When it is clear that the tort settlement proceeds are held in a separate account and the plan clearly provides for 100-percent reimbursement, the fact that the plan beneficiary is a minor child will not preclude the plan’s entitlement to reimbursement. The case is Iowa Health System, Inc. v. Graham, 2009 WL 2222780 (C.D. Ill., July 23, 2009).

Duncan Graham, a minor child, who was a covered plan beneficiary under his mother’s employer’s self-insured health plan, was injured in an auto accident. The plan paid about $27,600 toward his health expenses. His parents, in their capacity of guardian of Duncan’s estate, brought a lawsuit in a state court on his behalf for damages he suffered, and settled their tort claim for a total of $50,000 with the driver’s liability insurer and their own insurer’s underinsured motorist provision of their auto policy. (Although it was not stated in the opinion, it appears that each insurer settled for its maximum policy liability.) The court ordered that the net settlement proceeds (about $37,500, after reduction for attorney’s fees) be deposited with the court pending further order.

The Iowa Health System then sued in the federal court to enforce its subrogation and reimbursement agreement, seeking a constructive trust/or equitable lien over a portion of the settlement funds. Graham moved to dismiss the plan’s complaint, and the plan moved for summary judgment in its favor.

The court ruled in the plan’s favor, granting its motion for summary judgment, and rejecting the Grahams’ motion to dismiss the claim. The court’s decision was based primarily on the ruling in the Sereboff case (see App. IV of the Handbook, Case No. 498), noting that the plan was properly seeking equitable relief, as distinguished from legal relief, which was the basis for the U.S. Supreme Court’s earlier ruling in Great-West Life & Annuity Co. v. Knudson, 543 U.S. 204 (2002) (See App. IV, Case No. 293). It pointed out that the plaintiff held a specific fund that was for legal purposes in the injured child’s possession. That was not so in the Knudson case.

Graham argued that since the state court had decided the tort case, the doctrine of res judicata (a legal doctrine that bars further legal action when the matter has already been decided by another court) barred the plan’s ability to prevail in this case. The court rejected that argument, ruling that Illinois law could not bar this action because it was based on a federal law (ERISA), which could not be decided in a state lien adjudication proceeding that Graham had initiated. The court also pointed out that ERISA preempts not only state laws but also the judgments and orders of state courts.

This decision is unremarkable in its outcome. It illustrates that when a plan’s subrogation and reimbursement provision is properly drafted, and when the tort settlement (or judgment) proceeds were properly deposited into a court (or held in escrow by an attorney), there is an identifiable fund. In such cases, the plan can succeed in seeking equitable relief in the nature of an equitable lien or constructive trust.

It is interesting to note that the court’s opinion was not very flattering regarding the way the plan actually identified the specific funds at issue. Nevertheless, it concluded that was sufficient uncontested evidence and information to enable it to warrant a summary equitable ruling in the plan’s favor. The court said (in a footnote to a statement in the opinion), “Iowa Health’s failure to present more specific evidence as to the status of the Settlement Funds is difficult to justify and is nearly fatal to its suit. The specific identification of existing property is critical to this action.”

That warning should be noted by attorney’s who represent plans in similar cases. It is necessary to prove that there are settlement proceeds in the hands of the plan participant (which includes the plan participant’s attorney or a court to which the plan participant has recourse). Not all attorneys who handle such cases are fully familiar with the applicable rules and what they have to prove in order to prevail, and neither party in this case did an outstanding job or presenting their positions. If the decision in this case had gone the other way, it would not have been surprising.

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This entry was posted by Adam V. Russo on Wednesday, November 18th, 2009 at 9:55 am and is filed under 7th, Minor's Compromise. 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.