Great-West v. Knudson: Funds Must Be in the Control of the Defendant in Order to Pursue a Subrogation/Reimbursement Claim under ERISA

Thomas H. Lawrence¹

The United States Supreme Court decided Great-West Life & Annuity Ins. Co. v. Knudson, No. 99-1786, 2002 U.S. LEXIS 399, on January 8, 2002. Great-West had asked the Supreme Court to recognize the rights of ERISA plan fiduciaries to file suit in federal courts to enforce subrogation and reimbursement provisions, which the Court did, so long as the monies over which the plan fiduciary seeks restitution or constructive trust are being held by the defendant in the federal court lawsuit.

Janette Knudson and Eric Knudson were covered persons under the Health and Welfare Plan for Employees and Dependents of Earth Systems, Inc., which was administered by Great-West Life & Annuity Insurance Company. Ms. Knudson was injured in an automobile accident. The Plan paid benefits to Ms. Knudson and/or her medical providers in the amount of $411,157.11 for her medical care. In 1993, Ms. Knudson sued the third parties allegedly responsible for her injuries in California Superior Court.

On July 23, 1997, the California Superior Court approved the settlement of Knudson's state court action against the third parties allegedly responsible for her injuries. The settlement negotiated by the parties to the state court action allocated by agreement only $13,828.70 of the $650,000.00 settlement to past medical expenses. Great-West was not a party to - and did not participate in - the state court action.

In December, 1997, Great-West moved for summary judgment, moved for leave to file its Second Amended Complaint to add Jeffrey S. Pop, attorney for Knudson, and his law firm and Louise Curinga, Trustee of the Special Needs Trust, as defendants, and moved for preliminary injunction against the new parties. Knudson filed her cross-motion for summary judgment. On May 20, 1998, the district court granted Knudson's motion for summary judgment, denied Petitioners' motion for summary judgment, and denied the remaining motions as moot.

The Ninth Circuit dismissed Great-West's appeal, following its earlier decision in FMC Medical Plan v. Owens, which ruled that federal courts do not have subject matter jurisdiction over 29 U.S.C. § 1132(a)(3) claims whenever the substance of the remedy is monetary. Great-West Life filed a petition for certiorari because other circuits had previously held that ERISA authorized plan fiduciaries to obtain monetary relief in the form of restitution, constructive trust, and specific performance.

The Supreme Court granted certiorari. The Court affirmed the decision of the Ninth Circuit on a narrow procedural ground. The Court affirmed dismissal of the lawsuit in Knudson not on the basis that ERISA does not recognize such suits, but rather on a narrow procedural ground, being that the plan beneficiary there was not properly subject to a claim for reimbursement because she was not in possession of the monies recovered in the state court action. Instead, those monies had been transferred on her behalf directly from the auto manufacturer to a trust established under state law for her future needs and to her attorney as payment of his fees.

All nine Justices agreed that a cause of action in federal court is available under ERISA for equitable restitution or constructive trust to obtain such a reimbursement recovery from parties or persons who actually hold the funds recovered in the personal injury action: "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. [citations omitted]." Great-West Life & Annuity Ins. Co. v. Knudson, No. 99-1786, 2002 U.S. LEXIS 399, *18 (U.S. Jan. 8, 2002).

The Knudson decision should not be viewed as a loss, but like a "sacrifice" in baseball, where a single out places runners in a better scoring position for upcoming batters. Knudson clarifies that, even in the Ninth

[1]Thomas H. Lawrence is a partner in the Memphis, Tennessee law firm of Lawrence & Russell, LLP, and represents employers, health plans, and insurers in healthcare and property and casualty subrogation and other employee benefits and employment matters and related litigation in state and federal courts throughout the United States. He was one of the attorneys who represented Great-West Life in Knudson, and has been counsel of record in many of the otherpost-Knudson decisions that have clarified the scope of relief available under ERISA. He can be reached at toml@lawrencerussell.com