Federal courts are permitting ERISA plans to recover the benefits they paid on account of injuries arising through the fault of some third party from tort settlement or judgment proceeds that are set up in special needs trusts. Those are usually designed to provide resources to pay for ongoing care when an individual’s injuries are so severe that he or she will need professional care either for the remainder of his or her life or for an indefinite period.

In the absence of such a resource, in most cases, individuals will be cared for through state programs such as Medicaid. When a tort settlement or judgment is substantial, the special needs trust can provide some (or perhaps even all of the required care. Or, trusts might be used to provide some amenities (such as TV or other entertainment or respites) for the injured party.

However, with well-drafted subrogation and reimbursement provisions, self-funded ERISA plans can obtain what amounts to a first lien against the tort settlement proceeds, thereby reimbursing the plan for the benefits it advanced before the resolution of a tort settlement or judgment, but leaving the individual with no resources except for what the state or charity will provide. The most recent court decision is Mutual of Omaha Insurance Co. v. Estate of Arachikavitz, 2007 WL 2788604 (d. Nev., Sept. 21, 2007).

The Facts

Anthony Arachikavitz was seriously injured while he treated in a hospital. He was covered under a group health plan subject to ERISA administered by Mutual of Omaha (hereafter called Mutual), which paid about $1 million on account of his medical expenses arising from his injuries before his death in 2005. His lawsuit for damages on account of his injuries exceeded the $1 million paid, but apparently not by much. After his death but before the proceeds were distributed, Mutual brought an action to recover the benefits it paid, and moved for summary judgment.

The plan clearly provided for reimbursement of benefits from tort settlement (or judgment) proceeds, and specifically stated that it was entitled to reimbursement regardless of whether or not the plan participant was made whole by the settlement (or any judgment), and without regard to sharing of attorney’s fees.

The Decision

The court granted the motion for summary judgment. It ruled that the assets in question were specifically identifiable as related to the matter for which Mutual paid health benefits, and thus the claim was for equitable relief. The 9^th U.S. Circuit Court of Appeals had previously held that such recoveries were not available because it viewed such actions to be legal rather than equitable, but the U.S. Supreme Court overruled that doctrine in its Sereboff decision (which was described at length previously and in ¶633 of the Handbook).

Although the district court had no guidance on the law from the 9^th Circuit, it had plenty of guidance from decisions in other circuits, and so upheld the right of the plan to recover the almost $1 million it paid from those proceeds regardless of the fact that they would have been held by the special needs trust had there been no right of recovery for the plan.

Balance of Settlement Applied

Having reimbursed the plan, there was approximately $50,000 available to the special needs trust. However, the attorneys for the entity that paid the settlement sought reimbursement of its legal fees amounting to about $21,580. The court ruled that the entity simply was required to bring an action for interpleader, which is the appropriate remedy for a stakeholder that held money or assets claimed by rival parties (in this case, Mutual and the special needs trust).

The court noted that in such cases, attorneys have relatively little to do other than bring the rival claimants together in court, deposit the money it has into a court trust and seek a discharge of its liability to all claimants. In this case, the entity supported the arguments of the special needs trust and was involved in a state court action before the filing of the lawsuit by Mutual in federal court.

The court ruled that the entity was entitled only to fees related to the interpleader in federal court, and reduced the award of attorney’s fees to $5,000.

Implications

This decision is consistent with previous court decisions in other circuits and there is no reason to believe that the 9^th Circuit will disagree with it. Medical plans with well-drafted reimbursement provisions are entitled to full reimbursement of the benefits paid regardless of the insufficiency of tort settlement proceeds to fully compensate the plan participant for all consequences of the injuries incurred. Unless and until the law is changed (which does not appear to be likely any time soon), that settles the issue.

The decision reaches the same result reached by the 8^th Circuit in Administrative Committee of the Wal-Mart Stores, Inc. Associates’ Health and Welfare Plan v. Shank, 2007 WL 2457664, (8^th Cir., 2007), namely, that under the terms of well-drafted plan subrogation and reimbursement provisions, the plan’s right to reimbursement reaches funds deposited in special purpose trusts, even if that leaves a plan participant without funds for future medical or custodial care.

This entry was posted on Tuesday, April 22nd, 2008 at 8:34 am and is filed under 9th, Special Needs Trust. 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.