Joining the majority of circuit courts to address the issue, the Eleventh Circuit recently held that an ERISA plan seeking to recover funds via an equitable lien created by the plan’s subrogation provision is not required to satisfy traditional strict tracing rules.  In AirTran Airways, Inc. v. Elem, et al., 2014 WL 4694776 (11th Cir. 2014), a welfare plan sued a participant and her personal injury attorney to recover funds the plan paid for medical expenses after the participant received a settlement from the car accident that gave rise to the medical expenses.   The Eleventh Circuit held that the plan terms unambiguously created an equitable lien against the settlement funds up to the amount of benefits the plan had paid.

The court likened the plan and relief sought to those in Sereboff v. Mid Atlantic Med. Serv., Inc., 547 U.S. 356 (2006).  As in Sereboff, the “unambiguous terms of the AirTran plan created an equitable lien against any settlement funds that [the plan participant] received as a result of her accident.”  Further, as in Sereboff, the plan sought “specifically identifiable funds” that the participant actually possessed.  The court disregarded the fact that the participant had divided the settlement funds with her attorney after receiving them, noting that it did not matter “whether the settlement funds have since been disbursed or commingled with other funds” so long as the participant had possession of the funds at some point and the plan did not seek relief from the general assets of the participant.  The court concluded that “as soon as the settlement fund was identified” (i.e. when the participant possessed the fund), “the plan imposed an equitable lien” over it – both the amounts held by the participant and her attorney.  In other words, both the participant and her personal injury attorney were proper defendants

The court distinguished AirTran from Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), based on differences in the way the settlement funds in AirTran were paid.  In Knudson, the participant never actually possessed the settlement funds to which the plan claimed a subrogation right, because the funds were paid to various entities (including a special needs trust) rather than to the participant.  Here, the participant had control and possession over the settlement funds at some point (via settlement checks made out to the participant, her attorney, and his firm), and thus her subsequent dispersal of the funds was irrelevant to the plan’s ability to recover.  This case is particularly satisfying because, according to the 11th Circuit, the personal injury attorney tried to hide the full amount of the settlement from the plan.

This case greatly increases the leverage plans have when negotiating with a participant’s personal injury attorney, because if the attorney does not cooperate and tries to settle out from under the plan, the plan can sue the attorney to recover the funds he or she received and its attorneys’ fees under ERISA Section 502(g).

The other circuits that have found strict tracing to be unnecessary are the First, Second, Third, Sixth, and Seventh Circuits.  In contrast, the Eighth and Ninth Circuits have held that strict tracing of funds is required.  With courts lined up on each side of this issue, and potentially significant amounts of money at stake, Supreme Court guidance would be welcome.