This article has been published in "The Advocate", a monthly publication of the Arizona Association for Justice/Arizona Trial Lawyers Association, September 2009 issue, @2009 by Steven J. Bruzonsky, Esq.
ERISA LIENS UPDATE: A FEW RECENT FEDERAL DISTRICT COURT CASES RE THE SPECIFICALLY IDENTIFIABLE FUND REQUIREMENT
(Please see my prior "Liens Corner" articles on ERISA liens in issues dated July/August 2006; June, July/August and September 2007; and February 2009.)
The Ninth Circuit in Great West v. Knudson, 534 U.S. 204, 122 S.Ct. 708 (2002) held that there was no federal jurisdiction for lawsuits by ERISA healthplans against plan participants. In Knudson supra, 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.
In Sereboff v. Mid Atlantic Med. Servs., Inc., 547 U.S. 356 (2006), the injury case was settled, plaintiff's attorney distributed settlement funds, but from the settlement funds, $74,869.37 was set aside in an investment account (to cover the full claimed ERISA healthplan lien) pending the Court's ruling. The U.S. Supreme Court upheld the lower court's enforcement of the plan subrogation provision, holding that the ERISA plan properly sought equitable relief under Section 502(a)(3) of ERISAThe Court cites Barnes v. Alexander, 232 U.S. 117 (1914), wherein 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 357. 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." Id. at 358.
In my July/August 2006 "Liens Corner" article discussing Sereboff in detail, I pointed out that one issue likely to be litigated in the coming years would be expansion of the equitable jurisdiction facts in Sereboff. A key fact of the Sereboff case is that the ERISA plan "sought specifically identifiable funds" that were "within the possession and control of the Sereboffs. If settlement funds to cover the ERISA lien are retained in the Attorney's Trust Account, or in a specified investment account, then certainly per Sereboff there is federal court jurisdiction of the ERISA lien claim. But what if the attorney has fully distributed the settlement funds, and the client may have comingled the funds with other funds or investments, used the funds to pay of credit cards, a home equity line and/or other loans? Following are just two most recent federal court cases on this very subject (there are more cases on this subject since Sereboff, but I am not going to go over all of them here).
In James River Coal Company Medical and Dental Plans v. Bentley, 2009 WL 2211906 (E.D.Ky., July 23, 2009), the District Court dismissed the complaint because the plan failed to identify a particular fund from which the plan was to be reimbursed. The Court notes that "To assert an equitable lien for the purposes of § 1132(a)(3), the ERISA plan must (1) identify a particular fund distinct from the plan member's general assets and (2) specify the particular share of the fund to which the plan is entitled. Sereboff v. Mid Atlantic Med. Servs., Inc., 547 U.S. 356, 363-64 (2006) (citing Barnes v. Alexander, 232 U.S. 117, 121-23 (1914). In this case, Plan language provided that "when the Participant has recovered damages - - - for an Injury or Sickness - - - caused by a third party - - - the Participant shall promptly reimburse the Plan when the recovery is received until the Plan has been fully reimbursed - - -." The Court held that plan language failed to meet both prongs required by Sereboff; that if the plan language had provided that the recovery was limited to the proceeds recovered from a third party, then it would have satisfied the 1st prong of the Sereboff requirement â€“ the particular fund language; and that the plan failed to identify a particular fund from which reimbursement should come, thus failing the 2nd prong of the Sereboff requirement.Thus, plan language creates personal liability on the part of the plan member rather than an equitable lien or constructive trust.
In Martorello v. Sun Life Assurance Company of Canada, 2009 WL 2160652 (N.D.Cal., July 20, 2009), the District Court dismissed the plan's amended counterclaim, which alleged on information and belief that the benefits which the plan participant received from Sun Life "can be directly traced to particular funds" currently in the participant's possession, custody or control." Sun Life conceded that it couldn't specifically identify the particular fund without the opportunity to obtain discovery of facts that are uniquely within plaintiff's control. The Court states: "Although defendant's point regarding the need for discovery is understandable, the Supreme Court has been clear that conclusory allegations unsupported by proper factual allegations do not meet the requisite threshold to defeat a motion to dismiss. Bell Atlantic v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1950 (2009). Moreover, without the existence of any specifically identifiable fund that contains the alleged overpayments paid by defendant, and which is directly traceable to plaintiff's custody, possession, or control, defendant's claim for relief amounts to an impermissible claim for legal relief under ERISA. See Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 209, 213 (2002) (only equitable restitution from a plan beneficiary is proper under ERISA, provided that the claim for restitution seeks to recover monies or properties that were alleged to be properly due the fiduciary and can clearly be traced to particular and/or identifiable funds in plaintiff's possession or control); Sereboff v. Mid Atlantic Med. Servs., Inc., 547 U.S. 356, 363 (2006) ((Fiduciary "alleged breach of contract and sought money, to be sure, but it sought its recovery through a constructive trust or equitable lien on a specifically identified fund, not from the beneficiaries'] assets generally, as would be the case with a contract action at law."). Thus, the court concludes that defendant has not met its burden in establishing more than the "mere possibility" that it is entitled to relief. See Iqbal, 129 S.Ct. at 1949-50."
The language of the Sereboff decision has been interpreted by some Arizona attorneys as imposing a constructive trust against upcoming personal injury settlement funds, such that the plaintiff's attorney is a trustee; and moreover, imposing an ER 1.15 responsibility upon Arizona attorneys to protect the ERISA healthplan's interest even if the plan had paid accident-related medical bills and given no notice of any lien claim. Some Arizona attorneys have been of the opinion that "actual notice" of the lien claim is required to trigger the protections required by ER 1.15. Do the above recent federal district court cases perhaps confuse the matter even more in favor of the "actual notice" requirement to trigger ER 1.15 protections?