Supreme Court Declines Request By Special Needs Trust To Review ERISA Plan’s Right To Reimbursement

The U.S. Supreme Court has denied a petition by a special needs trust asking whether funds paid into the trust by “bona fide purchasers” on behalf of insured tortfeasors for the benefit of a health plan beneficiary pursuant to a settlement extinguished the health plan’s right to recover in equitable subrogation under ERISA. The case is Larry Griffin Special Needs Trust v. ACS Recovery Services, Inc. (Dkt. No. 13-182).

Background. Larry Griffin was an employee of FK Industries, Inc. (FKI), and participated in the company’s ERISA welfare benefit plan. The plan, which was administered by ACS Recovery Services, Inc. (ACS), paid $50,076.19 in medical expenses for Griffin’s treatment following a serious automobile accident in 2006.

Griffin sued the tortfeasors and reached a settlement. The settlement first segregated money for attorneys’ fees, additional medical expenses, and for Griffin’s wife pursuant to a divorce settlement. The remaining funds (having a “present sum value” of approximately $148,000) were paid by SAFECO, the tortfeasors’ commercial automobile insurer, to Hartford CEBSCO, which—as the tortfeasors’ assignee—was authorized to purchase an annuity from Hartford Life Insurance Company. Hartford Life, as “sole owner of the annuity policy,” was to issue monthly payments to the Larry Griffin 142 Special Needs Trust, whose Trustee was Willie Griffin, Larry’s brother.

At the time of the settlement, the ERISA plan provided that it would “have a first lien upon any recovery, whether by settlement, judgment, arbitration or mediation” to repay the medical expenses, and it prohibited Griffin from taking action that might prejudice the plan’s right to reimbursement. As a result of the settlement, however, no funds were paid to ACS and FKI.

ACS and FKI (collectively, ACS) brought suit against the Trust, the Trustee, Larry Griffin, and Larry’s wife, seeking a constructive trust upon “no less than $50,076.19 in funds intended to be paid to or received by the Defendants from any recovery made as compensation for injuries caused by the acts of a third party.” ACS requested that the defendants be enjoined from interfering with the plan’s right of reimbursement.

District court’s ruling. The district court ruled in favor of the defendants, holding that ACS’ claim sought legal, not equitable relief, as required by ERISA, because Larry Griffin had neither possession nor control of the settlement funds held in the annuity. Any judgment against Larry Griffin personally would be for money damages rather than for the enforcement of a constructive trust over the settlement proceeds. The district court also ruled that the Trust could not be sued for equitable relief because it had no possession or control over the annuity, which was owned by Hartford Life. Because Larry had no control over the Trust, the Trust could not be liable as his agent. Finally, because Larry lacked “even fleeting” possession or control over the settlement money that purchased the annuity, which, in turn, funded the Trust, equitable relief was pretermitted against the Trust.

Fifth Circuit’s ruling. Following an unfavorable appellate decision, ACS obtained en banc review. The Fifth Circuit U.S. Court of Appeals held that: (1) ACS was allowed to recover from the Special Needs Trust the costs that the plan bore on Griffin’s behalf; (2) the Trust was a proper ERISA defendant; (3) the Trust received funds directly traceable to Griffin’s tort recovery; and (4) the plan held a pre-existing equitable lien by agreement on the proceeds of the recovery after the plan paid Griffin’s medical bills.

Questions presented. The Trust and Trustee presented the following two questions for review:

1. Whether funds paid on behalf of insured tortfeasors, in exchange for a complete release of all claims from a Medical Plan Beneficiary, by their automobile liability insurance company, at its option, to a bona fide purchaser as their “assignee” that in turn purchases an annuity from a second bona fide purchaser to fund the assignee’s assumed obligation to make period payments to a 142 Special Needs Trust extinguishes the Plan’s right to recover in equitable subrogation under Sec. 502 (a) (3) ERISA against the 142 Special Needs Trust and its Trustee.

2. Whether the trial court correctly denied the Plaintiff’s Motion for Summary Judgment against the 142 Special Needs Trust and its Trustee as seeking legal relief rather than “appropriate equitable relief” under ERISA Sec. 502(a)(3) and dismissed its cause of action.

However, on Nov. 12, 2013, the Supreme Court declined to review this case, and thus, the Fifth Circuit’s decision stands.

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