With the U.S. Supreme Court decision in Sereboff v. Mid Atlantic Medical Services, Inc., it became clear that ERISA plans can enforce their subrogation and/or reimbursement provisions by asserting a claim for a constructive trust or equitable lien against clearly identifiable tort settlement or judgment proceeds. In most instances, those proceeds end up either in the plan participant’s attorney’s escrow or trust accounts or are held by a court if the third party’s casualty insurer deposits the funds there.

But some tort claims are resolved by having the settlement or judgment proceeds paid over to a special needs trust in which a trustee holds the funs to provide for that person’s special needs due to serious injuries. Generally, that means trustees for a special needs trust may spend funds for both medical and non-medical services and supplies that the injured person needs, including payment for custodial care, which is not covered by a health plan, and for necessary modifications to a home or auto.

Can those proceeds be reached by an ERISA plan to enforce its claim for reimbursement? The recent case of Administrative Committee for the Wal-Mart Stores, Inc. Associates’ Health and Welfare Plan v. Horton, 2008 WL 123536 (11^th Cir. Jan. 15, 2008), in the 11^th Circuit says yes.

The Wal-Mart plan paid over $51,000 in medical expenses incurred by Joshua Horton, the son of a Wal-Mart employee, on account of injuries he suffered in a car accident.  His mother filed a lawsuit on his behalf against the third-party driver and that case was settled for $99,000. After allowing $33,000 for the attorney’s fees, the court ordered the balance to be deposited with the local probate court in a special needs trust for Horton. The probate court named Horton’s mother as conservator of the proceeds and she then deposited the funds in a trust account at a local bank. The Wal-Mart plan brought this action to enforce its claim for the amount it paid for his medical expenses.  The U.S. District Court ruled against the Wal-Mart plan, ruling that its remedy was not “other appropriate relief” recognizable under §502 (a) (3) of ERISA, and the Wal-Mart plan appealed.

The appeals court based its decision on the principle that the transfer of property by a trustee does not extinguish the rights of a third party. This ruling was based on an underlying legal principle that holds that when a person holds property subject to a constructive trust for another party (the Wal-Mart plan), the transfer to the conservator does not cut off the interest of the beneficiary of the constructive trust.  Accordingly, it ruled that the Wal-Mart plan can assert its equitable lien and recover the benefits it paid for Horton.

This is not the first time a federal court reached this conclusion in a case involving the right of an ERISA plan to recover benefits it paid. See Administrative Committee of the Wal-Mart Stores, Inc. Associates’ Health and Welfare Plan v. Shan.  The case law dealing with the right of the plans to recover benefits paid from special needs trusts is still developing. Some courts are holding that state insurance laws that prohibit insured plans from seeking reimbursement for benefits paid from tort settlement of judgment proceeds are not preempted by ERISA.

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This entry was posted by Adam V. Russo on Tuesday, May 27th, 2008 at 1:00 pm and is filed under 11th. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.