Participants’ Novel Legal Strategies Fail to Prevent Full Plan Recoveries
Coordination of Benefits
Employee Benefits Series THOMPSON July 2011 | VOL. 19, No.3
Just because a strategy to avoid reimbursing a health plan is unique does not mean it is going to prevent a plan from getting a full recovery. In one such case, attorneys argued against the plan getting relief based on a U.S. Supreme Court decision that federal courts have discretion to stay or dismiss an action based on considerations of “wise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation.” (The ruling had nothing to do with health benefits). The court rejected this, finding no exceptional circumstances to warrant dismissal under that decision. In the other ruling, a participant tried to conceal the existence of a giant payoff but blundered spectacularly by enclosing a copy of $475,000 settlement check in a letter telling the plan that his client got only a $25,000 settlement.
Novel Legal Strategies by Participants Fail to Prevent Full Plan Recoveries
Since the decision of the U.S. Supreme Court in Sereboff v. Mid Atlantic Medical Services, 547 U.S. 356 (2006), self-funded ERISA health plans have generally succeeded in obtaining equitable relief to recover health benefits paid form plan participants’ tort settlement proceeds. This has caused some plan participant attorneys to create aggressive new strategies to counter this trend.
U.S. district courts recently decided two cases involving costly injuries resulting from auto accidents, in which plan participants’ attorneys negotiated substantial tort settlements for the plan participant. In both cases the self-funded ERISA plan was administered by Aetna Life Insurance Co. and the subrogation and reimbursement language were identical and well drafted. And in both cases, the courts ruled that creative approaches would not result in rulings in plain participants’ favor. But the reasons, for the courts’ rulings were different.
In one case, the plan participant’s attorney sought to invoke a novel doctrine of a case decided by the U.S. Supreme Court that had nothing whatsoever to do with ERISA plans. The case is Aetna Life Insurance Co. v. Kohler, 2011 WL 1990658 (N.D. Cal., May 23, 2011).
In the other case, an apparently misguided attempt to break the settlement into two distinct parts was also unsuccessful. The case is AirTran Airways, Inc. v. Elem, 2011 WL 1045583 (N.D. Ga., March 8, 2011).
The Facts in the Kohler Case
Diane Kohler was a Lehman Brothers employee. She and her husband, Thomas, were covered by Lehman’s self-funded ERISA health plan. On July 4, 2008, Thomas was seriously injured in an auto accident. The plan paid nearly $148,000 to cover his medical expenses. In November 2008 and again in June 2009, Aetna, acting through its agent, notified Mr. Kohler of his duty to inform Aetna of any claim he would make regarding the accident and whether he had retained an attorney. Aetna received no answer even though a lawsuit was filed against the other driver in June 2009. However, the other driver’s auto insurer, State Farm, notified Aetna’s agent that a lawsuit was filed by the Kohlers.
Aetna filed this action in the federal district court in January 2011 seeking equitable relief by way of constructive trust or equitable lien on the settlement proceeds. After filing an interpleader action in state court and depositing the settlement proceeds with that court, the Kohlers’ attorneys moved to dismiss the complaint.
The Decision in the Kohler Case
The Kohlers’ attorney offered several arguments for a ruling that Aetna was not entitled to equitable relief. First, they argued that the plan created a “forced waiver” of its “equitable defenses, including the make-whole doctrine.” The court noted that the make-whole doctrine is not an equitable defense, but rather was a federal common law rule that applied in the absence of an agreement to the contrary. Since the plan language clearly negated the make-whole doctrine, the court ruled that the fact that Kohler might not be made whole by the settlement does not require the dismissal of Aetna’s claim.
Second, they argued that the abrogation of the common-fund rule was inequitable because the Kohlers’ legal fees should take priority over Aetna’s claim. The court rejected that argument, holding that the common-fund doctrine does not require dismissal of Aetna’s claim either in whole or in part.
Third, they argued that Aetna was not “doing equity” in pursuing reimbursement of the health benefits it paid because neither the Kohler nor their attorneys would recover anything if the full amount of the settlement ended up going to reimburse Aetna for almost $148,000 it paid for Kohler’s medical expenses. The court found that there was no authority that such a result would preclude Aetna from pursuing equitable relief.
Next, they argued that since the bulk of the settlement was paid to Mrs. Kohler rather than to her husband, she is not a “covered person” as defined by the plan in this case. However, the court noted, the plan provision specifically stated that its “equitable lien may be enforced against any party who possesses the funds or proceeds representing the amount of benefits paid by the plan, including but not limited to, the Covered Person, … and/or any other source possessing funds representing the amount of the benefits paid by the plan.” The court held that the plan language, coupled with the fact that Mrs. Kohler received that amount under the settlement agreement, support the plan’s claim against her.
Finally, they advanced the unique argument that the Aetna’s claim should be dismissed under a decision by the U.S. Supreme Court in Colorado River Water Conservation District v. United States, 424 U.S 800 (1976). That case has nothing to do with health benefits or reimbursement. However, in its decision, the Supreme Court ruled that a federal court has discretion to stay or dismiss an action based on considerations of “Wise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation.” Several federal appellate courts held that the doctrine can apply in cases that are not exactly parallel to each other if the cases are “substantially similar” or if the issues are “parallel.”
The court rejected that use of the Colorado River case, pointing out that in its decision, the Supreme Court announced a balancing test weighing four factors to determine whether sufficiently exceptional circumstances exist to warrant a dismissal of an action. They are:
1). whether either court has assumed jurisdiction over property in dispute;
2). the relative convenience of the forums;
3). the desirability of avoiding piecemeal litigation; and
4). the order in which the concurrent forums obtained jurisdiction.
The court noted that the Supreme Court said: “No one factor is necessarily determinative; a carefully considered judgment taking into account both the obligation t exercise jurisdiction and the combination of factors counseling against that exercise is required.” This led the court to conclude that there was no presentation of the sort of exceptional circumstances that warranted dismissal under the Colorado River decision. The district court also pointed out that the tort settlement funds had been deposited in the state court interpleader action after this action was filed. Accordingly, the court ruled that the circumstances did not mandate dismissal.
The Facts in the Elem Case
On March 10, 2007 Brenna Elem, an employee of AirTran Airways, was seriously injured in an auto accident. AirTran’s self-insured ERISA health plan, administered by Aetna Life, paid health benefits of $131,700 as a result of her injuries.
Shortly after the accident, Elem’s attorneys filed a lawsuit against the driver of the other car. On July 13, 2007, Aetna advised Elem of the plan’s reimbursement provisions and requested her to contact Aetna “prior to settlement to obtain the final amount due” under those plan provisions. Shortly thereafter, Aetna sent a notice of lien letter to the other driver’s insurer, AIG Insurance, notifying it that the plan was subject to ERISA, which preempted any state law.
On Sept. 21, 2007, AIG received a demand letter from Elem’s attorney advising it of her willingness to settle her claim within AIG’s policy limits of $25,000. The letter stated that Aetna did not have an automatic lien on any settlement funds, and asserted Elem’s intention to pursue the full amount of her claim against the other driver and AIG if it would not pay her $25,000 within 30 days. AIG apparently did not respond to that offer.
On Dec.6, 2007, Aetna provided Elem’s attorneys with a notice of its lien on any settlement proceeds, and kept asking the attorneys for updates on her lawsuit, including the possibility of settlement. Apparently, Aetna received no response, and it appears that nothing else that was substantial happened regarding this matter until May 2010.
On May 11, 2010, Elem apparently settled her claim against the other driver for $500,000. However, she signed two identical releases of the other driver and AIG, each of which also contained an indemnity agreement and lien affidavit purportedly settling her claim. One of the releases was for $25,000. The other one was for $475,000,
On May 18, 2010, Elem’s attorneys sent a letter to Aetna stating: “After three years of waiting and countless continuances from the trial calendar [Elem] finally lost patience [and] abandoned any hope” of recovering anything beyond the AIG policy’s alleged $25,000 limit. It went on to say that Elem was “resigned to settle her claim.” The letter asked Aetna “to accept $4,500 as a full and final settlement of the plan’s reimbursement claim.” Enclosed with the letter was the release for $25,000. The letter made no mention of the $475,000 release. However, also enclosed with the letter and release was a copy of the AIG check for $475,000. Oops!
On May 28, 2010, Aetna responded to the letter by reasserting “its right to know of all types of claims against all parties by Ms. Elem,” reminding her attorneys that it had a right to know of all complaints. Aetna’s letter also demanded to receive a copy of the complaint. On Aug. 4, 2010, Elem’s attorneys responded to Aetna’s letter, characterizing the $475,000 as a settlement of a claim of bad faith by AIG. However, the release for that amount had no such reference in it to the bad faith claim.
On Nov. 10, 2010, AirTran filed this lawsuit in federal court against both Elem and her attorney seeking to enforce the reimbursement provision to recoup the approximately $131,700 it paid in benefits, alleging that it had an equitable lien or constructive trust against Elem and her attorneys for that amount. The complaint also asked for Elem and/or her attorneys to pay Aetna’s legal fees. Elem’s attorneys moved to dismiss the complaint.
The Decision in the Elem Case
The court rejected Elem’s attorneys’ argument supporting the motion to dismiss the complaint saying, “to the extent that the [attorneys] argue that their receipt of the settlement funds was ‘innocent’ because it occurred absent wrongdoing on their part, the court notes that there is no requirement that the attorney himself engage in the wrongful transfer. Indeed, all that is required is that they attorney had knowledge of the wrongful transfer.”
The court noted that plan provisions clearly indicated that it was not required to participate in or pay court costs or attorney’s fees to any attorney hired by the plan participant to pursue her damage claims. As a result, the court concluded that any funds the attorneys received were wrongfully transferred to them. It concluded that the plan was entitled to reimbursement from “any payment from any responsible party rather than from the general assets of the plan beneficiary.”
Accordingly, the court denied the attorneys’ motion to dismiss the claim against Elem and them. It also specified that AirTran’s claim for its own attorney’s fees from Elem’s attorneys survived the motion to dismiss.
Implications
The innovative strategies advanced in these cases did not get very far. One can have sympathy for the Kohlers and their attorneys because the settlement in the case left them with no recovery whatsoever because the entire amount of the settlement proceeds were needed to reimburse the health plan. Thomas Kohler clearly suffered losses beyond the benefits paid by the health plan. He incurred out-of-pocket costs (deductibles and copayments) and expenses not covered by the health plan. In addition, his injuries likely caused significant pain and suffering that can’t be reimbursed. Likewise, the attorneys who successfully negotiated a significant settlement won’t be paid for their efforts.
Yet, it’s clear that under ERISA, Congress intended to allow health plans to have first crack at reimbursement of the benefits they paid from tort settlement proceeds because doing so reduces their cost of providing health coverage.
The argument based on the doctrine of the Colorado River decision was innovative, but, as the district court pointed out, one can’t rely on the impact of that decision without considering the rationale behind it. The Supreme Court’s decision was not unanimous, and the majority of the court indicated that its application had to be limited to unusual circumstances. Certainly, the filing of an interpleader case in a state court after the plan filed an action for reimbursement in federal court was beyond anything that the majority of the Supreme Court thought should be applicable to warrant dismissal of a case that clearly belonged in the U.S. district court.
Elem’s attorneys’ strategy was less innovative but quite daring. The failure to disclose the full extent of the settlement probably was not a good idea, and the carelessness of enclosing a copy of the check for $475,000 instead of the one for $25,000 is almost unbelievable. In this case, the $500,000 settlement was sufficient to cover the plan’s lien of approximately $131,700, and Elem’s attorney’s fee. If the fee was the usual one-third of the settlement it would have been about $167,000. Thus, Elem probably ended up with something like $202,000 (more or less) as a result of this case, which is certainly not as bad as the situation involving the Kohlers and their attorneys, who ended up with nothing.
When individuals are severely injured, they almost never can be made whole by any settlement or judgment. In practically all such cases they either end up with permanent impairment (and perhaps serious pain) for the rest of their lives, or often will not regain their previous state of health.
In a perfect world, seriously injured individuals would be made whole, at least financially. But we don’t live in a perfect world. In this real world, seriously injured individuals whose medical expenses are covered by a self-funded ERISA health plan have most of their medical expenses paid by the plan. That’s better than not having health coverage. Since Congress has determined that it is in the public interest for ERISA health plans to be reimbursed from tort settlement or judgment proceeds, any recovery through tort settlements or judgments ends up reimbursing the plan, leaving little or nothing for pain and suffering and other economic losses in many cases.
Attorneys should be compensated for their efforts especially when they achieve a successful result for their clients. But when it comes to tort cases, they usually accept contingent fee arrangements. They can be well paid if they succeed and recover large sums, but they get nothing if they lose or can’t settle the case. That’s how our legal system works, and attorneys are used to it. Many attorneys do very well with it, but very few (if any) win all their cases.
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