A Supreme Victory For ERISA Subrogation

Today, in what can only be described as a major victory for subrogating insurance carriers and health plans, the Supreme Court rendered a decision in the case of Sereboff v. Mid Atlantic Medical Services, No. 05-250 (547 U.S. ___), and upheld the right of an ERISA Plan to file a federal suit for reimbursement, overturning prior inconsistent decisions from the 6^th and 9^th Circuits. Clarifying the confusion, which has existed in this area since the Supreme Court's 2002 decision in Great-West Life & Annuity Ins. Co. v. Knudson, Chief Justice John Roberts, writing the unanimous decision for the Court, held that a Plan's efforts to seek reimbursement through a constructive trust or equitable lien are considered "legal", not "equitable", whenever the funds sought are in the possession of the Plan beneficiary, and eliminated any need for "tracing funds" where a Plan provides for reimbursement on its face.

In this case, Joel and Marlene Sereboff were injured in an automobile accident in California. For their injuries, the Sereboffs received approximately $75,000.00 from an ERISA-covered Plan, which was administered in Maryland. The Sereboffs filed suit in California and received a $750,000.00 settlement from the tortfeasoer. The Plan contained a reimbursement provision that required covered persons to reimburse the Plan to the extent of benefits paid when a covered person recovers from another party. Pursuant to this language, the Plan requested that the Sereboffs reimburse the Plan as required under the terms of the Plan, but they refused.

The Plan responded by filing suit against the Sereboffs, seeking "appropriate equitable relief" under ERISA § 502(a)(3). The Sereboffs stipulated to hold an amount equal to the lien in their investment account until the litigation could be resolved. The district court held that the Plan was entitled to equitable relief against the funds in the investment account pursuant to Great-West Life & Annuity Ins. Co. v. Knudson. The Sereboffs appealed and the 4^th Circuit affirmed, declaring that the funds could be traced even though they had been placed in an account holding unrelated funds of the Sereboffs, and noting that these funds belonged in good conscience to the Plan. The Supreme Court granted review to the Sereboffs in order to decide a split between the federal appellate court over whether the ERISA Plan's action for reimbursement was "equitable."

In an unusually concise opinion, the Sereboff decision contained three main points of import. First, the Court easily distinguished the Knudson case because the Plan member in Knudson did not have possession of the funds, which were being held in a "Special Needs Trust", stating that "The Court in Knudson did not reject Great-West's suit out of hand because it alleged a breach of contract and sought money, but because Great-West did not seek to recover a particular fund from the defendant." By contrast, because the funds in this case were being held and controlled by the Sereboffs, Knudson did not apply.

Second the Court went on to explain its reasoning for holding that a breach of contract action can be equitable. It was forced to examine cases addressing the differing concepts of law versus equity when the United States judiciary was split between courts of law and courts of equity. It analogized this case to Barnes v. Alexander, 232 U.S. 117 (1914) that addressed two attorneys' dispute over their entitlement to a third attorney's settlement. In that case, two attorneys sought to create an equitable lien against the settlement based upon a prior promise from a third attorney. The Court likened the third attorney's promise to the first two attorneys to the ERISA Plan's reimbursement clause. Because the Barnes Court allowed the equitable claim, Justice Roberts held that the Sereboff's ERISA Plan "could rely on a 'familiar rul[e] of equity' to collect for the medical bills it had paid on the Sereboff' behalf." In essence, today the Supreme Court held for the first time that in ERISA subrogation, a Plan beneficiary becomes a trustee for the Plan the moment he or she receives a third party settlement. Noting that there are two types of equitable liens, the Court declared that where, as in ERISA subrogation, an equitable lien is sought to enforce an equitable lien established through the terms of an agreement (viz., the reimbursement terms of the Plan itself), there will be no tracing of the funds required as there is in cases involving an equitable lien sought as a matter of restitution.

Finally, the Chief Justice dismissed the Sereboff's claim that equitable remedies like make-whole or common fund would apply to the Plan's lien, where the contractual language specifically disavowed their application. [at *10]. In dismissing this claim, the Court acknowledged the difference between contractual and mere equitable subrogation. Justice Roberts wrote that the Plan's "claim is not considered equitable because it is a subrogation claim." [at *11]. Instead the Court noted that the claim was based on an express agreement, which overrides the apparent equitable considerations.

Never to be underestimated, be assured that trial lawyers will latch onto two potential weaknesses in this decision which may give them new areas in which to attack subrogating health Plans. First, because the decision noted that a constructive trust would attach to "that portion of the total recovery which is due [the Plan] for benefits paid", expect plaintiffs' lawyers to attempt to gerrymander settlements by designating all damages recovered as compensating pain and suffering, not medical expenses, and thereafter argue that Sereboff forbids reimbursement of these damages. Second, because the decision so strongly distinguished the facts therein from the facts in Knudson, where the monies were not in the possession of the beneficiary, but rather placed in a special needs trust, we can expect plaintiffs' lawyers to try more structured settlements and creation of trusts in order to bypass the new Sereboff decision.

IMPLICATIONS

The Court's decision is a clear victory for subrogation practitioners and its positive impact should not be underestimated. The entire country is now unified again, and practitioners no longer need to seek creative ways to avoid troublesome jurisdictions such as the 6^th and 9^th Circuits, in which the courts had declared any effort to enforce a reimbursement provision as "legal" rather than "equitable". The decision is also of significant importance because it finally acknowledges what many of us have been arguing for years - namely, that subrogation is not inherently equitable. The Court's acknowledgment of this fact may trickle down to even fully insured Plans, who seek to contractually disclaim the made-whole or common fund doctrines. Additional information and complete copy of this brand new decision can be found on our website at www.mwl-law.com.