In ACS Recovery Services, Inc. v. Griffin (2013 CA5), the Fifth Circuit recently allowed fiduciaries of an ERISA group health plan to seek reimbursement from a special needs trust established for a participant through a personal injury settlement.  The key to this decision was the court’s interpretation of the leading Supreme Court cases in this space – Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002) and Sereboff v. Mid-Atlantic Medical Services, Inc. 547 U.S. 356 (2006).

In this case, Mr. Griffin was employed by FKI Industries and was a participant in its ERISA group health plan when he was injured in a car accident.  Mr. Griffin entered into a settlement with a third party for $294,440, but did not reimburse the ERISA group health plan for the $50,076 in medical expenses it paid.  After segregating attorneys’ fees, additional medical expenses and amounts for Mr. Griffin’s ex-spouse, the settlement required the defendant to purchase an annuity from an unrelated insurer.  The annuity made monthly payments to Mr. Griffin’s special needs trust.  Mr. Griffin’s attorney indicated that the settlement was specifically structured to avoid any equitable lien claimed by the ERISA group health plan.

The Fifth Circuit’s en banc decision did not allow the plan’s equitable lien to be defeated by the structure of the settlement.  In Knudson, the ERISA plan sued the participant directly, and the Supreme Court held that an action for restitution against the participant, when the settlement funds were held in a special needs trust, was a legal cause of action for breach of contract.  Since Section 502(a)(3) of ERISA only allows equitable relief, the plan’s claim against the participant could not proceed.  However, in this case, the plan sued the trustee of the plan participant’s special needs trust.  Since Mr. Griffin had an agreement with the plan to reimburse the plan from any third party settlement, his settlement agreement created an equitable lien against the settlement money.  Therefore, the Fifth Circuit concluded that it was appropriate equitable relief under ERISA to impose a constructive trust on the settlement amounts, which include the proceeds from the annuity as they are paid into the special needs trust.

Mr. Griffin and the other defendants argued that the equitable lien was not proper because none of the defendants possessed the settlement funds.  The funds were held by Hartford, the insurer of the annuity, not the plan participant, and they argued that Mr. Griffin was never in control of the funds.  However, the Fifth Circuit did not interpret Sereboff to require a strict tracing requirement to funds that were at one time in the possession of the plan participant, but instead permitted an equitable lien by agreement to attach to the settlement funds held by the defendant trustee.

Plan language describing subrogation and reimbursement from third party litigation amounts can always be improved.  In order to put the plan in a better litigation position, the language should clearly describe that the ERISA group health plan has an equitable lien by agreement to any settlement amounts, no matter who holds such amounts, and that the lien is created upon payment of any medical expenses under the plan.