In Re: ERISA and Subrogation in North Carolina
North Carolina personal injury law is complex. Not only do plaintiffs have to deal with the laws of negligence (premises liability, motor vehicle, medical malpractice) you have to deal with HIPPA, Medicare, Medicaid, as well as the state and federal laws dealing with health insurance Subrogation, herein "Subrogation." Subrogation, in essence is when a health insurance company demands repayment for monies they spent if you injuries were caused by the negligence of a third party. There are many issues that could and have previously been discussed when talking about Subrogation including the difference between federal and state laws, the different types of insurance policies, etc. The scope of this article deals just with the liability and responsibility of lawyers when dealing with Subrogation claims from health insurance carriers. This is exceedingly important since the action of the lawyer effects the net result to the client.
north carolina courts are split on determining whether and attorney is liable to an ERISA plan administrator. Generally, an attorney is not liable to a plan administrator for funds that the attorney disperses to a client from recovery or a settlement, unless the attorney acts in bad faith or negligently. However, a plan administrator may attempt to bring a claim against an attorney for declaratory relief of funds received from a third party tortfeasor. In addition to seeking declaratory relief, a plan administrator may seek compensatory damages through claims of conversion and/ or tortious interference with a contract against an attorney.
In Barnhill, the Plan administrator (Plaintiff) brought action against a plan participant (insured) who was injured in an automobile collision, the third party tortfeasors, and the attorney and law firm (Bain Defendants) who settled the personal injury claim for the plan participant. Barnhill Contracting Co. v. Oxendine, 105 F. Supp. 3d 542 (E.D.N.C. 2015). The Plaintiff sought a declaratory judgment regarding its reimbursement rights, tortious interference with contract and conversion. The Bain Defendants moved to dismiss for failure to state a claim. Id. at 544.
The insured was injured in an automobile collision. Id. at 545. The Plaintiff expended specifically identified funds in the amount of $69,117.31 in medical benefits on behalf of the insured. Id. The Plaintiff sent several notices to the Bain Defendants to provide notice that the administrator was entitled to subrogation. Id. at 546. Despite receiving notice, the Bain Defendants and the insured settled the claim against the third party tortfeasor for $284,594 without giving notice to the Plaintiff. Id.
29 USCA § 1132(a)(3) in its pertinent part allows a claim for equitable relief against an attorney holding settlement funds subject to an equitable lien of an ERISA plan. Id. at 547. The Bain Defendants argued that the claim for declaratory relief under ERISA should be dismissed because they were not bound by the plan’s terms and that Plaintiff has not alleged any allegations that the Bain defendants acted in bad faith or negligently in dispersing the funds. Id. at 546. The Bain Defendants urged the court to follow the decisions in T.A. Loving Co. and Great-W. Life, but the court declined to follow those two cases. Id. The court referenced Sereboff, where that court determined that where funds are specifically identifiable and within the possession of a defendant attorney, the attorney will be liable for equitable relief. Id. at 547. The Sereboff decision also established that an equitable claim can be against a contingency fee held by an attorney. Id. at 548. The Bain Defendant’s argued that state law should be followed which prohibits subrogation. Id. at 549. However, the court rejected the Bain Defendant’s arguments and found that ERISA federal law preempts and that the Plaintiff stated a claim for equitable relief under ERISA. Id. at 550.
The court dismissed the Plaintiff’s state law claim of tortious interference with a contract because the Plaintiff did not establish all the necessary elements of the claim. Id. In order to assert a claim of tortious interference with a contract against an attorney, the Plaintiff must establish all of the following elements: (1) a valid contract between a plaintiff and third person which confers upon the plaintiff a contractual right against a third person, (2) defendant knows of the contract, (3) the defendant intentionally induces the third person not to perform the contract, (4) and in doing so without justification (5) results in actual damage to the plaintiff. Id.
The court found that the Plaintiff alleged sufficient facts to state a claim of conversion against the Bain Defendants. Id. at 551. The court defined conversion as, “an authorized assumption and exercise of the right of ownership over goods or personnel chattels belonging to another, to the alteration of their condition or the exclusion of an owner’s rights.” Id. The court noted how this definition of conversion is consistently used throughout North Carolina courts. Id.
In Great- W. Life & Annuity, a life insurance plan administrator (Plaintiff) brought an action against a plan participant (insured) and the insured’s attorney and law firm (Jackson Defendants) alleging ERISA claims, tortious interference with a contract and conversion. Great-W. Life & Annuity Ins. Co. v. Bullock, 202 F. Supp. 2d 461 (E.D.N.C. 2002). The Jackson Defendants moved to dismiss the claims for failure to state a claim. Id.
The insured was involved in a vehicle collision. Id. at 462. As a result of the injuries sustained in the collision, the insured received $40,000 worth of medical benefits from the Plaintiff. Id. The insured recovered $150,000 pursuant to a settlement agreement with the third party who caused the injuries. Id. Although the Jackson Defendants were aware of the Plaintiff’s rights to recover from the settlement, they failed to reimburse and dispersed the proceeds. Id. Plaintiff argued that the court should follow Greenwood, a Tennessee case, where the Middle District of Tennessee found that an attorney was liable for his actions of contravention of an ERISA regulated plan, where the attorney had knowledge of the plan, yet counseled his client to lie to the plan’s administrator to avoid having to pay the subrogation funds. Id. at 463. The court failed to follow Greenwood because the Plaintiff in this case unlike Greenwood did not allege attorney misconduct. Id. The court further opined that although under 29 USC § 1132(a)(3) (2000), ERISA grants a right to sue for violations of its provisions, it is not specific as to who can be held liable for such violations. Id. at 464. The court noted that the Supreme Court has instructed lower courts to develop “federal common law of rights and obligations under ERISA regulated plans.” Id.
In following the Supreme Court’s instructions, federal courts, including the Fourth Circuit, have consistently drawn from and sanctioned the use of the forum state’s law, if that law is compatible with ERISA’s policies. Id. Thus, the court stated that only a party to an ERISA regulated plan can be held liable under its statutory provisions. Id. The court further stated that only when an attorney signs a plan or agrees to abide by a plans provisions can the attorney be sued under ERISA. Id. The court noted how North Carolina courts are hesitant to hold attorneys liable for actions that impact non-client third parties because the third parties are not in privity with the attorney’s employment contract. Id. The Plaintiff urged the court to expand attorney liability and to apply the Code of Professional Responsibility to find liability of the Jackson Defendants. Id. at 464. The court rejected the Plaintiff’s argument and stated that a breach of the Code of Professional Responsibility does not in itself form a basis of civil liability. Id. at 464-465. Ultimately, the court dismissed the Plaintiff’s claim for ERISA, conversion and tortious interference with a contract with prejudice. Id. at 466-467.
In T.A. Loving Co., a plan administrator and fiduciary of medical benefit plan (plaintiff) brought an action against a plan participant (insured) and the insured’s attorney and law firm (Adams Defendants) for reimbursement of medical benefits under ERISA. T.A. Loving Co. v. Denton, 723 F. Supp. 2d 837 (E.D.N.C. 2010). The Plaintiff sought equitable relief in the form of constructive trust or equitable lien against proceeds from the insured’s proceeds from a settlement for a personal injury claim. Id. The Adams Defendants moved for summary judgment. Id.
The insured was involved in a vehicle collision and as a result received $48,264.48 in medical benefits from the Plaintiff. Id. The insured received a settlement in the amount of $100,000. Id. at 839. The Adams Defendants deposited the settlement into a trust account and after receiving a release of all claims from the insured, the Adams Defendants retained one third of the settlement pursuant to a contingency fee agreement and dispersed the remaining funds to the insured. Id. The Adams Defendants warned the insured that the funds might be subject to a claim from an insurer. Id. The Plaintiff’s motion for summary judgment against the insured was granted. Id. at 840. The Plaintiff also sought to recover the contingency fee from the Adams Defendants. Id. The court noted the rule established in Great-W. Life Ins., which states in its pertinent part that an attorney may liable under 29 USC § 1132(a)(3) only where the attorney is a party to the plan, the attorney agrees to abide by the plans provisions, or the attorney’s wrong-doing or intentional effort enables the beneficiary to avoid plan provisions. Id. The court further opined that an attorney’s knowledge that a client is a party to a subrogation agreement does not give rise to a claim against an attorney under ERISA. Id. at 841. Accordingly, the court granted the Adam Defendants motion for summary judgment because the plaintiff did not allege that the Adam Defendants were a party or signatory to the Plan, otherwise agreed to disperse funds in accordance with the plan or wrongfully enabled the insured to avoid the Plaintiff’s claim. Id. at 843.