Kelly on Malpractice

Medical malpractice lawyers and personal injury lawyers are all aware of subrogation/reimbursement provisions associated with ERISA health care plans. There had been some dispute about whether the plans were subject to equitable state law “made whole” doctrines and common fund theories. The Sixth Circuit settled that dispute in Longaberger Co. v. Kolt, 2009 WL 3806079 (6th Cir.). The plaintiff, Samuel Billiter, was involved in an automobile accident in which he was seriously injured. Longaberger’s self-funded plan covered Samuel Billiter (as the dependent child of Longaberger employee Theresa Billiter), paying his medical bills in the sum of $113,668.31. Kolt, an Ohio attorney, represented Samuel and Theresa Billiter in civil tort actions against the negligent drivers involved in the accident. Kolt reached settlements with the insurance companies of the two negligent drivers, receiving $35,000 from one carrier and $100,000 from the other carrier. Kolt deposited the $135,000 from the two separate settlements into his IOLTA. He also sent a letter to Longaberger notifying it of the settlements, and stating: “Mr. Billiter would like to try to amicably satisfy his subrogation obligation to you.” Kolt disbursed the majority of the settlement funds from his IOLTA. Kolt kept $45,000 for himself as an attorney fee and disbursed everything but $1,000 from his IOLTA.

The Longaberger Company Health Plan was governed by ERISA and self-funded by Longaberger employees who contribute to the Plan through payroll deductions. At the time of the automobile accident, the Plan’s provisions provided Longaberger with “RIGHTS OF REIMBURSEMENT AND SUBROGATION.” The Plan’s subrogation and reimbursement terms provided that the Plan would automatically have a first priority lien upon the proceeds of any recovery. The Plan had the right to recover the lesser of the amount actually paid by the Plan; or an amount received from the third party at the time that the third party’s liability is determined and satisfied; whether by full or partial settlement, judgment, arbitration or otherwise. The Plan had a first priority claim against any proceeds paid by or on behalf of a liable third party and “entitled to reimbursement or subrogation regardless of whether you or your Dependent(s) have been made whole.” The Plan’s rights “were not be subject to reduction under any common fund or similar claims or theories.” Regardless of how proceeds were designated, the Plan’s rights attached to any full or partial judgment, settlement or other recovery. In the event that benefits were to be paid by the Plan, “you or your Dependent(s), as appropriate, shall execute a Subrogation/Right of Reimbursement Agreement, in a form prescribed by the Plan.” In addition, “you and your Dependent(s) shall cooperate fully in the enforcement of the Plan’s rights, and shall take all actions necessary to enable the Plan to secure such rights and in no way prejudice or diminish such rights without the Plan’s written consent.” Moreover, “you or your Dependent(s) shall inform the Plan of any settlement offers, and shall take no action in settlement or otherwise that would diminish the Plan’s subrogation rights against the third party or diminish the Plan’s reimbursement rights.”

Longaberger filed a complaint in federal court against Kolt and Billiter alleging causes of action for constructive trust, equitable lien, and unjust enrichment. Longaberger also sought a temporary restraining order to prevent Kolt from disbursing, commingling, or transferring settlement funds that were in Kolt’s IOLTA. Longaberger amended its complaint to name Kolt as a defendant in his capacities as an individual and as a Trustee, and Theresa Billiter as a defendant. The amended complaint alleged claims against all named defendants for constructive trust, equitable lien, unjust enrichment, an accounting, equitable estoppel, and conversion, and against Kolt only for tortious interference with contract and breach of constructive trust. Longaberger clarified its position seeking “equitable lien by agreement” in light of the” Supreme Court’s 2006 holding in Sereboff v. Mid Atl. Med. Servs., 547 U.S. 356 (2006), which altered the controlling law in the present case. The district court granted Longaberger’s motion for summary judgment. Specifically, the district held that:

Longaberger automatically acquired a valid lien on the tort recovery fund when the funds became identifiable. In addition, Longaberger seeks equitable rather than legal restitution because the Plan specifies a particular amount and a particular fund from which restitution should be paid.

Accordingly, the district court ruled in favor of Longaberger and against Kolt in the amount of $37,889.44 and against Samuel Billiter in the amount of $75,778.87.

On appeal, the Sixth Circuit held that the plan’s reimbursement and subrogation provision created an automatic lien on a beneficiary’s tort recovery to the extent of benefits he received from plan; and that the plan was entitled to full reimbursement of funds beneficiary received from liable third parties and was not required to deduct attorney fees that beneficiary expended to obtain settlement. Virtually all state law claims relating to an employee benefit plan are preempted by ERISA. Only those state laws whose effect on employee benefit plans is merely tenuous, remote, or peripheral are not preempted. The “made whole” doctrine and any other law which diminishes the plan’s right to recover are preempted. The Plan contained clear and unambiguous reimbursement provisions attaching “to any full or partial judgment, settlement or other recovery.” Accordingly, Longaberger’s equitable lien attached to the settlement fund when it was identified and received. Kolt even conceded at the district court’s hearing that he “probably” was aware that the Plan contained language that indicated it had a first priority lien over funds recovered from third parties. Kolt argued that Sereboff and Gilchrest did not apply to him because he was neither a Plan fiduciary nor a beneficiary of the Plan. In Ward v. Wal-Mart Stores Inc., 194 F.3d 1315, 1999 WL 801532, at *5 (6th Cir.), the Sixth Circuit upheld a district court’s decision to award reimbursement to an ERISA plan, but reversed the district court’s decision to deduct a pro rata share of attorney fees from the amount of the reimbursement. The Ward panel also stated that “the Plan may then file suit against the attorneys to recover the remaining one-third of the amount it is due.” Longaberger contended that Ward was “established precedent” that “allowed an ERISA plan to seek reimbursement from an attorney for taking a fee on funds which belong to an ERISA plan.” Kolt countered that this single sentence in the Ward opinion was dicta and had no precedential effect. The Sixth Circuit disagreed and held that there is no statutory barrier to prevent Kolt from being named a defendant in a suit brought pursuant to § 502(a)(3) of ERISA, provided that the relief sought lies in equity.

The Longaberger case should send a chill through all of us who are tempted to settle a claim without the consent of a self-funded ERISA plan who pays for your client’s medical expenses. The simple message is “Don’t do it!” I suggest that you make a deal with the plan before you begin negotiating with the tortfeasor.