California U.S. District Court Holds That The Common Fund Rule Does Not Apply
Coordination of Benefits April 2011 | Vol. 19, No. 2
It is well established that a health plan subject to ERISA can recover the benefits it paid from identifiable tort settlement proceeds held by the plan participant’s attorney. When those proceeds are identifiable as to their source an equitable lien can be asserted against the proceeds. If a self-funded ERISA health plan is subject to the common fund rule, both the attorney and the plan would have to share client’s attorney’s fees, and each of them would bear a pro rata share of the tort settlement proceeds (that is, the common fund). On the other hand, if the plan’s subrogation provision states that it is entitled to full reimbursement from any tort settlement proceeds without application of the common fund rule, the plan would be entitled to full reimbursement before the plan participant’s attorney can be paid from the proceeds. That results in the plan participant bearing the full cost of recovering the tort settlement proceeds. With such a provision in its plan documents, the plan gets a free ride when achieving full reimbursement.
ERISA health plans know when their plan participants are incurring medical expenses as a result of some form of accident or other tort situation. In those cases, their attorneys or subrogation staffs or agents monitor potential tort settlements or litigation. They can then take appropriate action to protect their plans’ interests. Thus, reliance on their own attorneys, staffs or agents eliminates the need to rely on the plan participant’s attorney, whose main obligation is to look out for the plan participant’s interests.
It would be easy for us to know whether an ERISA health plan was subject to the common fund rule by simply seeing the applicable plan provision. A recent decision by a U.S. District Court in the state of Washington seems to hold that the common fund rule does not apply, but it does not tell us what the plan’s provision says. The case is GHI Technologies and Solutions, Inc. v. Rose, 2011 WL 197772 (W.D. Wash., Jan.19, 2011).
The Facts
When Rhonda Rose was injured in an auto accident in 2003, she was covered by GHI’s self-funded ERISA health plan, which paid almost $31,600 for health expenses that resulted from the accident. Rose retained Nelson Langer Engle, PLLC (the Nelson firm) to seek recovery of damages. The Nelson firm settled her tort claim for an amount that the court describes to be “substantially in excess of the amount” paid by her health plan. In addition, she also recovered an additional $100,000 from her own uninsured motorist insurance. The Nelson firm retained a portion of that recovery as its fee for legal services and placed the rest of the settlement proceeds in its trust account. The GHI plan brought this action to recover the benefits it paid, and it moved for summary judgment.
The Decision
The court’s decision made it clear that the plan was entitled to reimbursement for all the benefits it paid for Rose’s medical expenses. Its opinion focused on a discussion of the plan’s right to reimbursement from that portion of the recovery paid to the Nelson firm to cover its fees.
The court started by saying that although the decision of the U.S. Supreme Court in Sereboff v. Mid-Atlantic (see App. IV, Case No. 498) made it clear that an ERISA health plan could state a claim in equity against a plan participant, “it falls short of making the broader pronouncement that a plan’s equitable lien may be enforced against an attorney who is not a signatory to the reimbursement agreement.”
But it also noted that the 5th and 6th U.S. Circuit Courts of Appeals have held that ERISA health plans could obtain constructive trusts against the attorneys’ accounts in order to recover the benefits they paid (citing Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot & Wansbrough (see App. IV, Case No. 406) and Longaberger Co. v. Kolt (see App. IV, Case No. 603).
However, the court concluded that “there is no authority in the 9th Circuit that would lend support to such a broad interpretation of the Sereboff decision.” It noted that in the case of Hotel Employees & Restaurant Employees International Union Welfare Fund v. Gentner, 50 F.3d 719 (9th Cir., 1995), the 9th Circuit (which has jurisdiction over California federal cases) held that an ERISA plan’s lien could not be enforced against an attorney who was not a signatory to the reimbursement agreement or who did not expressly agree to the plan’s lien. It said that the attorney-client relationship is distinguishable since an attorney and a client are not “alteregos.” The court concluded that the Gentner decision was not overruled by the Sereboff decision.
That led the court to issue a complex series of directions, the bottom line of which was: the plan’s equitable lien could be asserted against Rose. The court ordered the Nelson firm refund its entire fee to the trust account, reimburse the plan for the full amount of it paid in benefits, then pay itself the amount to which it was entitled as a fee and reimbursement for expenses, and then deliver the balance of the trust account to Rose.
Implications
Although the court’s discussion of the reasons for its conclusion could have been focused on the plan’s provisions, it reached a somewhat convoluted conclusion by which the Nelson firm would refund its fee to the trust account and remit the amount of the medical benefits paid to the trust. Only then could it withdraw its fee from the trust account and pay the balance to Rose. Of course, in this case, there were ample funds to allow this to happen.
The court’s reliance on the Gentner case is questionable. That case was decided in 1995 before the U.S. Supreme Court’s decision in Sereboff, which overturned the numerous 9th Circuit decisions denying reimbursement to ERISA health plans through an equitable lien. While it is true that Sereboff did not overrule Gentner, it appears that the Gentner decision makes sense only relative to the precedents that held sway in the 9th Circuit before Sereboff.
Of course, we don’t know how much was in the trust account in this case. We are told that there was more than enough in the total tort settlement to fully cover both the reimbursement to the plan and the plan participant’s attorney’s fee. If the common fund were applicable, the plan’s share of it would have been only slightly more than $10,000 (assuming the attorney’s fee was 10 percent of the total recovery).
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