan terms indirectly in the summaries, even when, as here, the administrator is also the plan sponsor. Finally, it is difficult to reconcile an interpretation that would make a summary’s language legally binding with the basic summary plan description objective of clear, simple communication.”

 

3. Traditional Premium Purchased Health or Disability Insurance:

 

[This defense to ERISA (Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq) liens applies only in those states with anti-subrogation statutes or case law.]

 

If the ERISA plan pays a  premium to purchase traditional health (or short or long term disability insurance), which pays the medical benefits, then there is no federal (ERISA) preemption of that state law regulating insurance, and any state anti-subrogation statutes or case law apply. United Food & Commercial Workers & Employers Arizona Health and Welfare Trust v. Pacyga, 801 F.2d 1157 (9th  Cir., 1986); and F.M.C. v. Holliday, 498 U.S. 52 (1990).

 

The U.S Supreme Court in FMC v. Holliday, 498 U.S. 52 (1990), made it clear that simply by identifying a plan as “ERISA” did not preclude the application of state law. The Court held: “ - - - (E)mployee benefit plans that are insured are subject to indirect state regulation. An insurance company that insures a plan remains an insurer for the purposes of state laws `purporting to regulate insurance` after  application of the deemer  clause [of ERISA]. The insurance company is therefore not relieved from state insurance regulation. The ERISA plan is consequently bound by state insurance regulations insofar as they apply to the state’s insurer.”

 

The U.S. Supreme Court denied cert. (March 2008)  of Bauhaus, USA Inc. v. Copeland, 2007 Miss. 545 (Miss. 11-27-2007). In that case, the Mississippi Supreme Court affirmed a lower court’s determination that Mississippi’s anti-subrogation case law was not preempted by federal  law, and that Mississippi anti-subrogation case law  barred a self-funded ERISA lien claim from a minor plan participant.

 

Although ERISA plans are federally regulated, commercial insurers who administer them remain subject to state law. Congress determined that it is in the public interest for the states to regulate insurance. See McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1014. The United States Supreme Court has repeatedly recognized this distinction. See UNUM Life Insurance Company v. Ward, 526 U.S. 358 (1999) (upholding state law “notice-prejudice” requirements); Hartford Fire Insurance Company v. California, 509 U.S. 764 (1993) (upholding state law regulation of the “reinsurance business” as triggering McCarran-Ferguson Act immunity from antitrust prosecution); Metropolitan Life Insurance Company v.  Massachusetts, 471, U.S. 724 (1985) (upholding Massachusetts statute which mandated minimum healthcare benefits not preempted by ERISA); and  Kentucky Association of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003) (holding that Kentucky statutes making it unlawful for health insurer to discriminate, in this case  through the use of exclusive healthcare provider networks, against any willing health care provider who is willing to comply with an insurer’s terms and conditions are laws which “regulate insurance” and, as such, are applicable to HMOs operating under ERISA scheme).

 

On the other hand, if the ERISA plan self-pays actual medical (or disability) benefits (paying an administration fee to health insurance/administrator to administer), then there is strong case law support that Federal law preempts Arizona anti-subrogation case law.

 

The common law rule long followed in Arizona is that, absent a statute, an assignment of a cause of action for personal injuries against a third party tortfeasor is void and unenforceable.

        

      Harleysville Mutual Ins. Co. v. Lea, 2 Ariz. App. 538, 542, 410 P.2d 495, 499 (1966) (Auto medical payments, Pensylvania insurance policy. The Arizona non-assignability rule "has much support in public policy.")

 

      State Farm Fire and Casualty Co. v. Knapp, 107 Ariz. 184, 185, 484 P.2d 180, 181 (1971) (Auto medical payments. Subrogation is prohibited under Arizona common law.).

 

      Allstate Ins. Co. v. Druke, 118 Ariz. 301, 304, 576 P.2d 489, 492 (1978) (Auto medical payments. "Whatever the form, whatever the label, whatever the theory, the result is the same.  The policies create an interest in any recovery against a third party for bodily injury.  Such an arrangement, if made or contracted for prior to settlement or judgment, is the legal equivalent of an assignment and therefore unenforceable.")  

 

Gallego v. Strickland, 121 Ariz. 160, 589 P.2d 34 (App. 1978) (Uninsured motorist claim, prior to statutory amendment providing for uninsured motorist subrogation);

 

      Hall v. Olague, 119 Ariz. 73, 75 n.2, 579 P.2d 577, 579 n.2 (App. 1978) ("In Arizona recompensation from the tort recovery by means of subrogation or refund of benefits is not permissible.").

 

      Brockman v. Metropolitan Life Ins. Co., 125 Ariz. 246, 248, 609 P.2d 61, 63 (1980) (New York group health insurance policy that had a reimbursement agreement between insurer and insured was void as against Arizona public policy.).

     

      Karp v. Speizer, 132 Ariz. 599, 601, 647 P.2d 1197, 1199 (App. 1982) (Assignment to judgement creditor by judgement debtor of proceeds expected to be recovered from personal injury action."We feel and therefore hold, that the better reasoned rule is that even though a cause of action for personal injury may survive, an action still may not be assignable either in whole or in part prior to judgment.").

 

      Talley v. Industrial Commission of Arizona, 137 Ariz. 343, 670 P.2d 741, 744 (App. 1983) ("Ordinarily, under Arizona law, an insurance company may not be assigned an injured insured's claim or [be] subrogated to the proceeds of such a claim.").

 

      American and Foreign Ins. Co. v. Allstate Ins. Co., 139 Ariz. 223, 226, 677 P.2d 1331, 1334 (App. 1983) (The "subrogation or assignment of a personal injury claim is void in Arizona.").

 

      State Farm Mut. Auto. Ins. Co. v. Janssen, 154 Ariz. 386, 395, 742 P.2d 1372, 1381 (App. 1987) ("The common law of Arizona has held that subrogation or assignment of a personal injury claim is void.").

 

      Preferred Risk Mut. Ins. Co. v. Vargas, 157 Ariz. 17, 19, 754 P.2d 346, 348 (App. 1988) (Involving an Iowa insurance policy. "The Arizona Supreme Court has held that subrogation to another's rights in a personal injury claim amounts to assignment of the claim and is therefore void.").     

 

      Lo Piano v. Hunter, 173 Ariz. 172, 175, 840 P.2d 1037, 1040 (App. 1992) (Local school district health trust fund, prior to A.R.S. §12-962 establishing liens for local school districts. "The rule prohibiting assignment of a personal injury claim has been applied by the Arizona courts without exception in a variety of contexts.").

 

      Lingel v. Olbin, 198 Ariz. 249, 252, 8 P.3d 1163, 1166 (App. 2000) ("It is well established in Arizona . . . that, absent statutory authorization, an assignment of a cause of action for personal injuries against a third-party tortfeasor is void and unenforceable.").

 

      Premium Cigars International, Ltd. v. Farmer-Butler-Leavitt Ins. Agency,208 Ariz. 557, 564, 96 P.3d 555, 563 (App. 2004) ("Personal-injury . . . claims are not assignable.").

 

     Smith v. Arizona Long Term Care System,207 Ariz. 217, 222, 84 P.3d 482, 487 (App. 2004) (Personal injury settlement insurance proceeds cannot be "sold or assigned.").

 

Sometimes, the ERISA plan documents and filed Form 5500 may obscure the fact that the health insurer is actually directly paying the health benefits. Insurers have developed and used mandatory deductible, loan receipt agreements, etc. to obscure the fact that sometimes the insurer is actually paying the health benefits. For example, if the injured party is employed by a major retailer with outlets in many states, and you review the filed Form 5500s and Administration Contract, you may well find that its difficult to determine from those documents if the plan actually self-pays the health benefits vs. the health insurer doing so. Litigation and discovery (interrogatories, production of documents, depositions of plan administrators or other key personnel) may be necessary to reveal this. 

 

4.  Stop Loss Health Insurance:

 

[This defense to ERISA (Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq) liens applies only in those states with anti-subrogation statutes or case law.]

 

Please see section discussing “Traditional Premium Purchased Health or Disability Insurance”,

 

Sometimes, an ERISA plan may self-pay some of the injured party’s accident-related health benefits, but some of the health benefits may be paid by a regulated health insurer directly (a “stop loss”, “stop gap” or “umbrella” insurer). The ERISA plan may have a “stop loss” amount per plan participant/insured person and/or a “stop loss” amount for all plan participants/insured person per plan or calendar year.

 

Although there may be a lien on the portion of accident-related medical benefits paid by the ERISA plan, the portion of medical benefits paid by the stop loss health insurer are subject to state insurance regulation including anti-subrogation law. Connecticut Steel Corp. v. Cordova(USDC Conn., October 30, 1996).  The stop loss insurer’s claims against plan participants doesn’t arise under ERISA and the stop loss carrier doesn’t have standing to sue plan participants in federal court. Hornady Manufacturing Co. v. Perico Life Ins. Co., et al. (USDC Neb., September 22, 2010) ( No. 8: 10CV150). Where the ERISA plan paid only the first $500 of the claim, leaving all else to the stop loss insurer, this did not mask the reality that it is close to simple purchase of  insurance directly. Brown v. Granatelli, 897  F. 2d 1351 (5th Cir. 1990).

 

5.  Both the Plan Document and the Summary Plan Description (SPD) Must Include Subrogation/Lien Provisions:

 

The Subrogation/Lien Provision Must be in the Plan Document, as Required by ERISA; and Also Must be in the SPD, as required by Regulation:

 

In order to determine the legal pros and cons of whether there is a valid ERISA healthplan lien (and sometimes a claimed ERISA short or long term disability lien), you should as a standard practice request plan documents.  ERISA (Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq), at 29 U.S.C. § 1102(a)(1), requires that ”each employee benefit plan shall be established and maintained pursuant to a written instrument.” Mandatory features are set forth at 29 U.S.C. § 1102(b) and optional features are set forth at 29 U.S.C. § 1102(C). ERISA, at  29 U.S.C. § 1022, further requires that each employee benefit plan maintain a “Summary Plan Description”.

 

The following information regarding the “written plan” (often referred to as the “Plan Document”), SPD and Summary of Material Modifications (SMM) (amendments to the plan or information required to be in the SPD) are from the U.S. Department of Labor, Employee Benefits Security Administration (EBSA), website at http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html:

 

(1) Each “written plan” has certain key elements, including awritten plan that describes the benefit structure and guides day-to-day operations; a trust fund to hold the plan's assets; a recordkeeping system to track the flow of monies going to and from the retirement plan; and documents to provide plan information to plan participants and the government. Sometimes,

In some cases, ERISA plans may use a “wrap” document,  by which the “written plan” incorporates by reference the applicable Summary Plan Description (SPD), insurance policy or coverage certificate; or by which the “written plan” consolidates multiple employee welfare benefit plans into a single plan.

 

(2) The Summary of Material Modifications (SMM) informs participants and beneficiaries of changes to the plan or to the information required to be in the SPD. The SMM or an updated SPD for a retirement plan must be furnished automatically to participants within 210 days after the end of the plan year in which the change was adopted.

 

(3) The Summary Plan Description (SPD) is the plan’s basic descriptive document. It is a plain language explanation of the plan and must be comprehensive enough to apprise participants of their rights and responsibilities under the plan. It also informs participants about the plan features and what to expect of the plan. Among other things, the SPD must include information about when and how employees become eligible to participate; the source of contributions and contribution levels; the vesting period, i.e., the length of time an employee must belong to a plan to receive benefits from it; how to file a claim for those benefits; and a participant’s basic rights and responsibilities under ERISA. This document is given to employees after they join the plan and to beneficiaries after they first receive benefits. SPDs must also be redistributed periodically.

 

However, 29 CFR § 2520.102-3(l) mandates that the SPD contain notification of any right of subrogation or reimbursement that the plan may assert. The SPD must provide “a statement clearly identifying circumstances which may result in disqualification, ineligibility, or denial, loss, forfeiture, suspension, offset, reduction, or recovery (e.g., by exercise of subrogation or reimbursement rights) of any benefits that a participant or beneficiary might otherwise reasonably expect the plan to provide on the basis of the description of benefits required by paragraphs (j) and (k) of this section.”

 

Keep in mind that sometimes, the ambiguity of plan language may be construed in favor of the plan participant and against the ERISA plan. InReinhart Companies Employee Benefit Plan v. Vial, No. 2:09-CV-169, W.D. Mich. (3-17-2011),  two separate ERISA plans claimed liens against a medical malpractice settlement (with settlement documents stating that the defendants admitted no liability) for payment of medical bills related to complications to the birth of a baby boy. The defendant medical providers denied liability throughout the case as well as in the settlement documents. Summary Judgment was granted against one of the plans, as the plan subrogation provision extended the right of reimbursement against a recovery “from a responsible or liable party”. The court noted that if the plan language had allowed recovery against “an allegedly responsible or liable party”, then reimbursement would have been allowed.

 

In Cigna Corp. v. Amara(2011), the United States Supreme Court Makes It Crystal Clear That

the Plan Document is the Contract Between the ERISA Plan and Its Plan Participants, and that the SPD is Merely a Plan Summary and Not a Binding Contract Between the Parties:

 

Cigna Corp. v. Amara, No. 09-804, 563 U.S. ___  , 130 S. Ct. 1754 (5-16-2011) is a landmark case in regard to ERISA plan liens, regardless of the fact that this case didn’t involve per se any lien.

 

In 1998, Cigna changed retirement benefits for its employees when it converted its traditional defined benefit plan to a cash balance plan. Plan participants filed a class action, claiming that Cigna’s notice of the changes was improper, as in some respects the new plan provided them with less generous benefits; and that the Summary Plan Description (SPD) was misleading by providing assurances that the new plan would “significantly enhance” and provide an “overall improvement” in retirement benefits. The district court found that the conversion to a cash balance plan violated ERISA Sections 102 and 204(b) because the SPD and other communications intentionally misrepresented plan terms. Under the authority of  ERISA §502(a)(1)(B), which authorizes relief for the plan participant “to recover benefits due - - - under the terms of the plan”, the district court  reformed the plan to provide for the benefits that had been communicated, so that the higher benefits would be paid. The Second Circuit summarily affirmed the district court’s decision. The Court  held that although  ERISA §502(a)(1)(B)

did not give the district court authority to reform Cigna’s plan or to give relief to plan participants seeking to enforce misleading language in the SPD which is inconsistent with terms in the Plan Document, that relief was authorized by ERISA §502(a)(3), which authorizes “other appropriate equitable relief” for violations of ERISA, and that the relevant standard of harm would depend on the equitable theory by which the district court provided relief. The Court discussed injunctions, equitable estoppel, reformation, surcharge, and monetary damages.

The Court unanimously vacated and remanded the case to the district court for further proceedings.

 

The Court discusses how the “written instrument” or plan document, required by ERISA,

is adopted by the plan sponsor (the Plan  Administrator, or those officers/directors empowered to act on behalf of the plan itself);  how this plan document is the contractual terms of the plan itself;  that the SPDs are intended as clear, simple communication providing  basic summaries of plan terms; and that ERISA did not give the administrator (such as a Third Party Administrator health insurer, or even the Plan Administrator) the power to set plan terms indirectly in the SPDs:

 

 “Nor can the Court accept the Solicitor General’s alternative rationale that the District Court enforced the summary plan descriptions and that they are plan terms. That reading cannot be squared with ERISA §102(a), which obliges plan administrators to furnish summary plan descriptions, but does not suggest that information about the plan provided by those disclosures is itself part of the plan. Nothing in §502(a)(1)(B) suggests the contrary. The Solicitor General’s reading also cannot be squared with the statute’s division of authority between a plan’s sponsor – who, like a trust’s settlor, creates the plan’s basic terms and conditions, executes a written agreement containing those terms and conditions, and provides in that instrument a procedure for making amendments – and the plan’s administrator – a trustee-like fiduciary who manages the plan, follows its terms in doing so, and provides participants with the summary plan descriptions. ERISA carefully distinguishes these roles, and there is no reason to believe that the statute

intends to mix the responsibilities by giving the administrator the power to set plan terms indirectly in the summaries, even when, as here, the administrator is also the plan sponsor. Finally, it is difficult to reconcile an interpretation that would make a summary’s language legally binding with the basic summary plan description objective of clear, simple communication.”

 

Justice Scalia, in his concurring opinion, states that “An SPD is separate from a plan, and cannot amend a plan unless the plan so provides.” 

 

There are some additional federal court cases pertinent to the subject of the Plan Document, the SPD and subrogation/lien rights:

 

In Grosz-Salomon v. Paul Revere Insurance, 237 F.3d 1154 (9th Cir. 2001), the ERISA plan lien language was in the SPD, but not in the Plan Document, and the court held that the lien was not enforceable.

 

In Weitzenkamp v. Unum Life Insurance, 2011 WL 2675247 (7th Circuit, 7-11-2011), Unum Life Insurance, the ERISA long term disability insurer , was estopped from relying upon a plan limitation which was not included in the Summary Plan Description. Failure to include the limitation in the SPD was found to be in violation of 29 U.S.C. §  1022.  The Court states the following:  “If an SPD does not satisfy ERISA's disclosure requirements, a court may estop a plan administrator from denying coverage for terms not included in the SPD but found in the underlying plan. - - - Because the SPD failed to “reasonably apprise” Weitzenkamp of the self-reported symptoms limitation and this limitation is relevant to a wide spectrum of plan participants, the SPD does not satisfy § 1022. Unum is therefore estopped from relying on the self-reported symptoms limitation in denying Weitzenkamp benefits.”

 

In Bergt v. Retirement Plan for Pilots Employed by Markair, Inc.,293 F.3d 1139, 1143, 144-45 (9th Cir. 2002), the court held that when the plan and the summary plan description conflict, the provision more favorable to the claimant applies, citing other federal court cases: Hansen v. Continental Ins. Co.,940 F.2d at 981-82 (5th Cir. 1991); Heidgerd v. Olin Corp., 906 F.2d 903, 907-908 (2d Cir.1990); Edwards v. State Farm Mut. Auto. Ins. Co., 851 F.2d 134, 136-37 (6th Cir.1988); and McKnight, 758 F.2d at 1570-71.

 

In Providence Health Plans of Oregon v. Simnitt, 209 WL 700873 (Dist. Ct. Oregon) (March 13, 2009), the court noted that in interpreting ERISA plan provisions, the court must consider all documents, including the Plan Document and the SPD, and any conflicts that cannot be harmonized and which favor employee will be construed in employee’s favor (citing Bergt,

293 F.3d 1139).

 

"Courts will generally bind ERISA defendants to the more employee-favorable of two conflicting documents-even if one is erroneous."  Banuelos v. Constr. Laborers' Trust Funds for So. Cal., 383 F.3d 897, 903 (9th Cir. 2004) (citing Bergt, 293 F.3d at 1143).  "[T]he law should provide as strong an incentive as possible for employers to write the [summary plan descriptions] so that they are consistent with the ERISA plan master document, a relatively simple task."  Id. (citing Banuelos, 383 F.3d at 903; Barnes v. Independent Auto. Dealers Ass'n of Cal. Health & Welfare Benefit Plan, 64 F.3d 1389, 1393 (9th Cir. 1995). 

 

In Jackson v. E.J. Brach Corp., 937 F.Supp. 735 (N.D. Ill. 1996), the court noted that if an ERISA plan contends that the SPD is the Plan document, “one document cannot constitute both the plan description (document) and the SPD”. 

It is clear that after Cigna v. Amara, that some federal court cases which held that the regulations had merged the Plan Document and the SPD into a single document are no longer good law. See e.g., Krishan v. McDonnell Douglas Corp., 873 F.Supp. 345, 350 n. 3 (C.D.Cal.1994), and  Horton v. Phoenix Fuels, Co., Inc., 611 F. Supp. 2d 977, 991 (D. Ariz. 2009). 

 

In Merigan v. Liberty Life, Case 1:09-cv-11087-RBC (11/30/11) the U.S. District Court of Massachusetts refused to enforce a 180 day requirement for perfecting an appeal which was

only in the SPD and which was not in the Plan Document, citing Cigna v. Amara.

 

6.  First PartyUninsured or Underinsured Motorist Benefits:

 

ERISA plan liens are contractual under state law, with federal law only preempting application of state anti-subrogation law or case law in appropriate cases. ERISA does not require a plan to claim subrogation rights.  Baxter v ISTA Insurance Trust, 749 N.E.2d 47, 56 (lnd App. 2001).

("ERISA does not require subrogation provisions in plans, and a subrogation right exists only if a plan creates one." ); Freeze v. Pipefitters Welfare Fund Local, 597, 5 F.3d 272 (7th Cir., 1993) (employee refused to sign subrogation agreement, required by the plan documents, with court holding that benefits were not payable).

 

Lien/Subrogation rights, if any, are those expressly provided for by written plan provisions. Sometimes, plan language may refer to “third party” only without further clarification that lien/subrogation rights also extend to first party uninsured and underinsured motorist settlements.

 

An example of this is in the lien context of an A.R.S. §12-962 state or political subdivision lien.

In Arizona Department of Administration v. Cox, 213 P.3d 707 (App. 2009), the court, noting that A.R.S. §12-962(A) established lien rights against the “third party”, and this  “unambiguous language” limits the lien to  “circumstances creating tort liability upon a third person.:

The court stated that the “(u)nderinsured motorist coverage arises from contractual liability”,

and the court rejected any argument that the lien applied to the underinsured motorist settlement.

 

7.  Timing of the applicable sub rogation/lien provision:

 

An ERISA plan’s subrogation/lien rights is a matter of contract between the parties.

The subrogation/lien provision must be in the plan documents (Plan Document and the SPD) at the time of the injury accident, and/or when the accident or incident related medical bills

are incurred. This is a simple matter of contract law.

 

An ERISA plan can’t retroactively apply the terms of a subsequent plan document. Gorman v. Carpenters’ & Millwrights’ Health Benefit Trust Fund, 410 F.3d 1194 (10th Cir. 2005);

ACS/PRIMAX v. Polan, 2008 WL 5213093 (W.D. Pa.); Sheet Metal Workers Local 27 Health &

Welfare Fund v. Beenick, 2008 WL 5156663 (D.N.J.); Burgett v. MEBA Medical And Benefits

Plan, 2007 WL 2815745 (E.D.Tex.); Member Services Life Ins. v. American National Bank, 130 F.3d 950 (10'n Cir. 1997).

 

8.  Plan Language Ambiguity & the “Reasonable Expectations” Defense:

 

InReinhart Companies Employee Benefit Plan v. Vial, No. 2:09-CV-169, W.D. Mich. (3-17-2011),  two separate ERISA plans claimed liens against a medical malpractice settlement for payment of medical bills related to complications to the birth of a baby boy. The defendant medical providers denied liability throughout the case as well as in the settlement documents. Summary Judgment was granted against one of the plans, as the plan subrogation provision extended the right of reimbursement against a recovery “from a responsible or liable party”.

The court noted that if the plan language had allowed recovery against “an allegedly responsible or liable party”, then reimbursement would have been allowed.

 

The “reasonable expectations” doctrine was first set forth in Darner Motor Sales v. Universal Underwriters, 140 Ariz. 383 (1984). Darner and a long line of cases since establish the principal that non-bargained for boilerplate language is looked at with disfavor, and any parol evidence which suggests that contrary or even no representations were made by either party on the boilerplate language will render the language unenforceable as contrary to the parties “reasonable expectations”. 

 

The Ninth circuit has adopted Arizona’s “reasonable expectations” doctrine as part of federal common law for ERISA claims. See Saltarelli v. Bob Baker Group Medical Trust, 35 F.3d 382 (9th Cir. 1994). The “reasonable expectations” doctrine is a substantive rule of insurance law that permits courts to ignore unambiguous terms in policy forms that would otherwise defeat the expectations on insured.

 

9.  Equitable Defenses Including The Make-Whole Rule; and Adverse Publicity:  

 

There have been many cases in federal courts involving employer ERISA health or disability  plans, particularly employers seeking to enforce ERISA health plan lien/subrogation  provisions and to obtain reimbursement from their insured’s personal injury settlements.  These cases have been brought by the ERISA plan fiduciary under § 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3), which provides that a fiduciary may bring a civil action “to enjoin any act or practice which violates - - - the terms of the plan” or “to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce - - - the terms of the plan.”

 

Barnes, Ninth Circuit, 1995:

 

In Barnes v. Independent Auto Dealers’ Assoc., 64 F.3d 1389 (9th Cir., 1995), the Ninth Circuit adopted the make-whole rule, that an insured must be made whole before an insurer can enforce its right to subrogation as federal common law. Per the facts of Barnes as discussed by the Ninth Circuit, this rule applies (A) in the absence of a clear contract provision to the contrary; or (B) even if there is a clear “anti” make-whole contract provision ( such as use of the language that the lien applies to “any” or “all” rights of recovery), the rule applies when the circumstances require this, such as when the plan refuses to pay medical benefits and/or fails to join as a party, assist or contribute toward expense of suit.

 

Susan Barnes incurred $23,075.40 accident-related medical bills, including back surgery and lost wages of $8,906.92. Her ERISA health plan refused to pay medical benefits for her accident-related medical bills, withholding payment citing its subrogation clause, and the plan didn’t participate or intervene in her litigation.  In November 1991, the trial court granted Barnes’ motion for good faith settlement, reciting the parties’ agreement that the $25,000 represented general damages only. In August 1992, Barnes filed a state court action against her ERISA health plan to collect payment of $18,075.40, for her outstanding medical bills less the $5,000.00 paid by her auto medical payments coverage. The lawsuit was removed by the plan to federal court. Barnes submitted an affidavit from her attorney that her case was worth at least $65,000.00. The district court granted the plan’s motion for summary judgment that the plan was entitled to decline all payment to Barnes.

 

The Ninth Circuit  reversed and remanded to the district court to enter summary judgment for Barnes and to determine attorney’s fees to be awarded to Barnes. The Ninth Circuit’s states its reasons for this determination: (1) The plan made no payment, so there is no right to subrogation under the plan’s subrogation clause. The plan’s subrogation clause unambiguously provides that “the Plan’s right to subrogation arises only after the Plan makes payment to the insured”; and even if this clause was considered to be ambiguous, the same result is reached (The plan’s subrogation clause provides that the “plan may withhold payment of benefits when a party other than the employee or dependent may be liable for expenses until liability is legally determined.  - - - --- However, if this plan makes payment which the employee, dependent or any other party is or may be entitled to recover against any person or organization responsible for an accident or illness, this Plan is subrogated to all rights of recovery to the extent of its payment.”); and (2) That Barnes was not made whole by the settlement, so the plan’s rights are limited by the common law make-whole rule.

 

The Ninth Circuit explains the “make-whole” rule: “It is a general equitable principle of insurance law that, absent an agreement to the contrary, an insurance company may not enforce a right to subrogation until the insured has been fully compensated for her injuries, that is, has been made whole. See Fields v. Farmers Ins. Co., 18 F.3d 831, 835 (10th Cir.1994) (diversity case listing jurisdictions following the rule); Guy v. Southeastern Iron Workers' Welfare Fund, 877 F.2d 37, 39 (11th Cir.1989) (ERISA case  noting that subrogation right not mature until insured is reimbursed for loss). The make-whole principle is a rule of interpretation. No one doubts that the beneficiary of an insurance policy or (as here) an   employee welfare or benefits plan can if he wants sign away his make-whole right. The right exists only when the parties are silent. It is a gap filler.Cutting v. Jerome Foods, Inc., 993 F.2d 1293, 1297 (7th Cir.) (citations omitted), cert. denied,  ___   U.S. ___, 114 S.Ct. 308, 126 L.Ed.2d 255 (1993).

 

That rule is supported by substantial authority in existing insurance law, and it is consistent with ERISA's purpose of protecting *1395 participants in employee benefit plans. See Batchelor, 870 F.2d at 1449; Guy, 877 F.2d at 39-40 (allowing subrogation before plaintiff made whole would not be "compatible with the remedial principles of ERISA"). Because the make-whole rule does not permit an insured to recover from the tort-feasor and from her insurance company if the recovery would exceed the damages, it also is consistent with ERISA's related purpose of maintaining the interest of other employees in their benefit plans. See Nachwalter v. Christie, 805 F.2d 956, 960 (11th Cir.1986) (a central goal of ERISA is protection of employees' rights in benefit plans against unwarranted disbursements); Germany v. Operating Eng'rs Trust Fund, 789 F.Supp. 1165, 1171 (D.D.C.1992) (applying make-whole rule to subrogation under ERISA plan as "consistent with the prevention of unjust enrichment"). We adopt as federal common law this generally accepted rule that, in the absence of a clear contract provision to the contrary, an insured must be made whole before an insurer can enforce its right to subrogation.”

 

The plan argued thatreference in the subrogation clause to “any” or “all” rights of recovery overrides the make-whole rule, as the plan language in this case states that the “Plan is subrogated to all rights of recovery”, citing in support of its position  a number of federal cases. However, the Ninth Circuit notes that in those cases, the insurance company already had paid the insured’s claim; the insurance company had already paid the insured’s claim and then cooperated and assisted in the lawsuit against the third parties; or the court avoided the determination whether the make-whole survived by deferring to the interpretion of the plan administrator, when the benefit plan, unlike the one in this case, gave the administrator discretion to interpret its provisions. The Ninth Circuit noted that in contrast to the cases cited by the plan: “Under these circumstances, when the insurance company makes no payment to the injured insured for covered expenses, and places all the cost and risk of seeking recovery from a third party or the injured insured, the make-whole rule remains in place despite the “all rights” language in the contract.  See 16 Couch, supra, § 61.47 at 130 (where insurer aware of third-party suit refuses  or fails to join as party, assist, or contribute toward expense of suit, insured need only account for surplus remaining after loss and expenses of suit are recovered.” [16 Couch on Insurance 2d  (rev. ed. 1983)].

 

Wasn’t the Ninth Circuit’s decision in Barnes a determination that the ERISA plan had “unclean hands” by not paying the medical benefits and/or by not assisting in the litigation, such that the remedy of the make-whole rule was applied? Shouldn’t other equitable defenses therefore be available to injured parties in ERISA lien cases litigated in the Ninth Circuit?

 

Note: In Benefit Recovery v. Donelon  (No. 07-30414) (5th Cir., 2008), the Fifth Circuit held that a Louisiana Commissioner of Insurance directive requiring that insurers comply with the “make-whole” doctrine is “state law which regulates insurance”, and is thereby saved by ERISA’s Savings Clause and is applicable to insurers providing coverage to ERISA plans.

 

Sereboff, U.S. Supreme Court, 2006:

 

In Sereboff  v. Mid Atlantic Medical Services, Inc., 547 U.S. 356, 126 S. Ct. 1869 (2006),

a unanimous U.S. Supreme Court held that an ERISA plan’s action to collect medical expenses paid on behalf of the plan beneficiary who obtains a recovery from a third party in connection with the injuries requiring the treatment paid for by the ERISA plan is “equitable relief” under 29 U.S.C. §502(a)(3). The make-whole doctrine and other equitable defenses were not considered at the District Court or Court of Appeals, and the U.S. Supreme Court declined to consider these arguments for the first time. The Court stated that:  “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.2”  At footnote 2, the Court notes that: “2 The Sereboffs argue that, even if the relief Mid Atlantic sought was “equitable” under § 502(a)(3), it was not “appropriate” under that provision in that it contravened principles like the make-whole doctrine. Neither the District Court nor the Court of Appeals considered the argument that Mid Atlantic’s claim was not “appropriate” apart from the contention that it was not “equitable,” and from our examination of the record it does notappear that the Sereboffs raised this distinct assertion below. We decline to consider it for the first time here. - - -“

 

Cigna Corp. v. Amara, U.S. Supreme Court, 2011:

 

In Cigna Corp. v. Amara, No. 09-804, 563 U.S. ___  , 130 S. Ct. 1754 (5-16-2011), ERISA plan participants filed a class action concerning Cigna’s changing of disability  benefits. The U.S. Supreme Court remanded the case to the district court to award relief based on ERISA § 502(a)(3), which authorizes “other appropriate equitable relief” for violations of ERISA (the same provision under which ERISA plans use as a basis to litigate lien/subrogation claims against plan participants/insured in federal courts). The Court further stated that the relevant standard of harm would depend on the equitable theory by which the district court provided relief. The Court discussed injunctions, equitable estoppel, reformation, surcharge, and monetary damages.

 

U.S. Airways v. McCutcheon, Third Circuit, 2011:

 

In U.S. Airways v. McCutcheon, No. 10-3836, (3rd Circuit Nov. 16, 2011), the Third Circuit

states that it considers the question that the U.S. Supreme Court in Sereboff (2006) left open, whether ERISA § 502(a)(3)’s requirement that equitable relief be “appropriate” means that an ERISA plan fiduciary, like U.S. Airways in this case, is limited in its recovery from a plan beneficiary, like McCutheon in this case, by the equitable defense and principles that were “typically available in equity”. Or put another way, whether equitable principles limit the scope of an ERISA plan administrator's right to reimbursement as a question of whether federal common law can override the express language of ERISA benefit plans.

 

The Third Circuit three judge panel unanimously vacated the district court’s order, which had required full payment of the U.S. Airways ERISA health plan lien, and remanded the case for the district court to fashion “appropriate equitable relief”  for U.S. Airways, because  under§ 502(a)(3) of ERISA U.. Airways claim for reimbursement is subject to “equitable limitations”.

 

The ERISA participant, McCutcheon was “grievously injured” in a car accident, after surviving emergency surgery, requiring months of physical therapy and a hip replacement. Due to multiple injured claimants and one wrongful death, McCutcheon settled with the adverse driver’s liability insurance for $10,000, and also obtained his $100,000 Uninsured Motorist policy limits, for a total of $110,000. After paying a 40% contingency attorneys’ fee and expenses, his recovery was less than $66,000. His attorney held $41,500.00 in Trust (after reducing the lien for procurement costs), and the ERISA plan claimed a constructive trust or equitable lien on the $41,500 held in Trust, and sought the remaining $25,366.00 personally from McCutcheon. The district court granted summary judgment for the ERISA plan for the full amount of the claimed lien of $66,866, requiring  McCutcheon to sign over the $41,500 held inTrust,  and requiring him to pay the remaining $25,366 from his own funds.

 

The Third  Circuit cites the recent U.S. Supreme Court Cigna Corp. v. Amara (2011) decision, wherein the U.S. Supreme Court “interpreted the term ‘appropriate equitable relief’ under § 502(a)(3) of ERISA as referring to those categories of relief that, traditionally speaking (i.e., prior to the merger of law and equity) were typically  available in equity” and that equity courts possessed the power to prevent a trustee’s unjust enrichment. The Third Circuit found that “Congress intended to limit the equitable relief available under § 502(a)(3) through the application of equitable defenses and principles that were typically available in equity”, including the power of the Court to prevent a trustee’s “unjust enrichment”.  The Court held that the lower court’s ruling was “inappropriate and inequitable” and that the lower court’s award amounted to a “windfall” for U.S. Airways.

 

Note that U.S. Airways had cited  cases from other Courts of Appeals, some of which

were decided after Sereboff (but all of which were decided prior to Cigna Corp. v. Amara)

to support its position that equitable doctrines that might limit its reimbursement recovery are not applicable under § 502(a)(3). See Zurich Am. Ins. Co. v. O'Hara, 604 F.3d 1232 (11th Cir. 2010); Admin. Comm. Of Wal-Mart Stores, Inc. Assoc. Health & Welfare Plan v. Shank, 500 F.3d 834 (8th Cir. 2007); Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot & Wansbrough, 354 F.3d 348 (5th Cir. 2003); Admin. Comm. of the Wal-Mart Stores, Inc. Assocs.' Health & Welfare Plan v. Varco, 338 F.3d 680 (7th Cir. 2003).

 

On 1-4-2012, the 3rd Circuit unanimously denied US Airway’s Petition for rehearing en banc in this case.  It is expected that the ERISA plan will file a Petition for Writ of Cert in the U.S. Supreme Court. 

 

Adverse Publicity May Encourage ERISA Lien Waiver/Reduction:

 

In Wal-Mart v. Shank, 500 F.3d 834 (8th Cir. 2007), the Eighth Circuit (U.S. Supreme Court denied cert), plaintiff had a $700,000 injury settlement and suffered  permanent brain injury, Wal-Mart’s ERISA lien was more than $469,000, she had substantial lost wages as well, and the Eighth Circuit upheld the validity of Wal-Mart’s ERISA lien. No stop loss insurance was involved. However, there was significant public outcry over this, the result being that Wal-Mart  waived its lien in full and changed its policy including that it would not seek reimbursement and subrogation in situations where an injury or illness results in death or other serious conditions such as paraplegia, quadriplegia, severe burns, or total or permanent physical or mental disability.

 

10.  Procurement (Pro Rata Attorney’s Fees and Costs) Cost Reduction:

 

Sometimes, the plan language provides for the procurement reduction.  Also, even if not in the plan language, ask for this reduction, as sometimes an ERISA plan or its subrogation company may have a policy or practice, whether in writing or not, of  providing the procurement cost reduction.

 

Arizona case law concerning other types of liens may be used to support your request for the procurement cost reduction:

 

The lien applies to the injury settlement proceeds only after deduction of attorney’s fees and costs.  State v. Holly199 Ariz. 358 (App. 2001) [a plaintiff's charging lien for reasonable attorneys' fees and costs takes priority over the State's setoff under A.R.S. §31-238(D)].

 

A state of Arizona A.R.S. §12-962lien applies to the remaining injury settlement proceeds, after deduction of attorney’s fees,  from liability insurance.Arizona Department of Administration v. Cox,222 Ariz. 270, 213 P.3d 707 (2009).

 

In Labombard  v. Samaritan Health System, 195 Ariz. 543, 991 P.2d 246 (App. 1998), the Arizona Court of Appeals required the procurement cost reduction for statutory A.R.S. §33-931 et seq healthcare provider balance billing liens, even though the statute doesn’t mention any such lien reduction, as the attorney’s work was necessary to produce the fund for payment of the lien.

 

In Southwest Fiduciary and Flynn v. AHCCCS, 2011 WL 832235 (App. 2011), the Arizona Court of Appeals holding included approving the procurement cost reduction for AHCCCS liens, even though the Arizona AHCCCS statutes and Federal Medicaid statutes and regulations do not mention any procurement cost lien reduction.

 

In Bachman v. Genesis Investments, No. CV-09-1212-HU, (Dist. Oregon) (1-21-2011), an order containing a federal magistrate’s findings & recommendation was handed down.  This order applies Oregon state law to this ERISA reimbursement claim and holds, inter alia, that plan language disclaiming responsibility for payment of the beneficiary’s attorney fees in pursuit of the tort recovery is unenforceable under Oregon law. Due to the limited nature of the recovery ($50K), the plan is required to pay 59.91% of the beneficiary’s attorney fee.

 

11.  No Federal Jurisdiction Due to Special Needs Trust Or Other Failure to Prove Specifically Identifiable Traceable Funds:

 

1. The U.S. Supreme Court Great-West Life & Annuity Ins. Co. v. Knudson (2002):

 

In Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), plan provisions and a written subrogation agreement signed by the injured party required reimbursement from settlement. By the time suit was brought, the case was settled and settlement funds were already distributed by the attorney, and a Special Needs Trust had been set up under California law as part of the settlement. The U.S. Supreme Court held that there was no federal court equitable jurisdiction under §502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3), which provides that a fiduciary may bring a civil action “to enjoin any act or practice which violates - - - the terms of the plan” or “to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce - - - the terms of the plan.” 

 

During the years immediately subsequent to Knudson, the Ninth  Circuit basically held that there was no federal jurisdiction for such lawsuits by ERISA plans against plan participants.

 

2. The U.S. Supreme Court Sereboff v. Mid Atlantic Medical Services, Inc. Case (2006):

 

In Sereboff v. Mid Atlantic Medical Services, Inc., 126 S. Ct. 1869 (2006): The “Acts of Third Parties” plan provision provided for a lien for accident-related medical benefits paid against the settlement, and that “[Mid-Atlantic’s] share of the recovery will not be reduced because [the beneficiary] has not received the full damages claimed, unless [Mid-Atlantic] agrees in writing to a reduction.” The plan paid $74,869.37 medical benefits. The case was settled for $750,000.00 and the funds were distributed by the attorney to the Sereboffs. The plan filed suit in Federal District Court under Section 502(a)(3) of ERISA, seeking to collect from the Sereboffs the medical expenses, and also seeking a temporary restraining order and preliminary injunction requiring the couple to retain and set aside $74,869.37 of the settlement funds in an investment account until the court ruled and all appeals were exhausted. The District Court approved a stipulation by the parties under which the Sereboff’s agreed to preserve the $74,869.37 claimed by the ERISA plan in an investment account until the court ruled and all appeals were exhausted. The District Court ordered the Sereboffs to pay the plan $74,869.37, plus interest, with a deduction for the plan’s share of attorney’s fees and court costs. The Fourth Circuit Court of Appeals affirmed in relevant part. [Note that the express plan provisions provided for a prorated deduction for reasonable attorneys fees and costs incurred by beneficiaries in securing the third-party payments. Mid Atlantic Medical Services, LLC v. Sereboff, 407 F.3d 212 (4th Cir., 2005).]

 

A unanimous U.S. Supreme Court upheld the lower court’s enforcement of the plan subrogation provision, holding that an ERISA plan’s action to collect medical expenses paid on behalf of the plan beneficiary who obtains a recovery from a third party in connection with the injuries requiring the treatment paid for by the ERISA plan is “equitable relief” under 29 U.S.C. §502(a)(3), affirming in relevant part the judgment of the Fourth Circuit.

 

The Court distinguished its holding in Knudson: One feature of equitable restitution was that it sought to impose a constructive trust or equitable lien on “particular funds or property in the defendant’s possession.” That requirement wasn’t met in Knudson because the funds were not in Knudson’s possession but had been placed in a Special Needs Trust under California law; and in that case “Great-West did not seek to recover a particular fund from the defendant.”  “There was no need in Knudson to catalog all the circumstances in which equitable liens were available in equity; Great-West claimed a right of recovery in restitution, and the Court concluded only that equitable restitution was unavailable because the funds sought were not in Knudson’s possession.”

 

The Court states that there is no tracing requirement for the funds in this case. Citing Barnes v. Alexander, 232 U.S. 117 (1914), Justice Holmes recited “the familiar rul[e] of equity that a contract to convey a specific object even before it is acquired will make the contractor a trustee as soon as it gets a title to the thing.” The Sereboffs’ ERISA plan provisions “specifically identified a particular fund, distinct from the Sereboff’s general assets”, and “This rule allowed them to “follow” a portion of the recovery “into the [Sereboffs’] hands” “as soon as [the settlement fund] was identified,” and impose on that portion a constructive trust or equitable lien.” The Court stated that “Barnes confirms that no tracing requirement of the sort asserted by the Sereboffs applies to equitable liens by agreement or assignment.”

 

2. Federal Circuit and District Court Cases Post Sereboff:

 

At the time, Sereboff  (2006) was thought to significantly limit the holding in Knudson  to situations where the ERISA plan beneficiary does not have possession or control of the injury recovery (the funds were in a special needs trust in Knudson). However, since then, federal courts for the most part have continued to dismiss lawsuits for ERISA plan liens on the basis of no federal court jurisdictionunder §502(a)(3) of ERISA, due to failure of the lienholder to prove that there are specifically identifiable funds from the settlement which are traceable and distinct from the plan member’s general assets. These cases include:

 

Martorello v. Sun Life Assurance Company of Canada, 2009 WL 2160652 (U.S. District Court, N.D. Cal., 7-20-2009) (Dismissal of Sun Life’s counterclaim, which alleged on information and belief that the overpayment of long term disability benefits could be directly traced to particular funds in the plan participant’s possession, custody and control, with Sun Life admitting that it required discovery to identify the particular funds.)

 

James River Coal Company Medical and Dental Plans v. Bentley, 649 F.Supp.2d 657 (U.S. District Court, E.D.Ky., 7-23-2009) (ERISA healthplan lien Complaint dismissed  because the plan failed to identify a particular fund from which the plan was to be reimbursed.)  

 

Hall v. Liberty Life Assurance Corp., 2010 WL ___. (Nos. 08-4738/4739) (6th Circuit., 2-8-2010)  (The 6th Circuit reversed the trial court’s award, which attempted to impose a lien on the beneficiary’s future social security payments, as reimbursement for Liberty Life’s past long term disability overpayments, holding that not only does 42 U.S.C. §407(a) protect Social Security payments from liens, but that for restitution of insurer overpayments, the restitution must impose a constructive trust or equitable lien on “particular funds or property in the [insured’s] possession.”) 

 

Herman v. Metropolitan Life, 2010 WL 557267 (U.S. District Court, M.D.Fla., 2-11-2010) (Dismissal of Metropolitan Life’s counterclaim for reimbursement of Social Security overpayments, due to lack of evidence of an identifiable fund.)

 

Unum Life Ins v. Epes, # 4:09CV00244-WRW (U.S. District Court, E.D.Ark. 4-27-2010) (Dismissal of lawsuit, by Unum Life to collect $207,894.88 in alleged long term disability overpayments made to their insured, because there was no specifically identifiable fund and the overpayment couldn’t be clearly traced to particular funds or property in their insured’s possession.)

 

Stone v. Bayer Corporation, 08-CV-356-BR (U.S. District Court, Portland, Oregon, 6-21-2010) (Plaintiff awarded past due long term disability benefits, and Court denied the ERISA plans request to have the award offset for unpaid medical, vision, dental, accidental /death dismemberment and life insurance premiums because the offset claim wasn’t an equitable relief remedy available to fiduciaries under ERISA.)

 

The Pepsi Bottling Group, Inc. v. Donald Thomas, # C10-54MJP (U.S. District Court, W.D. of Washington at Seattle, 7-1-2010) (ERISA healthplan lien of $525,000; tentative but not finalized settlement for $606,000; Complaint dismissed due to lack of federal court equity jurisdiction; the ERISA plan had been served with an Order to Show Cause in the plan member’s state court injury lawsuit.); see companion case, Donald Thomas v Chase B. Powell et al, # C10-53 MJP (U.S. District Court, W.D. of Washington at Seattle, 5-7-2010) (Held that the ERISA plan wasn’t a “defendant” for the purpose of effectuating removal of the injury case from state to federal court.)

 

Funk v. Cigna Group Insurance, 2010 WL 3522085, (U.S. District Court, N.J., 8-31-2010) Dismissal of Cigna’s counterclaim due to no specifically identiable fund, for an overpayment realized from a Social Security retroactive lump sum award, where the insured had paid back part of the overpayment but had used the rest to pay mortgage and utilities bills.)

 

Epolito v Prudential Insurance, 2010 WL 3463211, (U.S. District Court, M.D., Fla 9-2-2010) (Dismissal of Prudential’s counterclaim for a retroactive Social Security lump sum award where there is no evidence that the funds are still in the possession of the insured.)

 

Ray v. Sun Life & Health Ins. Co.,2010 WL 4812806, *24 (N.D.Ala. 9-29-2010) (The Alabama Federal District Court, in ruling upon a counterclaim for overpayments on a disability policy issued by an ERISA insurer dismissed the insurer’s equitable restitution claim without prejudice, as “the court does not know whether the recovery sought is from Ray’s assets generally or from an identifiable fund or from a fund not in Ray’s possession.” 

 

CGI Technologies v. Rose(2011 WL 197772) (U.S. District Court, W.D. Washington, 1-19-2011) (Plaintiff’s attorney held the amount of the ERISA lien claim in the attorney’s Trust Account, the court upheld the ERISA plan’s reimbursement action against those funds.)

 

ACS Recovery Service v. Griffin, No. 6:09-cv0512, (3-23-2011) (The Federal Court, Eastern District, Texas (Tyler Division) dismissed an ERISA reimbursement claim in the amount of $50.076.19 because the tort recovery of $300,000 had been placed in a Special Needs Trust.) 

 

Sivalingam v. Unum, 2011 WL 1584055 (E.D.Pa. 4-26-2011) (Unum Life Insurance counterclaimed for $1,430,128.42 in alleged “overpaid” disability benefits, seeking  to impose a “constructive trust or equitable lien” on bank accounts into which the funds were deposited and also upon real property purchased with the funds. The Court denied Unum’s motion for summary judgment recognizing that the evidence does not “establish that the money in the identified bank accounts came exclusively from Unum” nor does the evidence show “that Sivalingam’s real estate purchases were financed using only disability benefits payments.” )

 

12.  Accident-Related Medical Expenses:

 

In Rotech Healthcare Inc. v. Huff, 2011 WL 873150, (Cent.Dist. Ill., 3-8-2011), the court granted summary judgment for the beneficiary, denying the ERISA plan’s reimbursement claim. The beneficiary’s doctor testified that none of the bills claimed in the lien were accident-related, but rather related to underlying disease of the back. The beneficiary had previously listed these same medical bills as having been caused by the accident in an interrogatory answer filed in the tort action, and the court held that this did not estop the beneficiary from contending that the bills weren’t accident-related.

 

Any lien/subrogation rights are generally expressly limited to recovery of “accident-related” (or similar language) health benefits paid by the plan.

 

Lets say that the client’s health care isn’t accident-related and isn’t claimed as accident-related – then ensure that the claimed lien doesn’t include non accident-related expenses. Only accident-related expenses are allowed by the contract language. 

 

Similarly, say the odds are that certain claimed accident-related expenses may on the average be awarded only X% of the time at trial, then argue that the lien for those expenses should be reduced to X% of the benefits paid towards those medical expenses. 

 

Argue that equity should be applied to avoid a “windfall” to the ERISA lien claimant, for the following reasons:

 

(1) The ERISA plan’s civil action on its lien/subrogation claim is brought under § 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3), which provides that a fiduciary may bring a civil action “to enjoin any act or practice which violates - - - the terms of the plan” or “to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce - - - the terms of the plan.”

 

(2) Authority to apply equitable defenses to ERISA lien claims brought under § 502(a)(3) of ERISA) are Barnes v. Independent Auto Dealers’ Assoc., 64 F.3d 1389 (9th Cir., 1995) (the Ninth Circuit applied the make-whole rule of equity to an ERISA health plan lien claim brought under

§ 502(a)(3) of ERISA); Sereboff  v. Mid Atlantic Medical Services, Inc., 547 U.S. 356, 126 S. Ct. 1869 (2006) [the U.S. Supreme Court held that an ERISA health plan lien claim brought under

§ 502(a)(3) of ERISA is a claim for “equitable relief” under 29 U.S.C. §502(a)(3)]; Cigna Corp. v. Amara, No. 09-804, 563 U.S. ___  , 130 S. Ct. 1754 (5-16-2011) (although this is a class action brought by Cigna disability plan participants concerning disability benefits, the U.S. Supreme Court remanded the case to the district court to fashion “equitable relief” under 29 U.S.C. §502(a)(3), with the Court discussing various types of equitable relief that may be considered by the district court, including injunctions, equitable estoppel, reformation, surcharge, and monetary damages); and U.S. Airways v. McCutcheon, No. 10-3836, (3rd Cir., 11-16-2011)

(the Third Circuit, post Sereboff and Cigna Corp. v. Amara, held that ERISA plan lien claims brought under § 502(a)(3) of ERISA are claims for “equitable relief” under that statute requiring the court to fashion “appropriate equitable relief”).

 

(3) That the equitable logic of Arkansas Dept. of Health and Human Services v. Ahlborn, 126 S.Ct. 1752 (2006), should be applied in ERISA lien claims brought under 29 U.S.C. §502(a)(3).

Ahlbornholds that state Medicaid agencies’ claims for lien reimbursement from tort settlements are limited to that portion of any settlement attributable to past medical expenses. Ahlborn recognized that an injured party’s cause of action constitutes “property” which was protected under the federal Medicaid anti-lien provision, 42 U.S.C. §1396p(a)(1), which prohibits States from imposing liens “against the property of any individual prior to his death on account of medical assistance paid . . . on his behalf under the State plan.”  Also, argue that if the federal equity court sustains the full claimed ERISA lien, as opposed to an equitable amount as discussed above, that this is an unconstitutional  taking of the injured party’s property which violates the 5th Amendment to the U.S. Constitution.  

 

A good trick is have the adverse insurance adjuster/defense attorney, arbitrator or mediator give you their written finding of the amount of and which post-accident medical expenses are considered accident-related and their reasons therefor. Then present this documentation to the subrogation company, and court if there is litigation over the ERISA lien.

 

13.  Lien Priority of Payment:

 

The injury claimant/insured’s attorney has a priority lien against settlement or judgment proceeds. Linder v. Lewis, Roca, Scoville & Beauchamp,85 Ariz. 118, 333 P.2d 286 (Ariz. 1958); State Farm Mutual Insurance Company v. St. Joseph's Hospital, 107 Ariz. 498, 489 P.2d 837 (1971); and Holly v. State of Arizona, 199 Ariz. 358, 18 P.3d 152 (App. 2001).

 

ERISA plan liens are contractual under state law, with federal law only preempting application of state anti-subrogation law or case law in appropriate cases. ERISA does not require a plan to claim subrogation rights.  Baxter v ISTA Insurance Trust, 749 N.E.2d 47, 56 (lnd App. 2001).

("ERISA does not require subrogation provisions in plans, and a subrogation right exists only if a plan creates one." ); Freeze v. Pipefitters Welfare Fund Local, 597, 5 F.3d 272 (7th Cir., 1993) (employee refused to sign subrogation agreement, required by the plan documents, with court holding that benefits were not payable); Gorman v. Carpenters’ & Millwrights’ Health Benefit Trust Fund, 410 F.3d 1194 (10th Cir. 2005), ACS/PRIMAX v. Polan, 2008 WL 5213093 (W.D. Pa.); Sheet Metal Workers Local 27 Health & Welfare Fund v. Beenick, 2008 WL 5156663 (D.N.J.); Burgett v. MEBA Medical And Benefits Plan, 2007 WL 2815745 (E.D.Tex.), and Member Services Life Ins. v. American National Bank, 130 F.3d 950 (10'n Cir. 1997) (all of which hold that an ERISA plan can’t retroactively apply the terms of a subsequent or later

issued plan document); 

 

An ERISA plan, as an assignee by contract, steps into the shoes of the assignor, and can have no greater rights than held by the assignor, and the result is the same under the doctrine of equitable subrogation: K. B. v Suite Farm Fire & Casualty,189 Ariz. 263, 267, 941 P 2d 1288, 1292 (App.1997) (assignee has no greater rights than assignor); Sun Valley Financial Services of Phoenix, LLC v. Guzman, 212 Ariz. 495, 134 P.3d 400 (App. 2006) (equitable subrogation works like an assignment); Capitol Indemnity Corp. v. Fleming, 203 Ariz. 589, 58 P.3d 955 (App. 2002) (treats subrogation same as assignment).

 

Accordingly, liens provided by Arizona or federal law have priority of payment over contractual ERISA healthplan liens. This includes but is not limited to AHCCCS/Medicaid liens, Medicare

Liens, hospital and healthcare provider recorded A.R.S. § 33-931 et seq liens, Federal Medicare Recovery Act liens (military, TriCare, Indian Health Service, Veteran’s Administration), and Arizona state or political governmental & subdivision liens (Arizona Department of Administration v. Cox, 213 P.3d 707 (App. 2009).

 

14.  Wrongful Death Claims:

 

Please see Attorney Steven J. Bruzonsky’s presentation at AAJ/AzTLA 2011 Annual Liens Seminar, also published in March 2011 “Liens Corner” article  in “The Advocate”.

 

15.  Employer Plans Maintained Solely To Comply with Disability Insurance Laws

 

ERISA, at  29 U.S.C. §1003(b) expressly provides the ERISA “shall not apply to any employee benefit plan if - - (3) such plan is maintained solely for the purpose of complying with applicable workmen's compensation laws or unemployment compensation or disability insurance laws”.

 

16.  Multiple Employer Welfare Arrangements:

 

Please see Attorney Steven J. Bruzonsky’s presentation at AAJ/AzTLA 2011 Annual Liens Seminar, also published in August 2010 “Liens Corner” article  in “The Advocate”.

 

17.  The “Payroll Practice” ERISA Exemption:

 

Please see Attorney Steven J. Bruzonsky’s presentation at AAJ/AzTLA 2011 Annual Liens Seminar, also published in June 2010 “Liens Corner” article  in “The Advocate”.

 

18.  Federal/ State Governments, Government Agencies and Political Subdivisions are Exempt from ERISA:

 

If the plan was established by a governmental entity, then it is exempt from ERISA.  SeeSilvera v. Mutual Life Ins.,  884 F.2d 423, 425 (9th Cir. 1989); Lo Piano v. Hunter,  173 Ariz. 172, 840 P.2d 1037 (App. 1992) (Arizona anti-subrogation case law applies to local school district self-insured medical trust fund, with school district trust fund exempt from coverage under ERISA).

 

ERISA, at  29 U.S.C. §1003(b) expressly provides that ERISA “shall not apply to any employee benefit plan if - - (1) such plan is a governmental plan (as defined in section 1002(32) - - -“.

 

29 U.S.C. §1002(32) is set forth below:

 

“(32) The term ``governmental plan'' means a plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. The term ``governmental plan'' also includes any plan to which the Railroad Retirement Act of 1935, or 1937 [45 U.S.C. 231 et seq.] applies, and which is financed by contributions required under that Act and any plan of an international organization which is exempt from taxation under the provisions of the International Organizations Immunities Act [22 U.S.C. 288 et seq.]. - - -“

 

19.  Church Plans are Exempt from ERISA:

 

ERISA also does not apply to church plans. Benson v. Providence Health & Services-Washington, (USDC Western Dst of Wash at Seattle, 11-30-2010).

 

ERISA, at  29 U.S.C. §1003(b) expressly provides the ERISA “shall not apply to any employee benefit plan if - - (2) such plan is a church plan (as defined in section 1002(33).

 

29 U.S.C. §1002(33) is set forth below:

 

“33)(A) The term ``church plan'' means a plan established and 
maintained (to the extent required in clause (ii) of subparagraph (B)) 
for its employees (or their beneficiaries) by a church or by a 
convention or association of churches which is exempt from tax under 
section 501 of title 26.
    (B) The term ``church plan'' does not include a plan--
        (i) which is established and maintained primarily for the 
    benefit of employees (or their beneficiaries) of such church or 
    convention or association of churches who are employed in connection 
    with one or more unrelated trades or businesses (within the meaning 
    of section 513 of title 26), or
        (ii) if less than substantially all of the individuals included 
    in the plan are individuals described in subparagraph (A) or in 
    clause (ii) of subparagraph (C) (or their beneficiaries).
 
    (C) For purposes of this paragraph--
        (i) A plan established and maintained for its employees (or 
    their beneficiaries) by a church or by a convention or association 
    of churches includes a plan maintained by an organization, whether a 
    civil law corporation or otherwise, the principal purpose or 
    function of which is the administration or funding of a plan or 
    program for the provision of retirement benefits or welfare 
    benefits, or both, for the employees of a church or a convention or 
    association of churches, if such organization is controlled by or 
    associated with a church or a convention or association of churches.
        (ii) The term employee of a church or a convention or 
    association of churches includes--
            (I) a duly ordained, commissioned, or licensed minister of a 
        church in the exercise of his ministry, regardless of the source 
        of his compensation;
            (II) an employee of an organization, whether a civil law 
        corporation or otherwise, which is exempt from tax under section 
        501 of title 26 and which is controlled by or associated with a 
        church or a convention or association of churches; and
            (III) an individual described in clause (v).
 
        (iii) A church or a convention or association of churches which 
    is exempt from tax under section 501 of title 26 shall be deemed the 
    employer of any individual included as an employee under clause 
    (ii).
        (iv) An organization, whether a civil law corporation or 
    otherwise, is associated with a church or a convention or 
    association of churches if it shares common religious bonds and 
    convictions with that church or convention or association of 
    churches.
        (v) If an employee who is included in a church plan separates 
    from the service of a church or a convention or association of 
    churches or an organization, whether a civil law corporation or 
    otherwise, which is exempt from tax under section 501 of title 26 
    and which is controlled by or associated with a church or a 
    convention or association of churches, the church plan shall not 
    fail to meet the requirements of this paragraph merely because the 
    plan--
            (I) retains the employee's accrued benefit or account for 
        the payment of benefits to the employee or his beneficiaries 
        pursuant to the terms of the plan; or
            (II) receives contributions on the employee's behalf after 
        the employee's separation from such service, but only for a 
        period of 5 years after such separation, unless the employee is 
        disabled (within the meaning of the disability provisions of the 
        church plan or, if there are no such provisions in the church 
        plan, within the meaning of section 72(m)(7) of title 26) at the 
        time of such separation from service.
 
    (D)(i) If a plan established and maintained for its employees (or 
their beneficiaries) by a church or by a convention or association of 
churches which is exempt from tax under section 501 of title 26 fails to 
meet one or more of the requirements of this paragraph and corrects its 
failure to meet such requirements within the correction period, the plan 
shall be deemed to meet the requirements of this paragraph for the year 
in which the correction was made and for all prior years.
    (ii) If a correction is not made within the correction period, the 
plan shall be deemed not to meet the requirements of this paragraph 
beginning with the date on which the earliest failure to meet one or 
more of such requirements occurred.
    (iii) For purposes of this subparagraph, the term ``correction 
period'' means--
        (I) the period ending 270 days after the date of mailing by the 
    Secretary of the Treasury of a notice of default with respect to the 
    plan's failure to meet one or more of the requirements of this 
    paragraph; or
        (II) any period set by a court of competent jurisdiction after a 
    final determination that the plan fails to meet such requirements, 
    or, if the court does not specify such period, any reasonable period 
    determined by the Secretary of the Treasury on the basis of all the 
    facts and circumstances, but in any event not less than 270 days 
    after the determination has become final; or
        (III) any additional period which the Secretary of the Treasury 
    determines is reasonable or necessary for the correction of the 
    default,whichever has the latest ending date.”

 

20.  Are Indian Tribal Plans Exempt from ERISA?

 

To be discussed in an upcoming “Liens Corner” article  in “The Advocate”.

 

21.  State Statutory or Court Required Notice:

 

Bradley v. Sebelius, 2010 WL 3769132 (11th Cir., 2010): A Wrongful Death case was brought under Florida law on behalf of the decedent’s estate and decedent’s surviving ten children. Florida's Wrongful Death Act (FWDA) is codified at Fla. Stat. §§ 768.16to 768.26 (2003). Under Florida law, “[t]he action shall be brought by the decedent's personal representative, who shall recover for the benefit of the decedent's survivors and estate all damages, as specified in this act, caused by the injury resulting in death.” Fla. Stat. § 768.20. Children of a decedent may also recover for lost parental companionship, instruction, and guidance and for mental pain and suffering from the date of injury. Fla. Stat. § 768.21(3).The case settled for the $52,500 nursing home’s liability policy limits. Medicare claimed a lien of $38,875.05 and per its regulations and manual reduced the lien by procurement costs (pro-rata attorney’s fees and costs divided by the settlement amount) to $22,480.89. The Florida Probate Court (after notice was given to Medicare but Medicare didn’t appear) found that the value of each of the ten survivors’ claims was at least $250,000 each; that Medicare’s lien was $38,875.08; that the full value of the ten survivors and decedents estate claims combined were $2,538,875.08; and that based upon “principles of equity”, that Medicare was entitled to recover $787.50 (about 2% of its original lien claim). The surviving children contended that the Florida Wrongful Death Act contemplated that damages allowed an estate are separate and distinct from damages recoverable for the deceased’ survivors, and that proceeds from a Wrongful Death action are the property of the survivors. The 11th Circuit concluded that under their de novo review, that Medicare was entitled to the sum of $787.50, as determined by the allocations of the probate court.

 

Coleman v. BCBS of Alabama, 2010 WL 4967473 (Fla. 1st DCA, 12-8-2010): The ERISA beneficiary settled a personal injury action and then filed suit in state court seeking a declaratory judgment that the ERISA plan had waived its right to subrogation because of its failure to comply with the Florida’s statutory notice requirements.  The state trial court had dismissed the case holding that there was exclusive federal court jurisdiction under ERISA. The Florida Court of Appeal for the First District held that the state court had concurrent jurisdiction and that the Florida statutory notice requirements constitute “laws regulating insurance” and as such, are applicable through ERISA’s “savings clause to the ERISA plan’s claim for reimbursement.

 

22.  Form 5500 and Attachments: 

 

The following information is from the U.S. Department of Labor, Employee Benefits Security Administration (EBSA), website at http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html:

 

“A Summary Annual Report (SAR) outlines in narrative form the financial information in the plan’s Annual Report, the Form 5500 (see below), and is furnished annually to participants. Traditional defined benefit pension plans that are required to provide an annual plan funding notice are not required to furnish an SAR. - - -

 

Plan administrators generally are required to file a Form 5500 Annual Return/Report with the Federal Government. The Form 5500 reports information about the plan and its operation to the U.S. Department of Labor, the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC). These disclosures are made available to participants and the public. Depending on the number and type of participants covered, the filing requirements vary. The form is filed and processed electronically under the ERISA Filing Acceptance System II (EFAST2). For more information on the forms, their instructions, and the filing requirements, see www.efast.dol.gov and request the publication Reporting and Disclosure Guide for Employee Benefit Plans. There are penalties for failing to file required reports and for failing to provide required information to participants.”

 

The “Reporting and Disclosure Guide for Employee Benefit Plans” is at

http://www.dol.gov/ebsa/pdf/rdguide.pdf. In particular, see “Overview of Form 5500 and Form M-1 Annual Reporting Requirements” starting at page 14. ERISA Plans are generally required to file the federal Form 5500 and applicable Schedules annually. (The Form M-1 is filed by Multiple Employer Welfare Arrangements. See my separate discussion regarding MEWAs.)

The chart at page 15 explains that (1) Schedule A – “Insurance Information” –  all plans “Must complete if plan has insurance contracts for benefits or investments”; (2) Schedule C – “Service Provider Information” – large pension plans and large welfare plans “Must complete if service provider was paid $5,000 or more or an account or enrolled actuary was terminated”.

 

The latest (2011) “Instructions For Form 5500” are at http://www.dol.gov/ebsa/pdf/2011-5500inst.pdf.  For “Who Must File”, see pages 2-4. For a basic explanation of each of the various schedules, see pages 7-8, which explains the following regarding Schedules A and C:

 

Schedule A (Insurance Information) – is required if any benefits under an employee benefit plan are provided by an insurance company, insurance service or other similar organization (such as Blue Cross, Blue Shield, or a health maintenance organization). This includes investment contracts with insurance companies, such as guaranteed investment contracts and pooled separate accounts. For additional information, see the Schedule A instructions. Note. Do not file Schedule A for Administrative Services Only (ASO) contracts. Do not file Schedule A if a Schedule A is filed for the contract as part of the Form 5500 filed directly by a master trust investment account (MTIA) or 103-12 IE.

 

Schedule C (Service Provider Information) – is required for a large plan, MTIA, 103-12 IE, or GIA if (1) any service provider who rendered services to the plan or DFE during the plan or DFE year received $5,000 or more in compensation, directly or indirectly from the plan or DFE, or (2) an accountant and/or enrolled actuary has been terminated. For additional information, see the Schedule C instructions.”

 

Review of the filing may indicate whether the plan pays a premium and purchases traditional health insurance, which pays accident-related medical expenses, or whether the plan self-pays the actual medical expenses. Per the aforementioned instructions, if the plan purchases traditional premium based health insurance, a Schedule A should be completed for that health insurance company; if the plan retains and pays a Third Party Administrator (TPA), or service provider,

to administer health benefits, with the plan self-paying the health benefits, then a Schedule C should be completed for that TPA/service provider.

 

However, in practice, I have found that ERISA plans, even large employers, fill out the Form 5500 and Schedules A and C incorrectly. E.G., there may be no Schedule A or Schedule C, or perhaps there is a Schedule A, for the health insurance company; yet there an applicable Administrative Services Agreement proving that the medical benefits were self-paid by the plan, with the health insurance company acting as a TPA.

 

23.  Penalty for Plan Administrator Late Production of Documents Requested by Plan Participant:

 

29 U.S.C. Section 1024(b) requires that the Plan Administrator shall, upon written request of any participant or beneficiary, furnish a copy of the latest updated summary plan description, and the latest annual report, any terminal report, the bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated. 29 U.S.C. Section 1132(c) requires that Plan documents be provided within thirty days from this written request, or the Plan is subject to an assessment of up to $100 per day for each day in excess of thirty that it takes to produce the documents. The Department of labor by rule increased this maximum penalty to $110 per day. See Final Rule Relating to Adjustment of Civil Monetary Penalties, 68 Fed.Reg. 2875-76 (Jan. 22, 2003). Christensen v. Qwest  Pension Plan,  462 F.3d 913 (C.A. 8 Neb. 2006). "It is important to note that a participant need not demonstrate any prejudice or harm from the lack of disclosure.  See, e.g., Moothart v. Bell, 21 F. 3d 1499 (10th Cir. 1994); Gillis v. Hoechst Celanese Corp., 4 F.3d 1137 (3d Cir. 1993) cert denied, 114 S. Ct. 1369 (1994); Daughtry v. Honeywell, Inc., 3 F. 3d 1488 (11th Cir. 1993).  After all, the purpose of the civil penalties is not to compensate participants for any injuries, but to punish for noncompliance with ERISA.  Faircloth v. Lundy Packing Co., 91 F.3d 648 (4th Cir. 1996). "

                   

Some recent cases awarding substantial fines against ERISA plans for failing to timely produce plan documents:

 

In Hoskins v. Metropolitan Life Insurance Co., 551 F.Supp.2d 942 (2008), the U.S. District Court in Phoenix awarded $4,400 based upon document production being 44 days late past the 30 days deadline.

 

In Huss v. IBM Medical and Dental Plan, 2009 WL 3713662,  (N.Dst.Ill. Nov. 4, 2009 & July 15, 2010), the District Court awarded $11,400.00, the maximum penalty of $110 per day times 104 days, and also awarded $86,906.04 attorney’s fees and costs.

 

In Leister v. Dovetail, 2009 WL 3460628 (C.C.Ill.) (10-22-09), the U.S. District Court for the Central District of Illinois awarded $377,600 based on $110 per day delay in document production.

 

In Thompson v. Transam Trucking, Case No. 2:08-cv-927, 10/26/10, the U.S. District Court of Ohio, Southern District, assessed  a penalty in the amount of $50 per day, per document, for a total of $17,600. 

 

In Mandry v. Am. Family Mut. Ins. Co., 2010 WL 3730910 (W.D. Wis. 2010), the plan administrator repeatedly failed to provide the requested plan documents which included internal guidelines not in the employer’s possession but relied on by the plans TPA in denying a participant’s claim for his child’s speech therapy services; in an earlier decision, the Seventh Circuit ruled that the employer must provide the requested documents and returned the case to the trial court to award  penalties for the delay; and the court awarded penalties of $30 per day totaling to $9,270.

 

In Yip v. Little, No. CV09-05683 RGX (JEMx) (April 4, 2011), the U.S. District Court for the Central District of California imposed statutory penalties of $19,360 against a plan administrator for failure to produce a document properly requested.  The plan administrator had taken the position that he was not required to produce the 1999 amendment to the plan.  This opinion also determines that the Plaintiff Employee (plan participant) was entitled to an award of attorney fees and costs despite the claim by the plan administrator “that he can ill afford an award of attorney’s fees because his company is small.” 

 

Only the ERISA Plan Administrator (not the Subrogation company or health insurer) is subject to the $110 per day penalty for late production, after thirty days, of requested Plan documents. Always request plan documents from Plan Administrator, even if you also request plan documents from subrogation company or health insurer. Plan penalties for late document production may be asserted as an offset against the lien claim, as well as independently litigated in federal court. Keep in mind that the only way to be sure of obtaining those plan documents applicable to your client’s plan benefits is to request and obtain those documents direct from the Plan Administrator.  I have found that health insurers and subrogation companies may at times will produce what is purportedly plan documents, but which differ from the actual documents produced by the Plan Administrator.

 

24.  Statute of Limitations:

 

To be discussed in an upcoming “Liens Corner” article  in “The Advocate”.

 

25.  Plan Document Request:

 

(Date)                                                              CERTIFIED MAIL: Return Receipt Requested

 

(Name of Plan Administrator – should be set forth in SPD and/or Form 5500)

Plan Administrator for __________ Employee Benefit (Including Medical, Short and/or Long

                                                            Term Disability) Plan

Street Address

City, State, Zip Code

 

 

Re:     Our Client/Your Plan Participant or Beneficiary

                (In Care of Our Law Firm):

           Employee:

           Employer:

           Client’s DOB:

 

Dear Plan Administrator for __________ Employee Benefit (Including Medical) Plan:

 

Pursuant to my right as a plan participant or beneficiary of the above employer’s employee benefits (including medical) plan, I respectfully request copies of the below listed plan documents.

 

Please address any questions or follow up regarding this document request to my attorney: (Name, address, phone, fax and email of attorney.) Enclosed is an Authorization, which I have signed, directing you to provide the below requested plan documents to me in care of my above referenced attorney.

 

ERISA (Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq),   at

29 U.S.C. §1024(b)(4), provides that “the administrator shall, upon written request of any participant or beneficiary, furnish a copy of the latest updated summary, plan description, and the latest annual report, any terminal report, the bargaining agreement, trust agreement, contract or other instruments under which the plan is established or operated.” Failure to provide the requested documents within thirty days is subject to a $110.00 per day penalty for each day of noncompliance. 29 U.S.C.  §1132(c)(1)(B); 29 C.F.R. § 2575.502c-1; See Final Rule Relating to Adjustment of Civil Monetary Penalties, 68 Fed.Reg. 2875-76 (Jan. 22, 2003).

 

I respectfully request that the above employer’s ERISA plan, including the above employer’s Medical Plan, provide to me, in care of my above referenced attorney, the below described documents issued effective for each plan year from January 1, ____ (insert plan year in which accident/incident occurred) to present:

 

1. The Summary Plan Descriptions (SPDs) for the plan’s various employee benefit plans, including but not limited to the medical, short and long terms disability plans and their subrogation and/or lien provisions. 

 

2. The “Written Instrument” (sometimes referred to as “Plan Document”, “Master Plan”, or “General Plan”) under which this ERISA employee benefit  plan is established, including but not limited to the medical, short and long term disability plans subrogation and/or lien provisions. If the “Written Instrument” includes “Wrap” provisions, which incorporate by reference other plan documents, including but not limited to the medical, short and long terms disability plans subrogation and/or lien provisions, then please be sure to provide both the “Wrap” document and the applicable documents which are “wrapped” or incorporated by reference into the “Written Instrument”. (Cigna Corp. v. Amara, No. 09-804, 563 U.S. _____ (5-16-2011) holds that the “Written Instrument” or “Plan Document” is the binding contract between the employer and its employees/insureds).

 

3. Amendments to the “Written Instrument” or “Plan Document”, including but not limited to the medical plan subrogation and/or lien provisions. 

 

4.  The Summary of Material Modifications (SMM) statements, including but not limited to the medical plan subrogation and/or lien provisions. (The SMM statements inform participants and beneficiaries of changes to the plan or to the information required to be in the SPD).

 

5.  Copies of all of the above employer’s ERISA plan contracts including, but not limited to: Insurance contracts including but not limited to medical, short and long term disability; medical Stop Loss Contracts (including disclosure of at what point the medical Stop Loss Insurance started or would have started paying my medical benefits individual and aggregate); Health Insurance Contracts; Insurance Intermediary Services Contracts; and Administrative Services Contracts related to the above employer’s Medical Plan serving the state or region of myself as plan participant or beneficiary.

 

6.  The Form 5500(s), including all attached schedules and attachments, filed with the U.S. Department of Labor.

 

7.  If my health or disability benefits are provided by a multiple employer or union plan or trust: Please provide the determination by the U.S. Secretary of Labor that the above employer’s Medical Plan is established or maintained pursuant to a collective bargaining agreement. Also, please provide the Plan’s complete last filed Form M-1 with each and every attachment filed along with the Form M-1.

 

Again, please provide the above requested plan documents to me in care of my above-referenced attorney. It is preferred if you can email the requested plan documents to my above referenced attorney.

 

Thank you for your courtesy and assistance.

 

Very truly yours,

 

___________________________

(Plan Participant or Beneficiary)

 



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