“Enbancworthy” – Fifth Circuit Weighs in on Whether Company Can Recover Funds from Special Needs Trust

“The question this court deems enbancworthy is whether ACS Recovery Services, Inc., the administrator, and FK Industries, Inc., the sponsor (collectively, ‘ACS’), of the ERISA plan (‘Plan’) that covered employee Larry Griffin, can sue Griffin, Griffin’s Special Needs Trust, or his ex-wife Judith, for reimbursement of medical expenses incurred by the Plan after Griffin received a tort settlement for his injuries. To what extent, in other words, does ACS’s suit seek ‘appropriate equitable relief’ to enforce the Plan’s reimbursement provision?” Thus begins the Fifth Circuit’s opinion in ACS Recovery Services, Inc. v. Griffin, No. 11–40446, 2013 WL 1890258, at *1 (5th Cir. May 7, 2013), the Fifth Circuit’s first opportunity to consider what is “appropriate equitable relief” under ERISA after the Supreme Court’s ruling in McCutchen v. US Airways, 133 S. Ct. 1537 (U.S. 2013).

The Supreme Court’s 5-4 ruling in McCutchen, which was in “two parts, one favoring US Airways, the other McCutchen,” held that, in an action brought under Section 502(a)(3) of ERISA based on an equitable lien by agreement, the terms of the ERISA plan govern. The Supreme Court held that neither general principles of unjust enrichment nor specific doctrines reflecting those principles can override the applicable contract. However, if the plan terms do not proscribe who will bear the costs of recovery, the common-fund doctrine provides the best indication of the parties’ intent. Though the Supreme Court did not allow equitable defenses to eviscerate and override plan terms, the McCutchen decision reinforced the importance of ensuring plan terms are sufficiently clear and specific. For additional analysis of the Supreme Court’s decision in McCutchen, please read our full advisory, available here.

In ACS Recovery Services, Inc. v. Griffin, the Fifth Circuit considered the scope of “appropriate equitable relief” under ERISA. Mr. Griffin worked for FK Industries (“FKI”) and was a participant in the company’s ERISA welfare benefits plan. The Plan paid over $50,000.00 in medical expenses for Griffin’s treatment and recovery following a serious car accident. Mr. Griffin and his wife sued the driver responsible for the accident and the driver’s employer. They reached a settlement for periodic payments to the Griffins for a present value sum of just over $294,000.00.

At the time the Griffins reached the settlement in the tort case, the Plan contained a provision which stated that the Plan “will have a first lien upon any recovery, whether by settlement, judgment, arbitration or mediation” to repay the medical expenses,” and the Plan also required that Mr. Griffin not take any action to prejudice the Plan’s right to reimbursement. Griffin, 2013 WL 1890258, at *1. ACS notified Mr. Griffin’s attorney of these provisions of the Plan, shortly after the Griffins filed their complaint in the tort suit. Mr. Griffin’s attorney later admitted that he structured the settlement of the tort case to “in an effort to legally avoid any equitable lien asserted by the Group Medical Plan. . . .” Id. Mr. Griffin’s attorney did so by first segregating money for attorneys’ fees, some additional medical expenses, and for Mrs. Griffin, pursuant to the Griffins’ divorce settlement. The remaining funds, with a present value sum of $148,000.00, were paid by the tort defendant’s insurer to Hartford CEBSCO, which was authorized to purchase an annuity from Hartford Life and therewith to make monthly payments of $843.42 for twenty years to a statutory Special Needs Trust. The trustee of the Special Needs Trust was Mr. Griffin’s brother, and the Trust was authorized to make monthly payments on Mr. Griffin’s behalf. The settlement agreement in the tort case represented that “no part of the claim” had been assigned or transferred to any person or entity, and that not only had all medical costs ben paid, but that “any liens pertaining to said case have been released or satisfied.” Id. at *2. Interestingly, the guardian ad litem for Mr. Griffin and the parties’ attorneys only signed the settlement agreement “as to form.” Id.

Thus, ACS and FKI, the Plan fiduciaries, were denied reimbursement. They sued Mr. Griffin, the now ex-Mrs. Griffin, the Special Needs Trust and its trustee under ERISA Section 502(a)(3)(B). The United States District Court for the Eastern District of Texas rejected ACS and FKI’s claims and granted summary judgment in favor of Mr. Griffin, the Trust and the trustee. ACS Recovery Services, Inc. v. Griffin, 784 F. Supp. 2d 694 (E.D. Tex. 2011).

On appeal, a panel of the Fifth Circuit agreed with the district court and expounded on its rulings, finding that (1) the Plan sought legal, not equitable relief as required by ERISA Section 502(a)(3)(B) because Mr. Griffin had neither possession nor control over the settlement funds that were held in the annuity and any judgment against Mr. Griffin personally would be for money damages, rather than for enforcement of a constructive trust over settlement proceeds; (2) the Special Needs Trust could not be sued for equitable relief because, like Mr. Griffin, it had no possession or control over the annuity; and (3) since Mr. Griffin lacked “even fleeting” possession or control over the settlement money that purchased the annuity that funds the Trust, equitable relief could not be had against the Trust. The decision for the original Fifth Circuit panel decision is ACS Recovery Services, Inc. v. Griffin, 676 F.3d 512 (5th Cir. 2012).

ACS petitioned for and received en banc review from the Fifth Circuit. The Court en banc held that Mr. Griffin’s Trust “could have been funded by an annuity reduced to satisfy his reimbursement obligation to the Plan. He and his attorneys chose instead to disregard the Plan’s equitable lien by agreement, as they attempted to divorce [Mr. Griffin] and the Trust from possession and control of the settlement funds.” ACS Recovery Services, Inc. v. Griffin, No. 11–40446, 2013 WL 1890258, at *9 (5th Cir. May 7, 2013). The Fifth Circuit ordered a remand for the imposition of equitable relief upon the Trust, through Mr. Griffin’s brother as the Trustee. The Court found that did not have to reach a decision on Mr. Griffin’s liability to the Plan because “imposing a constructive trust on his Trust affects exactly the same proceeds and effects the same result as would an equitable remedy against [Mr. Griffin].” Id. at *8. The Court also held that ACS could not attempt to recover from Mr. Griffin’s ex-wife because the Plan fiduciaries failed to demonstrate that the money that the former Mrs. Griffin received from the settlement was attributable to Mr. Griffin’s injuries, rather than her personal claims arising from the accident. Id.

The Fifth Circuit also rejected the bold assertion that Mr. Griffin “never” had possession or control of the settlement funds. The Court reasoned that, without Mr. Griffin’s injury, there would have been no Plan payments for his medical costs and no settlement of the tort action, and the settlement documents which Mr. Griffin signed were fully explained his assent to the disposition of the settlement fund. He had at least constructive possession and control of the funds to the extent that he facilitated the settlement. Id. at *9.

The Fifth Circuit also rejected the assertion that the Special Needs Trust could not be held liable as the recipient of the settlement funds because it was “special,” in that it was a vehicle “for the support and care of disabled individuals whose primary purpose is to maintain the beneficiaries’ eligibility for public benefits like Medicaid.” Id. The Court noted that, although Congress favored such trusts in certain aspects, Congress “did not exclude them as potential defendants from the broad reach of ERISA § 502(a)(3).” Id.

Circuit Judge Prado dissented from the en banc Court’s decision. He was not convinced that ACS was truly seeking equitable relief. He noted that the only money in the Trust at any given time comes in the form of monthly payments, which are funneled directly to Mr. Griffin. Id. at *11. Judge Prado noted that ACS was not seeking to satisfy its claim with a payment plan, to be paid from the proceeds of the annuity as they accrued in the Trust. Rather, ACS sought a “constructive trust” of “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.” Id. (emphasis in original). Judge Prado found that the majority’s decision to impose liability on the Trust was in conflict with the Supreme Court’s decision in Great–West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002). In Knudson, the Supreme Court differentiated between legal and equitable relief. When Knudson was seriously injured in a car accident, Great-West paid substantial sums for medical bills, pursuant to an ERISA-governed plan, which authorized the company to be reimbursed if Knudson recovered from a third party. Knudson won a favorable judgment in a tort suit regarding the car crash, and the tort defendant deposited her award into a special needs trust. The Supreme Court held that Great West could not recover “restitution” from the Knudsons personally under ERISA Section 502(a)(3)(B), as that would be tantamount to legal relief for a breach of contract. Because the settlement funds were no longer in Knudson’s possession, Great-West was not necessarily seeking “the particular funds obtained from the third party.” Id. at 220. However, in Knudson, the Supreme Court declined to decide whether the plan in question might have claimed equitable relief against the special needs trust or against the Knudsons’ attorney.

As the Fifth Circuit’s en banc decision in Griffin reflects, a plan participant will find it quite difficult to evade a clear and an unambiguous reimbursement provision in an ERISA-governed employee welfare benefits plan, if he or she later recovers from a third party. Even special needs trusts are not immune to the reach of “appropriate equitable relief” under ERISA Section 502(a)(3)(B).

Written by Elizabeth Wilson Vaughan, Associate, ERISA Litigation ‖ Alston & Bird, LLP