:: Enforcement Of Equitable Liens By ERISA Benefit Plans – A Contrast In Available Remedies
In this case, Ms. Powell did not commingle her funds and made no purchases that diminished in value. Thus, the “conscious wrongdoer” standard has no application. Moreover, in Sereboff the Supreme Court stated, “This rule allowed them to follow a portion of the recovery into the [Sereboff's] hands as soon as [the settlement fund] was identified, and impose on that portion a constructive trust or equitable lien.” Sereboff, 547 U.S. at 364 (changes in original) (quotations omitted).
Nothing in Sereboff indicates that “conscious wrongdoing” is required for a constructive trust under these circumstances.
Humana Health Plan, Inc. v. Powell, 2009 U.S. Dist. LEXIS 102887 (W.D. Ky. Nov. 5, 2009)
Equitable liens offer avenues of relief to fiduciaries which are distinguishable from the remedy offered by a constructive trust. Read together with a recent federal district decision in a California case, Humana v. Powell provides a valuable overview of these distinctions in the context of a ERISA health plan subrogation dispute.
These distinctions, while thought-provoking, may not entirely hold true in view of Sereboff’s rejection of the “parcel of equitable defenses” asserted in that case as will be pointed out below.
The Facts
The plan participant had converted her recovery from a tort settlement into other assets.
While Ms. Powell has dispersed of some of the funds, a significant sum remains in savings accounts and CDs started with the settlement proceeds.
Specifically, Ms. Powell stated she made the following investments:
(1) $ 25,000 in a money market with Bedford Bank;
(2) $ 75,000 in a CD with Bedford Bank;
(3) $ 30,000 in a money market with Republic Bank; and
(4) $ 25,000 in a money market with Fifth Third Bank.
Nonetheless, the funds were traceable to the recovery -
These funds are clearly traceable to the settlement proceeds and any one of these accounts is sufficient to satisfied the constructive trust sought by Plaintiff.
“Conscious Wrongdoer” Defense
The plan participant raised an defense to the constructive trust remedy based on a concept derived from the Restatement of Restitution. The participant argued that § 210 barred the constructive trust remedy unless the defendant was a “conscious wrongdoer.”
For this argument, the participant cited Bd. of Trs. for the Laborers Health & Welfare Fund for Northern California v. Hill, No. C 07-5849 CW, 2009 U.S. Dist. LEXIS 27116, 2009 WL 774093 (N.D.Cal. March 23, 2009) wherein the Court observed that:
The Restatement indicates that, where the defendant is a conscious wrongdoer, the plaintiff may, at his or her option, seek a constructive trust over his or her proportionate share of any property that is purchased with commingled funds. Restatement § 211(2).
Argument Rejected
The district court noted that the district court in Hill cited that authority in the context of discussing an election of remedies by a plan fiduciary where the plan participant had comingled funds. Since that was not the case before the court, the principle was inapplicable:
There [in Hill], the funds the defendant received from a settlement had been commingled with other funds to purchase a condominium and a car, both of which diminished in value. The court referenced Restatement of Restitution § 210 for the proposition that where commingling occurs and the subsequently obtained property decreases in value, the plaintiff may get a constructive trust over the entire amount of its funds used to purchase the property, without depreciation, if the defendant was a “conscious wrongdoer.”
In this case, Ms. Powell did not commingle her funds and made no purchases that diminished in value. Thus, the “conscious wrongdoer” standard has no application.
Additional Perspective
The Court gave further perspective on the conscious wrongdoer exception by noting that the Supreme Court did not import that equitable defense into the ERISA common law scheme:
Moreover, in Sereboff the Supreme Court stated, “This rule allowed them to follow a portion of the recovery into the [Sereboff's] hands as soon as [the settlement fund] was identified, and impose on that portion a constructive trust or equitable lien.” Sereboff, 547 U.S. at 364 (changes in original) (quotations omitted).
Nothing in Sereboff indicates that “conscious wrongdoing” is required for a constructive trust under these circumstances.
Thus, the plan’s motion for summary judgment was sustained.
Plaintiff is entitled to a constructive trust over $ 24,518.41 of the assets held by Ms. Powell that are directly traceable to settlement. At this time, all funds in the accounts listed in this Memorandum Opinion are not to be moved or used by Ms. Powell in any manner.
Note - Sereboff rejected the equitable defenses raised in that case since the plan had not brought a freestanding subrogation claim. The district court astutely noted this distinction, which though not quoted in the opinion, is specifically supported by this passage from Sereboff:
But Mid Atlantic’s claim is not considered equitable because it is a subrogation claim. As explained, Mid Atlantic’s action to enforce the “Acts of Third Parties” provision qualifies as an equitable remedy because it is indistinguishable from an action to enforce an equitable lien established by agreement, of the sort epitomized by our decision in Barnes. See 4 Palmer, Law of Restitution § 23.18(d), at 470. (A subrogation lien “is not an express lien based on agreement, but instead is an equitable lien impressed on moneys on the ground that they ought to go to the insurer”).
Mid Atlantic need not characterize its claim as a freestanding action for equitable subrogation. Accordingly, the parcel of equitable defenses the Sereboffs claim accompany any such action are beside the point.
There is at times a fine distinction between an element of a cause of action and a defense to the cause of action. The Humana court appears (correctly I believe) to have seen the plan participant’s argument as raising an equitable defense which is irrelevant where the predicate for relief is an equitable lien by agreement.
Election of Remedies - The Bd. of Trs. for the Laborers Health & Welfare Fund for Northern California v. Hill opinion offered a somewhat different set of facts in that the plan participant converted the recovered funds by applying them to a mortgage on her home, purchasing a car and paying off a small loan from her sister. She thereafter sold her California house at a diminished value and bought a condo in D.C.
The district court in Hill distinguished the constructive trust remedy from that afforded by equitable lien, stating:
The Restatement indicates that, where the defendant is a conscious wrongdoer, the plaintiff may, at his or her option, seek a constructive trust over his or her proportionate share of any property that is purchased with commingled funds. Restatement § 211(2). A constructive trust differs from an equitable lien in that the former gives the party a proportionate share of ownership of specific property that can be traced to the ill-gotten proceeds, whereas the latter gives the party a lien in an amount certain that can be enforced against that property.
A constructive trust is the preferred remedy if a portion of commingled funds are used to purchase property that appreciates in value. See Restatement § 211, comment d.
In almost every health plan reimbursement case the plan’s claim will be predicated on an equitable lien by agreement, i.e., the plan language conditioning payment of benefits upon acquiescence to the plan terms. Thus, the employment of a constructive trust as a remedy has advantages in an ERISA case that may not obtain in other contexts.
Nonetheless, the distinction is one worth noting, particularly in view of the discussion of election of remedies in Hill.
As for the defense, however, would not the plan participant be a conscious wrongdoer if she had previously agreed to reimbursement the plan? This question was not reached in the opinion.
Treatise On Equity - There is an older version of a treatise by Pomeroy on equity which discusses equitable liens in historical context. You can access this treatise here. The age of the work should be of no concern given the historical focus required by Supreme Court jurisprudence on the subject.
