by Michael J. Marovich

Transcription

1 An Alternative Approach in Illinois in Dealing with the United States Supreme Court Decision in U.S. Airways v. McCutchen as Applied to ERISA Fund Claims for Medical Bill Reimbursement by Michael J. Marovich In 2013, the United States Supreme Court handed down its decision in U.S. Airways v. McCutchen. 1 The McCutchen case dealt with the application of equitable defenses and principles, like the make whole and common fund doctrines in cases where an ERISA plan seeks reimbursement from the settlement proceeds of a personal injury action. The Supreme Court reversed a lower court ruling, 2 which held that the typical equitable defenses and principles apply in ERISA actions due to the fact that ERISA involves equitable considerations. The lower court reasoned that if equitable principles applied to these types of cases, so should the equitable defenses and principles of the make whole and common fund doctrines. 3 Ultimately, the appeals court found that the concept of unjust enrichment would apply if the ERISA plan s position was adopted, and ruled that the ERISA plan was not entitled to assert its subrogation rights against the settlement proceeds until plaintiff was made whole for a reasonable portion of the attorney s fees and cost in the case. 4 The USSC reversed the appeals court, finding that Neither general principles of unjust enrichment nor specific doctrines reflecting those principles such as the double-recovery or common-fund rules can override the applicable contract. 5 Despite this, the McCutchen court concluded there was an ambiguity in the plan relating to the way attorney s fees were to be allocated and left space for the common-fund rule to operate. 6 The Supreme Court found there was an ambiguity in the plan because the reimbursement provision stated that the employer had first claim on any monies recovered from [the] third party, and felt that the word recovered could refer to a recovery to which [the employer] has first claim [to] every cent the third party paid or, instead, the money the beneficiary took away [after subtracting the costs of recovery, including attorney s fees]. 7 In light of this ambiguity, the Supreme Court reasoned that the commonfund rule informs interpretation of [the] reimbursement provision, and construed recovered to refer to the beneficiary s net recovery, after subtracting attorney s fees. 8 The Supreme Court held that unambiguous language in an ERISA Plan cannot be overridden by equitable principles. These equitable principles may, however, be relevant in interpreting a plan provision that is ambiguous. After the McCutchen decision, it appeared that the common fund argument was all but dead as it applied to stopping properly worded ERISA plans from exerting the full power of their subrogation rights against the settlement proceeds of a plaintiff s personal injury settlement or award. Rest assured, all diligent ERISA funds are either currently reviewing, or have already reviewed, the language of their plan to insure that the recovered language in it is not ambiguous. The greatest tragedy in these types of cases arises when a plaintiff receives no money from a personal injury settlement due to the fact that none is left after their attorney and ERISA Fund provider takes their piece of the pie. Based on the McCutchen ruling, plaintiff attorneys must become more diligent in reviewing an ERISA plan s actual reimbursement language. An example of a properly worded plan is found in the case of Quest Diagnostics v. Bomani. 9 The plan in Bomani, contained the following recovery language: Recovery of Benefits Paid: You or a covered dependent may incur expenses for a condition or injury, such as from a car accident or Workers Compensation, for which someone else is legally responsible to pay. If your medical plan pays claims for any condition or injury for which a third party (which may be an individual, a company or an insurer) is liable, the medical plan reserves the right to recover the money it has paid. This means that if you or your dependent recovers funds from a third party as a result of a judgment, settlement or otherwise, you are responsible for reimbursing the medical plan for 100% of the amounts paid by the medical plan on your or your dependent s behalf. The medical plan has the first right to reimbursement and a priority over the funds you recover from the third party, regardless of how those funds are designated and regardless of whether you or your dependent have been made whole. If you or your dependent receive funds from the third party and do not promptly reimburse your medical plan, future benefits may be reduced to cover the amount of the required reimbursement. The medical plan also has the right to 34 Trial Journal Volume 17, Number 1 Winter 2015

2 bring legal action to enforce its reimbursement right. 11 The Bomani court held that McCutchen was distinguishable from the case because the recovery language in Bomani was unambiguous. 12 The last part of the Bomani Recovery paragraph should be noted. In it, the plan declares that if proper reimbursement is not made, future benefits may be reduced or held back until the amount of the required reimbursement is met. The reality of this part of the plan is that it forces a plaintiff to do something in an attempt to circumvent it. No longer does the plan have to intercede or file suit against the plan member; it simply can choose to refuse to pay all future medical bills of the plaintiff and their family until the claimed reimbursement amount is met. For most plaintiffs and their families, this is an extremely frightening proposition. One of the author s clients, when faced with this exact situation, became so upset and nervous about the thought of her child s medical treatment not being paid for and her credit rating being affected that she ordered me to drop the attempt to get a reduction on the ERISA plan medical bill payback amount and, instead, agreed to pay the full lien amount without any reductions. Given results like this, plaintiffs attorneys must become more creative in how they deal with ERISA plan claims for medical bill reimbursements. One such approach may be to try to keep ERISA out of the equation. If a plaintiff can keep the case and fund reimbursement issue in state court, plaintiff stands a far better chance of getting the payback amount reduced by the Common Fund Doctrine. In Bishop v. Burgard, 13 the Illinois Supreme Court held that the ERISA preemption doctrine does not bar the application of the equitable Common Fund Doctrine. In Bishop, plaintiff incurred medical expenses due to injuries she sustained in a car crash. 14 Her company s ERISA plan had paid $8, for medical expenses. 15 A settlement offer of $21,500 from the negligent driver was obtained. 16 Plaintiff argued the common fund doctrine required the plan to reimburse her attorney for the reasonable value of his time in generating the settlement fund. The supreme court ruled that the common fund doctrine applied, and that the circuit court properly reduced the benefit plan s reimbursement amount. 17 The court held that the fund would be unjustly enriched if it was able to obtain the benefit of a lawsuit without contributing to its costs. 18 It is critical to note that in Bishop, the defendant did not attempt to remove the case to federal court pursuant to 28 U.S.C.S Any plaintiff attempting to negotiate a reduction with an ERISA plan must insure they do nothing which may be interpreted as creating an equitable or constructive trust. An attorney who takes settlement proceeds and pays himself or herself the owed attorney s fee, then puts the remaining proceeds into a special account in the name of the plaintiff until the ERISA fund s reimbursement claim an alternative continued on page 36 Volume 17, Number 1 Winter 2015 Trial Journal 35

3 an alternative continued from page 35 is resolved, has been found to have created a constructive trust, which invokes federal jurisdiction under ERISA. 19 The Varco court ultimately ruled that the common fund doctrine did not apply, and that plaintiff was not entitled to any type of reduction in the ERISA plan payback amount. 20 The attorney in the McCutchen case also took his fee and placed the remainder of it into an escrow account until the dispute could be resolved. 21 As such, a res was created which invoked the equitable jurisdiction of the courts. It is critical that any plaintiff s attorney, in their desire to be paid promptly and to recover their costs, do nothing which can arguably create some type of equitable or constructive trust. The importance of this point was shown in Primax Recoveries v. Sevilla. 22 In Sevilla, the 7th circuit found that no equitable trust was created where a separate check was issued from the rest of the settlement proceeds to the ERISA lien holder. Apparently, the check was sent to the lien holder to endorse and return, but they never sent the check back. 23 The check was never deposited or signed by anyone. 24 The court found that because a res was not created by the facts of this case, the lawsuit was really one for just money under a breach of contract theory. 25 As such, the court ruled that it was not an equitable claim under ERISA. 26 Before the decision in U.S. Airways v. McCutchen, plaintiffs had some early success in arguing that federal jurisdiction is lacking in these types of cases under the theory that the plan is, in reality, attempting to bring a breach of contract suit in federal court to which ERISA jurisdiction does not apply. 27 Beginning in the year 2006, however, the United States Supreme Court began utilizing a less restrictive view regarding jurisdiction. In Sereboff v Mid Atlantic Med. Servs., 28 the Supreme Court held that an ERISA plan may sue to enforce a right of reimbursement set forth in its plan pursuant to 29 U.S.C. 1132(a) (3)(B). The Sereboffs were injured in a car accident, received insurance benefits for medical expenses incurred, and later settled against third parties involved in the accident. Pursuant to 29 U.S.C. 1132(a)(3)(B), the insurer, Mid-Atlantic, sought to enforce a plan provision which required a beneficiary who receives benefits under the plan...to reimburse [Mid Atlantic] for those benefits from [a]ll recoveries from a third party. 29 The Supreme Court found that the reimbursement provision in the Sereboffs insurance plan gave rise to an equitable lien by agreement. That is, a lien arising out of an agreement to convey ownership of specific property to one party as soon as the other party gets title to the property. 30 The court went on to hold that plan language specifying a right to reimbursement from [a]ll recoveries from a third party (whether by lawsuit, settlement, or otherwise) was sufficient to create an equitable lien by agreement that was actionable under 29 U.S.C (a)(3)(b). 31 The Sereboff court found that even though a subrogation lien was involved, the federal court, nonetheless, had jurisdiction to hear the claim because it involved an equitable GROW YOUR FIRM, NOT YOUR FRUSTRATION FindLaw helps small law firms grow. Our comprehensive portfolio of proven, industryleading business development solutions showcases your expertise and connects you to targeted prospective clients. Call today to learn how FindLaw can help you get found by clients you are looking for lawyermarketing.com 36 Trial Journal Volume 17, Number 1 Winter 2015

4 lien and sought equitable relief under 502(a)(3). 32 In any event, the McCutchen case seems to have put this argument to rest when it agreed with the logic it utilized in the Sereboff case, and found that federal jurisdiction exists to hear these types of cases. 33 As a result, it seems that the federal courts will find that they have jurisdiction under ERISA to hear these types of claims, even though such claims may, in reality, be simple breach of contract complaints. Thus, plaintiff attorneys need to find another avenue to pursue. For these reasons, it is imperative that if a plaintiff is going to have any chance of success in obtaining any type of reduction of an ERISA plan s lien, it will be necessary to establish that no federal jurisdiction applies. If plaintiff can be assured the ERISA plan will not attempt to remove the case to federal court, the Bishop case would seem to solve the problem. However, it is far more likely the ERISA plan will, in fact, attempt to remove the case to federal court. Accordingly, it is important to set the case up in such a way that the plaintiff will have the best opportunity to challenge removal, and any claim of federal jurisdiction. To that end, plaintiff should file a Petition for Remand, arguing there is no federal jurisdiction over the dispute. To place plaintiff in the best position to accomplish this, it is suggested that a Petition to Apportion Settlement Proceeds be filed first in state court. This approach has proven successful in both Speciale v. Seybold 34 and Blackburn v. Sunstrand Corp. 35 In both cases, the 7th circuit found such a petition was not preempted by ERISA, and that the apportionment of the settlement proceeds was for the state court to decide. The existence of these cases gives additional ammunition to the plaintiff, as well. If a defendant attempts to remove the case to federal court despite Speciale v. Seybold and Blackburn v. Sunstrand Corp., they may face sanctions. In Hart v. Wal-Mart Stores, Inc., 36 Wal-Mart attempted to remove a case to federal court after plaintiff filed a petition in state court to adjudicate several claims for reimbursement Wal-Mart was asserting against the settlement proceeds. 37 Wal- Mart removed the case to the federal district court, arguing that ERISA s preemption applied. 38 Plaintiff moved to remand, claiming that the court lacked subject matter jurisdiction. 39 The district court agreed, and remanded the case to state court. 40 Later, the district court judge imposed sanctions against Wal-Mart in the amount of $11,500 for filing what it deemed to be a frivolous removal petition. 41 The rulings were affirmed by the 7th circuit. The 7th circuit found that if a plaintiff is trying to get an apportionment of the settlement funds, then there is no federal jurisdiction under ERISA. 42 Another approach was done in the case of Trustees of Carpenters Health and Welfare Trust Fund of St. Louis v. Darr. 43 In Darr, the plaintiff settled a personal injury action for $500, An ERISA fund had paid $86, in medical and disability expenses to plaintiff. 45 Plaintiff s attorney, Darr, based his fee on only $413, of the $500,000 an alternative continued on page 38 Peace of Mind, Delivered As the patient advocate pharmacy, IWP provides convenient home delivery of medication to those injured on the job, on the road and everywhere in between. To learn more about IWP and our services visit IWPharmacy.com, or call us at Volume 17, Number 1 Winter 2015 Trial Journal 37

5 an alternative continued from page 37 settlement due to the fact that he had first subtracted out the $86, allegedly owed the ERISA plan. 46 Darr then forwarded to the ERISA plan a check in the amount of $57, which was the amount left over after he subtracted a fee for himself. 47 Darr later sent to the ERISA plan a check for $28,903.25, the amount he subtracted for his fee, because his client asked him to do so in order to prevent the plan from jeopardizing plaintiff s future medical benefits. 48 Darr then sued the Fund in Illinois State court to recover the $28, under the common fund doctrine. 49 The Fund then sued Darr in federal court to enjoin him from pursuing his state claim. 50 The federal district court entered an order enjoining Darr from pursuing his state claim, and awarded the fund attorney s fees for the federal action. 51 The district court also dismissed the fund s countersuit against Darr, which alleged that a constructive trust or express trust was created, and that Darr and/ or the plaintiff owed the fund an amount equal to any judgment Darr obtained in state court along with the trust s attorney s fees. 52 Darr appealed the rulings against him, and the fund appealed the rulings against them. 53 The 7th circuit ruled that Darr was not enjoined from pursuing his state court common fund claim, and that the fund s counts were improperly dismissed. 54 After remand, the state trial judge granted Darr s motion for summary judgment, and ruled that because Attorney Darr was not a member of the plan, ERISA did not preempt the common fund doctrine, and ordered the Health and Welfare Fund to pay Darr the sum of $28,903.25, plus prejudgment interest and costs. The plan argued in response to the motion for summary judgment that ERISA did preempt the Illinois Common Fund Doctrine, especially in light of the United States Supreme Court ruling in McCutchen. The plan has since appealed that ruling to the Fifth District Illinois Appellate Court, where it is currently pending. Therefore, if a plaintiff s attorney does not mind doing the extra work and spending the extra time, they may simply subtract the lien portion from the settlement proceeds, base their fee on the remaining, send the fund the entire lien amount and then file suit in state court for a common fund fee on the paid lien amount. Based on the cases outlined above, plaintiffs should simply file petitions to apportion settlement proceeds and ask the state courts to allot certain amounts of money to the plaintiff, plaintiff s counsel, and applicable lien holders or entities with subrogation interests. It is suggested that this all be done and finalized before the settlement or judgment checks are issued. This way, no arguable res will be created, which might create federal jurisdiction under some form of equitable lien or constructive trust theory. If despite doing this, the defendant attempts to remove the case to federal court, file a petition to remand along with a petition for sanctions pursuant to Hart for a frivolous removal petition having been filed. AN ALTERNATIVE TO FACTORING Midland s Structured Settlement Loan Do you have clients in need and nowhere to turn except for the factoring companies? Do you have concerns about your clients agreeing to a structured settlement for fear they will factor it later? Direct them to Midland Settlement Trust Group for a Structured Settlement Loan. Savings A lower cost solution than typical factoring transactions Flexibility Loan terms structured for short and long-term needs Safety Bank regulated, fully disclosed and transparent loans Settlement Trust Group Benjamin Malsch, CSSC, Vice President bmalsch@midlandsb.com O: (414) C: (262) Deanna Haught, Vice President dhaught@midlandsb.com O: (414) C: (262) Member FDIC. Loans subject to approval. Some restrictions may apply. The Settlement Trust Group is a division of Midland States Bank, a bank organized under the laws of the State of Illinois. 38 Trial Journal Volume 17, Number 1 Winter 2015

6 Endnotes 1 U.S., 133 S.Ct (2013) F.3d 671 (3rd Cir. 2011) F.3d at , at S.Ct. 1537, , at , at , at Quest Diagnostics v. Bomani, 2013 U.S. Dist. LEXIS (USDC CT 2013). 10, at , at Ill.2d 495, 764 N.E.2d 24 (2002). 13, at , at , at , at , at Administrative Committee of the Wal- Mart Stores, Inc. Associates Health and Welfare Plan v. Varco, 338 F.2d 680 (7th Cir. 2003). 19, at , at F.3d 544 (7th Cir. 2003). 22, at , at U.S., 133 S.Ct (2013). 27 Great-West Life & Annuity Ins. Co. v Knudson, 534 U.S. 204, 122 (2002) U.S. 356, 360, 126 S.Ct (2006); Accord, Dinnigan v. ABC Corp., 951 N.Y.S.2d 85 (2012). 29, at , at , at , at McCutchen, at F.3d 612 (7th Cir. 1998) F.3d 493 (7th Cir. 1997) F.3d 674 (7th Cir. 2004). 37, at , at , at F.3d 803 (7th Cir. 2012) , at , at 811. Michael J. Marovich is a partner in the law firm of Hiskes, Dillner, O Donnell, Marovich & Lapp, Ltd in Orland Park, Illinois. He graduated from Loyola School of Law in He was the President of the South Suburban Bar Association in 1993, and served on the Association s Board of Directors from He was a member of the Illinois State Bar Association Assembly from He was also on the ISBA s Ad Hoc Committee Task Force on Governance For The New Century. He was a member of the ISBA s committee on Membership and Bar Activites from He received a John. C. McAndrews Honorable Mention from the ISBA for his Pro Bono participation in the year His practice focuses mainly on plaintiff s personal injury, civil litigation, petitioner s workers compensation, criminal defense and municipal law. HOW CAN YOU GET INVOLVED IN ITLA? Take advantage of the many membership benefi ts included with your ITLA membership. - EDUCATION - Educational CLE Programs - As an accredited MCLE provider, ITLA offers the most comprehensive civil educational programs in the state. Members receive reduced rates for 9 seminars annually. Educational Materials - Our course handbooks and CDs offer you legal education advancement at your home or offi ce, AND you have the opportunity to receive MCLE credit when you purchase and listen to seminar CD s. Notebooks for Trial - The Workers Compensation Notebook and the Medical Malpractice Trial Notebook are updated annually with the latest information. They are indexed, easy to read and save you hours of research time. Bonus: Now you can order the notebooks on CD. Load this on your laptop or ipad to take with you to the courthouse. Volume 17, Number 1 Winter 2015 Trial Journal 39