WARNING: ERISA Liens & Tracing of Settlement Funds:
In early July of this year, after the decisions in Cannella v. Boone, 2017 WL 2872423 (M.Dis. Ga. July 5, 2017), and Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 136 S. Ct. 651, 577 U.S. ___, 193 L. Ed. 2d 556 (January 20, 2016), there was a good amount of discussion on our Arizona Association for Justice/Arizona Trial Lawyers Association listserve about evading ERISA subrogation/lien claims by disbursing the settlement funds to the client with instruction to the client to “dissipate” the settlement funds to avoid federal court equity jurisdiction by the ERISA Plan.
My personal opinion is that except perhaps in an unusual situation, especially if you or client have received “actual notice” of an ERISA subrogation/lien claim (Arizona ER 1.15), it is simply too
risky for both the attorney and the client to ignore and not negotiate an ERISA subrogation/lien claim (unless you can establish and prevail that the Plan documents do not lawfully support the subrogation/lien claim).
Even if the Plaintiff’s attorney does not charge the client extra for the federal district court and quite possible federal appellate work, if the client loses, the court may hold the client liable for defense attorney’s fees and costs. And if the Plan has offered any discretionary lien reduction that will be lost as well. Almost all ERISA Plans have provision to withhold, sometimes terminate, future benefits for nonpayment of a subrogation/lien claim against settlement funds. So if the client or a family member remains employed, or has a pension or medical benefits being paid by, the same ERISA plan employer, this is a huge concern. And of course as Plaintiff attorneys we are always concerned about the reach of the State Bar concerning Arizona ER 1.15 complaints.
What about setting up as part of the settlement an annuity or trust? Does the annuity or trust fall into the category of “nontraceable items” exempt from legal enforceability of the ERISA subrogation/lien claim?
We really don’t know, as there are no applicable court decisions in this regard. This question is certainly ripe r litigation here in Arizona and other anti-subrogation states , but as discussed above, this is a risky proposition for both the attorney and the client.
Following is a discussion of the very limited guidance we have by federal court decisions.
In Montanile, the case settled; then the Montanile’s attorney gave written notice to the Plan that if it failed to respond within 14 days that the remaining settlement funds would be released; and then the funds were disbursed to Montanile once the Plan failed to respiond within the 14 days. Six months later the plan filed suit in federal district court to enforce its “equitable” lien. The district court granted summary judgment in favor of the Plan. On appeal the Eleventh Circuit held that the funds were “specifically identifiable” and that the “equitable” lien could attach even in the case of “dissipation” against Montanile’s general assets. The U.S. Supreme Court reversed (8-1), stating that “We hold that, when a participant dissipates the whole settlement on nontraceable items, the fiduciary cannot bring a suit to attach the participant’s general assets under §502(a)(3) because the suit is not one for “appropriate equitable relief.” “ The case was remanded to the district court to determine whether or not Montanile had dissipated the entire settlement funds on “nontraceable” assets.
In Cannella v. Boone, an ERISA pension plan sued the plan participant’s widow in federal district court, seeking an equitable “constructive trust” under ERISA 29 U.S.C. § 1132(a)(3) and also asserting a state law claim for conversion, to recover 22 months of pension benefits that were placed into her bank account by "direct deposit" following death of husband. The defendant widow appeared pro se and did not even file a response to the ERISA pension plan’s Motion for Summary Judgment. The court applied the Montanile decision and dismissed the ERISA claim without prejudice, noting that the ERISA pension plan offered no reason why the ERISA claim should not be dismissed. The court also exercised its discretion and dismissed the Georgia state law claim for conversion without prejudice, noting that “These matters are best left to Georgia courts”. Keep in mind that this is simply a Georgia federal district court decision, and it is not binding here in Arizona and our Ninth Circuit.
In Montanile, the U.S. Supreme Court refers to “nontraceable items” as “… (for instance, on services or consumable items like food).” and “… (like food or travel)”. It remains an open question under federal law here in Arizona and our Ninth Circuit whether settlement funds placed in a bank savings or checking account may in certain circumstances be “specifically identifiable” such that
the “equitable” could attach. Perhaps the longer the funds are in the bank account and the more the original funds are dissipated would more likely result in the court finding that the funds are not “specifically identifiable” such that the “equitable” lien does not attach.
In Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), although the 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 ERISA plan lawsuit was for a money judgment, and the Court held that a suit for money judgment is not a form of equitable relief under §502(a)(3) of ERISA and thus there was no federal court equitable jurisdiction under §502(a)(3) of ERISA).
In Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), per agreement of the parties, the full ERISA healthplan lien of $74,869.37 was maintained in an investment account; and the Court held that there was federal court equitable jurisdiction under §502(a)(3) of ERISA) to enforce the “equitable lien by agreement” set forth in the plan documents.
In U.S. Airways v. McCutchen, 569 U.S. ___, 133, S. Ct. 1537 (2013), McCutchen’s attorney held $41,500 in the attorney’s trust account, and the Court held that there was federal court equitable jurisdiction under §502(a)(3) of ERISA to enforce the “equitable lien by agreement” set forth in the plan documents.