It’s relatively easy for a health plan to establish its right to an equitable lien against tort settlement proceeds. However, if the plan participant actually receives those proceeds and uses them for his or her own purposes, the plan will probably find it difficult to trace those proceeds.

The plan might be able to establish that a specific asset, such as a home might be subject to a constructive trust in favor of the plan. However, taking possession of such an asset and liquidating it will be problematic.

Nevertheless, plans that find themselves in that position may be entitled to trace the proceeds. A recent court decision Board of Trustees for the Laborers Health and Welfare Trust Fund for Northern California v. Hill, 2008 WL 5047705 )N.D. Cal., Nov. 25, 2008) allows just this.

Jeanne Hill was covered by the Laborers Health and Welfare Fund for Northern California and suffered a perforated bowel that she alleged was caused by her doctor’s negligence. She claimed almost $400,000 in medical expenses of which the fund paid about $167,700.

Once the plan learned that a third party might have caused her to incur the expenses paid by the plan, the plan sent her a subrogation agreement. It appears she did sign it but she never returned it to the plan. Instead she used it to negotiate a $230,000 settlement for her malpractice action against her doctor.

The settlement agreement characterized the amount paid as compensation for her loss of income and her pain and suffering. She did not reimburse the plan for benefits it paid and used the money to pay off her mortgage, credit card and personal loans, purchase a car and to serve as down payment on a new home. The fund brought this action to seek equitable relief under ERISA to enforce its plan provisions and moved for summary judgment.

The court concluded that the plan had an automatic lien against the settlement proceeds received by Hill and that it was entitled to summary judgment based on Hill’s obligations. But the court found a significant problem with the remedy available to the plan despite its clear entitlement to settlement proceeds. The only remedy it could seek under ERISA was equitable relief in the nature of a constructive trust on her assets.

The court could not grant a lien for any specific amount because the settlement proceeds had been spent and the plan could not trace any or all of the settlement proceeds in Hill’s possession. The court stated that even though settlement proceeds were no longer set aside it would not necessarily bar granting equitable relief, because the court could impose a constructive trust or equitable lien on specific property it if could be traced to those proceeds.

The court noted that if the proceeds were used to purchase property that remains in Hills’ possession, it might be possible for the court to impose a constructive trust on it. The Court stated that “To the extent property is traceable back to the ill-gotten profits it is subject to a constructive trust or an equitable lien.”

The court found that Hill’s deposition regarding how she used the proceeds was vague and not adequate to permit the court to impose a constructive trust or an equitable lien in any specific amount on any of her property. It ruled that the plan had to show how the settlement was spent and prove that an equitable lien or constructive trust was still available. The court denied summary judgment allowing the plan to show how equitable relief could be granted or proceed with further discovery to determine exactly what Hill did with the funds.

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This entry was posted by Adam V. Russo on Wednesday, May 13th, 2009 at 3:04 pm and is filed under 9th, 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.