An ERISA Plan Administrator’s subrogation rights are not the easiest thing in the world to determine. I’m not talking about the situation where the plan is making current payments to the beneficiary and wants to offset some prior liability or overpayment. That’s easy.

What is complicated is when the plan has made a full payment, and then seeks to recover some of that payment from the beneficiary. This usually happens when the beneficiary receives a settlement or judgment for the accident that resulted in the payment of plan benefits.

The Supreme Court has ruled, for reasons obscured by the dense mists of ancient equity, that a plan administrator can recover from a beneficiary who has “possession” of a pot of money that was obtained by reason of the injury that gave rise to the plan benefit. But a plan administrator cannot recover from a beneficiary who does not have “possession.”

This led to the recent case of ACS Recovery Services, Inc. v. Griffin, 2012 WL 1071216 (5th Cir. Apr. 2, 2012), in the plan futilely picked shell after shell, only to find no money under any of them.

In 2006, Larry Griffin, who participated in his employer’s medical plan, was seriously injured in a car accident and received about $50,000 in medical benefits from the Plan. Larry  and his then-wife, Judith, sued the person responsible for the accident, ultimately settling for almost $300,000. The Griffins’ lawyer intentionally structured the settlement “in an effort to legally avoid any equitable lien asserted by the [medical plan].” The structure provided that about half the settlement covered attorneys’ fees, medical expenses, and a payment to Judith (now Larry’s ex). For the balance, the settlement required the tortfeasor to pay the money directly to Hartford CEBSCO, which would, in turn, buy an annuity that would make payments to a special needs trust set up for Larry.

The Plan sued Larry, the trustee of his special needs trust (with the excellent name Willie Earl), and Judith, the ex-Mrs. Larry. Larry, Willie Earl and the trust did not dispute that the settlement money “belonged in good conscience” to the Plan, but said the Plan couldn’t have any of the money because none of them ever had possession or control of any of it. Judith didn’t appear at all, but won anyway. The Fifth Circuit evaluated each defendant, and concluded that none of them ever had possession.

First, Larry. As the beneficiary of a special needs trust, Larry, didn’t have possession or control of any of the money in the trust. This is so even though the trustee of the trust is obligated to use the money for Larry’s support. And even though the reason that Larry didn’t have possession was because he had the agreement settling his claim structured so that the money went to other people.

Next, Willie Earl and the special needs trust. They didn’t have possession or control either, because  Larry’s settlement required the money to be paid directly to Hartford CEBSCO.  It didn’t matter that the annuity Hartford CEBSCO bought was payable to the trust. Even if the settlement money had passed through the hands of Willie Earl or the  trust, it probably would not be enough, because the key issue is whether Larry, as beneficiary of the ERISA plan, had possession or control over the money. And, said the court, Larry couldn’t control Willie Earl or the trust under the laws governing special needs trusts.

Finally, Judith,, ex-Mrs. Larry. Though she didn’t even appear in the action, the ERISA plan could not manage to get a judgment against her. The court held, rather bizarrely, it seems, that Judith’s  money didn’t “belong in good conscience to the plan” because Larry owed the money to her under their divorce decree for loss of consortium. (One wonders how much loss of consortium can be worth in a divorce when it would seem that the whole point of a divorce is to end the consortium.) Anyway, though Judith’s claim existed only because of Larry’s accident, the court held that it was a separate claim, and Judith’s money was Judith’s money.

Could it be that the ERISA plan can ultimately recover from Hartford CEBSCO, or the company that actually issued the annuity? Maybe, because the court did say that Hartford CEBSCO was the person that actually had possession of the money. But Hartford CEBSCO is not a beneficiary of the ERISA Plan, and is not likely to be under Larry’s control. These were key reasons why the claim against Willie Earl and the trust were dismissed.  Is it possible that Larry’s enterprising lawyer designed the perfect shell game to avoid subrogation? Maybe, at least in Texas.