In a post from last year, I reported on how the Fifth Circuit had issued a decision In ACS Recovery Servs., Inc. v. Griffin, 676 F.3d 512, 514 (5th Cir. 2012), in which it held that an ERISA plan beneficiary and his lawyer had created a perfect settlement structure in which no one ever had enough possession or control over the substantial settlement proceeds to support an equitable remedy.

The Fifth Circuit decided that the shell game issue was “enbancworthy” and, in a May 7, 2013 decision, reversed the panel’s decision.

The facts underlying the claim can be summarized as these. In 2006, Larry Griffin, who participated in his employer’s medical Plan, was seriously injured in a car accident, for which the Plan paid about $50,000 in medical benefits. Larry and his then-wife, Judith, sued the person responsible for the accident, ultimately settling for almost $300,000. The Plan provided that it “will have a first lien upon any recovery” to repay medical expenses, and it required Larry not to take action that might prejudice the Plan’s right to reimbursement. The court found that Larry told his lawyer about these provisions but, “[r]ather than help Larry comply with the Plan, his attorney devised an artful attempt to insulate the settlement proceeds from the reimbursement provision.”

The “artful attempt” provided that about half the settlement proceeds would pay attorneys’ fees, outstanding medical expenses, and a payment to Judith (now Larry’s ex). The balance would be paid by the settling defendant’s insurance company directly to an annuity company to buy an annuity that would make payments to a Special Needs Trust (SNT) set up for Larry. The Plan sued Larry, the trustee of the SNT, and Judith.  In ACS Recovery Servs., Inc. v. Griffin, 676 F.3d 512, 514 (5th Cir. 2012), a panel of the Fifth Circuit had held that none of the defendants ever had possession of any settlement proceeds, or was otherwise amenable to suit by the plan, so therefore no equitable claim could be asserted.

The entire Fifth Circuit, sitting en banc, reversed the panel’s decision, finding it did not comply with Supreme Court precedent (or common sense). ACS Recovery Services, Inc. v. Griffin, — F.3d –, 2013 WL 1890258 (5th Cir. May 7, 2013). After an extensive discussion of Supreme Court precedent and authority from other circuits, the court held:

From Knudson, Sereboff, and applicable circuit case law, the following conclusions seem inescapable. Larry Griffin had a pre-existing agreement with ACS to reimburse the Plan for its payments on his behalf in the event of a third-party recovery. When Larry Griffin signed the Order approving settlement and the Agreement awarding compensation for his injuries, an equitable lien by agreement arose for the benefit of ACS. Griffin’s right to receive money from the settlement was subordinate to the Plan’s lien. Both the annuity and its monthly payments to the Trust, which accrue to Larry’s benefit, are an identifiable fund to which the Plan’s lien attaches. The money belongs “in good conscience” to the Plan to the extent of the costs it incurred. Under § 502(a)(3)(B), appropriate equitable relief demands the imposition of a constructive trust on the proceeds of the annuity as they accrue to the Special Needs Trust. ACS should be awarded this relief from the Trust and Willie Griffin, Trustee.

The court rejected the defense argument that an equitable claim against anyone required that Larry, the Plan beneficiary, have possession or control at some point. The court held that an equitable remedy could lie against any defendant that had control; it did not have to be Larry. In any event, the court expressly rejected the notion that Larry never had possession or control of the settlement fund:

Without Larry’s injury, there would have been no Plan payments for his medical costs nor a settlement. The settlement documents he signed fully explain his assent to the disposition of the fund. He had at least constructive possession and control of the fund to facilitate the settlement. He would not have agreed to indemnify the settling parties and Hartford for unpaid medical bills had he expected to receive nothing from the settlement. Griffin’s attempt to divorce himself from the origin of the fund and its disposition is no more persuasive than if he had directed the money to a close relative. But the more important point, as Bombardier put it, is that he could not give away that which he did not possess. Sereboff authorized resort to the beneficiaries’ segregated account only after the Supreme Court concluded the plan had an equitable lien by agreement that attached at the fund’s creation. So, here, a holding that no equitable lien by agreement arose would blink reality and elevate form over substance

The court rejected the argument that special needs trusts are too “special” to allow to be sued by an ERISA plan. Though they are authorized by statute, and do not affect a beneficiary’s eligibility for Medicaid, “Congress did not exclude them as potential defendants from the broad reach of ERISA § 502(a)(3).”

The court declined to decide whether the plan could state an equitable claim against Larry to recover benefits paid to him by the Special Needs Trust, after explaining that “the facts in Knudson so closely parallel those of the instant case as to render a different outcome, even an outcome predicated on Sereboff, arguable.” The court held that a decision was unnecessary “because  imposing a constructive trust on his Trust affects exactly the same proceeds and effects the same results as would an equitable remedy against Larry.”

The court agreed with the panel, however, that the plan could not recover from Judith, Larry’s ex-wife, “because the fiduciaries did not demonstrate that the money she received from the settlement was attributable to Larry’s injuries rather than her personal claims arising from the accident.”