Can the Plan get reimbursed even when the beneficiary’s settlement funds have been disbursed or commingled?

Yes in the 11th Circuit.  But watch out in the 9th Circuit.

Here’s the case of AirTran Airways Inc. v. Elem, __ F.3d __ 2014 WL 4694776 (11th Cir. September 23, 2014)(Willful refusal to abide by the terms of the ERISA plan could not destroy the equitable lien that attached before the beneficiary divided the funds with her attorney. The Court rejects Bilyeu v. Morgan Stanley LTD Plan, 683 F.3d 1083 (9th Cir. 2012).)

FACTS:  Elem was a participant of the AirTran self-funded welfare benefit plan.  Elem sustained injuries in an auto accident, and the plan paid out over $131,000 in medical expenses. The plan designated Elem as a “constructive trustee” over any payments recovered. Elem also acknowledged the plan had a “first priority claim” to all payments made by a third party “even if that third party failed to pay the full amount of her damages.”  Elem then sued the tortfeasor and settled for $500,000. When AirTran sought reimbursement, Elem’s attorney misrepresented that the lawsuit settled for only $25,000. AirTran sued for reimbursement.

ISSUE:  Whether an equitable lien requires reimbursement after beneficiary has disbursed and commingled settlement funds?

11th Cir. HELD: YES.

  1. ERISA allows for “appropriate equitable relief.” AirTran sought “to enforce the equitable lien by agreement created by the plan.  As soon as [the tortfeasor] gave Elem the settlement funds, AirTran ‘could follow it into the hands of Elem and [her attorney].’”  Op. at 8.
  2.  “A remedy of money damages is quintessentially a remedy at law….But when a plan seeks ‘specifically identifiable funds’ in the ‘possession and control’ of a beneficiary, such restitution is equitable in nature.”  Op. at 9.
  3. “[A]ll that matters is that the beneficiary did, at some point, have possession and control of the specific portion of the particular fund sought by the insurer. Once [Elem] possessed these funds, the equitable lien by agreement attached….”  Op. at 10.
  4. The Court rejects the 9th Circuit analysis in Bilyeu v. Morgan Stanley LTD Plan, 683 F.3d 1083 (9th Cir. 2012). “It matters not whether the settlement funds have been disbursed or commingled with other funds.”  Op. at 10.
  5. “[E]ven though Elem willfully refused to abide by the terms of the AirTran plan, her dereliction as a constructive trustee could not destroy the lien that attached beforeElem divided the funds with her attorney.”  Op. at 11 (Emph. in original).
  6. AirTran was awarded attorney fees. “[A]n award of attorney fees in this circumstance would help deter others from cheating their employee benefit plan.”  Op. at 19.