The U.S. District Court for the Eastern District of North Carolina recently held that the Employee Retirement Income Security Act of 1974 (“ERISA”) precludes a plan administrator with a claim against the insured for amounts recovered from a third party for medical benefits from pursuing equitable remedies against the insured attorney’s contingency fee award.

In T.A. Loving Company v. Denton, et al., No. 5:08-CV-591-BO (E.D.N.C. July 14, 2010), the plaintiff, T.A. Loving Company (“T.A. Loving”), was the sponsor and plan administrator of an employee medical benefit plan. The defendant, a plan participant and plaintiff’s employee, Annette Denton, suffered injuries in a motor vehicle accident and received medical benefits from the T.A. Loving plan for her medical care for those injuries. Denton settled her personal injury claim with the other driver for $100,000, and paid her lawyer a contingency fee of $33,833.88.

The plan contained a reimbursement and subrogation clause, requiring the participant to reimburse the plan when benefits were provided for injuries caused by a third party and the participant recovered money damages from that third party. Following Denton’s settlement, T.A. Loving filed suit on behalf of the plan against Denton and her attorney for reimbursement of the medical benefits she had received. The district court granted summary judgment against Denton and ordered her to reimburse the plan from the portion of the settlement she had received. However, the court denied summary judgment against the attorney because he was not a party to the subrogation clause in the plan.

Following prior decisions in the Eastern District of North Carolina, the court held that the mere fact that the defendant’s attorney had knowledge of his client’s subrogation agreement does not create a valid claim for restitution under ERISA. Because the attorney was not a party to the plan agreement containing the subrogation clause, the court rejected plaintiff’s claim for equitable restitution against the attorney under ERISA’s equitable remedies provision, 29 U.S.C. § 1132(a)(3).

Importantly, the court held that Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), which had facts similar to T.A. Loving Company, did not control the case. Sereboff involved a suit by Mid Atlantic Medical Services, Inc. (“Mid Atlantic”) against the Sereboffs for reimbursement of approximately $75,000 that Mid Atlantic had paid the Sereboffs in benefits related to injuries they suffered in an accident. The Sereboffs had recovered $750,000 in a personal injury action. Mid Atlantic filed its reimbursement suit under 29 U.S.C. § 1132(a)(3) for equitable relief. The Supreme Court found that recovery was appropriate, and the reimbursement was equitable in nature, because (1) the funds were identifiable, (2) the funds rightfully belonged to Mid Atlantic, and (3) the identified funds were within the possession and control of the Sereboffs.

In applying the Supreme Court’s holding, the district court in T.A. Loving Company principally distinguished Sereboff because that case did not involve equitable claims against a third party such as the plan participant’s attorney. The court indicated that 29 U.S.C. § 1132(a)(3) did not authorize a reimbursement suit for “appropriate equitable relief” against a person or entity “who is not a party to the plan or guilty of obtaining the proceeds of the insured’s claim through wrongdoing.” Therefore, Sereboff did not control whether an ERISA plan could seek appropriate equitable relief against a contingency fee attorney. The court observed, however, that its decision differed from the Sixth Circuit’s decision in Longaberger Co. v. Kolt, 586 F.3d 459 (6th Cir. 2009).

T.A. Loving Company underscores that an employee medical benefit plan must seek reimbursement directly from the participant, and that the Supreme Court’s ruling on ERISA reimbursement and subrogation provisions in Sereboff does not expand the scope of equitable restitution against third parties. Plans would, therefore, be well advised to follow the approach of Mid Atlantic in Sereboff and assert reimbursement rights directly against the participant’s damages awards or settlements early in the participant’s lawsuit. In doing so, it is vitally important that the plan specifically identify the fund that is subject to the equitable claim for relief, identify as precisely as possible the assets subject to the claim, and ensure that the plan participant has control over that fund.

Robert Ward Shaw is an associate at Williams Mullen in Raleigh, where he focuses his practice on litigation and state and local taxation.

Mark Stanton Thomas is a partner at Williams Mullen in Raleigh, with a focus on employee benefits litigation.

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This entry was posted by cmonfils on Wednesday, December 29th, 2010 at 11:20 am and is filed under 4th, Common Fund, Subrogation. 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.