Case: 11-40446 Document: 00512232754 Page: 1 Date Filed: 05/07/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
May 7, 2013
No. 11-40446 Lyle W. Cayce
Clerk
ACS RECOVERY SERVICES, INC.;
FKI INDUSTRIES, INC.,
Plaintiffs - Appellants
v.
LARRY GRIFFIN; WILLIE EARL GRIFFIN;
LARRY GRIFFIN SPECIAL NEEDS TRUST;
JUDITH GRIFFIN,
Defendants - Appellees
Appeal from the United States District Court
for the Eastern District of Texas
Before STEWART, Chief Judge, and REAVLEY, JOLLY, DAVIS, JONES,
SMITH, DENNIS, CLEMENT, PRADO, OWEN, ELROD, SOUTHWICK,
HAYNES, GRAVES, and HIGGINSON, Circuit Judges.*
EDITH H. JONES, Circuit Judge, joined by STEWART, Chief Judge, and
JOLLY, DAVIS, SMITH, CLEMENT, OWEN, SOUTHWICK, GRAVES, and
HIGGINSON, Circuit Judges :
ERISA § 502(a)(3)(B) authorizes actions by fiduciaries “. . . to obtain other
appropriate equitable relief . . . to enforce . . . the terms of the [ERISA] plan.”
29 U.S.C. § 1132(a)(3)(B). The question this court deems enbancworthy is
whether ACS Recovery Services, Inc., the administrator, and FK Industries, Inc.,
*
Judge King did not participate in this decision.
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the sponsor (collectively, “ACS”), of the ERISA plan (“Plan”) that covered
employee Larry Griffin, can sue Griffin, Griffin’s Special Needs Trust, or his
ex-wife Judith, for reimbursement of medical expenses incurred by the Plan
after Griffin received a tort settlement for his injuries. To what extent, in other
words, does ACS’s suit seek “appropriate equitable relief” to enforce the Plan’s
reimbursement provision? Parting company with this court’s panel decision, we
hold that ACS may recover from the Special Needs Trust the costs the Plan bore
on Larry’s behalf: the Trust is a proper ERISA defendant; the Trust received
funds directly traceable to Larry Griffin’s tort recovery; and the Plan held a
pre-existing equitable lien by agreement on the proceeds of the recovery after the
Plan paid Griffin’s medical bills. Sereboff v. Mid Atlantic Medical Services, Inc.,
547 U.S. 356, 126 S. Ct. 1869 (2006). Under the circumstances of this case,
however, we need not rule on whether ACS can recover from Larry, and ACS did
not offer evidence to sustain a judgment against Judith. The district court
judgment to the contrary is reversed in part, affirmed in part, and remanded.
BACKGROUND
While Griffin worked for FK Industries, he participated in the company’s
ERISA welfare benefit plan. The Plan paid over $50,000 in medical expenses for
his treatment following a serious automobile accident in 2006. Larry and Judith
sued Ashley E. Smith and J-Co Production Management, Inc., the company
responsible for the accident, and reached a settlement to pay “cash and periodic
payments with a present value sum” just over $294,000.
At the time of the settlement, the Plan provided it “will have a first lien
upon any recovery, whether by settlement, judgment, arbitration or mediation”
to repay the medical expenses, and it required Larry not to take action that
might prejudice the Plan’s right to reimbursement. ACS had notified Larry’s
2
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attorney of these provisions shortly after he filed suit. Rather than help Larry
comply with the Plan, his attorney devised an artful attempt to insulate the
settlement proceeds from the reimbursement provision. His attorney admitted
that he structured the settlement “in an effort to legally avoid any equitable lien
asserted by the Group Medical Plan . . . .” Accordingly, the settlement first
segregated money for attorneys’ fees, some additional medical expenses, and for
Judith Griffin pursuant to the couple’s divorce settlement. The remaining funds
(having a “present sum value” of about $148,000) were paid by SAFECO, the
defendant’s insurer, to Hartford CEBSCO, which was authorized to purchase an
annuity from Hartford Life and therewith to make monthly payments of $843.42
for twenty years to a statutory Special Needs Trust,1 whose trustee is Willie
Griffin, Larry’s brother. The Trust is authorized to make monthly payments for
Larry’s benefit.
The settlement documents reflect Larry’s approval of this arrangement.
On October 24, 2008, the state court approved creating a tax-qualified Special
Needs Trust pursuant to Texas Property Code § 142.007 based on the
understanding that Larry is “incapacitated” under state law and disabled for
federal Social Security purposes. That same day, the state court entered an
Order Approving Settlement and of Dismissal (“Order”), signed by Larry and a
guardian ad litem (among others), that delineated the exact payments to be
made to each party including the Special Needs Trust.
The Order referenced the parties’ contemporaneously executed
Compromise Settlement Agreement (“Agreement”), designated as being by and
between “Larry Griffin and Judith Griffin as Plaintiffs . . . ,” and Larry signed
1
Accordingly, the settlement funds flow into the Trust’s possession.
3
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it as well. Both the guardian ad litem and the parties’ attorneys signed the
Agreement only “as to form.” This Agreement exchanged the plaintiffs’ release
of claims for (in pertinent part) the defendants’ agreement to pay the Larry
Griffin 142 Special Needs Trust (“Trust”) certain monthly payments “through
annuity issuer, Hartford Life Insurance Company.” The Griffins and the Trust
further agreed to an assignment of the defendants’ liability to make the periodic
payments to Hartford CEBSCO, such that Hartford’s obligation to make the
periodic payments “shall be no greater” than that of the defendants. Plaintiffs
further consented to holding Hartford to be the “sole obligor” respecting the
obligation. Hartford, as “sole owner of the annuity policy,” was to issue the
monthly payments to the Trust, c/o Willie Griffin, Trustee. Finally, the plaintiffs
warranted in the Agreement that “no part of the claim” has been assigned or
transferred to any person or entity, and that not only have all medical costs been
paid, but “any liens pertaining to said care have been released or satisfied.”
ACS and FKI, the Plan fiduciaries, were denied reimbursement by the
design and intent of this settlement. They sued Larry Griffin, Judith Griffin,
the Trust, and Willie Griffin as Trustee under ERISA § 502(a)(3)(B). Among
other claims for relief, the fiduciaries sought a constructive trust upon “no less
than $50,076.19 in funds intended to be paid to or received by the Defendants
from any recovery made as compensation for injuries caused by the acts of a
third party,”2 and they requested that the defendants be enjoined from
interfering with the Plan’s right of reimbursement.
2
Judge Prado’s dissent asserts that ACS did not plead with sufficient particularity to
obtain an equitable lien on the monthly payments received by the Trust under the Settlement
Agreement. We disagree. Seeking “funds intended to be paid or received by the Defendants”
does not limit ACS to a lump sum, nor to funds paid through intermediaries before reaching
the Trust and Larry.
4
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The district court, approving a magistrate judge’s report and
recommendation, rejected the fiduciaries’ claims for summary judgment and
granted Larry Griffin’s, Willie Griffin’s, and the Trust’s cross motions.3 A panel
of this court expanded on the trial court rulings, but the fundamental analysis
supporting the appellees rests on the following propositions. First, the Plan’s
claim seeks legal, not equitable relief as required by § 502(a)(3)(B), because
Larry Griffin has neither possession nor control of the settlement funds now held
in the annuity. Any judgment against Larry Griffin personally would be for
money damages rather than for the enforcement of a constructive trust over the
settlement proceeds. Likewise, the Trust cannot be sued for equitable relief for
several reasons. It has no possession or control over the annuity, which
Hartford owns. Because Larry has no control over the Trust, the Trust cannot
be liable as his agent. Finally, since Larry lacked “even fleeting” possession or
control over the settlement money that purchased the annuity that funds the
Trust, equitable relief is pretermitted against the Trust. This reasoning
purports to be compelled by the Supreme Court’s decision in Great-West Life &
Annuity Ins. Co. v. Knudson, 534 U.S. 204, 122 S. Ct. 708 (2002), and this court’s
decision in Bombardier Aerospace Emp. Welfare Benefits Plan v. Ferrer, Poirot
& Wansbrough, 354 F.3d 348 (5th Cir. 2003). Following an unfavorable
appellate decision, ACS obtained en banc review.
3
The district court noted that ACS failed to object to the magistrate judge’s rejection
of the motion for default judgment against Judith Griffin, and it refused further to consider
that claim against her. Subsequently, the court’s dismissal of the entire case covers ACS’s
claim against Judith and resulted in a final, appealable judgment as to all parties.
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DISCUSSION
1. Standard of Review
The panel decision adhered to our circuit precedent in concluding that
ACS’s failure to support a claim for equitable relief necessitated dismissal for
lack of jurisdiction. See, e.g., Bauhaus USA Inc., v. Copeland, 292 F.3d 439, 445
(5th Cir. 2002) (affirming the district court’s dismissal for lack of subject matter
jurisdiction because appellants failed to state a valid claim under § 502(a)(3)).
Whatever the origin of this jurisdiction-based reasoning,4 it is inconsistent with
Supreme Court precedent and the majority of sister circuits, for which the
failure to state a claim cognizable under federal law is distinct from holding that
a court lacks subject matter jurisdiction. The Supreme Court has long held that
“the absence of a valid (as opposed to arguable) cause of action does not implicate
subject-matter jurisdiction, i.e., the courts’ statutory or constitutional power to
adjudicate the case.” Steel Co. v. Citizens for a Better Env’t., 523 U.S. 83, 89,
118 S. Ct. 1003, 1010 (1998). Subject matter jurisdiction is not implicated unless
the claim is “so insubstantial, implausible, foreclosed by prior decisions of [the
Supreme Court], or otherwise completely devoid of merit as not to involve a
federal controversy.” Oneida Indian Nation of N.Y. v. Cnty. of Oneida, 414 U.S.
661, 666, 94 S. Ct. 772, 777 (1974); see also Adar v. Smith, 639 F.3d 146, 150–51
(5th Cir. 2011) (en banc), cert. denied, 132 S. Ct. 400 (2011). Consistent with
these principles, at least five other circuits have held that whether a claim for
equitable relief under ERISA § 502(a)(3) has been stated is within federal courts’
4
The Knudson decision, holding a plan’s claim against the beneficiaries was not for
equitable relief, did not clearly rest on either failure to state a claim or lack of jurisdiction.
Thus, we recur to basic procedural decisions of the Supreme Court.
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jurisdiction irrespective of the claim’s ultimate merit.5 Reinforcing this
conclusion is that ERISA grants federal courts exclusive jurisdiction separate
and apart from its articulation of causes of action. See 29 U.S.C. § 1132(e).
We align with the majority rule and frame this appeal as requiring a
decision whether the Plan stated a claim for equitable relief under ERISA
§ 502(a)(3). The interrelated issues, raised because the parties offered evidence
outside the pleadings, are whether there was no genuine, material fact issue and
the Plan or its adversaries were entitled to judgment as a matter of law. FED.
R. CIV. PRO. 56.
2. Section 502(a)(3).
Guided by Supreme Court decisions that have systematically refined the
scope of “appropriate equitable relief,” the case law interpreting § 502(a)(3) has
evolved over twenty years. In Mertens v. Hewitt Assocs., 508 U.S. 248, 255,
113 S. Ct. 2063, 2068 (1993), the Court held that “appropriate equitable relief”
allowed plaintiffs to seek “a remedy traditionally viewed as ‘equitable.’” In
Knudson, supra, the Court undertook to differentiate between legal and
equitable relief. When Janette Knudson was seriously injured in a car crash,
Great-West paid substantial medical bills under an ERISA plan that authorized
the company to be reimbursed from any recovery she received from a third party.
Id. at 207, 122 S. Ct. at 711. Knudson won a favorable judgment, and the
5
Metro Life Ins. Co. v. Price, 501 F.3d 271, 276-77 (3d Cir. 2007); Carlson v. Principal
Fin. Grp., 320 F.3d 301, 307 (2d Cir. 2003); Cement Masons Health & Welfare Trust Fund for
N. Cal. v. Stone, 197 F.3d 1003, 1008 (9th Cir. 1999); Blue Cross & Blue Shield of Ala. v.
Sanders, 138 F.3d 1347, 1352-53 (11th Cir. 1998). The Seventh Circuit’s decisions are unclear.
Compare Admin. Comm. of Wal-Mart Stores, Inc., Assocs.’ Health & Welfare Plan v. Varco,
338 F.3d 680, 688 (7th Cir. 2003) (arguably jurisdictional holding), with Health Cost Controls
v. Skinner, 44 F.3d 535, 537 (7th Cir. 1995) (failure to state a claim).
7
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tortfeasor deposited her award directly into a special needs trust with Knudson
as beneficiary and her husband as the trustee.
The Court ruled that Great-West could not recover “restitution” from the
Knudsons personally under § 502(a)(3)(B) because this was tantamount to legal
relief for breach of contract. The majority held that whether restitution is a
legal or equitable remedy depends on the basis for the plaintiff's claim. Id. at
213, 122 S. Ct. at 714. The Court stated:
[A] plaintiff could seek restitution in equity, ordinarily in the form of a
constructive trust or an equitable lien, where money or property identified
as belonging in good conscience to the plaintiff could clearly be traced to
particular funds or property in the defendant’s possession. See 1 Dobbs
§ 4.3(1), at 587-588; Restatement of Restitution, supra, § 160, Comment
a, at 641-642; 1 G. Palmer, Law of Restitution § 1.4, p. 17; § 3.7, p. 262
(1978). A court of equity could then order a defendant to transfer title (in
the case of the constructive trust) or to give a security interest (in the case
of the equitable lien) to a plaintiff who was, in the eyes of equity, the true
owner. But where “the property [sought to be recovered] or its proceeds
have been dissipated so that no product remains, [the plaintiff’s] claim is
only that of a general creditor,” and the plaintiff “cannot enforce a
constructive trust or an equitable lien upon other property of the
[defendant].” Restatement of Restitution, supra, § 215, Comment a, at
867. Thus, for restitution to lie in equity, the action generally must seek
not to impose personal liability on the defendant, but to restore to the
plaintiff particular funds or property in the defendant’s possession.
Id. at 213–14, 122 S. Ct. at 714–15. As the settlement funds were no longer in
Knudson's possession, Great-West was seeking “some funds,” not necessarily the
particular funds obtained from the third party. Significantly, the Court declined
to decide whether the ERISA plan might have claimed equitable relief from
either the special needs trust or the Knudsons’ attorney. Id. at 220, 122 S. Ct.
at 718. Justice Ginsburg, in dissent, observed that under the majority’s
reasoning a “constructive trust claim would lie; hence, the outcome of this case
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would be different if Great-West had sued the trustee of the Special Needs Trust,
who has ‘possession’ of the requested funds, instead of the Knudsons, who do
not.” Id. at 225, 122 S. Ct. at 721 (Ginsburg, J., dissenting).
After Knudson, this court decided Bombardier, supra, and held that an
ERISA plan was pursuing “appropriate equitable relief” against a law firm
holding funds in its trust account on behalf of a client. The client-beneficiary
owed his plan, according to its reimbursement terms, over $13,000 for medical
expenses paid on his behalf following a car accident. His settlement with the
tortfeasor was deposited in the firm's trust account. The plan sued the law firm
and was met with two defenses: (1) the firm, neither a fiduciary nor a signatory
to the plan, was not a proper defendant under ERISA, and (2) a constructive
trust was improper because the funds were not in the possession of the
beneficiary himself. Id. at 351. This court rejected both defenses to liability.
First, we held that the law firm was a proper party pursuant to the Supreme
Court’s conclusions that § 502(a)(3) “admits of no limit (aside from the
‘appropriate equitable relief caveat’ . . .) on the universe of possible defendants,”
and therefore “authorizes a cause of action against a non-fiduciary, non-‘party
in interest’ . . . [who] holds disputed settlement funds on behalf of a plan-
participant . . . .” Id. at 352–53 (quoting Harris Trust & Savings Bank v.
Salomon Smith Barney, Inc., 530 U.S. 238, 244–46, 120 S. Ct. 2180, 2187 (2000)
(emphasis in original)). Second, relying on the holding of Knudson while
distinguishing it factually, this court held that the plan indeed sought to recover
(1) specifically identifiable funds that (2) were in the constructive possession and
the legal control of the participant but (3) belonged in good conscience to the
plan. See id. at 355–58. This court inferred its three-part inquiry from
Knudson. The funds were in the “constructive possession and control” of the
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client despite the firm’s claimed contingency fee arrangement because the
client/beneficiary’s obligation to the plan predated any agreement with the law
firm and thus precluded him “from contracting away . . . that which he did not
own himself, namely, the [money] that rightfully belonged to the Plan.” Id. at
357.
Three years after Bombardier, the Supreme Court decided Sereboff v. Mid
Atlantic Med. Servs., Inc., 547 U.S. 356, 126 S. Ct. 1869 (2006). In the wake of
Knudson, a circuit split had developed about whether an ERISA plan seeking to
enforce benefits reimbursement provisions could invoke “equitable relief” under
§ 502(a)(3)(B). See Admin. Comm. for WalMart v. Horton, 513 F.3d 1223, 1226
(11th Cir. 2008) (discussing circuit split). The Court unanimously agreed in
Sereboff that properly framed relief could be characterized as equitable.6 The
Sereboffs received medical benefits from Mid Atlantic following a car crash
under an ERISA plan requiring them to reimburse Mid Atlantic for recoveries
from third parties. Sereboff, 547 U.S. at 360, 126 S. Ct. at 1872. When they
declined to reimburse Mid Atlantic for their settlement with the tortfeasors, the
Sereboffs placed the disputed funds in an investment account while the Mid
Atlantic litigation was pending. Id. at 360, 126 S. Ct. at 1873. Mid Atlantic
sued for breach of contract and for imposition of a constructive trust and
equitable lien on its portion of the settlement. Summarizing Knudson, the Court
first pointed out that a constructive trust or equitable lien can be imposed on
“‘particular funds or property in the defendant’s possession.’” Id. at 362,
126 S. Ct. at 1874 (quoting Knudson, 543 U.S. at 213, 122 S. Ct. at 708). Unlike
6
The Court cited Bombardier as one example of the circuit split. Sereboff, 547 U.S. at
361 n.1, 126 S. Ct. at 1873 n.1.
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the Knudsons, the Sereboffs possessed the disputed funds in their investment
account. Id. at 362–63, 126 S. Ct. at 1874. Mid Atlantic accordingly sought an
equitable remedy.
Mid Atlantic’s additional burden, however, was to prove that the basis for
its claim was equitable. See id. at 362, 126 S. Ct. at 1874 (whether the remedy
“is legal or equitable depends on ‘the basis for [the plaintiff’s] claim’ and the
nature of the underlying remedies sought”) (quoting Knudson, 543 U.S. at 213,
122 S. Ct. at 708). The Court ascertained that Mid Atlantic’s claim was
equitable because it sought to enforce an “equitable lien by agreement.”
Equitable liens by agreement are described in Barnes v. Alexander, 232 U.S. 117,
34 S. Ct. 276 (1914), where Justice Holmes wrote that they arise when an
agreement identifies a specific fund, distinct from the obligor’s general assets,
and identifies a particular portion of the fund that is owed to a counter party.
See Sereboff, 547 U.S. at 364, 126 S. Ct. at 1875. That the agreement is made
before the fund comes into existence is of no moment, Sereboff reiterated. Id. at
366, 126 S. Ct. at 1876. Based on Barnes, Mid Atlantic could rely on the
“familiar rule of equity,” which “allowed [it] to ‘follow’ a portion of the recovery
‘into the [Sereboffs’] hands’ ‘as soon as [the settlement fund] was identified,’ and
impose on that portion a constructive trust or equitable lien.” Id. at 363–64,
126 S. Ct. at 1875 (quoting Barnes, 232 U.S. at 123, 34 S. Ct. 276).
Particularly significant here is the Court’s rejection of the Sereboffs’
argument that Mid Atlantic’s claim was not equitable because equitable
restitution requires a strict tracing of the tainted assets. First, the Court
distinguished equitable restitution from equitable liens by agreement and
affirmed that Barnes places no similar tracing requirement on the latter type of
claim. The Court also refused to hold that Knudson crafted a new tracing
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requirement because Knudson described only “in general terms” a fiduciary’s
right to recover equitable restitution, and “[t]here was no need in Knudson to
catalog all the circumstances in which equitable liens were available in
equity . . . .” Id. at 365, 126 S. Ct. at 1876. Neither Knudson nor Sereboff, in
other words, exhausts the universe of “appropriate equitable relief,” so long as
both the claim and the relief sought sound in equity.
Following these decisions, other circuits have readily enforced ERISA plan
reimbursement terms against third parties holding tort settlements achieved by
plan beneficiaries. Constructive trusts have been imposed to enforce a plan’s
equitable lien by agreement on settlement proceeds held by a beneficiary’s tort
lawyer, Longaberger v. Kolt, 586 F.3d 459 (6th Cir. 2009); by a trustee of his
wife’s special needs trust, Admin. Comm. of Wal-Mart Stores, Inc. Assocs.’
Health & Welfare Plan v. Shank, 500 F.3d 834 (8th Cir. 2007); and by a
conservator acting as a trustee for a special needs trust. Admin Comm. of Wal-
Mart Stores, Inc. Assocs.’ Health & Wealth Plan v. Horton, 513 F.3d 1223 (11th
Cir. 2008).7 In each of these cases, the courts held that, according to Knudson
and Sereboff, an equitable lien for reimbursement attached to settlement
proceeds as soon as a settlement fund arose from the injuries requiring plan
7
Courts have also imposed constructive trusts on ERISA plan beneficiaries who
accepted tort settlements or disability payments without reimbursing the plan under an
equitable lien by agreement. See, e.g., CGI Tech. & Solutions Inc. v. Rose, 683 F.3d 1113 (9th
Cir. 2012), cert. granted, judgment vacated on other grounds, No. 12-240, 2013 WL 1704705
(U.S. Apr. 22, 2013); US Airways, Inc. v. McCutchen, 663 F.3d 671 (3d Cir. 2011), judgment
vacated on other grounds, 133 S. Ct. 1537 (2013); Funk v. CIGNA Grp. Ins., 648 F.3d 182, 195
(3d Cir. 2011); Cusson v. Liberty Life Assurance Co. of Boston, 592 F.3d 215, 231 (1st Cir.
2010); Popowski v. Parrott, 461 F.3d 1367, 1373 (11th Cir. 2006); Dillard’s v. Liberty Life,
456 F.3d 894, 901 (8th Cir. 2006).
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payments. See, e.g. Longaberger, 586 F.3d at 467. The discussion in Horton,
supra, quotes, inter alia, the Restatement of Restitution:
Where property is held by one person upon a constructive trust for
another, and the former transfers the property to a third person who is not
a bona fide purchaser, the interest of the beneficiary is not cut off. In such
a case, he can maintain a suit in equity to recover the property from the
third person, at least if his remedies at law are not adequate.
Id. at 1228 (quoting RESTATEMENT OF RESTITUTION §160 cmt. g (1937)). Horton’s
salient conclusion is:
In the instant case, the Administrative Committee properly seeks
equitable restitution of a specifically identifiable fund in possession of a
defendant. As required by Knudson, the [Plan] asserts title and right to
possession of particular property that is in the hands of Mrs. Werber in
her capacity as Joshua’s conservator. The money Mrs. Werber holds in
trust has been identified as belonging in good conscience to the [Plan] by
virtue of the Plan’s terms, and the money can clearly be traced to a
particular fund in the defendant’s possession. The fact that Mrs. Werber
holds the funds as a third party does not defeat the [Plan’s] claim. Under
Knudson, Sereboff, and the other authorities cited above, the most
important consideration is not the identity of the defendant, but rather that
the settlement proceeds are still intact, and thus constitute an identifiable
res that can be restored to its rightful recipient.
Id. at 1228–29 (emphasis added).
Most analogous to the present case is Shank, which, in one sentence,
dispatched a trustee’s defense that the plan’s suit to place a constructive trust
on his injured wife’s special needs trust sought legal, not equitable relief. The
court held:
The [plan’s] claim meets Sereboff’s requirements for equitable restitution:
it seeks (1) the specific funds it is owed under the terms of the plan—i.e.,
the money it paid to cover Shank’s medical expenses; (2) from a
specifically identifiable fund that is distinct from the Shanks’ general
assets—i.e., the special needs trust; and (3) that is controlled by defendant
James Shank, the trustee.
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Shank, 500 F.3d at 836. Analogous to Kundson and this case, Mrs. Shank did
not have “possession” of the funds, yet the constructive trust claim was
enforceable against the special needs trust.
Longaberger instructs on the lack of a tracing requirement in connection
with the enforcement of an equitable lien by agreement. There, the ERISA plan
sued a beneficiary and his lawyer for benefits reimbursement after a settlement
had been reached with the tortfeasor.8 Kolt, the attorney, moved for summary
judgment on the basis that the plan sought legal, not equitable relief because the
settlement funds had already been disbursed from his Interest on Lawyer Trust
Accounts (IOLTA) account before the plan filed suit. The Sixth Circuit affirmed
summary judgment for the plan and against the attorney. The plan’s equitable
lien attached when the settlement funds were identified. As to tracing, the
Court noted:
The fact that Kolt chose to disregard Longaberger’s first priority lien
and commingle the settlement funds does not defeat Longaberger’s
claim for equitable relief, because under Sereboff, Longaberger was
free to follow a portion of the settlement funds into Kolt’s hands.
Longaberger, 586 F.3d at 469 (emphasis added).
Longaberger is reminiscent of Bombardier’s holding, even before Sereboff,
that “[t]his pre-existing reimbursement obligation to the [p]lan precluded [the
beneficiary] from contracting away to the law firm that which he did not own
himself, namely, the right to all or any portion of the [sum] that rightfully
belonged to the [p]lan.” Bombardier, 354 F.3d at 357. When the beneficiary
accepted a settlement subject to the plan’s prior lien, he could not transfer the
proceeds, in any of the above cases, free and clear to a third party. Morever, the
8
A judgment for restitution was entered against the beneficiary, who failed to appeal.
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third party’s liability even after the disposition of tainted proceeds was held
remediable in equity by a constructive trust because no strict tracing
requirement existed in this situation.
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.9 ACS should be
awarded this relief from the Trust and Willie Griffin, Trustee.10
9
Contrary to Judge Prado’s dissenting opinion, it is irrelevant whether the entire
$50,076.19 is in the Trust’s possession at any particular time. The constructive trust still
attaches to the particular funds owed to ACS as they reach the Trust penny by penny. It
makes little sense to contend that equity would reach the funds if the Trustee had received the
settlement money as a lump sum and then placed it in an annuity of Hartford, but because
Hartford allegedly got the same money first and disburses it to the Trustee, no equitable
remedy is available.
10
Judge Haynes’s dissent places the burden on Congress to provide ERISA plans a
“first money” right to funds recovered by a beneficiary from a third party. In doing so, the
dissent overlooks the fact that § 502(a)(3) serves to enforce the contractual terms of ERISA
plans. See McCutchen, 133 S. Ct. at 1547–49. The plans can create “first money” rights
similar to those provided by statutes.
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As to Larry’s receipt of benefits from the Special Needs Trust, the situation
is less clear. Confronted with an ERISA plan beneficiary who had received, but
dissipated or commingled, disability benefits for which the plan claimed a setoff,
the Seventh Circuit authorized the imposition of a constructive trust. Gutta v.
Standard Select Trust Ins. Plans, 530 F.3d 614, 621 (7th Cir. 2008). The court
relied on Sereboff in holding that Gutta and the plan had formed an equitable
lien by agreement, and because strict tracing is not required, a remedial trust
could be imposed notwithstanding Gutta’s dissipation or commingling of the
fund. Id. at 620–21; see also Cusson v. Liberty Life Assurance Co., 592 F.3d 215,
231 (1st Cir. 2010); Funk v. CIGNA Grp. Ins., 648 F.3d 182, 194–95 (3d Cir.
2011). On the other hand, 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. We do not reach a decision on Larry’s liability to the Plan,
because imposing a constructive trust on his Trust affects exactly the same
proceeds and effects the same result as would an equitable remedy against
Larry.
ACS must fail in its attempt to recover from Judith Griffin, however,
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.
Several objections have been made against fastening equitable relief on
the Trust. The principal one is that because the Trust receives proceeds from an
annuity purchased by Hartford with the settlement fund, Larry lacks possession
or control of the settlement money and stands in the same position as the
Knudsons. This reasoning is flawed. First, unlike in Knudson, the Trust is a
defendant. The Knudson majority expressly reserved this point. As Justice
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Ginsburg’s dissent forecast, supra at 225, 122 S. Ct. at 721, this distinction
makes a difference, because the Trust administers proceeds directly traceable
to the settlement.
Another objection is that Bombardier prescribed a three part “test” in
which the beneficiary’s possession and control are required at the time of suit.
To the extent Bombardier embraced such a test, it must yield to the higher
subsequent authority of Sereboff, which states that the funds only need to be in
the possession of the defendant. Sereboff, 547 U.S. at 362, 126 S. Ct. at 1874.11
In any event, the Court’s Bombardier description of the factors that led to the
ERISA plan’s successful suit for equitable relief may be viewed as neither a
prescription for liability in all § 502(a)(3)(B) cases nor necessarily a proscription
of other varieties of equitable claims. Bombardier’s result is harmonious with
Sereboff and post-Sereboff case law. See, e.g., Funk, supra; Cusson, supra; Gutta,
supra; Longaberger, supra; but cf. CGI Tech. & Solutions Inc. v. Rose, 683 F.3d
1113, 1118 (9th Cir. 2012) (holding that the ERISA plan was not entitled to
funds held in a trust by the beneficiary’s attorney), petition for cert. filed (Aug.
24, 2012) (No. 12-240).
Additionally, the bolder assertion that Larry “never” had possession or
control of the settlement fund ignores the instant facts and the rationale of
Sereboff. 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
11
Bauhaus is overruled to the extent it is irreconcilable with Sereboff’s requirement
that the funds only need to be in the defendant’s possession.
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possession and control of the fund to facilitate the settlement.12 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.
A final objection against holding the Trust liable as the recipient of the
settlement fund or its proceeds is that statutory special needs trusts are
“special.” They are vehicles for the support and care of disabled individuals
whose primary purpose is to maintain the beneficiaries’ eligibility for public
benefits like Medicaid. See 1 Stuart Zimring, Rebecca C. Morgan, Bradley J.
Frigon & Craig C. Reaves, FUNDAMENTALS OF SPECIAL NEEDS TRUSTS, §§ 1.04,
1.05 (Matthew Bender 2012). Texas, like many states, authorizes such trusts.
TEX. PROP. CODE ANN. § 142.005. Nevertheless, although favoring such trusts
in certain respects, see 42 U.S.C. § 1396p(d)(4)(A) (providing that assets held in
a special needs trust do not affect an individual’s eligibility for Medicaid),
Congress did not exclude them as potential defendants from the broad reach of
ERISA § 502(a)(3). Two circuits have held a special needs trust and a similar
conservatorship arrangement liable for equitable restitution of ERISA plan
12
Contrary to the dissenting opinions, we do not find the Trust’s self-serving
declarations dispositive on the issue of possession.
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benefits. See Shank, supra; Horton, supra. And in Knudson, the Court pointedly
noted the absence of the special needs trust as a defendant, while Justice
Ginsburg implied that the trust’s possession of the identifiable settlement fund
could render it liable. There is nothing inconsistent in maintaining special needs
trusts but also insisting they not be funded with proceeds transferred in
violation of a beneficiary’s duty to satisfy an equitable lien by agreement with
his ERISA plan.
Conclusion
Larry Griffin’s Trust could have been funded by an annuity reduced to
satisfy his reimbursement obligation to the Plan. He and his attorneys chose
instead to disregard the Plan’s equitable lien by agreement, as they attempted
to divorce Larry and the Trust from possession and control of the settlement
funds. Against this ruse, ACS asserts an equitable claim for restitution and
seeks the equitable remedy of a constructive trust over the proceeds of the
settlement fund as they come into the Trust’s possession. As we have explained,
this claim is well supported in law. For the foregoing reasons, we REVERSE IN
PART, AFFIRM IN PART, and REMAND for the imposition of equitable relief
upon the Trust through Willie Griffin, Trustee.
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PRADO, Circuit Judge, concurring in part and dissenting in part:
I agree with much of the Court’s analysis regarding the scope of
“appropriate equitable relief” under § 502(a)(3)(B). That analysis, however,
should lead to the denial of ACS’s claims. Instead, the Court crafts an
unrequested remedy in conflict with Supreme Court precedent. Though I concur
in the portion of the judgment affirming the district court’s denial of relief
against Judith Griffin and Larry Griffin, I dissent from the award of relief
against the Trust and Trustee.
Section 502(a)(3)(B) authorizes “those categories of relief that were
typically available in equity.” Mertens v. Hewitt Assocs., 508 U.S. 248, 256
(1993). Elaborating on this construction, the Supreme Court has explained that
two factors must be considered equitable to justify relief under § 502(a)(3)(B):
(1) “the basis for the plaintiff’s claim,” and (2) “the nature of the underlying
remedies sought.” Great–W. Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204,
213 (2002) (alterations omitted); see also Sereboff v. Mid Atl. Med. Servs., Inc.,
547 U.S. 356, 361–63 (2006). The Court made clear in Sereboff that the first
factor is satisfied when an ERISA fiduciary seeks to enforce a plan’s
reimbursement provision because “case law from the days of the divided bench”
would recognize such a claim as enforcing an equitable lien by agreement. 547
U.S. at 363. Thus, that factor does not impede recovery; the basis for ACS’s
claim is equitable.
But ACS must also show that its requested remedy is equitable rather
than legal. “[A] judgment imposing a merely personal liability on the defendant
to pay a sum of money” is a legal remedy. Knudson, 534 U.S. at 213. An
equitable remedy, by contrast, seeks the return of “money or property [that is]
identified as belonging in good conscience to the plaintiff [and can] clearly be
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traced to particular funds or property in the defendant’s possession.” Id.
Though it takes the form of a payment of money, the remedy of restoring to the
plaintiff particular funds in the defendant’s possession is equitable because it is
as much a declaration that the plaintiff is the true owner of the funds as it is a
money judgment. See id. (“A court of equity could then order a defendant to
transfer title (in the case of the constructive trust) or to give a security interest
(in the case of the equitable lien) to a plaintiff who was, in the eyes of equity, the
true owner.”). Thus, for the remedy to lie in equity, “the action generally must
seek not to impose personal liability on the defendant, but to restore to the
plaintiff particular funds or property in the defendant’s possession.” Id. at 214.
If the defendant does not possess the funds, the underlying basis of the equitable
remedy is lost. See, e.g., Amschwand v. Spherion Corp., 505 F.3d 342, 346 (5th
Cir. 2007) (“[T]he sine qua non of restitutionary recovery available under
§ 502(a)(3) is a defendant’s possession of the disputed res.”), implicitly overruled
on other grounds by CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011), as
recognized in Gearlds v. Entergy Servs. Inc., 709 F.3d 448, 450–52 (5th Cir.
2013); id. at 347 (“[P]ossession is the key to awarding equitable restitution in the
form of a constructive trust or equitable lien.”); id. at 347–48 (“A defendant’s
possession of the disputed res is central to the notion of a restitutionary remedy,
which was conceived not to assuage a plaintiff’s loss, but to eliminate a
defendant’s gain.”); Restatement (Third) of Restitution and Unjust Enrichment
§ 55 cmt. h (2011) (“If the claimant cannot show an equitable entitlement to
specific property in the hands of the defendant, the underlying basis of the
remedy is lost.”).
Given this emphasis on possession, it is curious that the Court today
grants relief when none of the named defendants actually possesses the disputed
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funds.1 Reading the Court’s opinion, one gets the impression that the funds
reside in the Trust, waiting to be returned to their rightful owner. In reality,
however, neither the Trust nor the Trustee possesses the settlement funds that
ACS claims an entitlement to. Those funds were instead transferred to Hartford
CEBSCO to fund the annuity. ACS’s summary judgment evidence confirms this
fact. ACS requested that Larry Griffin “[i]dentify all moneys received and/or
disbursed by [the Trust], and state the current balance of funds held by [the
Trust].” Larry responded,
Since the date of the settlement, Mr. Griffin has received $843.00
per month in payments administered by [the Trust]. The [Trust]
does not have and has not had a balance of funds held in it. Rather,
periodic payments are made to it from Hartford Life Insurance
1
The Court’s reliance on Sereboff’s “elimination” of a strict tracing requirement to
justify relief against the Trust is unpersuasive. In Sereboff, the Court explained that “[w]hen
an equitable lien was imposed as restitutionary relief, it was often the case that an asset
belonging to the plaintiff had been improperly acquired by the defendant and exchanged by
him for other property.” 547 U.S. at 364. In this situation equity required that the plaintiff
identify the specific funds that he lost and trace it into the defendant’s funds or assets to
justify relief. Id. But, the Court explained, “an equitable lien sought as a matter of
restitution, and an equitable lien ‘by agreement’ . . . were different species of relief.” Id. at
364–65. A plaintiff enforcing an equitable lien by agreement was not required to identify an
asset he originally possessed. Id. at 365. This is a sensible distinction as the funds subject
to an equitable lien by agreement would not necessarily be in existence at the time the
agreement was made. See id. at 365–67.
All of this discussion, however, was in the context of whether § 502(a)(3)(B) could ever
authorize an action to enforce a reimbursement provision—a question that had previously
divided courts of appeals. See id. at 361. In essence, the Court simply stated that it is not an
obstacle to relief that a plan cannot show that it originally possessed the disputed funds. The
Court did not, however, somehow eliminate Knudson’s requirement that a plaintiff seek
recovery from a particular fund in the defendant’s possession. If it had, the Court would have
had no reason to question whether the defendant in Sereboff possessed the disputed funds.
The Court did, however, analyze the defendant’s possession, ultimately holding that the
plaintiff satisfied the requirement because it sought “to recover a particular fund from the
defendant.” Id. at 363. Here, the Court fails to adequately address how the requirement that
the defendant be in possession of the specified funds has been satisfied as to the Trust.
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Company at the direction of Hartford [CEBSCO] to fund monthly
payments to [the Trust] which were then paid to Mr. Griffin.
(emphasis added). Thus, the only money in the Trust at any given time comes
in the form of monthly payments, which are then funneled directly to Larry.
This is reflected in the Court’s remedy: “appropriate equitable relief demands
the imposition of a constructive trust on the proceeds of the annuity as they
accrue to the Special Needs Trust.” Slip Op. at 15 (emphasis added).
But ACS did not seek to satisfy its claim with a payment plan. Instead,
ACS alleged that Larry and the Trust “now hold or shortly will hold for the
benefit of the Plan proceeds of settlement in an amount no less than $50,076.19”
and requested “[t]hat a constructive trust be impressed upon no less than
$50,076.19 in funds intended to be paid to or received by the Defendants from
any recovery made as compensation for injuries caused by the acts of a third
party.” (emphasis added). Though ACS invoked the label “constructive trust,”
it did not seek the return of any funds in a defendant’s possession, nor did it,
upon learning how the settlement fund was distributed, amend its complaint to
seek the imposition of a constructive trust on the proceeds of the annuity or on
the funds used by Hartford CEBSCO to purchase the annuity. ACS simply
requested “[t]hat judgment be entered against the Defendants in the amount of
no less than $50,076.19.” It is not enough that an equitable remedy can be
conceived of on these facts. ACS must have sought “to restore to [itself]
particular funds or property in the defendant’s possession.” Knudson, 534 U.S.
at 214. Because it did not, the remedy ACS sought was legal. Cf. CIGNA Corp.
v. Amara, 131 S. Ct. 1866, 1878–79 (2011) (“We noted [in Knudson] that the
fiduciary sought to obtain a lien attaching to (or a constructive trust imposed
upon) money that the beneficiary had received from the tort-case defendant. But
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we noted that the money in question was not the particular money that the tort
defendant had paid. And, traditionally speaking, relief that sought a lien or a
constructive trust was legal relief, not equitable relief, unless the funds in
question were particular funds or property in the defendant’s possession.”
(internal quotation marks omitted)).
The Court nonetheless crafts a remedy against the Trust but stops short
of granting the same relief against Larry, reasoning that “the facts in Knudson
so closely parallel those of the instant case as to render a different outcome [for
Larry], even an outcome predicated on Sereboff, arguable.” Slip Op. at 15. This
reluctance reveals the flaw in the Court’s approach. The Court is undoubtedly
correct in seeing a conflict with Knudson because ACS’s claim against Larry is
identical to the claim rejected in Knudson. But why does the claim against the
Trust not suffer the same fate? It is true that ACS included the Trust as a
defendant where the plaintiff in Knudson did not, but that is a hollow distinction
when the Trust is as empty as the beneficiary’s pockets. The reason the outcome
would have been different in Knudson had the Trust been included as a
defendant is that the Trust was the entity that possessed the funds. See
Knudson, 534 U.S. at 214 (“Here, the funds to which petitioners claim an
entitlement under the Plan’s reimbursement provision—the proceeds from the
settlement of respondents’ tort action—are not in respondent’s possession. As
the order of the state court approving the settlement makes clear, the
disbursements from the settlement were paid by two checks, one made payable
to the Special Needs Trust and the other to respondents’ attorney . . . .”).2 As
2
Indeed, most of the cases from other circuits the Court cites involve specified funds
that are intact and in the possession of a defendant. See, e.g., Admin. Comm. for Wal-Mart
Stores, Inc. Assocs. Health & Welfare Plan v. Horton, 513 F.3d 1223, 1228–29 (11th Cir. 2008)
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mentioned above, that is not the case here. Instead, the Trust and Larry are in
the same position: neither possesses the disputed settlement fund, and both
simply receive periodic payments from it. If relief were permissible on these
facts, the Knudson Court could have produced a similar remedy to the one the
Court seeks to impose today. It did not, however, and we should follow that
example.
I appreciate the Court’s desire to provide a remedy in this case. Larry’s
attorney deliberately structured the settlement to avoid the undisputed
obligation to reimburse ACS and, during oral argument, even went so far as to
describe this undertaking as similar to money laundering. But it is not our duty
to do ACS’s work for it. It should be clear by now that a plan seeking to enforce
a reimbursement provision must seek the return of particular funds from
whatever party possesses them. Because ACS did not, I respectfully dissent.
(“In the instant case, the Administrative Committee properly seeks equitable restitution of a
specifically identifiable fund in possession of a defendant. As required by Knudson, the
Administrative Committee asserts title and right to possession of particular property that is
in the hands of Ms. Werber in her capacity as Joshua’s conservator. The money Ms. Werber
holds in trust has been identified as belonging in good conscience to the Administrative
Committee by virtue of the Plan’s terms, and the money can clearly be traced to a particular
fund in the defendant’s possession.” (emphases added)); Admin. Comm. of Wal-Mart Stores,
Inc. Assocs. Health & Welfare Plan v. Shank, 500 F.3d 834, 836 (8th Cir. 2007) (“The
Committee’s claim meets Sereboff’s requirements for equitable restitution: it seeks (1) the
specific funds it is owed under the terms of the plan—i.e., the money it paid to cover Shank’s
medical expenses; (2) from a specifically identifiable fund that is distinct from the Shank’s
general assets—i.e., the special needs trust; and (3) that is controlled by defendant James
Shank, the trustee.” (emphases added)).
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HAYNES, Circuit Judge, joined by REAVLEY, DENNIS, and ELROD, Circuit
Judges, concurring in part and dissenting in part:
I concur with the portion of the judgment affirming the district court’s
denial of relief against Judith Griffin and Larry Griffin.1 I part ways with the
majority opinion’s reversal as to the Larry Griffin 142 Special Needs Trust (the
“Trust”) and its trustee, Willie Earl Griffin (the “Trustee”). This appeal presents
the narrow question of whether an ERISA plan, under § 502(a)(3), may exercise
its subrogation right against a special needs trust established to benefit a
disabled beneficiary. I submit that it cannot. Accordingly, I respectfully dissent
from the majority opinion’s award of relief for the Appellants against the Trust
and Trustee.
I. No Explicit “First Money” Right Exists Under ERISA
The majority opinion’s focus on the existence of an equitable lien by
agreement between the Plan and Larry Griffin overlooks a critical fact:
Congress has not provided ERISA plans a “first money” right to funds recovered
by a beneficiary from a third party. A “first money” right provides a statutory
first right to any funds recovered by beneficiaries from third-party tortfeasors.
Many states have created such a right in the context of workers’ compensation
1
The majority opinion concludes it is not necessary to reach a decision concerning
Larry Griffin because it grants the Appellants the relief they seek against other defendants.
In my view, the Supreme Court’s holding in Great-W. Life & Annuity Insurance v. Knudson
bars recovery against Larry Griffin in any event. See 534 U.S. 204, 214 (2002) (holding that
a plan’s beneficiary—who was entitled to the benefits of a special needs trust—could not be
held liable under § 502(a)(3) because he did not have possession of the funds at issue).
Further, the Appellants have not identified any funds—including any potential payments from
the Trust to Larry Griffin—related to the settlement that are in Larry Griffin’s possession.
Although there is some indication in the record that some monies were paid from the Trust
to Larry Griffin, the Plan failed to develop any facts in this regard or to negate the fact that
the Trust is a special needs trust. The Appellants have failed to state a valid claim against
Larry Griffin.
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benefits. For example, the Texas Labor Code specifically provides that “[t]he net
amount recovered by a claimant in a third-party action shall be used to
reimburse the insurance carrier for benefits, including medical benefits, that
have been paid for the compensable injury.” TEX. LAB. CODE ANN. § 417.002(a);
see also Argonaut Ins. Co. v. Baker, 87 S.W.3d 526, 530 (Tex. 2002) (explaining
that “first money paid [to] or recovered by the employee, or his representatives,
belongs to the compensation carrier paying the compensation, and until it is paid
in full, the employee or his representatives have no right to any funds.”
(alteration in original) (citation and quotation marks omitted)). In addition to
Texas, over half of the states have provided a similar “first money” right to
payments recovered by recipients of workers’ compensation funds.2
With regard to ERISA, Congress could similarly have provided plans with
a “first money” right to any payments from third parties recovered by a plan’s
beneficiaries.3 Instead of providing such relief, however, Congress simply
2
See ALA. CODE § 25-5-11; ALASKA STAT. § 23.30.015; ARIZ. REV. STAT. ANN.
§ 23-1023(D); CAL. LABOR CODE § 3852; COLO. REV. STAT. § 8-41-203; CONN. GEN. STAT.
§ 31-293; 19 DEL. CODE ANN. § 2363; FLA. STAT. § 440.39; HAW. REV. STAT. § 386-8; IDAHO CODE
ANN. § 72-223; IOWA CODE § 85.22; ME. REV. STAT. ANN. tit. 39-A, § 107; MD. CODE ANN. LAB.
& EMPL. § 9-902; MASS. GEN. LAWS ANN. ch. 152, § 15; MISS. CODE ANN. § 71-3-71; NEV. REV.
STAT. § 616C.215; N.H. REV. STAT. ANN. § 281-A:13; N.J. STAT. ANN. § 34:15-40; N.Y. WORKERS’
COMP. LAW § 29; N.D. CENT. CODE § 65-01-09; OR. REV. STAT. § 656.593; R.I. GEN. LAWS
§ 28-35-58; S.D. CODIFIED LAWS § 62-4-39; TENN. CODE ANN. § 50-6-112; VA. CODE ANN.
§ 65.2-309; W. VA. CODE ANN. § 23-2A-1.
3
Indeed, Congress has established such a remedy in other contexts. Specifically,
Congress expressly provides a “first money” right for states to seek reimbursement of medical
expenses paid on behalf of a Medicaid beneficiary from the beneficiary’s tort recovery. See Wos
v. E.M.A. ex rel. Johnson, 133 S. Ct. 1391, 1396 (2013) (“Congress has directed States, in
administering their Medicaid programs, to seek reimbursement for medical expenses incurred
on behalf of beneficiaries who later recover from third-party tortfeasors.”); see also 42 U.S.C.
§ 1396k(a)(1)(A) (eligibility for Medicaid assistance requires an individual “to assign the State
any rights . . . to payment for medical care from any third party”).
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provided a general right to equitable relief to redress violations of or to enforce
a plan’s terms, and specifically did not provide a contractual or statutory right
of recovery like the state workers’ compensation programs. See 29 U.S.C.
§ 1132(a)(3).
Allowing the Plan to reach through a special needs trust under ERISA
§ 502(a)(3)—thereby effectively providing the Plan a “first money” right—would
disrupt the mechanism specifically established by Congress to provide for
disabled individuals. Had Congress intended this consequence, it could have
provided that a plan has a right to recover any medical benefits paid to a
beneficiary from a third-party settlement or provided for specific enforcement of
a contractual “first money” right. It did not, however, and we are not free to
upset this delicate balance struck by Congress, particularly in the ERISA arena.
See Mass. Mut. Life Ins. v. Russell, 473 U.S. 134, 146 (1985) (noting that “[t]he
six carefully integrated civil enforcement provisions found in § 502(a) . . . provide
strong evidence that Congress did not intend to authorize other remedies that
it simply forgot to incorporate expressly . . . [, especially in light of] ERISA’s
interlocking, interrelated, and interdependent remedial scheme, which is in turn
part of a ‘comprehensive and reticulated statute’” (citation omitted)).
Accordingly, the relief the Appellants seek lies with Congress, not this court.
II. No “Possession” So No “Tracing”
The majority opinion posits that the Trust’s argument is one of “strict
tracing” and then rejects such a tracing argument. The majority opinion submits
that the money can be traced from Larry Griffin to the Trust and the Trustee,
thereby making them proper targets for equitable relief. However, this is not a
question of tracing, “strict” or otherwise. The tracing argument is unavailing as
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to the Trust and the Trustee because it does not work as to Larry Griffin—there
is nothing to “trace” from Larry Griffin into the Trust.
The tracing cases cited in the majority opinion address situations where
the funds sought are all or partially within the possession or control of the
defendant-beneficiary but they have been “commingled” or “dissipated” such that
the exact funds are not identifiable. See, e.g., Longaberger Co. v. Kolt, 586 F.3d
459, 469 (6th Cir. 2009) (noting that a lien applied when the funds became
identifiable); Gutta v. Standard Select Ins. Plans, 530 F.3d 614, 621 (7th Cir.
2008) (noting that strict tracing is not required, and a plan may bring a suit even
if the money is not specifically traceable to current assets). The problem with
relying on these cases is that the money was once in the direct possession or
control of the defendant-beneficiary (i.e., there is something to “trace”). Indeed,
in Longaberger the beneficiary had more than “fleeting possession and
control”—the money sat in the IOLTA account for several months and was
therefore directly in the defendant-beneficiary’s constructive possession and
control. 586 F.3d at 462. Here, as recognized in the settlement agreement and
Trust documents, Larry Griffin never had possession of the funds. Because
Knudson precludes a finding that the money could be traced from Larry Griffin
into the Trust, there is nothing to “trace,” strictly or otherwise, in this case. See
534 U.S. at 214. Thus, neither Gutta nor Longaberger counsel in favor of
liability for the Trust or the Trustee.
III. Supreme Court and Fifth Circuit Precedent Do Not Support
Recovery from the Trust
A. Defendant’s Possession or Control
The Supreme Court has not directly considered whether equitable relief
under § 502(a)(3) allows a plan to recover against a special needs trust or its
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trustee. The Court discussed the issue in Knudson where an ERISA plan’s stop-
loss insurer sued the Knudsons under § 502(a)(3) to recover medical benefits it
had paid on the beneficiary’s behalf. Id. at 207. In accordance with the ERISA
plan’s reimbursement provision, the insurer sought to recover from the funds the
beneficiary received from the underlying tortfeasor, which she had placed in a
special needs trust. Id. In denying relief, the Court explained that “for
restitution to lie in equity, the action must seek not to impose personal liability
on the defendant, but to restore to the plaintiff particular funds or property in
the defendant’s possession.” Id. at 214 (emphasis added). Because the
settlement order showed that the funds were paid to a special needs trust and
to the Knudsons’ attorney—neither of whom were named as defendants—the
court concluded that the claim was legal, not equitable. Id. Ultimately, while
Knudson left open the question of “whether petitioners could have obtained
equitable relief against . . . the trustee of the Special Needs Trust,” its reasoning
(focusing on possession) is not supportive of recovery from the Trust. Id. at 220.
The Supreme Court later elaborated on the availability of § 502(a)(3) relief
in Sereboff v. Mid Atlantic Medical Services, 547 U.S. 356 (2006). In Sereboff,
a plan successfully sought reimbursement for medical expenses paid on behalf
of a beneficiary from the proceeds of the beneficiary’s settlement with a
tortfeasor, which were held in an investment account. 547 U.S. at 359, 369. For
its part, Sereboff set forth four significant elements for seeking equitable relief
in § 502(a)(3) claims: (1) the funds must be specifically identified by the plaintiff,
(2) the funds must be in the possession and control of the defendant,
(3) commingling of funds will not prevent recovery, and (4) the plaintiff need not
trace back to the exact same tainted funds and show that they were in existence
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when the equitable lien agreement was entered into. Id. at 363-66.4
Importantly, the simple fact that a plan does not have to establish that the
defendants possessed the original funds in question does not exempt the plan
from having to show that the defendants actually possess the identified funds
subject to the lien. Id. at 362-63.5
Our court, following Knudson, declined to expand the scope of relief for
ERISA plans under alternative theories of recovery, such as unjust enrichment,
because “ERISA’s civil enforcement provision specifically and clearly addresses
[the scope of available relief], thereby eschewing any possibility that a ‘gap’
exists in the statutory text that would permit us to employ federal common law
to create [remedies not provided for in the statute].” Coop. Benefit Adm’rs, Inc.
v. Ogden, 367 F.3d 323, 330 (5th Cir. 2004). Instead, we established a three-part
test for determining whether the relief sought is equitable and, therefore,
available under ERISA. See Bombardier Aerospace Emp. Welfare Benefit Plan
v. Ferrer, Poirot & Wansbrough, 354 F.3d 348, 356 (5th Cir. 2003). It asks
whether the plan seeks “to recover funds (1) that are specifically identifiable, (2)
that belong in good conscience to the [p]lan, and (3) that are within the
4
The majority opinion notes that “[p]articularly significant here is [Sereboff’s] rejection
of the [beneficiaries’] argument that [the plan’s] claim was not equitable because equitable
restitution requires a strict tracing of the tainted assets.” Slip Op. at 11. Larry Griffin never
had possession of the funds. Therefore, as discussed above, “strict” tracing is not the issue
because there is nothing to trace.
5
The Supreme Court recently re-examined Sereboff in US Airways, Inc. v. McCutchen,
133 S. Ct. 1537, 1545-47 (2013). That case addressed neither the issue of possession nor a
special needs trust. Instead, it holds that equitable defenses that are contrary to the terms
of the ERISA plan cannot defeat the plan’s right to equitable reimbursement, a matter not at
issue here. See id. at 1548. The opinion’s only mention of possession is as follows: “The suit
requested an equitable lien on $66,866–the $41,500 in the escrow account [established by
McCutchen’s attorney specifically in connection with the reimbursement lawsuit] and $25,366
more in McCutcheon’s possession.” Id. at 1543.
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possession and control of the defendant beneficiary.” Id. (emphasis added). In
Bombardier, the plan sued one of its beneficiaries and the beneficiary’s law
firm—which held the proceeds from a third-party tort suit in trust on behalf of
the beneficiary—to recover for medical expenses paid on the beneficiary’s behalf.
Id. at 350. First, the court concluded that the law firm was a proper defendant
because “Congress did not see fit . . . to include a . . . limitation on the set of
proper defendants to a § 502(a)(3) action.” Id. at 354. Next, the court concluded
that the suit was equitable in nature because all three elements of the test were
met. Id. at 356. The plan sought (1) identifiable funds (2) that belonged in good
conscience to the plan under the reimbursement provision. Id. The third
element—that the beneficiary have control over and possession of the disputed
funds—was met because the “Plan’s participant . . . ha[d] ultimate control over,
and thus constructive possession of, the disputed funds” held in trust by his
attorney on his behalf. Id. Because the “Plan [did] not seek to impose personal
liability on either [the beneficiary] or his counsel,” the court concluded “that
§ 502(a)(3) authorize[d] the Plan’s claim for relief.” Id. at 358.
In Bombardier, we distinguished our prior opinion in Bauhaus USA, Inc.
v. Copeland, 292 F.3d 439 (5th Cir. 2002), in which we held that funds deposited
in a state court’s registry in anticipation of an interpleader action were not in
the defendant-beneficiary’s actual or constructive possession or control.
Bombardier, 354 F.3d at 356 (discussing Bauhaus, 292 F.3d at 445). Because
the funds in Bauhaus were in the court’s registry and thus outside of the
defendant’s control, we concluded that the plan was trying to impose personal
liability on the defendant-beneficiary, and the action could not proceed under
§ 502(a)(3). Bauhaus, 292 F.3d at 444-45. The Bombardier court also
distinguished Knudson, noting in that case, “the funds had been placed in a
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Special Needs Trust, as mandated by California law, to provide for the
beneficiary’s care, and the trustee was totally independent of the plan
beneficiary.” Bombardier, 354 F.3d at 356. Under Bauhaus and Bombardier,
the panel correctly ruled that Larry Griffin did not have possession or
“constructive possession” (and certainly not “control”) of the funds in the Trust.
In sum, Bombardier and Sereboff do not support a finding that the Trust
and Trustee can be held liable.6 In those cases, the money was actually in the
defendant-beneficiary’s possession or control. Unlike here, the defendant-
beneficiary in Bombardier had constructive possession and actual control of the
settlement funds—a portion of which were placed in his lawyer’s IOLTA account.
See 354 F.3d at 350-51. Similarly, in Sereboff, the funds were held in an
investment account that was actually controlled by the plan’s beneficiary. 547
U.S. at 360. Thus, the facts of Sereboff and Bombardier are distinguishable
from this case.
B. Failure to Join Hartford
An additional basis for concluding that the Appellants’ claim fails here
rests on their failure to join Hartford CEBSCO as a defendant. Under Supreme
Court and Fifth Circuit precedent, the Appellants must demonstrate that both
the basis and nature of their claim are equitable. See Knudson, 534 U.S. at 213
(“[W]hether [a remedy] is legal or equitable depends on the basis for [the
plaintiff’s] claim and the nature of the underlying remedies sought.” (alteration
in original) (emphasis added) (citation and internal quotation marks omitted));
see also Sereboff, 547 U.S. at 363. Although the Appellants’ basis for relief—a
constructive trust—is equitable, the nature of the Appellants’ relief does not lie
6
The majority opinion implicitly overrules the third prong of the Bombardier test. I
submit that this overruling is error as discussed more fully below.
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in equity because Hartford CEBSCO—the entity that possesses and controls the
annuity containing the funds at issue—was not joined as a defendant. Indeed,
the Appellants’ remedy is legal in nature because it effectively seeks to impose
personal liability on Larry Griffin, the Trust, and the Trustee “in an amount no
less than $50,076.19,” regardless of the fact that none of these defendants has
actual or constructive possession of the settlement funds. See Knudson, 534 U.S.
at 214 (“The kind of restitution [sought], therefore, is not equitable—the
imposition of a constructive trust or equitable lien on particular property—but
legal—the imposition of personal liability for the benefits . . . conferred upon [the
beneficiaries].” (emphasis added)); see also Restatement (Third) of Restitution
and Unjust Enrichment § 55 cmt. h (2011) (“If the claimant cannot show an
equitable entitlement to specific property in the hands of the defendant, the
underlying basis of the remedy is lost.”). Therefore, the failure to join Hartford
CEBSCO as a defendant precludes the Appellants from establishing the
equitable nature of the relief they seek because they cannot demonstrate that
any of the named defendants has possession of the settlement funds.
C. Summary
In the end, Bombadier’s emphasis on a defendant-beneficiary’s actual or
constructive possession should continue to be the law of this circuit because it
appropriately balances the availability of equitable relief for ERISA plans with
the important protections afforded to special needs trusts by Congress and the
states as a means of providing for disabled individuals. Indeed, continuing to
follow our approach in Bombadier would align us with many of our sister
circuits, which emphasize the importance of the defendant-beneficiary or
defendant-conservator currently having either actual or constructive possession
of the funds at issue. See, e.g., Hall v. Liberty Life Assur. Co. of Boston, 595 F.3d
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270, 275 (6th Cir. 2010) (concluding that a plan seeking reimbursement could
not impose an equitable lien on a beneficiary’s future social security disability
benefits because the plan had no claim to the benefits until they were in the
beneficiary’s possession); Longaberger, 586 F.3d at 469 (funds at issue were held
by beneficiary’s attorney in an IOLTA account thereby giving defendant-
beneficiary constructive possession and defendant-attorney actual possession of
funds); Admin. Comm. for the Wal-Mart Stores, Inc. Assocs.’ Health & Welfare
Plan v. Horton, 513 F.3d 1223, 1228-29 (11th Cir. 2008) (disputed funds held in
trust account over which defendant-conservator had possession and control);
Dillard’s Inc. v. Liberty Life Ins., 456 F.3d 894, 901 (8th Cir. 2006) (defendant-
beneficiary had received disputed funds from Social Security Administration);
Wal-Mart Stores, Inc. Assocs.’ Health & Welfare Plan v. Wells, 213 F.3d 398, 401
(7th Cir. 2000) (defendant had constructive possession of funds held by
attorney); see also Cusson v. Liberty Life Assurance Co. of Boston, 592 F.3d 215,
223 (5th Cir. 2010) (defendant-beneficiary had possession of the social security
disability benefit funds sought by the plan).
IV. Special Needs Trusts
Finally, the majority opinion fails to account for a significant aspect of this
case. The need to give effect to § 502(a)(3)’s provision of equitable relief for
ERISA plans must be balanced with the need to give effect to the protections
afforded to special needs trusts by Congress and the states. This is not a case
in which the plan seeks to recover from only the beneficiary, see Knudson, 534
U.S. at 214, a lawyer’s IOLTA account, see Longaberger, 586 F.3d at 469, a state
court’s registry, see Bauhaus, 292 F.3d at 441, a court-sanctioned investment
account, see Sereboff, 547 U.S. at 360, or any other usual source. Instead, the
Appellants seek to recover, inter alia, against a special category of
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trusts—special needs trusts. Permitting such recovery requires disregarding the
special nature of these trusts, which the majority opinion does not consider apart
from a short discussion at the end of the opinion. Giving special needs trusts
appropriate consideration, however, leads to the inescapable conclusion that we
must respect the protections afforded to them by Congress and the states.
A special needs trust is created for a disabled individual to allow a trustee
to manage assets for the benefit of a disabled person. See 1 STUART D. ZIMRING,
REBECCA C. MORGAN, BRADLEY J. FRIGON & CRAIG C. REAVES, FUNDAMENTALS OF
SPECIAL NEEDS TRUSTS, § 1.04 (Matthew Bender ed., 2012). It has very specific
requirements concerning its establishment, it is not available to everyone (for
example, the beneficiary must be “disabled” under the definition provided in the
Social Security Act), and disbursements from the trust may only be used for
limited and specific purposes. See, e.g., 42 U.S.C. § 1396p(d)(4)(A) (discussing
requirements of a special needs trust to ensure the assets it contains are
excluded when determining a beneficiary’s Medicaid eligibility); TEX. PROP. CODE
ANN. § 142.005(b)(2) (explaining that the trust’s assets can only be used for
expenses “reasonably necessary for the health, education, support, or
maintenance of the beneficiary”). Also, the trust may not be established by the
individual with the disability, but instead must be “established for the benefit
of such individual by a parent, grandparent, legal guardian of the individual, or
a court . . . .” See 42 U.S.C. § 1396p(d)(4)(A). Further, it is critical that the
beneficiary does not directly receive the money in hand—it must be paid to the
trust for the use and benefit of the beneficiary. See ZIMRING ET AL., supra, § 1.05;
see also TEX. PROP. CODE ANN. § 142.005(a) (providing that a court may direct
the proceeds of a beneficiary’s judgment to be paid directly to a special needs
trust). These requirements for establishing and maintaining special needs
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trusts ensure that they do not operate as a conduit through which to pass money
to the beneficiary or to harbor tainted assets.
The primary purpose of special needs trusts is to allow beneficiaries to
maintain eligibility for public benefits—such as Medicaid—while supplementing
those benefits so that the beneficiary enjoys a better quality of life. See ZIMRING
ET AL., supra, § 1.05. Indeed, Congress and the states sanction the use of special
needs trusts as a lawful means of protecting assets to achieve this purpose. See
42 U.S.C. § 1396p(d)(4)(A); TEX. PROP. CODE ANN . § 142.005(g) (providing that
the court may structure the terms of a trust as “necessary or appropriate to
allow the beneficiary to be eligible to receive public benefits or assistance under
a state or federal program”). This result can be achieved because a special needs
trust is “irrevocable and . . . there are limits on the source and use of funds,
otherwise the trust principal would be considered available to the beneficiary,
and the beneficiary would be disqualified from public benefits.” See ZIMRING ET
AL., supra, § 1.05.
Here, regardless of Larry Griffin’s motive, a special needs trust has been
created. The Appellants do not dispute that Larry Griffin was adjudicated by
the Texas courts to be disabled, and they do not dispute that a special needs
trust was established pursuant to section 142.005 of the Texas Property Code
and 42 U.S.C. § 1396p(d)(4)(A).7 The Appellants also never contend that the
Trust is merely a means to pass the money from the annuity directly into Larry
Griffin’s hands. Furthermore, the Trust agreement provides that the Trust was
established at the specific direction of the Court, and therefore the assets
7
Before the panel, the Appellants argued that Chapter 142 of the Texas Property Code
was preempted by ERISA, but they mention this argument only in passing before the en banc
court. In any event, special needs trusts are expressly condoned by federal law.
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directed to this trust by the Court should not be deemed to have been or to be
available to the Beneficiary. This trust is established under the jurisdiction, at
the direction, and with the specific approval of the Court without transfer of
ownership of the settlement proceeds to the Beneficiary or his legal guardians.
(emphasis added). Accordingly, every indication is that the money was never in
Larry Griffin’s possession but was passed directly to the Trust and is now used
to care for Larry Griffin, who is disabled. Larry Griffin cannot decide when and
how the money will be spent on his behalf because the Trustee, not Larry
Griffin, has control of the money and may only use it for limited purposes. The
fact that the beneficiary of a special needs trust explicitly does not have the right
to either possession or control is crucial because it preserves his right to public
benefits. See 42 U.S.C. § 1396p(d) (providing that assets contained in a special
needs trust shall be excluded when determining eligibility for public benefits);
see also ZIMRING ET AL., supra, § 1.05.
If Larry Griffin had unfettered access to the money from the annuity, the
Appellants could recover the money from Larry Griffin or the Trust as Larry
Griffin would have possession and the right to control the money. However,
under the law of special needs trusts, the Trust is structured in such a way that
the funds are used for Larry Griffin’s benefit, but Larry Griffin is not in
possession of or control over the funds. Accordingly, in my view, this lack of
possession renders the Appellants’ request for equitable relief under § 502(a)(3)
inappropriate.
Furthermore, the two decisions from our sister circuits supporting the
majority opinion’s holding do not give adequate consideration to the unique
nature of special needs trusts. For example, the Eleventh Circuit in Horton
provided that a plan could seek equitable relief against a beneficiary in her
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capacity as the trustee of her son’s special needs trust.8 513 F.3d at 1228-29
(noting that the plan has identified “particular property that is in the hands of
[the beneficiary] in her capacity as . . . conservator” of her son’s special needs
trust). Similar to the majority opinion—which focuses on possession and tracing
requirements—the court in Horton did not address the unique nature of special
needs trusts, but instead focused on “whether a benefit plan could use § 502(a)(3)
to recover a specifically identified fund in the possession of a third party, such
as a trustee or conservator, by suing the third party directly.” Id. at 1227. The
general nature of Horton’s approach is illustrated by the court’s statement that
a suit in equity may be maintained against a third party when “‘property is held
by one person upon a constructive trust for another, and the former transfers the
property to a third person who is not a bona fide purchaser[.]’” Id. at 1228
(quoting RESTATEMENT OF RESTITUTION §160 cmt. g (1937)). While this may be
the standard in other contexts, I note that it must be applied in a manner that
accounts for the protections afforded to special needs trusts.9
Moreover, the Eighth Circuit’s opinion in Administrative Committee of
Wal-Mart Stores, Inc. Associates’ Health & Welfare Plan v. Shank, 500 F.3d 834,
836 (8th Cir. 2007), provides minimal guidance in this matter. Indeed, Shank
addresses facts similar to those presented by this appeal and determines that
8
The beneficiary’s son was a “covered person” under the ERISA plan and the plan
sought reimbursement for medical expenses paid on behalf of the beneficiary’s son after he
recovered money from the tortfeasor and placed it in a special needs trust. Horton, 513 F.3d
at 1224, 1229.
9
Horton is also distinguishable because the beneficiary had possession of the funds at
issue in her capacity as the trustee of the special needs trust. 513 F.3d at 1224 n.1 (noting
that the beneficiary, “in her capacity as conservator, acts as the equivalent of a trustee who
possesses the funds on [her son’s] behalf”). Accordingly, unlike here where a non-beneficiary
serves as the Trustee, the plan in Horton could establish defendant-beneficiary possession.
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equitable relief under § 502(a)(3) could lie against a beneficiary’s husband in his
capacity as trustee of a special needs trust. See id. at 836-37. Nonetheless, the
court’s mention of the special needs nature of the trust at issue was completely
devoid of any analysis of the special considerations attendant to such trusts and
Congress’s express approval of them. The court provided only a brief discussion
of whether the relief sought was equitable, see id. at 836, and instead focused on
whether “appropriate” relief under ERISA constituted a full or pro rata
reimbursement of funds paid by the plan, see id. at 836-40. Accordingly,
although this case facially supports the majority opinion’s conclusion that
recovery can lie against the Trust and Trustee, the lack of consideration it gives
to special needs trusts undercuts its value in our analysis.
As explained above, this way of structuring a trust is sanctioned by
Congress and the State of Texas as a way to provide a disabled individual with
additional benefits while also permitting the individual to retain access to public
benefits such as Medicaid. See, e.g., 42 U.S.C. § 1396p(d) (providing that the
calculation of an individual’s eligibility for public benefits should not include
assets held in a special needs trust); TEX. PROP. CODE ANN. § 142.005(g). It is not
a sham, and the Appellants have not contended that it is or that it fails the test
for a special needs trust. In sum, the Trust represents a congressionally
sanctioned means of providing Larry Griffin with additional benefits without
interfering with his entitlement to public benefits.10 The majority opinion’s
10
The value of the Trust demonstrates it has a purpose well beyond any
reimbursement issue. The annuity holding the funds against which the Appellants seek
equitable relief has a value of approximately $148,000, which is more than the approximately
$50,000 sought in reimbursement. Putting the reimbursement issue aside, the
Trust—through the annuity—holds almost $100,000 in assets that lie completely outside of
Larry Griffin’s possession and control and that will be used solely by the Trustee for Larry’s
benefit. This demonstrates that the Trust has a broader purpose than merely protecting the
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approach ignores this key distinction and raises the specter that all special
needs trusts will be available for “equitable” relief to various creditors of
beneficiaries of such trusts. Such a drastic approach should come from
Congress, not the courts. From the majority opinion’s contrary conclusion, I
respectfully dissent.
funds from the Appellants’ attempts to seek equitable relief.
41