This week, the United States District Court for the Northern District of California, in Aetna Life Ins. Co. v. Kohler, No. C 11-0439, 2011 WL 1990658 (N.D. Cal. May 23, 2011), refused to dismiss a subrogation action in which an ERISA Plan sought first-dollar reimbursement against settlement proceeds that had been deposited in a state court interpleader proceeding.
By way of background, the Plan paid out $147,986.76 to cover a plan participant's medical injuries following a traffic accident.
The participant brought an action against the tortfeasor, and thereafter entered into a settlement agreement whereby the participant would receive $7,250.00 and his spouse would receive $137,750.00, for a total of $145,000.00.
The participant advised the Plan that he and his spouse had reached a settlement with the tortfeasor, and that, based on the amount at issue, the Plan likely would not recover any reimbursement. The Plan filed a Federal Court action to enforce its subrogation rights. The participant and his spouse, together with the tortfeasor, then filed an interpleader in action in state court, depositing the settlement funds.
In response to the Federal Court complaint, the participant and his spouse (the "Defendants") moved to dismiss the Plan's Federal action, and contended, inter alia, that (1) the Plan was not entitled to equitable relief because the Plan sought to exhaust all settlement proceeds; (2) the Plan may not recover from the participant's wife because she is not a "Covered Person" within the meaning of the Plan; and (3) dismissal under the Colorado River doctrine was warranted because the disputed settlement amount was deposited in the state court registry.
The court explained that the make-whole doctrine was a gap-filling doctrine and not an equitable defense. The court cited the Plan's "First-Priority Claim" provision, which entitled the Plan to "full reimbursement on a first-dollar basis, even if such payment to the pan will result in a recovery to the Covered Person which is insufficient to make the Covered Person whole or to compensate the Covered Person in part or in whole for the damages sustained." Accordingly, the Court rejected the Defendants' assertion the the Plan's attempt to exhaust the settlement proceeds was not equitable.
As to the Plan's recovery against the participant's spouse, the Court stated that the "Plan provides that a 'lien may be enforced against any party who possesses the funds or process representing the amount of benefits paid by the plan including, but not limited to, the Covered Person, . . . and/or any other source possessing funds representing the amount of benefits paid by the plan." Id. at *5.
Finally, as to the Defendants' attempt to dismiss in favor of the state court interpleader, the Federal Court stated that "federal district courts have 'virtually unflagging obligation' to exercise their jurisdiction' . . and should only invoke a stay or dismissal under the Colorado River doctrine in 'exceptional circumstances.' Here, the Court noted that the Defendants had failed to present such exceptional circumstances, and noted that the Defendants sought to interplead the funds in state court "only after" the Plan filed the Federal court action.
You may review a copy of the Court's decision here.