:: State Supreme Court Holds ERISA Subrogation Provisions Unenforceable
The deciding issue in this case is whether ERISA pre-empts the right of the state court with regard to assigning a minor’s rights to insurance proceeds. . . . Family law is an area traditionally regulated by the states. There is a presumption against pre-emption. Although ERISA does state its intent to pre-empt state law by positive enactment, there is no clear intention of Congress to pre-empt cases dealing with minors’ rights. Moreover, there is no damage to any clear and substantial federal interest. In re Guardianship of Holmes, — So.2d —-, 2007 WL 2792491 Miss. (September 27, 2007)
The recent decision in In Re Holmes extends a line of decisions which confuses the application of state and federal statutes in the enforcement of ERISA plan subrogation rights. Succinctly stated, the issue was whether a state law requiring Chancery Court approval to validly assign minor’s right to insurance proceeds is preempted by ERISA.
The Facts
The salient facts are those of the typical health plan subrogation case.
Rashan Danielle Holmes, a minor, was injured in an automobile accident on June 1, 1996. Holmes was covered under the Bauhaus Group Employee Benefit Plan (the Plan) as a dependent of her mother and guardian, Lillie Regina Holmes Copeland. The Plan advanced payments for Holmes’ medical expenses of more than $46,000.
Copeland, an employee of Bauhaus, filed suit against third-party tortfeasors on behalf of Holmes, the minor child. Thereafter, she entered into a settlement agreement for $750,000.
The Subrogation Claim
Bauhaus asserted a subrogation lien on the “advance payments” of medical benefits to Holmes. In response, Copeland then filed a “Petition for Authority to Settle Doubtful Claim of Minor”. In this petition, Copeland requested approval of the final settlement offer.
Further, Copeland (1) agreed that the portion of the settlement over which rights were contested, $78,161.47, would be deposited into the registry of the Lee County Chancery Court but (2) asked the court to find the subrogation claim invalid since Holmes was not made whole by the settlement.
The chancery court approved the final settlement and released the tortfeasors but left the $78,161.47 in the court registry.
The Path To The State Supreme Court
In the context of a ruling on the health plan’s motion for summary judgement, the chancery court held:
“After reviewing the briefs of the parties, and the pertinent case law, including the federal law in this case, the Court finds that the case law in regard to this matter has been well settled, and that the administration of a minor’s estate is entirely a matter of state law, and is not pre-empted by ERISA.â€
The plan appealed to the Mississippi Supreme Court where the issues were framed as follows:
- Whether the chancery court incorrectly held that Mississippi’s made-whole rule applied to cases involving minors despite the Mississippi Supreme Court’s ruling in Yerby v. United Health Care Insurance Co., 846 So.2d 179 (Miss.2002); and
- whether the chancery court incorrectly held that ERISA does not pre-empt Mississippi’s common law rule requiring chancery court approval to assign a minor’s right to insurance proceeds. This Court finds that ERISA does not pre-empt state law in the instant case and affirms the judgment of the Lee County Chancery Court.
The Court ruled against the plan on both issues.
# 1 Comity Rationale
The Court relied upon a federal district court case that, despite being somewhat long in the tooth, did possess the virtue of factual similarity. In Clardy v. ATS, Inc. Employee Welfare Benefit Plan, 921 F.Supp. 394 (N.D.Miss.1996), the district court held:
The defendants in this case would have this court preempt not a state law which impinges upon contractual subrogation rights under ERISA, but a state law of general application which has only an incidental effect upon an ERISA plan. The state law in question today relates to ERISA in “too tenuous, remote, or peripheral a manner†to be preempted in this case . . . It is the opinion of this court that the Mississippi law requiring a Chancellor’s approval before a parent may contract away a minor’s legal rights is not preempted by ERISA in this case.
In that opinion the district court took note of Cooper Tire v. Striplin, 652 So.2d 1102 (Miss.1995), stating:
While the decision is not precedentially binding upon this court, the Mississippi Supreme Court has also addressed this same aspect of ERISA preemption in the case of Cooper Tire v. Striplin, 652 So.2d 1102 (Miss.1995). In Striplin, the Mississippi Supreme Court came to the conclusion that “[t]he subject of minor’s estates is a matter within the field of domestic relations not governed by ERISA,†and that the law did not “directly or indirectly relate to pension plans.†Striplin, 652 So.2d at 1103.
The Cooper Tire reasoning unhinges the ERISA preemption argument on grounds of comity. Relying upon Cooper Tire, the Court in In Re Holmes stated:
There is no direct clash between state law and the provisions of ERISA in the instant case. Moreover, compliance with both federal and state regulations is not a physical impossibility. Mississippi law does not absolutely prohibit assignment, but requires prior chancery approval.
The Court distinguished Boggs v. Boggs, 520 U.S. 833, 117 S.Ct. 1754, 138 L.Ed.2d 45 (1997), (ERISA pre-empts a state law allowing a non-participant spouse to transfer by testamentary instrument an interest in undistributed pension plan benefits) and Egelhoff v. Egelhoff, 532 U.S. 141, 121 S.Ct. 1322, 149 L.Ed.2d 264 (2001) (ERISA preempts a Washington state statute providing the designation of a spouse as a beneficiary of nonprobate assets was revoked automatically upon divorce). In the Mississippi court’s view, the important point was that Supreme Court’s stated presumption against preemption in areas of traditional state regulation such as family law.
# 2 Knudson Rationale
The Mississippi Supreme Court also took note of the Fifth Circuit decision in Bauhaus USA, Inc. v. Copeland, 292 F.3d 439 (5th Cir.2002). (This 2002 case was one aspect of the dispute between the parties in federal court.)
In that opinion, the Fifth Circuit held that ERISA did not authorize employer’s declaratory judgment action to enforce terms of an employee benefit plan’s reimbursement provision. The settlement proceeds were in registry of Mississippi Chancery Court and, in the view of the majority, that did not constitute possession of the funds by the defendant plan participant.
Since the Fifth Circuit concluded that ERISA did not authorize Bauhaus’ declaratory judgment action, it did not reach the preemption question.
Note: The litigation in this case has run the gamut in both state and federal court. As to the implications of the federal case (Bauhaus USA, Inc. v. Copeland), the holding has been effectively limited to cases in which the settlement funds are paid into the chancery court registry. Nonetheless, leaving the last word on the preemption issue to the Mississippi Supreme Court will spawn much confusion, as the Court is profoundly mistaken in its interpretation of U.S. Supreme Court authority on the issue.
Note that the Fifth Circuit distinguished Bauhaus in Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot and Wansbrough, 354 F.3d 348 (5th Cir. 2003):
The [Bauhaus] court observed that the disputed funds in Knudson were outside the “possession and control” of the beneficiary, having been placed in a Special Needs Trust to cover the beneficiary’s medical expenses. Reasoning that funds placed in the court registry were just as much beyond the “possession and control” of the beneficiary as those placed in a Special Needs Trust, the panel majority held that the plan’s suit did not lie in equity and was therefore unauthorized by § 502(a)(3).
In Bombardier, the funds were in an attorney’s trust account – this constituted constructive possession in the Fifth Circuit’s view.
Court Registry - The plan failed in Knudson and in Bauhaus to include the party in possession of the funds as a defendant. Based upon the U.S. Supreme Court’s interpretation of ERISA Section 502(a)(3) “equitable relief”, this defect defeated the plan claims.
The question is suggested, who would be the proper defendant, if any, when funds are in the registry of a state chancery court? Would inclusion of the custodian of the funds make a difference? This has been the confounding issue in the Mississippi subrogation cases. The outcome in In Re Holmes only muddles the issue further.
Cooper Tire - Aside from the Knudson issue, the preemption question, resolved against the plan by the Mississippi Supreme Court, is worthy of further analysis.
First, the execution of a subrogation or reimbursement agreement is not necessary to perfect plan subrogation rights. The plan provisions itself will suffice. The focus in the case upon the reimbursement agreement contributes significantly to the flaws in the Court’s analysis.
Second, if the parent or legal guardian of the minor child is permitted to obtain plan benefits on the child’s behalf, a compelling argument can be made that, implicit in that claim for benefits, lies agreement to the terms and conditions. To the extent that state law abrogates this obligation, absent state court approval, the state law should be preempted as imposing impermissible state mandated requirements on ERISA plan administration. It is a pity this issue was not resolved in the federal court litigation. Perhaps in a future case, it will be.
See also - For more on the Mississippi Chancery Court versus ERISA controversy, see :: Assertion of Subrogation Rights Does Not Constitute Tortious Interference With Settlement:
The Cooper Tire case may appear to have received some sanction from a Fifth Circuit case, Bauhaus USA, Inc. v. Copeland, 292 F.3d 439 (5th Cir.2002). On the other hand, another more recent Fifth Circuit opinion, Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot & Wansbrough, 354 F.3d 348 (5th Cir.2003), a decision that adumbrated Sereboff v. Mid Atlantic Medical Services, Inc., 126 S.Ct. 1869 (2006), suggests that ERISA plans may assert rights under constructive trust theory in a proper case, i.e., where the claims are asserted against the party holding the funds and the plan contains a subrogation provision).
