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Claim under ERISA Section 502(a)(3) Permitted Against Plan Participant

Claim under ERISA Section 502(a)(3) Permitted Against Plan Participant's Personal Injury Attorney

ERISA and Life Insurance News
(April 19, 2011)

AirTran Airways, Inc. v. Elem,
2011 U.S. Dist. LEXIS 35470 (N.D. Ga. Mar. 8, 2011)

AirTran sued Elem and her personal injury attorney under section 502(a)(3) of ERISA seeking reimbursement of more than $131,000 in self-funded health plan benefits paid by AirTran to Elem. The benefits were paid to cover medical expenses incurred due to injuries Elem sustained in a motor vehicle accident.

Elem filed a personal injury lawsuit against the responsible driver. Despite the fact that AirTran provided Elem and her attorney with ample notice of the plan’s subrogation and reimbursement rights, the lawsuit was settled for $500,000 and the settlement funds were distributed to Elem and her attorney without reimbursing the plan.

After the personal injury lawsuit was settled, AirTran invoked section 502(a)(3) to impose an equitable lien on the settlement funds and to recover the full amount paid as health benefits from the funds in the possession of Elem and the attorney.

The attorney filed a motion to dismiss the complaint under Fed. R. Civ. P. 12(b)(6), arguing that he was not a plan fiduciary, and therefore, was not subject to suit under ERISA. He further argued that he “innocently” possessed settlement funds as an attorney fee that should not be subject to the plan’s reimbursement provisions.

The court denied the attorney’s motion to dismiss, noting that unlike other sections of ERISA, section 502(a)(3) does not limit the defendants against whom a plan fiduciary may proceed to obtain equitable relief. Thus, in Harris Trust and Savings Bank v. Salomon Smith Barney, Inc., 530 U.S. 238 (2000), the Supreme Court held that a non-fiduciary can be a proper defendant under section 502(a)(3).

The court noted that the Fifth and Sixth Circuits had extended the rationale of Harris Trust to attorneys of plan participants who hold settlement funds that should be reimbursed to the plan. See The Longaberger Co. v. Kolt, 586 F.3d 459 (6th Cir. 2009); Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot and Wansbrough, 354 F.3d 348 (5th Cir. 2003).

Following these authorities, the court held that counsel for an ERISA plan beneficiary may be subject to suit under section 502(a)(3) if (1) funds rightfully belonging to a plan were wrongfully transferred; (2) the attorney had “actual or constructive knowledge” of the circumstances that rendered the transfer wrongful; and (3) the plan seeks appropriate equitable relief, such as restitution or imposition of a constructive trust.

AirTran had alleged that (1) settlement funds rightfully belonging to the plan under its subrogation and reimbursement provisions were wrongfully transferred to the attorney; (2) the attorney had actual knowledge of the plan’s subrogation and reimbursement rights and therefore knew that any transfer of settlement funds to the attorney was wrongful; and (3) AirTran was entitled to equitable relief via imposition of a constructive trust or equitable lien or through a theory of unjust enrichment.

Thus, the court held that each of the section 502(a)(3) elements was satisfied and the attorney was subject to suit.

The court rejected the attorney’s argument that he merely “innocently possess[ed] funds paid as compensation for legal services rendered,” noting that AirTran attached letters to its complaint showing that the attorney was expressly informed of the subrogation and reimbursement rights of the plan.

The court further observed that Harris Trust did not require the attorney himself to engage in any wrongdoing. Rather, all that was required was that the attorney “had knowledge of the wrongful transfer” of funds owed to the plan, which AirTran alleged in its complaint.

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