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Beware the ERISA health plan lien: you've negotiated a good settlement for your client. But now the client's health plan wants to be reimbursed for the medical benefits it paid. Can the plan's lien be defeated - or negotiated down?

Article Excerpt
Once largely ignored, ERISA liens have become formidable obstacles to settlement and client satisfaction. (1) Plaintiff attorneys cannot afford to overlook their impact. They can lay claim to most or even all of the proceeds from settlement of, for example, a personal injury case involving an auto accident where the plaintiff received benefits from an ERISA health plan.

To make matters worse, many states' ethical opinions and rules of professional conduct can now be read to impose a duty to hold disputed funds (such as lien amounts) in the attorney's trust account and even to notify the ERISA lien holder of settlement. (2) These developments present an alarming challenge to the traditional view that an attorney owes no duties to the lien holder. The presence and size of a potential ERISA lien must now be considered when determining whether to even take a case.

What caused this change? In 2006, the Supreme Court's decision in Sereboff v. Mid Atlantic Medical Services, Inc., gave ERISA liens some very large teeth by holding that ERISA plans can enforce complete reimbursement of their liens. (3) The case originated in California, where Marlene Sereboff and her husband, Joel, received health insurance under her employer-sponsored plan. Mid Atlantic Services administered the plan, which was covered by ERISA.

The plan's "acts of third parties" provision stated that if the Sereboffs received benefits for an injury or illness and later recovered damages related to a tort claim against a third party for that injury or illness, the Sereboffs would have to reimburse Mid Atlantic Services for the benefits they had received. The provision also stated that Mid Atlantic's share of the recovery would not be reduced if the Sereboffs did not receive the full damages claimed.

The Sereboffs were injured in a car accident, and the plan paid about $75,000 of the couple's medical expenses. They sued several third parties, seeking damages for their injuries. Shortly thereafter, Mid Atlantic notified the Sereboffs that it was asserting a lien on any recovery they received. The Sereboffs settled the lawsuit for $750,000 but did not pay anything to Mid Atlantic.

Mid Atlantic sued to enforce the lien under [section] 502(a) (3) of ERISA, claiming that it was entitled to reimbursement as a matter of equity. That section of the statute permits a lawsuit to enjoin any act or practice that violates the terms of a plan, or to obtain "other appropriate equitable relief" to enforce the terms of the plan. The trial court found in the company's favor and the Sereboffs appealed, arguing that MidAtlantic's claim was actually for breach of contract, not equitable relief--the only type of relief granted under [section] 502 (a) (3). The Fourth Circuit affirmed, ruling that Mid Atlantic's suit was one seeking equitable relief, and a unanimous Supreme Court agreed.

Sereboff has emboldened ERISA plan administrators everywhere and led to sobering interpretations by federal courts. (4) In light of the decision, courts have ruled that ERISA liens can trump a catastrophically injured plaintiff's need for lifetime care, (5) consume a special-needs trust, (6) and lay claim to an entire settlement--including attorney fees. (7) One recent decision that looked like a solid win for plaintiff counsel holding that an ERISA lien cannot be recovered from a minor's special-needs trust--depended more on procedural technicalities than substantive ERISA law and should not be given widespread reliance. (8)

ERISA subrogation has thus become a minefield for plaintiff attorneys. If a valid lien is not adequately satisfied, you risk a lawsuit against your client or yourself. Although a plaintiff attorney is generally not considered a plan fiduciary, (9) you may still be sued by a plan administrator. (10) You may also be liable for the amount of your attorney fees if your client has signed a reimbursement agreement, even though you yourself were not a party to it. (11) Moreover, if you counsel or assist your client in subverting a valid ERISA claim through deceit or dishonesty, you can also be liable to the plan. (12)

Thus, even though an attorney is not a party to the ERISA plan, he or she may still be held liable in a number of ways. Conversely, if you mistakenly pay an invalid lien, you have committed malpractice against your client. If you disburse the settlement before the lien is resolved, you risk ethical sanctions as well.

Throughout, you must advise and counsel your client that the lien might consume a large portion (and possibly all) of any potential settlement. These dangers are not what the average plaintiff attorney bargains for when taking a case, and it is crucial that ERISA liens be dealt with properly. (13)

Getting started

The first thing you will probably want to know is whether you owe any obligation to ERISA lien holders. Must you notify ERISA plans of third-party claims? Can you simply disburse the settlement funds to clients and leave them to work out liens...

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