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I am indebted to Roy Harmon, who writes Health Plan Law, for his explanation of the basis for the Fourth Circuit’s opinion in Martine v. Hertz Corp., 103 F.3d 118 (4th Cir. 1996), which held that West Virginia’s Public Employees Insurance Agency (PEIA) had no right of subrogation against a verdict obtained by its insured for personal injuries.

In his dissent in Turner ex rel. Turner v. Turner, Justice Larry Starcher had suggested that Martine held that ERISA does not preempt West Virginia’s made-whole doctrine.

As I noted in my post about the dissent, the Fourth Circuit did not explicitly hold that ERISA does not preempt the made-whole doctrine in West Virginia.  But, as Roy explained in a post at ERISABoard, the PEIA is a governmental plan and therefore exempt from coverage under ERISA.  So, the Martine Court would have had no need to discuss, much less apply, ERISA or whether ERISA barred the made-whole doctrine. 

Although Justice Starcher disagrees with the majority’s decision in Turner, while conceding that it was "technically correct," his opinion illustrates what happens often when state courts delve into ERISA issues.

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I’ve been writing quite a bit lately about cases dealing with ERISA, and the dissent filed by Justice Larry Starcher in Turner ex rel. Turner v. Turner, 2008 WL 5449773 (December 15, 2008), provides an opportunity to discuss a potentially significant issue.   

As you may recall, in Turner, which I wrote about last week, the Supreme Court of Appeals of West Virginia held that a subrogation action by an ERISA plan fiduciary or administrator has to be filed in federal court and cannot be adjudicated as part of an underlying personal injury action.

In his dissent, Justice Starcher, who left the Court on December 31, 2008 after he did not run for reelection, questioned whether the “made-whole” doctrine would preclude City Hospital from recovering for the medical expenses paid on behalf of its employee’s children.  Justice Starcher wrote that, “[i]n West Virginia, the ‘made whole doctrine’ stops an insurance company from gobbling up a plaintiff’s entire settlement under the rubric of ‘subrogation’ if the settlement is insufficient to fully compensate the plaintiff’s past and future losses.”

He then went on to write that, “[m]ost importantly, a per curiam opinion from the Fourth Circuit Court of Appeals indicates that West Virginia’s made whole doctrine is not preempted by ERISA.  See Martine v. Hertz Corp., 103 F.3d 118 (4th Cir. 1996)."

Unfortunately, the dissent in Turner does not expand on that issue. 

In  Martine, USB, the claims administrator for the West Virginia Public Employees Insurance Agency (PEIA), appealed the dismissal of its subrogation claim created by PEIA's payment of more than $124,000 in medical expenses incurred by Martine, who had been involved in an accident with another driver who had rented a car from Hertz. 

USB moved to intervene in the action, which the district court permitted.  Following a four-day trial, but before the jury announced its verdict, Martine moved to dismiss USB's complaint on the grounds that he would not be made whole because the tortfeasor had insufficient assets to satisfy a probable judgment. 

The jury's verdict of $650,000 included $36,800 for past medical expenses and $5,000 for future medical bills.  In granting Martine's motion, the district court relied on the Supreme Court of Appeals of West Virginia's decision in Kittle v. Icard, 405 S.E.2d 456 (W. Va. 1991) and concluded that because Martine would not be made whole by the amount he could collect, USB was not entitled to subrogation.  USB appealed.

The Fourth Circuit noted initially that the West Virginia Code gave PEIA a statutory right to subrogation, and that the Supreme Court of Appeals had held that subrogation clauses in insurance contracts are valid and enforceable.

USB argued that Kittle did not apply because its right to subrogation was contractual, while the insurer in Kittle had only a statutory right, and cited a case from the Tenth Circuit Court of Appeals that rejected the made-whole doctrine when an insurance contract unambiguously provided the insurer with subrogation rights if its insured obtained a settlement or verdict.

The Fourth Circuit disagreed because "Kittle defines subrogation in such a way as to require that equity be considered whenever an insurer invokes its right."   Here is the Court's explanation for why equitable principles did not entitle USB to subrogation at least in the amount awarded by the jury for medical expenses:

The district court determined that the West Virginia Supreme Court's pronouncements in Kittle and [State ex rel. Allstate Ins. Co. v.] Karl, supra, defined equity as per se denying insurers any recovery when insureds were not fully compensated by a settlement or judgment.  And, noting that Martine received less than one-sixth of the amount to which he was entitled and would be further undercompensated for his injuries if USB were entitled to subrogation the district court held that even aside from any per se rule, the equities favor Martine over USB.  We find no abuse of discretion or legal error in that conclusion.

This is an interesting issue.  Martine does not explicitly hold that ERISA does not preempt the made-whole doctrine in West Virginia.  But the opinion did address the presence of subrogation language in insurance policies, which would be akin to the subrogation language or anti-made-whole doctrine language present in a summary plan description, such as City Hospital's in Turner, and found that Kittle's definition of subrogation required equity to be considered.  

I would like to know if anyone has relied on Kittle or Martine successfully to defeat a health plan's subrogation claim.  The majority opinion in Turner does not cite either case -- but the opinion did not seem interested in expanding the Turners' options for challenging City Hospital's subrogation interest.  

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I hope everyone is enjoying their holidays.  I haven’t written in the past few weeks due to a death in my family, but I’m back in my office and resuming work, including catching up on decisions and developments.  The Supreme Court of Appeals of West Virginia’s Fall Term ended on December 10, so I’ll be writing about some of its opinions in the next few days.  By the way, the Court’s Spring Term starts on January 13, with the first argument docket that day.

The first opinion I want to write about is Turner ex rel. Turner v. Turner, 2008 WL 5273080 (December 15, 2008), a 4-1 decision by Chief Justice Elliott E. "Spike" Maynard, which was one of the last opinions issued for the term.

Turner is unique because it’s a state court appellate decision dealing with ERISA, which ordinarily and almost exclusively is adjudicated in federal court. 

In Turner, City Hospital, Inc. moved to intervene in the settlement of personal injury claims asserted on behalf of the minor children of City Hospital’s employee, Diane Turner.  City Hospital's health plan had paid most of the children’s medical expenses.  The settlement provided that Diane Turner agreed to waive her interest in the settlements and settle the claims within policy limits as long as the Circuit Court of Berkeley County precluded City Hospital from asserting a lien on the settlement proceeds that was inconsistent with West Virginia law.

Not surprisingly, City Hospital objected to the settlements and challenged the circuit court’s jurisdiction to consider the petitions for approval of the settlements because ERISA governed City Hospital’s health plan's claims.

The circuit court concluded that it had jurisdiction to approve or reject the proposed settlements, but did not have jurisdiction to decide the issue of City Hospital’s lien, based on its request for what was essentially equitable relief, which was governed by 29 U.S.C. § 1132(e)(1).  Diane Turner appealed that ruling on behalf of herself and her minor children.

There was a preliminary issue of whether the circuit court’s order was a final order for purposes of prosecuting an appeal, which is not germane to the resolution of the ERISA issue.  The Supreme Court concluded that the order “had the nature and effect of ending the litigation between the appellants and City Hospital with regard to City Hospital’s reimbursement/subrogation claim[,]” and could be appealed.

The more significant issue, as identified by the Court, was “whether the circuit court properly determined that it does not have jurisdiction pursuant to ERISA to decide, limit, or enforce City Hospital’s employee health plan’s subrogation rights to the proposed minor settlements submitted on behalf of Dylan, Rhiannon, and Ronan Turner.”

The Court first distinguished between ordinary preemption and complete preemption.  Because the circuit court did not find that the issue was preempted under § 1144(a) (ordinary preemption), the Court analyzed the issue under § 1132(e)(1) and controlling federal precedents.  The Court concluded:

Based on the clear language of § 1132(a)(3) in conjunction with § 1132(e)(1), and the Supreme Court’s application of these provisions, this Court now holds that an action by a fiduciary or administrator of a plan under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq., to obtain appropriate equitable relief to enforce the terms the ERISA plan pursuant to 29 U.S.C. § 1132(a)(3), must be brought in the federal courts of the United States as provided for in 29 U.S.C. § 1132(e)(1).

The Court’s holding, which was incorporated in new Syllabus Point 3, left the remaining issue of whether City Hospital’s claim had to be brought under § 1132(a)(3).  The Court looked to the Supreme Court's decision in Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), which presented a situation similar to Turner, i.e., "a fiduciary seeking reimbursements for amounts an ERISA health plan paid for the medical expenses of beneficiaries, who were injured in an automobile accident, from proceeds of the beneficiaries' settlement with the tortfeasors."

Guided by Sereboff, the Court found that the relief sought by City Hospital -- reimbursement for expenses paid on behalf of its plan's beneficiaries -- is the type provided for in § 1132(a)(3), which meant that a claim in state court arising from City Hospital's plan's subrogation/reimbursement would duplicate a § 1132(a)(3) action, which must be brought in federal court.

The Court did not devote any consideration to the Turners' arguments that the circuit court had jurisdiction, with one exception: the Turners asserted that, assuming approval of the settlements, the funds would not be paid to Diane Turner, but would be held in trust for her children.  Thus, the funds would never be available to her and could not be the subject of a claim by City Hospital under § 1132(a)(3).

The Court noted that City Hospital acknowledged that it could not seek proceeds that had not been paid to Diane Turner, but found that City Hospital's request that the circuit court preserve the funds in a separate account while City Hospital pursued an action in federal court addressed that concern.  Plus, West Virginia Code § 44-10-14(g) would prevent settlement funds from being transferred to minors' trust accounts in a way that liens, such as City Hospital's, would not be satisfied.

I question, as did Rob Hoskins at ERISABoard, why City Hospital didn't go ahead and file an action in federal court in order to assert its lien(s) against the Turner children's settlement proceeds, which may have mooted some or all of this action.  I also agree with him that in certain circumstances, a plan or its fiduciary can have state law claims that are not preempted.  But Turner makes clear that a plan fiduciary's action to obtain equitable relief under 29 U.S.C. § 1132(a)(3) must be filed in federal court.

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