John Tucker is one of the only attorneys in the State of Florida who actively litigates ERISA Subrogation and Reimbursement claims. Mr. Tucker has lectured at national seminars on this topic, and frequently lectures to attorney groups in Florida about ERISA liens. Tucker & Ludin represents individuals in helping them negotiate ERISA liens. We also defend ERISA lien lawsuits filed by ERISA plan administrators seeking to recover liens.
Subrogation and Reimbursement are legal claims asserted by health and disability insurance companies to recovery benefits they have to pay to claimants when they are hurt in an accident caused by someone who is negligent. The most common scenario involves a person hurt in a car accident who goes to a hospital or doctor. If the medical provider's bill is paid under a health plan (as opposed to auto insurance), the health plan administrator has a right to try to recoup the amount that was paid from either the driver that caused the accident (through subrogation) or from the injured person (through reimbursement). This scenario can invovle any type of negligence, including medical malpractice or a slip and fall injury.
Reimbursement and subrogation are legal doctrines which are based upon cost-shifting principles. As the Seventh Circuit put it in Cutting v. Jerome Foods, Inc., 993 F.2d 1293, 1297-98 (7th Cir.1993), the theory is that “[a]ssignment, by shifting the insured’s tort rights to the insurance company, reduces the price of insurance and thus enables the insured to obtain more coverage, in effect trading an uncertain bundle of tort rights for a larger certain right, which is just the sort of trade that people seek through insurance.” Whether realistic or not, this is the perspective of many courts.
While many courts have blurred the distinction between reimbursement and subrogation, there remains a meaningful distinction between these two types of claims. Subrogation is a pre-tort recovery remedy that allows an insurer to stand in its insured’s shoes, whereas reimbursement occurs after a tort recovery has been made by the injured party. Explaining why an ERISA plan was not entitled to assert its subrogation rights (as compared to reimbursement rights found in the same plan document), the Sixth Circuit explained:
This court has explicitly held that subrogation is not available in a situation such as this, when the plan participant or beneficiary has already recovered, because subrogation allows a plan fiduciary only to step into the shoes of a plan participant or beneficiary and assert the rights of the participant or beneficiary against another; subrogation does not allow a plan fiduciary to obtain a judgment of personal liability against a plan beneficiary or participant. [citations omitted] Therefore, QualChoice may have been able to use subrogation to step into the shoes of Rowland during the settlement negotiations with W & LE, but QualChoice may not now use the doctrine of subrogation [after settlement occurred] to impose personal liability on Rowland.
Qualchoice v. Rowland, 367 F.3d 638, 649-50 (6th Cir. 2004). See also Nova Information Systems v. Greenwich Ins. Co. NAC , 365 F.3d 996, 1004 (11th Cir. 2004)(“Conventional subrogation ‘depends upon a lawful contract, and occurs where one having no interest in or relation to the matter pays the debt of another, and by agreement is entitled to the securities and rights of the creditor so paid. [citation omitted]’”).
Reimbursement, on the other hand, is a claim against an insured which may only be asserted after the insured has obtained a recovery from the tortfeasor. “While subrogation and reimbursement are similar in their effect, they are different doctrines. With subrogation, the insurer stands in the shoes of the insured. With reimbursement, the insurer has a direct right of repayment against the insured. As a matter of logic and case law, a party can have one right, but not the other.” Provident Life and Accid. Ins. Co. v. Williams, 858 F.Supp. 907, 911 (W.D.Ark. 1994). Often, a plan will only provide for subrogation, and this can dramatically impact its ability to recover monies from an injured person’s settlement or judgment.
As a general rule, subrogation must arise under state law, because it involves actions against third parties by allowing the insurer to stand in the shoes of its insured. Unisys Medical Plan v. Timm, 98 F.3d 971, 973 (7th Cir. 1996).
Florida recognizes two types of subrogation: conventional subrogation and equitable or legal subrogation. Conventional subrogation arises or flows from a contract between the parties establishing an agreement that the party paying the debt will have the rights and remedies of the original creditor. Boley v. Daniel, 72 Fla. 121, 123, 72 So. 644, 645 (1916) (finding that conventional subrogation arises when a party having no interest in the matter pays the debt of another and by agreement is entitled to the rights and securities of the creditor who has been paid); Phoenix Ins. Co. v. Florida Farm Bureau Mut. Ins. Co., 558 So.2d 1048, 1050 (Fla. 2d DCA 1990).
1. A Trilogy of Supreme Court Cases: It would be an understatement to say that reimbursement or subrogation were not topics of conversation during the drafting of ERISA. ERISA’s applicability to these types of claims did not reach a point of high profile until the U.S. Supreme Court decided FMC v. Holiday, 498 U.S. 52, 111 S.Ct. 403, 112 L.Ed.2d 356 (1990). Over 10 years later, the Court decided Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 122 S.Ct. 708, 151 L.Ed.2d 635 (2002), and Sereboff v. Mid-Atlantic Medical Services, Inc. (“MAMSI”), 547 U.S. 356, 126 S.Ct. 1869 (2006), completing a trilogy of must-read Supreme Court law in this area.
a. FMC v. Holiday – ERISA preemption hits state subrogation law: In FMC v. Holiday, the Supreme Court first addressed subrogation in the context of ERISA. The Court conducted an extensive analysis of preemption and ERISA’s “savings” and “deemer” clauses. As explained above, 29 U.S.C. §1144 saves state insurance laws from preemption. However, the same code section prevents states from “deeming” ERISA plans to be insurance companies if the plan is self-funded (i.e., an insurance policy is not used to fund the plan).
The Court held that a Pennsylvania statute which barred subrogation by insurance companies in motor vehicle cases did not apply to a self-funded plan. There was no question that the anti-subrogation statute in question would be saved from preemption in the context of an insured plan, but the Court’s extensive analysis of the Congressional history in adopting the deemer clause led it to the conclusion that self-funded plans are not subject to state laws regulating insurance.
Thus began the commonplace occurrence of ERISA plans expecting full reimbursement following tort recoveries.
b. Great-West Life v. Knudson -- What is “equitable relief”?: The landscape of ERISA lien enforcement changed in January 2002 when the U.S. Supreme Court issued its decision in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 122 S.Ct. 708, 151 L.Ed.2d 635 (2002). Before Great-West, plans and their administrators had nearly unchecked power to recover health and disability insurance liens. Great-West established that the only remedies available to fiduciaries under ERISA are equitable. ERISA §502(a)(3) is the only statute that provides standing to fiduciaries, and its text plainly limits relief to equitable causes of action. In Great-West, the Court unequivocally prohibited the use of common law relief, including any actions which amount to nothing more than an effort to obtain a money judgment from participants or beneficiaries.
Janette Knudson was in a severe car accident which left her a paraplegic in 1992. 122 S.Ct. at 711. Her husband participated in an ERISA health plan through work, and she was a beneficiary under the plan. Id. Following the accident, the plan paid $411,157.11 of her medical expenses. Id. Great-West Life & Annuity Ins. Co. paid all but $75,000.00 of these expenses. Id. The plan contained a reimbursement provision which gave the plan a first right of recovery to be reimbursed for any monies it paid out up to the amount of any recovery by Knudson. Id. The plan had assigned its rights to recover the lien to Great-West.
In 1993, Knudson settled her tort case for $ 650,000. As part of that settlement, the monies were divided as follows:
Special Needs Trust - $ 256,745.30
Attorney Fees/Costs - $ 373,426.00
Reimbursement to Medicaid - $ 5,000.00
Reimbursement to Great-West - $ 13,828.70
Id. The parties to the tort settlement had the settlement approved by the state court, and a check was issued to Great-West. Id.
However, Great-West did not deposit the check, instead, it filed suit in U.S. District Court seeking both injunctive and declaratory relief under ERISA §502 (a)(3), 29 U.S.C. §1132 (a)(3). Id. at 712. The District Court denied Great-West’s relief. Id. The Ninth Circuit Court of Appeals affirmed, but on different grounds than that of the District Court. Id. The Ninth Circuit relied upon its earlier precedent in FMC Medical Plan v. Owens, 122 F.3d 1258 (9th Cir. 1997) to conclude that the relief sought by Great-West was nothing more than “judicially decreed reimbursement for payments made to a beneficiary of an insurance plan by a third party.” Id. It held that this was not equitable relief within the scope of ERISA. Id. This effectively held that Great-West failed to state a cognizable cause of action exists under ERISA. Id.
The Supreme Court affirmed on the same grounds. In a very detailed exposition of what traditionally constituted equitable relief versus legal relief, Justice Scalia began his analysis by plainly stating:
Here, petitioners seek, in essence, to impose personal liability on respondents for a contractual obligation to pay money--relief that was not typically available in equity. “A claim for money due and owing under a contract is ‘quintessentially an action at law.’” Wal-Mart Stores, Inc. v. Wells, 213 F.3d 398, 401 (C.A.7 2000) (Posner, J.). “Almost invariably ... suits seeking (whether by judgment, injunction, or declaration) to compel the defendant to pay a sum of money to the plaintiff are suits for ‘money damages,’ as that phrase has traditionally been applied, since they seek no more than compensation for loss resulting from the defendant's breach of legal duty.” Bowen v. Massachusetts, 487 U.S. 879, 918-919, 108 S.Ct. 2722, 101 L.Ed.2d 749 (1988) (SCALIA, J., dissenting). And “[m]oney damages are, of course, the classic form of legal relief.” Mertens, supra, at 255, 113 S.Ct. 2063.
122 S.Ct. at 712-13. The Court distinguished actions for restitution in equity from those at law, by noting that for an action to be equitable, a petitioner must be seeking restoration to specific funds or property which are in a defendant’s possession. Id. at 715. Where a defendant no longer has specific property, a party seeking restitution is no more than a general creditor, and the action is one at law, not equity. Id. Put another way, a party must be seeking to impose a constructive trust or equitable lien on specifically identifiable property, rather than attempting to impose personal liability on a defendant where no such property remains to state an action in equity. Id.
In dicta, the Court rejected an argument that the plan administrator had equitable powers by virtue of its status as a fiduciary under trust law. Id. at 718. The Court noted that a beneficiary who receives more than their share of a trust may have their remaining interest charged for the overpayment, but the trustee has no other recourse against that beneficiary. Id. In effect, the trustee can deduct from future payments that are to be paid to the beneficiary, but may not seek reimbursement for monies owed to the trust other than through future deductions. Id.
It is important to note that Great-West also did not decide the issues of whether a plan could intervene in a state court action to protect its lien rights, or whether a plan could use state law causes of action to enforce its lien rights. See Great-West, 122 S.Ct. at 718-19. It is doubtful that Florida federal courts will allow any state law causes of action against participants, as they have uniformly been held to be preempted. See, e.g., Space Gateway Support v. Prieth, 371 F.Supp.2d 1364 (M.D. Fla. 2005); MEBA Medical & Benefits Plan v. Lago, 867 So.2d 1184 (Fla. 4th DCA 2004); Great-West Life & Annuity Ins. Co. v. Smith, 180 F.Supp.2d 1311 (M.D. Fla. 2002).
The essence of the Court’s ruling can be summed up in the following quote:
“A claim for money due and owing under a contract is ‘quintessentially an action at law.’” Wal Mart Stores, Inc. v. Wells, 213 F.3d 398, 401 (C.A.7 2000) (Posner, J.). “Almost invariably ... suits seeking (whether by judgment, injunction, or declaration) to compel the defendant to pay a sum of money to the plaintiff are suits for ‘money damages,’ as that phrase has traditionally been applied, since they seek no more than compensation for loss resulting from the defendant's breach of legal duty. (internal citation omitted).
Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 210, 122 S.Ct. 708, 713, 151 L.Ed.2d 635 (2002).
However, following Great-West, there remains a dispute over whether equitable relief exists which may be utilized by ERISA fiduciaries to recover liens. While a plan may not use a legal cause of action to recover benefits from a participant, it may only use an equitable cause of action to at least freeze assets to which it has a colorable right. This is problematic because the Supreme Court has long emphasized its “unwillingness to infer causes of action in the ERISA context.” Mertens v. Hewett Assocs., 508 U.S. 248, 254, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993). The equitable remedies available under ERISA do not include all of the types of relief that could be awarded by a court of equity, but instead are limited to those remedies “that were typically available in equity.” Great-West, 534 U.S. at 210 (quoting Mertens, 508 U.S. at 256).
c. Sereboff v. MAMSI – Equitable lien and constructive trust refined:
In Sereboff v. Mid-Atlantic Medical Services, Inc., 126 S.Ct. 1869 (2006), the Supreme Court again answered the question whether equitable lien and constructive trust are equitable remedies which may be pursed under 29 U.S.C. §1132 (a)(3). However, it reaffirmed the principle that an attempt “to impose personal liability…for a contractual obligation to pay money” is not equitable, and is not a permitted cause of action under ERISA §502 (a)(3). Id. at 1874.
The Court affirmed a 4th Circuit decision imposing a constructive trust over a particular fund the parties agreed to set aside while the litigation over the reimbursement claim was pending. Id. The Court’s decision was an affirmance that an equitable claim must involve an effort to “recover a particular fund from the Defendant.” Id.
The Court left open the following questions: 1) is such relief “appropriate” equitable relief under the statute (or under particular circumstances), and 2) whether defenses such as the make whole doctrine are permissible. These were not issues raised in the lower courts.
2. The 11th Circuit….Post-Sereboff:
The 11th Circuit addressed ERISA liens in two companion cases in Popowski v. Parrott, 461 F.3d 1367 (11th Cir. 2006). It considered plan language from two different ERISA plans and reached a conclusion that plan language that does not “specify that recovery come from any identifiable fund” or “limit that recovery to any portion thereof” is insufficient to meet the guidelines set out in Sereboff for a plan to assert an equitable lien. Id. at 1374.
The key paragraphs from the case read as follows:
1. United Distributors Plan
[4] The subrogation and reimbursement provision in the United Distributors Plan claims a lien “on any amount recovered by the Covered Person whether or not designated as payment for medical expenses.” PR1-1, Exh. G at 63. It further clarifies that “[t]he Covered Person ... must repay to the Plan the benefits paid on his or her behalf out of the recovery made from the third party or insurer.” Id. (emphasis added). Thus, language essentially identical to the Supreme Court's characterization of the plan language in Sereboff, specifies both the fund (recovery from the third party or insurer) out of which reimbursement is due to the plan and the portion due the plan (benefits paid by the plan on behalf of the defendant). Unlike in Knudson, a significant portion of the funds specified went directly into the Parrotts' bank account and, thereby, was in their possession for purposes of this case. Thus, at the time they filed their suit, Popowski and the Commerce Group sought “not to impose personal liability on [Parrott], but to restore to the plaintiff[s] particular funds or property in [Parrott's] possession.” See Knudson, 534 U.S. at 214, 122 S.Ct. at 714-15. Accordingly, we conclude that Popowski and the Commerce Group have stated a claim for “appropriate equitable relief” under § 1132(a)(3) and that the district court erred in dismissing the suit for lack of subject matter jurisdiction.
2. Mohawk Plan
*6 [5] The subrogation and reimbursement provision in the Mohawk Plan, unlike that of the United Distributors Plan, claims a right to reimbursement “in full, and in first priority, for any medical expenses paid by the Plan relating to the injury or illness,” but does not specify that that reimbursement be made out of any particular fund, as distinct from the beneficiary's general assets. BCBS Letter Br., Exh. B; BR1-1 at 3. Instead, it makes receipt of “a settlement, judgment, or other payment relating to the accidental injury or illness” a trigger for the general reimbursement obligation. Id. Further, in requiring reimbursement “in full”, it fails to limit recovery to a specific portion of a particular fund. Accordingly, we conclude that, because the Mohawk plan fails to specify that recovery come from any identifiable fund or to limit that recovery to any portion thereof, it fails to meet the requirements outlined in Sereboff for the assertion of an equitable lien for the purposes of 29 U.S.C. § 1132(a)(3). For this reason, we conclude that it was not error to dismiss BCBS's claims.
Id. at 13673-74. However, the Court also recognized that Sereboff does not require that strict tracing requirements do not apply to equitable liens as a matter of agreement. Id. at 1374, fn. 8.
This year, the 11th Circuit issued another ERISA lien decision, Administrative Committee for the Wal-mart Stores, Inc. Associates’ Health and Welfare Plan v. Horton, 513 F.3d 1223 (11th Cir. 2008). In Horton, the 11th Circuit reiterated its interpretation of Supreme Court precedent that a claim by an administrator for equitable relief can lie only when a participant is actually in possession of the funds at issue. Id. at 1227. It went on to answer the following specific question: May a plan “use §502(3) to recover a specifically identified fund in the possession of a third party, such as a trustee or conservator, by suing the third party directly.” The 11th Circuit answered that question in the affirmative, holding that such an administrator may sue third parties in possession of a specifically identifiable fund to which it asserts title and right to possession. Id. at 1228-29.
A crucial passage from the Horton decision explaining the 11th Circuit’s interpretation reads:
Under Knudson, Sereboff, and the other authorities cited above, the most important consideration is not the identity of the defendant, but rather that the settlement proceeds are still intact, and thus constitute an identifiable res that can be restored to its rightful recipient. Had the Administrative Committee solely sued parties not in possession of the disputed funds, the claim would have failed under Knudson because it merely would have sought to impose personal liability on those parties.
Id. at 1229. This decision reinforces the concept that funds recovered from a tort settlement or judgment must still be in the possession of the person against whom an ERISA plan administrator files a lawsuit to enforce its lien.
