8th Circuit Rules on Recovering Funds in ERISA Plans

Question: The facts of the case:

1.Settlement proceeds have been disbursed to client and spent.
2.Attorney fees were deposited in our general account and eventually disbursed for expenses and salaries.

Does the 8th Circuit allow the plan under a constructive trust theory or any other theory to recover anyof the funds? Is it possible to trace such funds?

Missouri Attorney

Answer: The plan MAY be able to recover such funds from your client and even from yourself. I would first direct you to an article I recently wrote regarding a 6th circuit case. If you go to our website www.garretsongroup.com and look to the bar on the right you will see an article entitled "What you should learn from the Longaberger case". This article provides some insight into an ERISA situation which may be similar to the facts posed in your question.

First, the plan may have a right to seek recovery from your client. The plan's right will be dictated by the strength of the plan language. If there is strong language, i.e. there are no defenses such as the made whole doctrine and the plan's language creates the right to an equitable remedy, the plan may recover from your client. The plan also may have the right to offset its interest against your client's future benefits.

Second, if the plan provided you with notice and you failed to set aside such funds they may be able to seek recovery for a portion of their interest from you. This was the case in Longaberger.

Third, the fact that funds are disbursed is irrelevant and tracing is not required. An equitable lien does not require tracing or maintenance of a fund in order for equity to allow repayment. In Sereboff, the Supreme Court stated, "Barnes confirms that no tracing requirement of the sort asserted by the Sereboffs applies to equitable liens by agreement or assignment: The plaintiffs in Barnes could not identify an asset they originally possessed, which was improperly acquired and converted into property the defendant held, yet that did not preclude them from securing an equitable lien. Id. at 365, 126 S.Ct. 1869. The focus is on the fact that when those settlement proceeds were received, the plan's equitable interest can vest."

In conclusion, without knowing more facts it is hard to predict the plan's right of recovery. While Longaberger has raised considerable concern among PI attorneys it is important to remember that the facts of that case were very specific. While these scenarios are not common, it certainly does illustrate the importance of taking ERISA liens seriously and properly addressing any claims for which you have received reasonable notice. If you have any additional or follow up questions please do not hesitate to contact me and we can discuss further. Thank you.