Can an ERISA Medical Plan Sue My Law Firm?
So, you settled a personal injury lawsuit. An ERISA medical benefits plan previously put you on notice that it had paid medical expenses. The subrogation demand is a significant portion of the settlement. Do you have to pay the plan in full before you disburse funds to the client? What about your fee? Can the plan sue you if you don’t?
Whether the plan has a priority over the claimant’s other damages, and over your fee, will depend on what the plan document says. If the plan disclaims the “make-whole” rule (which is the default rule), then whether your client is made whole or not is irrelevant. In fact, the plan may state that it is entitled to the first dollar paid regardless of whether there is sufficient recovery to compensate for pain and suffering and loss of wages. If the plan document states that it disclaims the common-fund rule, then your attorney’s fee doesn’t come out first either. The plan can take whatever it is due without paying you a fee.
So, if you proceed to disburse funds to your client and you take your fee despite such a provision, what liability do you have?
An ERISA fiduciary recently sued a participant or beneficiary and a law firm to obtain reimbursement of medical benefits from a settlement in North Carolina.
The law firm moved to dismiss the lawsuit, contending that the ERISA statute (29 U.S.C. §1132(a)(3)) did not permit a plan administrator to sue a participant’s attorney for reimbursement of settlement proceeds that should have been paid over to the plan. See, Mann+Hummel Filtration Tech. U.S. v. Demayo Law Offices, LLP, Civil Action 3:21-CV-00374-GCM-DSC (W.D.N.C. Mar. 24, 2022). The magistrate judge refused to grant the dismissal and the matter was referred to the District Court judge with the law firm’s objections noted. The district court judge agreed with the magistrate to the extent that the plan’s lawsuit asserted a right to equitable relief. The case was allowed to proceed.
Given there have been so few reported decisions where a law firm has been sued, what was different about this one? The law firm thought it was on solid legal footing and refused to cooperate with the plan.
It noted three cases in support of its position, one appearing to influence the other two. The most persuasive case was Great-West Life & Annuity Ins. Co. v. Bullock, 202 F.Supp.2d 461, 465 (E.D. N.C. 2002). In Bullock, the court noted that the ERISA statute was silent on whether an attorney can be personally liable under ERISA, and so it looked to state law to fill in the gaps. Under state law, the attorney could not be liable unless he signed on to a plan or contract, or otherwise agreed to disburse funds according to the plan.
The North Carolina court first found trust law principles were more appropriate than state law. It also noted that Bullock apparently overlooked some adverse controlling authority, Harris Trust & Sav. Bank v. Salomon Smith, Inc., 530 U.S. 238, 246 (2000). That case found that ERISA does not include the universe of potential defendants, thus a law firm is not automatically excluded as a defendant. Rather the sole test is whether a plaintiff seeking reimbursement is pursuing appropriate equitable relief. Seeking restitution and equity in the form of a constructive trust or equitable lien where the plaintiff can trace particular funds or properties to the defendant’s possession had already been found to constitute equitable relief in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 213 (2002).
The court went on to note that even the Eleventh Circuit (among other circuits) permitted a lawsuit for equitable relief. “The Eleventh Circuit reached the same conclusion in a case that was later vacated on other grounds. See AirTran Airways v. Elem, 767 F.3d 1192, 1199 (11th Cir. 2014), vacated on other grounds, 136 S.Ct. 979 (2016)” Mann+Hummel Filtration Tech. at *7. The vacation on other grounds dealt with the then-recent Montanile v. Bd. of Trs. of Nat’l Elevator Indus. Health Benefit Plan, 577 U.S. 136, 139 (2016). So long as the relief sought is appropriate, equitable relief such as seeking reimbursement from specifically identifiable settlement funds in the possession and control of a law firm, the lawsuit will be permitted.
There are a few facts about the AirTran case that are worth noting. In that case, the judge claimed a law firm was outright lying. The law firm had said that the settlement was for only $25,000. The medical benefit plan was claiming over $131,000 for medical expense reimbursement. However, the settlement check, a copy of which the attorney included with his letter, was for $475,000. The plan sued the law firm. The firm lost. Attorney’s fees were also awarded against the law firm.
An appeal followed to the Eleventh Circuit, and Judge Pryor wrote the opinion affirming the Northern District of Georgia. Judge Martin, on the other hand, dissented finding that the district court improperly considered the claims asserted against the law firm to be equitable relief when in fact they were not. She believed that the relief sought was a legal remedy. The Supreme Court agreed with her. AirTran was vacated for reconsideration in light of the Montanile decision.
Ideally, a personal injury law firm should review the ERISA plan before taking on a case, so it understands the extent of any subrogation interest. It should definitely review the plan before making any settlement disbursements. We are not personal injury lawyers. We focus on ERISA claims and disability policy claims. But we can help you evaluate and defend your right to a fee and your client’s right to compensation.