ACS Recovery Services, Inc. v. Larry Griffi

Case: 11-40446 Document: 00512232754 Page: 1 Date Filed: 05/07/2013

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

May 7, 2013

No. 11-40446 Lyle W. Cayce

Clerk

ACS RECOVERY SERVICES, INC.;

FKI INDUSTRIES, INC.,

Plaintiffs - Appellants

v.

LARRY GRIFFIN; WILLIE EARL GRIFFIN;

LARRY GRIFFIN SPECIAL NEEDS TRUST;

JUDITH GRIFFIN,

Defendants - Appellees

Appeal from the United States District Court

for the Eastern District of Texas

Before STEWART, Chief Judge, and REAVLEY, JOLLY, DAVIS, JONES,

SMITH, DENNIS, CLEMENT, PRADO, OWEN, ELROD, SOUTHWICK,

HAYNES, GRAVES, and HIGGINSON, Circuit Judges.*

EDITH H. JONES, Circuit Judge, joined by STEWART, Chief Judge, and

JOLLY, DAVIS, SMITH, CLEMENT, OWEN, SOUTHWICK, GRAVES, and

HIGGINSON, Circuit Judges :

ERISA § 502(a)(3)(B) authorizes actions by fiduciaries “. . . to obtain other

appropriate equitable relief . . . to enforce . . . the terms of the [ERISA] plan.”

29 U.S.C. § 1132(a)(3)(B). The question this court deems enbancworthy is

whether ACS Recovery Services, Inc., the administrator, and FK Industries, Inc.,

*

Judge King did not participate in this decision.

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the sponsor (collectively, “ACS”), of the ERISA plan (“Plan”) that covered

employee Larry Griffin, can sue Griffin, Griffin’s Special Needs Trust, or his

ex-wife Judith, for reimbursement of medical expenses incurred by the Plan

after Griffin received a tort settlement for his injuries. To what extent, in other

words, does ACS’s suit seek “appropriate equitable relief” to enforce the Plan’s

reimbursement provision? Parting company with this court’s panel decision, we

hold that ACS may recover from the Special Needs Trust the costs the Plan bore

on Larry’s behalf: the Trust is a proper ERISA defendant; the Trust received

funds directly traceable to Larry Griffin’s tort recovery; and the Plan held a

pre-existing equitable lien by agreement on the proceeds of the recovery after the

Plan paid Griffin’s medical bills. Sereboff v. Mid Atlantic Medical Services, Inc.,

547 U.S. 356, 126 S. Ct. 1869 (2006). Under the circumstances of this case,

however, we need not rule on whether ACS can recover from Larry, and ACS did

not offer evidence to sustain a judgment against Judith. The district court

judgment to the contrary is reversed in part, affirmed in part, and remanded.

BACKGROUND

While Griffin worked for FK Industries, he participated in the company’s

ERISA welfare benefit plan. The Plan paid over $50,000 in medical expenses for

his treatment following a serious automobile accident in 2006. Larry and Judith

sued Ashley E. Smith and J-Co Production Management, Inc., the company

responsible for the accident, and reached a settlement to pay “cash and periodic

payments with a present value sum” just over $294,000.

At the time of the settlement, the Plan provided it “will have a first lien

upon any recovery, whether by settlement, judgment, arbitration or mediation”

to repay the medical expenses, and it required Larry not to take action that

might prejudice the Plan’s right to reimbursement. ACS had notified Larry’s

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attorney of these provisions shortly after he filed suit. Rather than help Larry

comply with the Plan, his attorney devised an artful attempt to insulate the

settlement proceeds from the reimbursement provision. His attorney admitted

that he structured the settlement “in an effort to legally avoid any equitable lien

asserted by the Group Medical Plan . . . .” Accordingly, the settlement first

segregated money for attorneys’ fees, some additional medical expenses, and for

Judith Griffin pursuant to the couple’s divorce settlement. The remaining funds

(having a “present sum value” of about $148,000) were paid by SAFECO, the

defendant’s insurer, to Hartford CEBSCO, which was authorized to purchase an

annuity from Hartford Life and therewith to make monthly payments of $843.42

for twenty years to a statutory Special Needs Trust,1 whose trustee is Willie

Griffin, Larry’s brother. The Trust is authorized to make monthly payments for

Larry’s benefit.

The settlement documents reflect Larry’s approval of this arrangement.

On October 24, 2008, the state court approved creating a tax-qualified Special

Needs Trust pursuant to Texas Property Code § 142.007 based on the

understanding that Larry is “incapacitated” under state law and disabled for

federal Social Security purposes. That same day, the state court entered an

Order Approving Settlement and of Dismissal (“Order”), signed by Larry and a

guardian ad litem (among others), that delineated the exact payments to be

made to each party including the Special Needs Trust.

The Order referenced the parties’ contemporaneously executed

Compromise Settlement Agreement (“Agreement”), designated as being by and

between “Larry Griffin and Judith Griffin as Plaintiffs . . . ,” and Larry signed

1

Accordingly, the settlement funds flow into the Trust’s possession.

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it as well. Both the guardian ad litem and the parties’ attorneys signed the

Agreement only “as to form.” This Agreement exchanged the plaintiffs’ release

of claims for (in pertinent part) the defendants’ agreement to pay the Larry

Griffin 142 Special Needs Trust (“Trust”) certain monthly payments “through

annuity issuer, Hartford Life Insurance Company.” The Griffins and the Trust

further agreed to an assignment of the defendants’ liability to make the periodic

payments to Hartford CEBSCO, such that Hartford’s obligation to make the

periodic payments “shall be no greater” than that of the defendants. Plaintiffs

further consented to holding Hartford to be the “sole obligor” respecting the

obligation. Hartford, as “sole owner of the annuity policy,” was to issue the

monthly payments to the Trust, c/o Willie Griffin, Trustee. Finally, the plaintiffs

warranted in the Agreement that “no part of the claim” has been assigned or

transferred to any person or entity, and that not only have all medical costs been

paid, but “any liens pertaining to said care have been released or satisfied.”

ACS and FKI, the Plan fiduciaries, were denied reimbursement by the

design and intent of this settlement. They sued Larry Griffin, Judith Griffin,

the Trust, and Willie Griffin as Trustee under ERISA § 502(a)(3)(B). Among

other claims for relief, the fiduciaries sought a constructive trust upon “no less

than $50,076.19 in funds intended to be paid to or received by the Defendants

from any recovery made as compensation for injuries caused by the acts of a

third party,”2 and they requested that the defendants be enjoined from

interfering with the Plan’s right of reimbursement.

2

Judge Prado’s dissent asserts that ACS did not plead with sufficient particularity to

obtain an equitable lien on the monthly payments received by the Trust under the Settlement

Agreement. We disagree. Seeking “funds intended to be paid or received by the Defendants”

does not limit ACS to a lump sum, nor to funds paid through intermediaries before reaching

the Trust and Larry.

4

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The district court, approving a magistrate judge’s report and

recommendation, rejected the fiduciaries’ claims for summary judgment and

granted Larry Griffin’s, Willie Griffin’s, and the Trust’s cross motions.3 A panel

of this court expanded on the trial court rulings, but the fundamental analysis

supporting the appellees rests on the following propositions. First, the Plan’s

claim seeks legal, not equitable relief as required by § 502(a)(3)(B), because

Larry Griffin has neither possession nor control of the settlement funds now held

in the annuity. Any judgment against Larry Griffin personally would be for

money damages rather than for the enforcement of a constructive trust over the

settlement proceeds. Likewise, the Trust cannot be sued for equitable relief for

several reasons. It has no possession or control over the annuity, which

Hartford owns. Because Larry has no control over the Trust, the Trust cannot

be liable as his agent. Finally, since Larry lacked “even fleeting” possession or

control over the settlement money that purchased the annuity that funds the

Trust, equitable relief is pretermitted against the Trust. This reasoning

purports to be compelled by the Supreme Court’s decision in Great-West Life &

Annuity Ins. Co. v. Knudson, 534 U.S. 204, 122 S. Ct. 708 (2002), and this court’s

decision in Bombardier Aerospace Emp. Welfare Benefits Plan v. Ferrer, Poirot

& Wansbrough, 354 F.3d 348 (5th Cir. 2003). Following an unfavorable

appellate decision, ACS obtained en banc review.

3

The district court noted that ACS failed to object to the magistrate judge’s rejection

of the motion for default judgment against Judith Griffin, and it refused further to consider

that claim against her. Subsequently, the court’s dismissal of the entire case covers ACS’s

claim against Judith and resulted in a final, appealable judgment as to all parties.

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DISCUSSION

1. Standard of Review

The panel decision adhered to our circuit precedent in concluding that

ACS’s failure to support a claim for equitable relief necessitated dismissal for

lack of jurisdiction. See, e.g., Bauhaus USA Inc., v. Copeland, 292 F.3d 439, 445

(5th Cir. 2002) (affirming the district court’s dismissal for lack of subject matter

jurisdiction because appellants failed to state a valid claim under § 502(a)(3)).

Whatever the origin of this jurisdiction-based reasoning,4 it is inconsistent with

Supreme Court precedent and the majority of sister circuits, for which the

failure to state a claim cognizable under federal law is distinct from holding that

a court lacks subject matter jurisdiction. The Supreme Court has long held that

“the absence of a valid (as opposed to arguable) cause of action does not implicate

subject-matter jurisdiction, i.e., the courts’ statutory or constitutional power to

adjudicate the case.” Steel Co. v. Citizens for a Better Env’t., 523 U.S. 83, 89,

118 S. Ct. 1003, 1010 (1998). Subject matter jurisdiction is not implicated unless

the claim is “so insubstantial, implausible, foreclosed by prior decisions of [the

Supreme Court], or otherwise completely devoid of merit as not to involve a

federal controversy.” Oneida Indian Nation of N.Y. v. Cnty. of Oneida, 414 U.S.

661, 666, 94 S. Ct. 772, 777 (1974); see also Adar v. Smith, 639 F.3d 146, 150–51

(5th Cir. 2011) (en banc), cert. denied, 132 S. Ct. 400 (2011). Consistent with

these principles, at least five other circuits have held that whether a claim for

equitable relief under ERISA § 502(a)(3) has been stated is within federal courts’

4

The Knudson decision, holding a plan’s claim against the beneficiaries was not for

equitable relief, did not clearly rest on either failure to state a claim or lack of jurisdiction.

Thus, we recur to basic procedural decisions of the Supreme Court.

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jurisdiction irrespective of the claim’s ultimate merit.5 Reinforcing this

conclusion is that ERISA grants federal courts exclusive jurisdiction separate

and apart from its articulation of causes of action. See 29 U.S.C. § 1132(e).

We align with the majority rule and frame this appeal as requiring a

decision whether the Plan stated a claim for equitable relief under ERISA

§ 502(a)(3). The interrelated issues, raised because the parties offered evidence

outside the pleadings, are whether there was no genuine, material fact issue and

the Plan or its adversaries were entitled to judgment as a matter of law. FED.

R. CIV. PRO. 56.

2. Section 502(a)(3).

Guided by Supreme Court decisions that have systematically refined the

scope of “appropriate equitable relief,” the case law interpreting § 502(a)(3) has

evolved over twenty years. In Mertens v. Hewitt Assocs., 508 U.S. 248, 255,

113 S. Ct. 2063, 2068 (1993), the Court held that “appropriate equitable relief”

allowed plaintiffs to seek “a remedy traditionally viewed as ‘equitable.’” In

Knudson, supra, the Court undertook to differentiate between legal and

equitable relief. When Janette Knudson was seriously injured in a car crash,

Great-West paid substantial medical bills under an ERISA plan that authorized

the company to be reimbursed from any recovery she received from a third party.

Id. at 207, 122 S. Ct. at 711. Knudson won a favorable judgment, and the

5

Metro Life Ins. Co. v. Price, 501 F.3d 271, 276-77 (3d Cir. 2007); Carlson v. Principal

Fin. Grp., 320 F.3d 301, 307 (2d Cir. 2003); Cement Masons Health & Welfare Trust Fund for

N. Cal. v. Stone, 197 F.3d 1003, 1008 (9th Cir. 1999); Blue Cross & Blue Shield of Ala. v.

Sanders, 138 F.3d 1347, 1352-53 (11th Cir. 1998). The Seventh Circuit’s decisions are unclear.

Compare Admin. Comm. of Wal-Mart Stores, Inc., Assocs.’ Health & Welfare Plan v. Varco,

338 F.3d 680, 688 (7th Cir. 2003) (arguably jurisdictional holding), with Health Cost Controls

v. Skinner, 44 F.3d 535, 537 (7th Cir. 1995) (failure to state a claim).

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tortfeasor deposited her award directly into a special needs trust with Knudson

as beneficiary and her husband as the trustee.

The Court ruled that Great-West could not recover “restitution” from the

Knudsons personally under § 502(a)(3)(B) because this was tantamount to legal

relief for breach of contract. The majority held that whether restitution is a

legal or equitable remedy depends on the basis for the plaintiff's claim. Id. at

213, 122 S. Ct. at 714. The Court stated:

[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. See 1 Dobbs

§ 4.3(1), at 587-588; Restatement of Restitution, supra, § 160, Comment

a, at 641-642; 1 G. Palmer, Law of Restitution § 1.4, p. 17; § 3.7, p. 262

(1978). A court of equity could then order a defendant to transfer title (in

the case of the constructive trust) or to give a security interest (in the case

of the equitable lien) to a plaintiff who was, in the eyes of equity, the true

owner. But where “the property [sought to be recovered] or its proceeds

have been dissipated so that no product remains, [the plaintiff’s] claim is

only that of a general creditor,” and the plaintiff “cannot enforce a

constructive trust or an equitable lien upon other property of the

[defendant].” Restatement of Restitution, supra, § 215, Comment a, at

867. Thus, for restitution to lie in equity, the action generally must seek

not to impose personal liability on the defendant, but to restore to the

plaintiff particular funds or property in the defendant’s possession.

Id. at 213–14, 122 S. Ct. at 714–15. As the settlement funds were no longer in

Knudson's possession, Great-West was seeking “some funds,” not necessarily the

particular funds obtained from the third party. Significantly, the Court declined

to decide whether the ERISA plan might have claimed equitable relief from

either the special needs trust or the Knudsons’ attorney. Id. at 220, 122 S. Ct.

at 718. Justice Ginsburg, in dissent, observed that under the majority’s

reasoning a “constructive trust claim would lie; hence, the outcome of this case

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would be different if Great-West had sued the trustee of the Special Needs Trust,

who has ‘possession’ of the requested funds, instead of the Knudsons, who do

not.” Id. at 225, 122 S. Ct. at 721 (Ginsburg, J., dissenting).

After Knudson, this court decided Bombardier, supra, and held that an

ERISA plan was pursuing “appropriate equitable relief” against a law firm

holding funds in its trust account on behalf of a client. The client-beneficiary

owed his plan, according to its reimbursement terms, over $13,000 for medical

expenses paid on his behalf following a car accident. His settlement with the

tortfeasor was deposited in the firm's trust account. The plan sued the law firm

and was met with two defenses: (1) the firm, neither a fiduciary nor a signatory

to the plan, was not a proper defendant under ERISA, and (2) a constructive

trust was improper because the funds were not in the possession of the

beneficiary himself. Id. at 351. This court rejected both defenses to liability.

First, we held that the law firm was a proper party pursuant to the Supreme

Court’s conclusions that § 502(a)(3) “admits of no limit (aside from the

‘appropriate equitable relief caveat’ . . .) on the universe of possible defendants,”

and therefore “authorizes a cause of action against a non-fiduciary, non-‘party

in interest’ . . . [who] holds disputed settlement funds on behalf of a plan-

participant . . . .” Id. at 352–53 (quoting Harris Trust & Savings Bank v.

Salomon Smith Barney, Inc., 530 U.S. 238, 244–46, 120 S. Ct. 2180, 2187 (2000)

(emphasis in original)). Second, relying on the holding of Knudson while

distinguishing it factually, this court held that the plan indeed sought to recover

(1) specifically identifiable funds that (2) were in the constructive possession and

the legal control of the participant but (3) belonged in good conscience to the

plan. See id. at 355–58. This court inferred its three-part inquiry from

Knudson. The funds were in the “constructive possession and control” of the

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client despite the firm’s claimed contingency fee arrangement because the

client/beneficiary’s obligation to the plan predated any agreement with the law

firm and thus precluded him “from contracting away . . . that which he did not

own himself, namely, the [money] that rightfully belonged to the Plan.” Id. at

357.

Three years after Bombardier, the Supreme Court decided Sereboff v. Mid

Atlantic Med. Servs., Inc., 547 U.S. 356, 126 S. Ct. 1869 (2006). In the wake of

Knudson, a circuit split had developed about whether an ERISA plan seeking to

enforce benefits reimbursement provisions could invoke “equitable relief” under

§ 502(a)(3)(B). See Admin. Comm. for WalMart v. Horton, 513 F.3d 1223, 1226

(11th Cir. 2008) (discussing circuit split). The Court unanimously agreed in

Sereboff that properly framed relief could be characterized as equitable.6 The

Sereboffs received medical benefits from Mid Atlantic following a car crash

under an ERISA plan requiring them to reimburse Mid Atlantic for recoveries

from third parties. Sereboff, 547 U.S. at 360, 126 S. Ct. at 1872. When they

declined to reimburse Mid Atlantic for their settlement with the tortfeasors, the

Sereboffs placed the disputed funds in an investment account while the Mid

Atlantic litigation was pending. Id. at 360, 126 S. Ct. at 1873. Mid Atlantic

sued for breach of contract and for imposition of a constructive trust and

equitable lien on its portion of the settlement. Summarizing Knudson, the Court

first pointed out that a constructive trust or equitable lien can be imposed on

“‘particular funds or property in the defendant’s possession.’” Id. at 362,

126 S. Ct. at 1874 (quoting Knudson, 543 U.S. at 213, 122 S. Ct. at 708). Unlike

6

The Court cited Bombardier as one example of the circuit split. Sereboff, 547 U.S. at

361 n.1, 126 S. Ct. at 1873 n.1.

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the Knudsons, the Sereboffs possessed the disputed funds in their investment

account. Id. at 362–63, 126 S. Ct. at 1874. Mid Atlantic accordingly sought an

equitable remedy.

Mid Atlantic’s additional burden, however, was to prove that the basis for

its claim was equitable. See id. at 362, 126 S. Ct. at 1874 (whether the remedy

“is legal or equitable depends on ‘the basis for [the plaintiff’s] claim’ and the

nature of the underlying remedies sought”) (quoting Knudson, 543 U.S. at 213,

122 S. Ct. at 708). The Court ascertained that Mid Atlantic’s claim was

equitable because it sought to enforce an “equitable lien by agreement.”

Equitable liens by agreement are described in Barnes v. Alexander, 232 U.S. 117,

34 S. Ct. 276 (1914), where Justice Holmes wrote that they arise when an

agreement identifies a specific fund, distinct from the obligor’s general assets,

and identifies a particular portion of the fund that is owed to a counter party.

See Sereboff, 547 U.S. at 364, 126 S. Ct. at 1875. That the agreement is made

before the fund comes into existence is of no moment, Sereboff reiterated. Id. at

366, 126 S. Ct. at 1876. Based on Barnes, Mid Atlantic could rely on the

“familiar rule of equity,” which “allowed [it] to ‘follow’ a portion of the recovery

‘into the [Sereboffs’] hands’ ‘as soon as [the settlement fund] was identified,’ and

impose on that portion a constructive trust or equitable lien.” Id. at 363–64,

126 S. Ct. at 1875 (quoting Barnes, 232 U.S. at 123, 34 S. Ct. 276).

Particularly significant here is the Court’s rejection of the Sereboffs’

argument that Mid Atlantic’s claim was not equitable because equitable

restitution requires a strict tracing of the tainted assets. First, the Court

distinguished equitable restitution from equitable liens by agreement and

affirmed that Barnes places no similar tracing requirement on the latter type of

claim. The Court also refused to hold that Knudson crafted a new tracing

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requirement because Knudson described only “in general terms” a fiduciary’s

right to recover equitable restitution, and “[t]here was no need in Knudson to

catalog all the circumstances in which equitable liens were available in

equity . . . .” Id. at 365, 126 S. Ct. at 1876. Neither Knudson nor Sereboff, in

other words, exhausts the universe of “appropriate equitable relief,” so long as

both the claim and the relief sought sound in equity.

Following these decisions, other circuits have readily enforced ERISA plan

reimbursement terms against third parties holding tort settlements achieved by

plan beneficiaries. Constructive trusts have been imposed to enforce a plan’s

equitable lien by agreement on settlement proceeds held by a beneficiary’s tort

lawyer, Longaberger v. Kolt, 586 F.3d 459 (6th Cir. 2009); by a trustee of his

wife’s special needs trust, Admin. Comm. of Wal-Mart Stores, Inc. Assocs.’

Health & Welfare Plan v. Shank, 500 F.3d 834 (8th Cir. 2007); and by a

conservator acting as a trustee for a special needs trust. Admin Comm. of Wal-

Mart Stores, Inc. Assocs.’ Health & Wealth Plan v. Horton, 513 F.3d 1223 (11th

Cir. 2008).7 In each of these cases, the courts held that, according to Knudson

and Sereboff, an equitable lien for reimbursement attached to settlement

proceeds as soon as a settlement fund arose from the injuries requiring plan

7

Courts have also imposed constructive trusts on ERISA plan beneficiaries who

accepted tort settlements or disability payments without reimbursing the plan under an

equitable lien by agreement. See, e.g., CGI Tech. & Solutions Inc. v. Rose, 683 F.3d 1113 (9th

Cir. 2012), cert. granted, judgment vacated on other grounds, No. 12-240, 2013 WL 1704705

(U.S. Apr. 22, 2013); US Airways, Inc. v. McCutchen, 663 F.3d 671 (3d Cir. 2011), judgment

vacated on other grounds, 133 S. Ct. 1537 (2013); Funk v. CIGNA Grp. Ins., 648 F.3d 182, 195

(3d Cir. 2011); Cusson v. Liberty Life Assurance Co. of Boston, 592 F.3d 215, 231 (1st Cir.

2010); Popowski v. Parrott, 461 F.3d 1367, 1373 (11th Cir. 2006); Dillard’s v. Liberty Life,

456 F.3d 894, 901 (8th Cir. 2006).

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payments. See, e.g. Longaberger, 586 F.3d at 467. The discussion in Horton,

supra, quotes, inter alia, the Restatement of Restitution:

Where property is held by one person upon a constructive trust for

another, and the former transfers the property to a third person who is not

a bona fide purchaser, the interest of the beneficiary is not cut off. In such

a case, he can maintain a suit in equity to recover the property from the

third person, at least if his remedies at law are not adequate.

Id. at 1228 (quoting RESTATEMENT OF RESTITUTION §160 cmt. g (1937)). Horton’s

salient conclusion is:

In the instant case, the Administrative Committee properly seeks

equitable restitution of a specifically identifiable fund in possession of a

defendant. As required by Knudson, the [Plan] asserts title and right to

possession of particular property that is in the hands of Mrs. Werber in

her capacity as Joshua’s conservator. The money Mrs. Werber holds in

trust has been identified as belonging in good conscience to the [Plan] by

virtue of the Plan’s terms, and the money can clearly be traced to a

particular fund in the defendant’s possession. The fact that Mrs. Werber

holds the funds as a third party does not defeat the [Plan’s] claim. Under

Knudson, Sereboff, and the other authorities cited above, the most

important consideration is not the identity of the defendant, but rather that

the settlement proceeds are still intact, and thus constitute an identifiable

res that can be restored to its rightful recipient.

Id. at 1228–29 (emphasis added).

Most analogous to the present case is Shank, which, in one sentence,

dispatched a trustee’s defense that the plan’s suit to place a constructive trust

on his injured wife’s special needs trust sought legal, not equitable relief. The

court held:

The [plan’s] claim meets Sereboff’s requirements for equitable restitution:

it seeks (1) the specific funds it is owed under the terms of the plan—i.e.,

the money it paid to cover Shank’s medical expenses; (2) from a

specifically identifiable fund that is distinct from the Shanks’ general

assets—i.e., the special needs trust; and (3) that is controlled by defendant

James Shank, the trustee.

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Shank, 500 F.3d at 836. Analogous to Kundson and this case, Mrs. Shank did

not have “possession” of the funds, yet the constructive trust claim was

enforceable against the special needs trust.

Longaberger instructs on the lack of a tracing requirement in connection

with the enforcement of an equitable lien by agreement. There, the ERISA plan

sued a beneficiary and his lawyer for benefits reimbursement after a settlement

had been reached with the tortfeasor.8 Kolt, the attorney, moved for summary

judgment on the basis that the plan sought legal, not equitable relief because the

settlement funds had already been disbursed from his Interest on Lawyer Trust

Accounts (IOLTA) account before the plan filed suit. The Sixth Circuit affirmed

summary judgment for the plan and against the attorney. The plan’s equitable

lien attached when the settlement funds were identified. As to tracing, the

Court noted:

The fact that Kolt chose to disregard Longaberger’s first priority lien

and commingle the settlement funds does not defeat Longaberger’s

claim for equitable relief, because under Sereboff, Longaberger was

free to follow a portion of the settlement funds into Kolt’s hands.

Longaberger, 586 F.3d at 469 (emphasis added).

Longaberger is reminiscent of Bombardier’s holding, even before Sereboff,

that “[t]his pre-existing reimbursement obligation to the [p]lan precluded [the

beneficiary] from contracting away to the law firm that which he did not own

himself, namely, the right to all or any portion of the [sum] that rightfully

belonged to the [p]lan.” Bombardier, 354 F.3d at 357. When the beneficiary

accepted a settlement subject to the plan’s prior lien, he could not transfer the

proceeds, in any of the above cases, free and clear to a third party. Morever, the

8

A judgment for restitution was entered against the beneficiary, who failed to appeal.

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third party’s liability even after the disposition of tainted proceeds was held

remediable in equity by a constructive trust because no strict tracing

requirement existed in this situation.

From Knudson, Sereboff, and applicable circuit case law, the following

conclusions seem inescapable. Larry Griffin had a pre-existing agreement with

ACS to reimburse the Plan for its payments on his behalf in the event of a third-

party recovery. When Larry Griffin signed the Order approving settlement and

the Agreement awarding compensation for his injuries, an equitable lien by

agreement arose for the benefit of ACS. Griffin’s right to receive money from the

settlement was subordinate to the Plan’s lien. Both the annuity and its monthly

payments to the Trust, which accrue to Larry’s benefit, are an identifiable fund

to which the Plan’s lien attaches. The money belongs “in good conscience” to the

Plan to the extent of the costs it incurred. Under § 502(a)(3)(B), appropriate

equitable relief demands the imposition of a constructive trust on the proceeds

of the annuity as they accrue to the Special Needs Trust.9 ACS should be

awarded this relief from the Trust and Willie Griffin, Trustee.10

9

Contrary to Judge Prado’s dissenting opinion, it is irrelevant whether the entire

$50,076.19 is in the Trust’s possession at any particular time. The constructive trust still

attaches to the particular funds owed to ACS as they reach the Trust penny by penny. It

makes little sense to contend that equity would reach the funds if the Trustee had received the

settlement money as a lump sum and then placed it in an annuity of Hartford, but because

Hartford allegedly got the same money first and disburses it to the Trustee, no equitable

remedy is available.

10

Judge Haynes’s dissent places the burden on Congress to provide ERISA plans a

“first money” right to funds recovered by a beneficiary from a third party. In doing so, the

dissent overlooks the fact that § 502(a)(3) serves to enforce the contractual terms of ERISA

plans. See McCutchen, 133 S. Ct. at 1547–49. The plans can create “first money” rights

similar to those provided by statutes.

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As to Larry’s receipt of benefits from the Special Needs Trust, the situation

is less clear. Confronted with an ERISA plan beneficiary who had received, but

dissipated or commingled, disability benefits for which the plan claimed a setoff,

the Seventh Circuit authorized the imposition of a constructive trust. Gutta v.

Standard Select Trust Ins. Plans, 530 F.3d 614, 621 (7th Cir. 2008). The court

relied on Sereboff in holding that Gutta and the plan had formed an equitable

lien by agreement, and because strict tracing is not required, a remedial trust

could be imposed notwithstanding Gutta’s dissipation or commingling of the

fund. Id. at 620–21; see also Cusson v. Liberty Life Assurance Co., 592 F.3d 215,

231 (1st Cir. 2010); Funk v. CIGNA Grp. Ins., 648 F.3d 182, 194–95 (3d Cir.

2011). On the other hand, the facts in Knudson so closely parallel those of the

instant case as to render a different outcome, even an outcome predicated on

Sereboff, arguable. We do not reach a decision on Larry’s liability to the Plan,

because imposing a constructive trust on his Trust affects exactly the same

proceeds and effects the same result as would an equitable remedy against

Larry.

ACS must fail in its attempt to recover from Judith Griffin, however,

because the fiduciaries did not demonstrate that the money she received from

the settlement was attributable to Larry’s injuries rather than her personal

claims arising from the accident.

Several objections have been made against fastening equitable relief on

the Trust. The principal one is that because the Trust receives proceeds from an

annuity purchased by Hartford with the settlement fund, Larry lacks possession

or control of the settlement money and stands in the same position as the

Knudsons. This reasoning is flawed. First, unlike in Knudson, the Trust is a

defendant. The Knudson majority expressly reserved this point. As Justice

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Ginsburg’s dissent forecast, supra at 225, 122 S. Ct. at 721, this distinction

makes a difference, because the Trust administers proceeds directly traceable

to the settlement.

Another objection is that Bombardier prescribed a three part “test” in

which the beneficiary’s possession and control are required at the time of suit.

To the extent Bombardier embraced such a test, it must yield to the higher

subsequent authority of Sereboff, which states that the funds only need to be in

the possession of the defendant. Sereboff, 547 U.S. at 362, 126 S. Ct. at 1874.11

In any event, the Court’s Bombardier description of the factors that led to the

ERISA plan’s successful suit for equitable relief may be viewed as neither a

prescription for liability in all § 502(a)(3)(B) cases nor necessarily a proscription

of other varieties of equitable claims. Bombardier’s result is harmonious with

Sereboff and post-Sereboff case law. See, e.g., Funk, supra; Cusson, supra; Gutta,

supra; Longaberger, supra; but cf. CGI Tech. & Solutions Inc. v. Rose, 683 F.3d

1113, 1118 (9th Cir. 2012) (holding that the ERISA plan was not entitled to

funds held in a trust by the beneficiary’s attorney), petition for cert. filed (Aug.

24, 2012) (No. 12-240).

Additionally, the bolder assertion that Larry “never” had possession or

control of the settlement fund ignores the instant facts and the rationale of

Sereboff. Without Larry’s injury, there would have been no Plan payments for

his medical costs nor a settlement. The settlement documents he signed fully

explain his assent to the disposition of the fund. He had at least constructive

11

Bauhaus is overruled to the extent it is irreconcilable with Sereboff’s requirement

that the funds only need to be in the defendant’s possession.

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possession and control of the fund to facilitate the settlement.12 He would not

have agreed to indemnify the settling parties and Hartford for unpaid medical

bills had he expected to receive nothing from the settlement. Griffin’s attempt

to divorce himself from the origin of the fund and its disposition is no more

persuasive than if he had directed the money to a close relative. But the more

important point, as Bombardier put it, is that he could not give away that which

he did not possess. Sereboff authorized resort to the beneficiaries’ segregated

account only after the Supreme Court concluded the plan had an equitable lien

by agreement that attached at the fund’s creation. So, here, a holding that no

equitable lien by agreement arose would blink reality and elevate form over

substance.

A final objection against holding the Trust liable as the recipient of the

settlement fund or its proceeds is that statutory special needs trusts are

“special.” They are vehicles for the support and care of disabled individuals

whose primary purpose is to maintain the beneficiaries’ eligibility for public

benefits like Medicaid. See 1 Stuart Zimring, Rebecca C. Morgan, Bradley J.

Frigon & Craig C. Reaves, FUNDAMENTALS OF SPECIAL NEEDS TRUSTS, §§ 1.04,

1.05 (Matthew Bender 2012). Texas, like many states, authorizes such trusts.

TEX. PROP. CODE ANN. § 142.005. Nevertheless, although favoring such trusts

in certain respects, see 42 U.S.C. § 1396p(d)(4)(A) (providing that assets held in

a special needs trust do not affect an individual’s eligibility for Medicaid),

Congress did not exclude them as potential defendants from the broad reach of

ERISA § 502(a)(3). Two circuits have held a special needs trust and a similar

conservatorship arrangement liable for equitable restitution of ERISA plan

12

Contrary to the dissenting opinions, we do not find the Trust’s self-serving

declarations dispositive on the issue of possession.

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benefits. See Shank, supra; Horton, supra. And in Knudson, the Court pointedly

noted the absence of the special needs trust as a defendant, while Justice

Ginsburg implied that the trust’s possession of the identifiable settlement fund

could render it liable. There is nothing inconsistent in maintaining special needs

trusts but also insisting they not be funded with proceeds transferred in

violation of a beneficiary’s duty to satisfy an equitable lien by agreement with

his ERISA plan.

Conclusion

Larry Griffin’s Trust could have been funded by an annuity reduced to

satisfy his reimbursement obligation to the Plan. He and his attorneys chose

instead to disregard the Plan’s equitable lien by agreement, as they attempted

to divorce Larry and the Trust from possession and control of the settlement

funds. Against this ruse, ACS asserts an equitable claim for restitution and

seeks the equitable remedy of a constructive trust over the proceeds of the

settlement fund as they come into the Trust’s possession. As we have explained,

this claim is well supported in law. For the foregoing reasons, we REVERSE IN

PART, AFFIRM IN PART, and REMAND for the imposition of equitable relief

upon the Trust through Willie Griffin, Trustee.

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PRADO, Circuit Judge, concurring in part and dissenting in part:

I agree with much of the Court’s analysis regarding the scope of

“appropriate equitable relief” under § 502(a)(3)(B). That analysis, however,

should lead to the denial of ACS’s claims. Instead, the Court crafts an

unrequested remedy in conflict with Supreme Court precedent. Though I concur

in the portion of the judgment affirming the district court’s denial of relief

against Judith Griffin and Larry Griffin, I dissent from the award of relief

against the Trust and Trustee.

Section 502(a)(3)(B) authorizes “those categories of relief that were

typically available in equity.” Mertens v. Hewitt Assocs., 508 U.S. 248, 256

(1993). Elaborating on this construction, the Supreme Court has explained that

two factors must be considered equitable to justify relief under § 502(a)(3)(B):

(1) “the basis for the plaintiff’s claim,” and (2) “the nature of the underlying

remedies sought.” Great–W. Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204,

213 (2002) (alterations omitted); see also Sereboff v. Mid Atl. Med. Servs., Inc.,

547 U.S. 356, 361–63 (2006). The Court made clear in Sereboff that the first

factor is satisfied when an ERISA fiduciary seeks to enforce a plan’s

reimbursement provision because “case law from the days of the divided bench”

would recognize such a claim as enforcing an equitable lien by agreement. 547

U.S. at 363. Thus, that factor does not impede recovery; the basis for ACS’s

claim is equitable.

But ACS must also show that its requested remedy is equitable rather

than legal. “[A] judgment imposing a merely personal liability on the defendant

to pay a sum of money” is a legal remedy. Knudson, 534 U.S. at 213. An

equitable remedy, by contrast, seeks the return of “money or property [that is]

identified as belonging in good conscience to the plaintiff [and can] clearly be

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traced to particular funds or property in the defendant’s possession.” Id.

Though it takes the form of a payment of money, the remedy of restoring to the

plaintiff particular funds in the defendant’s possession is equitable because it is

as much a declaration that the plaintiff is the true owner of the funds as it is a

money judgment. See id. (“A court of equity could then order a defendant to

transfer title (in the case of the constructive trust) or to give a security interest

(in the case of the equitable lien) to a plaintiff who was, in the eyes of equity, the

true owner.”). Thus, for the remedy to lie in equity, “the action generally must

seek not to impose personal liability on the defendant, but to restore to the

plaintiff particular funds or property in the defendant’s possession.” Id. at 214.

If the defendant does not possess the funds, the underlying basis of the equitable

remedy is lost. See, e.g., Amschwand v. Spherion Corp., 505 F.3d 342, 346 (5th

Cir. 2007) (“[T]he sine qua non of restitutionary recovery available under

§ 502(a)(3) is a defendant’s possession of the disputed res.”), implicitly overruled

on other grounds by CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011), as

recognized in Gearlds v. Entergy Servs. Inc., 709 F.3d 448, 450–52 (5th Cir.

2013); id. at 347 (“[P]ossession is the key to awarding equitable restitution in the

form of a constructive trust or equitable lien.”); id. at 347–48 (“A defendant’s

possession of the disputed res is central to the notion of a restitutionary remedy,

which was conceived not to assuage a plaintiff’s loss, but to eliminate a

defendant’s gain.”); Restatement (Third) of Restitution and Unjust Enrichment

§ 55 cmt. h (2011) (“If the claimant cannot show an equitable entitlement to

specific property in the hands of the defendant, the underlying basis of the

remedy is lost.”).

Given this emphasis on possession, it is curious that the Court today

grants relief when none of the named defendants actually possesses the disputed

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funds.1 Reading the Court’s opinion, one gets the impression that the funds

reside in the Trust, waiting to be returned to their rightful owner. In reality,

however, neither the Trust nor the Trustee possesses the settlement funds that

ACS claims an entitlement to. Those funds were instead transferred to Hartford

CEBSCO to fund the annuity. ACS’s summary judgment evidence confirms this

fact. ACS requested that Larry Griffin “[i]dentify all moneys received and/or

disbursed by [the Trust], and state the current balance of funds held by [the

Trust].” Larry responded,

Since the date of the settlement, Mr. Griffin has received $843.00

per month in payments administered by [the Trust]. The [Trust]

does not have and has not had a balance of funds held in it. Rather,

periodic payments are made to it from Hartford Life Insurance

1

The Court’s reliance on Sereboff’s “elimination” of a strict tracing requirement to

justify relief against the Trust is unpersuasive. In Sereboff, the Court explained that “[w]hen

an equitable lien was imposed as restitutionary relief, it was often the case that an asset

belonging to the plaintiff had been improperly acquired by the defendant and exchanged by

him for other property.” 547 U.S. at 364. In this situation equity required that the plaintiff

identify the specific funds that he lost and trace it into the defendant’s funds or assets to

justify relief. Id. But, the Court explained, “an equitable lien sought as a matter of

restitution, and an equitable lien ‘by agreement’ . . . were different species of relief.” Id. at

364–65. A plaintiff enforcing an equitable lien by agreement was not required to identify an

asset he originally possessed. Id. at 365. This is a sensible distinction as the funds subject

to an equitable lien by agreement would not necessarily be in existence at the time the

agreement was made. See id. at 365–67.

All of this discussion, however, was in the context of whether § 502(a)(3)(B) could ever

authorize an action to enforce a reimbursement provision—a question that had previously

divided courts of appeals. See id. at 361. In essence, the Court simply stated that it is not an

obstacle to relief that a plan cannot show that it originally possessed the disputed funds. The

Court did not, however, somehow eliminate Knudson’s requirement that a plaintiff seek

recovery from a particular fund in the defendant’s possession. If it had, the Court would have

had no reason to question whether the defendant in Sereboff possessed the disputed funds.

The Court did, however, analyze the defendant’s possession, ultimately holding that the

plaintiff satisfied the requirement because it sought “to recover a particular fund from the

defendant.” Id. at 363. Here, the Court fails to adequately address how the requirement that

the defendant be in possession of the specified funds has been satisfied as to the Trust.

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Company at the direction of Hartford [CEBSCO] to fund monthly

payments to [the Trust] which were then paid to Mr. Griffin.

(emphasis added). Thus, the only money in the Trust at any given time comes

in the form of monthly payments, which are then funneled directly to Larry.

This is reflected in the Court’s remedy: “appropriate equitable relief demands

the imposition of a constructive trust on the proceeds of the annuity as they

accrue to the Special Needs Trust.” Slip Op. at 15 (emphasis added).

But ACS did not seek to satisfy its claim with a payment plan. Instead,

ACS alleged that Larry and the Trust “now hold or shortly will hold for the

benefit of the Plan proceeds of settlement in an amount no less than $50,076.19”

and requested “[t]hat a constructive trust be impressed upon no less than

$50,076.19 in funds intended to be paid to or received by the Defendants from

any recovery made as compensation for injuries caused by the acts of a third

party.” (emphasis added). Though ACS invoked the label “constructive trust,”

it did not seek the return of any funds in a defendant’s possession, nor did it,

upon learning how the settlement fund was distributed, amend its complaint to

seek the imposition of a constructive trust on the proceeds of the annuity or on

the funds used by Hartford CEBSCO to purchase the annuity. ACS simply

requested “[t]hat judgment be entered against the Defendants in the amount of

no less than $50,076.19.” It is not enough that an equitable remedy can be

conceived of on these facts. ACS must have sought “to restore to [itself]

particular funds or property in the defendant’s possession.” Knudson, 534 U.S.

at 214. Because it did not, the remedy ACS sought was legal. Cf. CIGNA Corp.

v. Amara, 131 S. Ct. 1866, 1878–79 (2011) (“We noted [in Knudson] that the

fiduciary sought to obtain a lien attaching to (or a constructive trust imposed

upon) money that the beneficiary had received from the tort-case defendant. But

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we noted that the money in question was not the particular money that the tort

defendant had paid. And, traditionally speaking, relief that sought a lien or a

constructive trust was legal relief, not equitable relief, unless the funds in

question were particular funds or property in the defendant’s possession.”

(internal quotation marks omitted)).

The Court nonetheless crafts a remedy against the Trust but stops short

of granting the same relief against Larry, reasoning that “the facts in Knudson

so closely parallel those of the instant case as to render a different outcome [for

Larry], even an outcome predicated on Sereboff, arguable.” Slip Op. at 15. This

reluctance reveals the flaw in the Court’s approach. The Court is undoubtedly

correct in seeing a conflict with Knudson because ACS’s claim against Larry is

identical to the claim rejected in Knudson. But why does the claim against the

Trust not suffer the same fate? It is true that ACS included the Trust as a

defendant where the plaintiff in Knudson did not, but that is a hollow distinction

when the Trust is as empty as the beneficiary’s pockets. The reason the outcome

would have been different in Knudson had the Trust been included as a

defendant is that the Trust was the entity that possessed the funds. See

Knudson, 534 U.S. at 214 (“Here, the funds to which petitioners claim an

entitlement under the Plan’s reimbursement provision—the proceeds from the

settlement of respondents’ tort action—are not in respondent’s possession. As

the order of the state court approving the settlement makes clear, the

disbursements from the settlement were paid by two checks, one made payable

to the Special Needs Trust and the other to respondents’ attorney . . . .”).2 As

2

Indeed, most of the cases from other circuits the Court cites involve specified funds

that are intact and in the possession of a defendant. See, e.g., Admin. Comm. for Wal-Mart

Stores, Inc. Assocs. Health & Welfare Plan v. Horton, 513 F.3d 1223, 1228–29 (11th Cir. 2008)

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mentioned above, that is not the case here. Instead, the Trust and Larry are in

the same position: neither possesses the disputed settlement fund, and both

simply receive periodic payments from it. If relief were permissible on these

facts, the Knudson Court could have produced a similar remedy to the one the

Court seeks to impose today. It did not, however, and we should follow that

example.

I appreciate the Court’s desire to provide a remedy in this case. Larry’s

attorney deliberately structured the settlement to avoid the undisputed

obligation to reimburse ACS and, during oral argument, even went so far as to

describe this undertaking as similar to money laundering. But it is not our duty

to do ACS’s work for it. It should be clear by now that a plan seeking to enforce

a reimbursement provision must seek the return of particular funds from

whatever party possesses them. Because ACS did not, I respectfully dissent.

(“In the instant case, the Administrative Committee properly seeks equitable restitution of a

specifically identifiable fund in possession of a defendant. As required by Knudson, the

Administrative Committee asserts title and right to possession of particular property that is

in the hands of Ms. Werber in her capacity as Joshua’s conservator. The money Ms. Werber

holds in trust has been identified as belonging in good conscience to the Administrative

Committee by virtue of the Plan’s terms, and the money can clearly be traced to a particular

fund in the defendant’s possession.” (emphases added)); Admin. Comm. of Wal-Mart Stores,

Inc. Assocs. Health & Welfare Plan v. Shank, 500 F.3d 834, 836 (8th Cir. 2007) (“The

Committee’s claim meets Sereboff’s requirements for equitable restitution: it seeks (1) the

specific funds it is owed under the terms of the plan—i.e., the money it paid to cover Shank’s

medical expenses; (2) from a specifically identifiable fund that is distinct from the Shank’s

general assets—i.e., the special needs trust; and (3) that is controlled by defendant James

Shank, the trustee.” (emphases added)).

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HAYNES, Circuit Judge, joined by REAVLEY, DENNIS, and ELROD, Circuit

Judges, concurring in part and dissenting in part:

I concur with the portion of the judgment affirming the district court’s

denial of relief against Judith Griffin and Larry Griffin.1 I part ways with the

majority opinion’s reversal as to the Larry Griffin 142 Special Needs Trust (the

“Trust”) and its trustee, Willie Earl Griffin (the “Trustee”). This appeal presents

the narrow question of whether an ERISA plan, under § 502(a)(3), may exercise

its subrogation right against a special needs trust established to benefit a

disabled beneficiary. I submit that it cannot. Accordingly, I respectfully dissent

from the majority opinion’s award of relief for the Appellants against the Trust

and Trustee.

I. No Explicit “First Money” Right Exists Under ERISA

The majority opinion’s focus on the existence of an equitable lien by

agreement between the Plan and Larry Griffin overlooks a critical fact:

Congress has not provided ERISA plans a “first money” right to funds recovered

by a beneficiary from a third party. A “first money” right provides a statutory

first right to any funds recovered by beneficiaries from third-party tortfeasors.

Many states have created such a right in the context of workers’ compensation

1

The majority opinion concludes it is not necessary to reach a decision concerning

Larry Griffin because it grants the Appellants the relief they seek against other defendants.

In my view, the Supreme Court’s holding in Great-W. Life & Annuity Insurance v. Knudson

bars recovery against Larry Griffin in any event. See 534 U.S. 204, 214 (2002) (holding that

a plan’s beneficiary—who was entitled to the benefits of a special needs trust—could not be

held liable under § 502(a)(3) because he did not have possession of the funds at issue).

Further, the Appellants have not identified any funds—including any potential payments from

the Trust to Larry Griffin—related to the settlement that are in Larry Griffin’s possession.

Although there is some indication in the record that some monies were paid from the Trust

to Larry Griffin, the Plan failed to develop any facts in this regard or to negate the fact that

the Trust is a special needs trust. The Appellants have failed to state a valid claim against

Larry Griffin.

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benefits. For example, the Texas Labor Code specifically provides that “[t]he net

amount recovered by a claimant in a third-party action shall be used to

reimburse the insurance carrier for benefits, including medical benefits, that

have been paid for the compensable injury.” TEX. LAB. CODE ANN. § 417.002(a);

see also Argonaut Ins. Co. v. Baker, 87 S.W.3d 526, 530 (Tex. 2002) (explaining

that “first money paid [to] or recovered by the employee, or his representatives,

belongs to the compensation carrier paying the compensation, and until it is paid

in full, the employee or his representatives have no right to any funds.”

(alteration in original) (citation and quotation marks omitted)). In addition to

Texas, over half of the states have provided a similar “first money” right to

payments recovered by recipients of workers’ compensation funds.2

With regard to ERISA, Congress could similarly have provided plans with

a “first money” right to any payments from third parties recovered by a plan’s

beneficiaries.3 Instead of providing such relief, however, Congress simply

2

See ALA. CODE § 25-5-11; ALASKA STAT. § 23.30.015; ARIZ. REV. STAT. ANN.

§ 23-1023(D); CAL. LABOR CODE § 3852; COLO. REV. STAT. § 8-41-203; CONN. GEN. STAT.

§ 31-293; 19 DEL. CODE ANN. § 2363; FLA. STAT. § 440.39; HAW. REV. STAT. § 386-8; IDAHO CODE

ANN. § 72-223; IOWA CODE § 85.22; ME. REV. STAT. ANN. tit. 39-A, § 107; MD. CODE ANN. LAB.

& EMPL. § 9-902; MASS. GEN. LAWS ANN. ch. 152, § 15; MISS. CODE ANN. § 71-3-71; NEV. REV.

STAT. § 616C.215; N.H. REV. STAT. ANN. § 281-A:13; N.J. STAT. ANN. § 34:15-40; N.Y. WORKERS’

COMP. LAW § 29; N.D. CENT. CODE § 65-01-09; OR. REV. STAT. § 656.593; R.I. GEN. LAWS

§ 28-35-58; S.D. CODIFIED LAWS § 62-4-39; TENN. CODE ANN. § 50-6-112; VA. CODE ANN.

§ 65.2-309; W. VA. CODE ANN. § 23-2A-1.

3

Indeed, Congress has established such a remedy in other contexts. Specifically,

Congress expressly provides a “first money” right for states to seek reimbursement of medical

expenses paid on behalf of a Medicaid beneficiary from the beneficiary’s tort recovery. See Wos

v. E.M.A. ex rel. Johnson, 133 S. Ct. 1391, 1396 (2013) (“Congress has directed States, in

administering their Medicaid programs, to seek reimbursement for medical expenses incurred

on behalf of beneficiaries who later recover from third-party tortfeasors.”); see also 42 U.S.C.

§ 1396k(a)(1)(A) (eligibility for Medicaid assistance requires an individual “to assign the State

any rights . . . to payment for medical care from any third party”).

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provided a general right to equitable relief to redress violations of or to enforce

a plan’s terms, and specifically did not provide a contractual or statutory right

of recovery like the state workers’ compensation programs. See 29 U.S.C.

§ 1132(a)(3).

Allowing the Plan to reach through a special needs trust under ERISA

§ 502(a)(3)—thereby effectively providing the Plan a “first money” right—would

disrupt the mechanism specifically established by Congress to provide for

disabled individuals. Had Congress intended this consequence, it could have

provided that a plan has a right to recover any medical benefits paid to a

beneficiary from a third-party settlement or provided for specific enforcement of

a contractual “first money” right. It did not, however, and we are not free to

upset this delicate balance struck by Congress, particularly in the ERISA arena.

See Mass. Mut. Life Ins. v. Russell, 473 U.S. 134, 146 (1985) (noting that “[t]he

six carefully integrated civil enforcement provisions found in § 502(a) . . . provide

strong evidence that Congress did not intend to authorize other remedies that

it simply forgot to incorporate expressly . . . [, especially in light of] ERISA’s

interlocking, interrelated, and interdependent remedial scheme, which is in turn

part of a ‘comprehensive and reticulated statute’” (citation omitted)).

Accordingly, the relief the Appellants seek lies with Congress, not this court.

II. No “Possession” So No “Tracing”

The majority opinion posits that the Trust’s argument is one of “strict

tracing” and then rejects such a tracing argument. The majority opinion submits

that the money can be traced from Larry Griffin to the Trust and the Trustee,

thereby making them proper targets for equitable relief. However, this is not a

question of tracing, “strict” or otherwise. The tracing argument is unavailing as

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to the Trust and the Trustee because it does not work as to Larry Griffin—there

is nothing to “trace” from Larry Griffin into the Trust.

The tracing cases cited in the majority opinion address situations where

the funds sought are all or partially within the possession or control of the

defendant-beneficiary but they have been “commingled” or “dissipated” such that

the exact funds are not identifiable. See, e.g., Longaberger Co. v. Kolt, 586 F.3d

459, 469 (6th Cir. 2009) (noting that a lien applied when the funds became

identifiable); Gutta v. Standard Select Ins. Plans, 530 F.3d 614, 621 (7th Cir.

2008) (noting that strict tracing is not required, and a plan may bring a suit even

if the money is not specifically traceable to current assets). The problem with

relying on these cases is that the money was once in the direct possession or

control of the defendant-beneficiary (i.e., there is something to “trace”). Indeed,

in Longaberger the beneficiary had more than “fleeting possession and

control”—the money sat in the IOLTA account for several months and was

therefore directly in the defendant-beneficiary’s constructive possession and

control. 586 F.3d at 462. Here, as recognized in the settlement agreement and

Trust documents, Larry Griffin never had possession of the funds. Because

Knudson precludes a finding that the money could be traced from Larry Griffin

into the Trust, there is nothing to “trace,” strictly or otherwise, in this case. See

534 U.S. at 214. Thus, neither Gutta nor Longaberger counsel in favor of

liability for the Trust or the Trustee.

III. Supreme Court and Fifth Circuit Precedent Do Not Support

Recovery from the Trust

A. Defendant’s Possession or Control

The Supreme Court has not directly considered whether equitable relief

under § 502(a)(3) allows a plan to recover against a special needs trust or its

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trustee. The Court discussed the issue in Knudson where an ERISA plan’s stop-

loss insurer sued the Knudsons under § 502(a)(3) to recover medical benefits it

had paid on the beneficiary’s behalf. Id. at 207. In accordance with the ERISA

plan’s reimbursement provision, the insurer sought to recover from the funds the

beneficiary received from the underlying tortfeasor, which she had placed in a

special needs trust. Id. In denying relief, the Court explained that “for

restitution to lie in equity, the action must seek not to impose personal liability

on the defendant, but to restore to the plaintiff particular funds or property in

the defendant’s possession.” Id. at 214 (emphasis added). Because the

settlement order showed that the funds were paid to a special needs trust and

to the Knudsons’ attorney—neither of whom were named as defendants—the

court concluded that the claim was legal, not equitable. Id. Ultimately, while

Knudson left open the question of “whether petitioners could have obtained

equitable relief against . . . the trustee of the Special Needs Trust,” its reasoning

(focusing on possession) is not supportive of recovery from the Trust. Id. at 220.

The Supreme Court later elaborated on the availability of § 502(a)(3) relief

in Sereboff v. Mid Atlantic Medical Services, 547 U.S. 356 (2006). In Sereboff,

a plan successfully sought reimbursement for medical expenses paid on behalf

of a beneficiary from the proceeds of the beneficiary’s settlement with a

tortfeasor, which were held in an investment account. 547 U.S. at 359, 369. For

its part, Sereboff set forth four significant elements for seeking equitable relief

in § 502(a)(3) claims: (1) the funds must be specifically identified by the plaintiff,

(2) the funds must be in the possession and control of the defendant,

(3) commingling of funds will not prevent recovery, and (4) the plaintiff need not

trace back to the exact same tainted funds and show that they were in existence

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when the equitable lien agreement was entered into. Id. at 363-66.4

Importantly, the simple fact that a plan does not have to establish that the

defendants possessed the original funds in question does not exempt the plan

from having to show that the defendants actually possess the identified funds

subject to the lien. Id. at 362-63.5

Our court, following Knudson, declined to expand the scope of relief for

ERISA plans under alternative theories of recovery, such as unjust enrichment,

because “ERISA’s civil enforcement provision specifically and clearly addresses

[the scope of available relief], thereby eschewing any possibility that a ‘gap’

exists in the statutory text that would permit us to employ federal common law

to create [remedies not provided for in the statute].” Coop. Benefit Adm’rs, Inc.

v. Ogden, 367 F.3d 323, 330 (5th Cir. 2004). Instead, we established a three-part

test for determining whether the relief sought is equitable and, therefore,

available under ERISA. See Bombardier Aerospace Emp. Welfare Benefit Plan

v. Ferrer, Poirot & Wansbrough, 354 F.3d 348, 356 (5th Cir. 2003). It asks

whether the plan seeks “to recover funds (1) that are specifically identifiable, (2)

that belong in good conscience to the [p]lan, and (3) that are within the

4

The majority opinion notes that “[p]articularly significant here is [Sereboff’s] rejection

of the [beneficiaries’] argument that [the plan’s] claim was not equitable because equitable

restitution requires a strict tracing of the tainted assets.” Slip Op. at 11. Larry Griffin never

had possession of the funds. Therefore, as discussed above, “strict” tracing is not the issue

because there is nothing to trace.

5

The Supreme Court recently re-examined Sereboff in US Airways, Inc. v. McCutchen,

133 S. Ct. 1537, 1545-47 (2013). That case addressed neither the issue of possession nor a

special needs trust. Instead, it holds that equitable defenses that are contrary to the terms

of the ERISA plan cannot defeat the plan’s right to equitable reimbursement, a matter not at

issue here. See id. at 1548. The opinion’s only mention of possession is as follows: “The suit

requested an equitable lien on $66,866–the $41,500 in the escrow account [established by

McCutchen’s attorney specifically in connection with the reimbursement lawsuit] and $25,366

more in McCutcheon’s possession.” Id. at 1543.

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possession and control of the defendant beneficiary.” Id. (emphasis added). In

Bombardier, the plan sued one of its beneficiaries and the beneficiary’s law

firm—which held the proceeds from a third-party tort suit in trust on behalf of

the beneficiary—to recover for medical expenses paid on the beneficiary’s behalf.

Id. at 350. First, the court concluded that the law firm was a proper defendant

because “Congress did not see fit . . . to include a . . . limitation on the set of

proper defendants to a § 502(a)(3) action.” Id. at 354. Next, the court concluded

that the suit was equitable in nature because all three elements of the test were

met. Id. at 356. The plan sought (1) identifiable funds (2) that belonged in good

conscience to the plan under the reimbursement provision. Id. The third

element—that the beneficiary have control over and possession of the disputed

funds—was met because the “Plan’s participant . . . ha[d] ultimate control over,

and thus constructive possession of, the disputed funds” held in trust by his

attorney on his behalf. Id. Because the “Plan [did] not seek to impose personal

liability on either [the beneficiary] or his counsel,” the court concluded “that

§ 502(a)(3) authorize[d] the Plan’s claim for relief.” Id. at 358.

In Bombardier, we distinguished our prior opinion in Bauhaus USA, Inc.

v. Copeland, 292 F.3d 439 (5th Cir. 2002), in which we held that funds deposited

in a state court’s registry in anticipation of an interpleader action were not in

the defendant-beneficiary’s actual or constructive possession or control.

Bombardier, 354 F.3d at 356 (discussing Bauhaus, 292 F.3d at 445). Because

the funds in Bauhaus were in the court’s registry and thus outside of the

defendant’s control, we concluded that the plan was trying to impose personal

liability on the defendant-beneficiary, and the action could not proceed under

§ 502(a)(3). Bauhaus, 292 F.3d at 444-45. The Bombardier court also

distinguished Knudson, noting in that case, “the funds had been placed in a

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Special Needs Trust, as mandated by California law, to provide for the

beneficiary’s care, and the trustee was totally independent of the plan

beneficiary.” Bombardier, 354 F.3d at 356. Under Bauhaus and Bombardier,

the panel correctly ruled that Larry Griffin did not have possession or

“constructive possession” (and certainly not “control”) of the funds in the Trust.

In sum, Bombardier and Sereboff do not support a finding that the Trust

and Trustee can be held liable.6 In those cases, the money was actually in the

defendant-beneficiary’s possession or control. Unlike here, the defendant-

beneficiary in Bombardier had constructive possession and actual control of the

settlement funds—a portion of which were placed in his lawyer’s IOLTA account.

See 354 F.3d at 350-51. Similarly, in Sereboff, the funds were held in an

investment account that was actually controlled by the plan’s beneficiary. 547

U.S. at 360. Thus, the facts of Sereboff and Bombardier are distinguishable

from this case.

B. Failure to Join Hartford

An additional basis for concluding that the Appellants’ claim fails here

rests on their failure to join Hartford CEBSCO as a defendant. Under Supreme

Court and Fifth Circuit precedent, the Appellants must demonstrate that both

the basis and nature of their claim are equitable. See Knudson, 534 U.S. at 213

(“[W]hether [a remedy] is legal or equitable depends on the basis for [the

plaintiff’s] claim and the nature of the underlying remedies sought.” (alteration

in original) (emphasis added) (citation and internal quotation marks omitted));

see also Sereboff, 547 U.S. at 363. Although the Appellants’ basis for relief—a

constructive trust—is equitable, the nature of the Appellants’ relief does not lie

6

The majority opinion implicitly overrules the third prong of the Bombardier test. I

submit that this overruling is error as discussed more fully below.

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in equity because Hartford CEBSCO—the entity that possesses and controls the

annuity containing the funds at issue—was not joined as a defendant. Indeed,

the Appellants’ remedy is legal in nature because it effectively seeks to impose

personal liability on Larry Griffin, the Trust, and the Trustee “in an amount no

less than $50,076.19,” regardless of the fact that none of these defendants has

actual or constructive possession of the settlement funds. See Knudson, 534 U.S.

at 214 (“The kind of restitution [sought], therefore, is not equitable—the

imposition of a constructive trust or equitable lien on particular property—but

legal—the imposition of personal liability for the benefits . . . conferred upon [the

beneficiaries].” (emphasis added)); see also Restatement (Third) of Restitution

and Unjust Enrichment § 55 cmt. h (2011) (“If the claimant cannot show an

equitable entitlement to specific property in the hands of the defendant, the

underlying basis of the remedy is lost.”). Therefore, the failure to join Hartford

CEBSCO as a defendant precludes the Appellants from establishing the

equitable nature of the relief they seek because they cannot demonstrate that

any of the named defendants has possession of the settlement funds.

C. Summary

In the end, Bombadier’s emphasis on a defendant-beneficiary’s actual or

constructive possession should continue to be the law of this circuit because it

appropriately balances the availability of equitable relief for ERISA plans with

the important protections afforded to special needs trusts by Congress and the

states as a means of providing for disabled individuals. Indeed, continuing to

follow our approach in Bombadier would align us with many of our sister

circuits, which emphasize the importance of the defendant-beneficiary or

defendant-conservator currently having either actual or constructive possession

of the funds at issue. See, e.g., Hall v. Liberty Life Assur. Co. of Boston, 595 F.3d

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270, 275 (6th Cir. 2010) (concluding that a plan seeking reimbursement could

not impose an equitable lien on a beneficiary’s future social security disability

benefits because the plan had no claim to the benefits until they were in the

beneficiary’s possession); Longaberger, 586 F.3d at 469 (funds at issue were held

by beneficiary’s attorney in an IOLTA account thereby giving defendant-

beneficiary constructive possession and defendant-attorney actual possession of

funds); Admin. Comm. for the Wal-Mart Stores, Inc. Assocs.’ Health & Welfare

Plan v. Horton, 513 F.3d 1223, 1228-29 (11th Cir. 2008) (disputed funds held in

trust account over which defendant-conservator had possession and control);

Dillard’s Inc. v. Liberty Life Ins., 456 F.3d 894, 901 (8th Cir. 2006) (defendant-

beneficiary had received disputed funds from Social Security Administration);

Wal-Mart Stores, Inc. Assocs.’ Health & Welfare Plan v. Wells, 213 F.3d 398, 401

(7th Cir. 2000) (defendant had constructive possession of funds held by

attorney); see also Cusson v. Liberty Life Assurance Co. of Boston, 592 F.3d 215,

223 (5th Cir. 2010) (defendant-beneficiary had possession of the social security

disability benefit funds sought by the plan).

IV. Special Needs Trusts

Finally, the majority opinion fails to account for a significant aspect of this

case. The need to give effect to § 502(a)(3)’s provision of equitable relief for

ERISA plans must be balanced with the need to give effect to the protections

afforded to special needs trusts by Congress and the states. This is not a case

in which the plan seeks to recover from only the beneficiary, see Knudson, 534

U.S. at 214, a lawyer’s IOLTA account, see Longaberger, 586 F.3d at 469, a state

court’s registry, see Bauhaus, 292 F.3d at 441, a court-sanctioned investment

account, see Sereboff, 547 U.S. at 360, or any other usual source. Instead, the

Appellants seek to recover, inter alia, against a special category of

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trusts—special needs trusts. Permitting such recovery requires disregarding the

special nature of these trusts, which the majority opinion does not consider apart

from a short discussion at the end of the opinion. Giving special needs trusts

appropriate consideration, however, leads to the inescapable conclusion that we

must respect the protections afforded to them by Congress and the states.

A special needs trust is created for a disabled individual to allow a trustee

to manage assets for the benefit of a disabled person. See 1 STUART D. ZIMRING,

REBECCA C. MORGAN, BRADLEY J. FRIGON & CRAIG C. REAVES, FUNDAMENTALS OF

SPECIAL NEEDS TRUSTS, § 1.04 (Matthew Bender ed., 2012). It has very specific

requirements concerning its establishment, it is not available to everyone (for

example, the beneficiary must be “disabled” under the definition provided in the

Social Security Act), and disbursements from the trust may only be used for

limited and specific purposes. See, e.g., 42 U.S.C. § 1396p(d)(4)(A) (discussing

requirements of a special needs trust to ensure the assets it contains are

excluded when determining a beneficiary’s Medicaid eligibility); TEX. PROP. CODE

ANN. § 142.005(b)(2) (explaining that the trust’s assets can only be used for

expenses “reasonably necessary for the health, education, support, or

maintenance of the beneficiary”). Also, the trust may not be established by the

individual with the disability, but instead must be “established for the benefit

of such individual by a parent, grandparent, legal guardian of the individual, or

a court . . . .” See 42 U.S.C. § 1396p(d)(4)(A). Further, it is critical that the

beneficiary does not directly receive the money in hand—it must be paid to the

trust for the use and benefit of the beneficiary. See ZIMRING ET AL., supra, § 1.05;

see also TEX. PROP. CODE ANN. § 142.005(a) (providing that a court may direct

the proceeds of a beneficiary’s judgment to be paid directly to a special needs

trust). These requirements for establishing and maintaining special needs

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trusts ensure that they do not operate as a conduit through which to pass money

to the beneficiary or to harbor tainted assets.

The primary purpose of special needs trusts is to allow beneficiaries to

maintain eligibility for public benefits—such as Medicaid—while supplementing

those benefits so that the beneficiary enjoys a better quality of life. See ZIMRING

ET AL., supra, § 1.05. Indeed, Congress and the states sanction the use of special

needs trusts as a lawful means of protecting assets to achieve this purpose. See

42 U.S.C. § 1396p(d)(4)(A); TEX. PROP. CODE ANN . § 142.005(g) (providing that

the court may structure the terms of a trust as “necessary or appropriate to

allow the beneficiary to be eligible to receive public benefits or assistance under

a state or federal program”). This result can be achieved because a special needs

trust is “irrevocable and . . . there are limits on the source and use of funds,

otherwise the trust principal would be considered available to the beneficiary,

and the beneficiary would be disqualified from public benefits.” See ZIMRING ET

AL., supra, § 1.05.

Here, regardless of Larry Griffin’s motive, a special needs trust has been

created. The Appellants do not dispute that Larry Griffin was adjudicated by

the Texas courts to be disabled, and they do not dispute that a special needs

trust was established pursuant to section 142.005 of the Texas Property Code

and 42 U.S.C. § 1396p(d)(4)(A).7 The Appellants also never contend that the

Trust is merely a means to pass the money from the annuity directly into Larry

Griffin’s hands. Furthermore, the Trust agreement provides that the Trust was

established at the specific direction of the Court, and therefore the assets

7

Before the panel, the Appellants argued that Chapter 142 of the Texas Property Code

was preempted by ERISA, but they mention this argument only in passing before the en banc

court. In any event, special needs trusts are expressly condoned by federal law.

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directed to this trust by the Court should not be deemed to have been or to be

available to the Beneficiary. This trust is established under the jurisdiction, at

the direction, and with the specific approval of the Court without transfer of

ownership of the settlement proceeds to the Beneficiary or his legal guardians.

(emphasis added). Accordingly, every indication is that the money was never in

Larry Griffin’s possession but was passed directly to the Trust and is now used

to care for Larry Griffin, who is disabled. Larry Griffin cannot decide when and

how the money will be spent on his behalf because the Trustee, not Larry

Griffin, has control of the money and may only use it for limited purposes. The

fact that the beneficiary of a special needs trust explicitly does not have the right

to either possession or control is crucial because it preserves his right to public

benefits. See 42 U.S.C. § 1396p(d) (providing that assets contained in a special

needs trust shall be excluded when determining eligibility for public benefits);

see also ZIMRING ET AL., supra, § 1.05.

If Larry Griffin had unfettered access to the money from the annuity, the

Appellants could recover the money from Larry Griffin or the Trust as Larry

Griffin would have possession and the right to control the money. However,

under the law of special needs trusts, the Trust is structured in such a way that

the funds are used for Larry Griffin’s benefit, but Larry Griffin is not in

possession of or control over the funds. Accordingly, in my view, this lack of

possession renders the Appellants’ request for equitable relief under § 502(a)(3)

inappropriate.

Furthermore, the two decisions from our sister circuits supporting the

majority opinion’s holding do not give adequate consideration to the unique

nature of special needs trusts. For example, the Eleventh Circuit in Horton

provided that a plan could seek equitable relief against a beneficiary in her

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capacity as the trustee of her son’s special needs trust.8 513 F.3d at 1228-29

(noting that the plan has identified “particular property that is in the hands of

[the beneficiary] in her capacity as . . . conservator” of her son’s special needs

trust). Similar to the majority opinion—which focuses on possession and tracing

requirements—the court in Horton did not address the unique nature of special

needs trusts, but instead focused on “whether a benefit plan could use § 502(a)(3)

to recover a specifically identified fund in the possession of a third party, such

as a trustee or conservator, by suing the third party directly.” Id. at 1227. The

general nature of Horton’s approach is illustrated by the court’s statement that

a suit in equity may be maintained against a third party when “‘property is held

by one person upon a constructive trust for another, and the former transfers the

property to a third person who is not a bona fide purchaser[.]’” Id. at 1228

(quoting RESTATEMENT OF RESTITUTION §160 cmt. g (1937)). While this may be

the standard in other contexts, I note that it must be applied in a manner that

accounts for the protections afforded to special needs trusts.9

Moreover, the Eighth Circuit’s opinion in Administrative Committee of

Wal-Mart Stores, Inc. Associates’ Health & Welfare Plan v. Shank, 500 F.3d 834,

836 (8th Cir. 2007), provides minimal guidance in this matter. Indeed, Shank

addresses facts similar to those presented by this appeal and determines that

8

The beneficiary’s son was a “covered person” under the ERISA plan and the plan

sought reimbursement for medical expenses paid on behalf of the beneficiary’s son after he

recovered money from the tortfeasor and placed it in a special needs trust. Horton, 513 F.3d

at 1224, 1229.

9

Horton is also distinguishable because the beneficiary had possession of the funds at

issue in her capacity as the trustee of the special needs trust. 513 F.3d at 1224 n.1 (noting

that the beneficiary, “in her capacity as conservator, acts as the equivalent of a trustee who

possesses the funds on [her son’s] behalf”). Accordingly, unlike here where a non-beneficiary

serves as the Trustee, the plan in Horton could establish defendant-beneficiary possession.

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equitable relief under § 502(a)(3) could lie against a beneficiary’s husband in his

capacity as trustee of a special needs trust. See id. at 836-37. Nonetheless, the

court’s mention of the special needs nature of the trust at issue was completely

devoid of any analysis of the special considerations attendant to such trusts and

Congress’s express approval of them. The court provided only a brief discussion

of whether the relief sought was equitable, see id. at 836, and instead focused on

whether “appropriate” relief under ERISA constituted a full or pro rata

reimbursement of funds paid by the plan, see id. at 836-40. Accordingly,

although this case facially supports the majority opinion’s conclusion that

recovery can lie against the Trust and Trustee, the lack of consideration it gives

to special needs trusts undercuts its value in our analysis.

As explained above, this way of structuring a trust is sanctioned by

Congress and the State of Texas as a way to provide a disabled individual with

additional benefits while also permitting the individual to retain access to public

benefits such as Medicaid. See, e.g., 42 U.S.C. § 1396p(d) (providing that the

calculation of an individual’s eligibility for public benefits should not include

assets held in a special needs trust); TEX. PROP. CODE ANN. § 142.005(g). It is not

a sham, and the Appellants have not contended that it is or that it fails the test

for a special needs trust. In sum, the Trust represents a congressionally

sanctioned means of providing Larry Griffin with additional benefits without

interfering with his entitlement to public benefits.10 The majority opinion’s

10

The value of the Trust demonstrates it has a purpose well beyond any

reimbursement issue. The annuity holding the funds against which the Appellants seek

equitable relief has a value of approximately $148,000, which is more than the approximately

$50,000 sought in reimbursement. Putting the reimbursement issue aside, the

Trust—through the annuity—holds almost $100,000 in assets that lie completely outside of

Larry Griffin’s possession and control and that will be used solely by the Trustee for Larry’s

benefit. This demonstrates that the Trust has a broader purpose than merely protecting the

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approach ignores this key distinction and raises the specter that all special

needs trusts will be available for “equitable” relief to various creditors of

beneficiaries of such trusts. Such a drastic approach should come from

Congress, not the courts. From the majority opinion’s contrary conclusion, I

respectfully dissent.

funds from the Appellants’ attempts to seek equitable relief.

41