Bombardier Aerospace v. Ferrer, Poirot ( 2004 )

United States Court of Appeals
Fifth Circuit
REVISED JANUARY 5, 2004
F I L E D
IN THE UNITED STATES COURT OF APPEALS December 17, 2003
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
_____________________ Clerk
No. 03-10195
_____________________
BOMBARDIER AEROSPACE EMPLOYEE
WELFARE BENEFITS PLAN,
Plaintiff - Appellee,
versus
FERRER, POIROT AND WANSBROUGH; ET ALS,
Defendants,
FERRER, POIROT AND WANSBROUGH;
STEVEN MESTEMACHER,
Defendants - Appellants.
---------------------
Appeal from the United States District Court for the Northern
District of Texas, Dallas Division
---------------------
Before JOLLY and WIENER, Circuit Judges and WALTER,* District Judge.
WIENER, Circuit Judge:
Defendants-Appellants Ferrer, Poirot & Wansbrough, P.C. (the “law
firm”) and Steven Mestemacher appeal the district court’s grant of the
summary judgment motion of Plaintiff-Appellee Bombardier Aerospace
Employee Welfare Benefits Plan (the “Plan”), an ERISA-governed, self-
funded employee welfare benefit plan, to enforce the terms of the
Plan’s reimbursement provision against the law firm and Mestemacher.
They also appeal the district court’s denial of their respective
motions to dismiss the Plan’s action for lack of subject matter
*
District Judge for the Western District of Louisiana,
sitting by designation.
jurisdiction and for failure to state a claim, as well as its denial
of their joint motion for summary judgment. We affirm.
I. FACTS AND PROCEEDINGS
A. Background
The Plan was established by Bombardier Aerospace to provide
managed care services for its employees and their dependents.1
Mestemacher was an employee of Bombardier Aerospace and a participant
in the Plan. After he was injured in an automobile accident, he
sought $13,643.63 from the Plan for medical expenses. The Plan paid
Mestemacher’s medical expenses in that amount, subject to a
“Reduction, Reimbursement and Subrogation” provision contained in the
Plan’s documents. That provision gave the Plan “the right to recover
or subrogate 100% of the Benefits paid...by the Plan for Covered
Persons to the extent of...[a]ny judgment, settlement, or payment made
or to be made, because of an accident, including but not limited to
insurance.” The documents further specified that “attorneys fees and
court costs are the responsibility of the participant, not the Plan.”
Mestemacher retained the law firm on a one-third contingent fee
basis to seek recovery from the tortfeasor responsible for the
automobile accident. After negotiating a $65,000 settlement, the law
firm received the settlement payment on Mestemacher’s behalf and
placed the funds in a trust account at Bank of America in the law
firm’s name.
1
See 29 U.S.C. § 1002(1).
2
B. The Instant Litigation
This action arises out of the Plan’s efforts to obtain
reimbursement for the funds advanced to Mestemacher. The Plan filed
suit in district court against the law firm, Mestemacher, and Bank of
America before Mestemacher’s settlement funds were ever disbursed to
him from the law firm’s trust account at Bank of America.2 In its
efforts to recover the funds that it had advanced to Mestemacher for
medical expenses, the Plan sought (1) the imposition of a constructive
trust over $13,643.63 of the funds being held for Mestemacher in the
law firm’s trust account, (2) a declaration that the Plan is entitled
to ownership of that amount out of the settlement funds that remained
in the trust account, (3) an order directing the law firm and Bank of
America to execute any instruments necessary to transfer legal title
of the “converted property” to the Plan, and (4) a temporary
restraining order and a preliminary injunction prohibiting the law
firm from disbursing the share of the settlement funds claimed by the
Plan.
In an agreed order, the law firm consented to hold $18,500.00 of
the settlement proceeds in its trust account, an amount more than
sufficient to satisfy the Plan’s reimbursement demand. The law firm
nevertheless maintained that it was entitled to one-third of the
proceeds of the settlement ($21,666.66) plus costs ($302.24), by
virtue of its contingent fee agreement with Mestemacher. The law firm
2
Bank of America was voluntarily dismissed from this suit
after settling with all parties.
3
and Mestemacher each filed a motion to dismiss for lack of subject
matter jurisdiction, contending that § 502(a)(3) of ERISA does not
provide a cause of action against an entity like the law firm, which
is neither a plan fiduciary nor a signatory to the plan, and does not
authorize the Plan’s claim for a constructive trust over funds not in
the possession of its participant, Mestemacher.
Agreeing with the Plan’s assertion that it was seeking “equitable
relief” within the contemplation of § 502(a)(3), the district court
accepted subject matter jurisdiction over the Plan’s action and denied
Mestemacher’s and the law firm’s motions to dismiss. Agreeing further
that the terms contained in the Plan’s documents provide a right of
reimbursement, the district court granted summary judgment in favor
of the Plan and ordered the law firm to transfer to the Plan the sum
of $13,643.63 from the settlement proceeds being held in its trust
account. This judgment further ordered that nothing be deducted from
the Plan’s funds for attorneys’ fees and costs.
Citing our opinion in Sunbeam-Oster Company, Inc. Group Benefits
Plan for Salaried and Non-bargaining Hourly Employees v. Whitehurst,3
the district court observed that the Plan contained “clear and
unambiguous reimbursement provisions, including a provision allowing
the Plan reimbursement from third party beneficiaries such as
settlement proceeds.”4 As for whether the Plan had stated a claim
3
102 F.3d 1368 (5th Cir. 1996).
4
All parties agree that the Plan’s language unambiguously
provides for a right of reimbursement and subrogation. As neither
4
under § 502(a)(3), the court noted that the Plan did not seek to
impose in personam liability on any of the defendants, but merely
sought the in rem imposition of a constructive trust over funds in the
trust account. Thus, the district court concluded, the Plan’s claim
was for “appropriate equitable relief” under § 502(a)(3) and fell
comfortably within that jurisdictional grant. Finally, the court
refused to apply either the Texas or the federal version of the common
fund doctrine to block the Plan’s recovery, noting that “the Plan
expressly provides that attorney’s fees and court costs are the
responsibility of Mestemacher and not the Plan.” Final judgment was
entered in the Plan’s favor, and Mestemacher and the law firm timely
filed a notice of appeal.
II. ANALYSIS
A. Standard of Review
We review de novo both a grant of a motion to dismiss and a grant
of a motion for summary judgment.5 In our de novo review of a
district court’s ruling on a motion to dismiss under either Rule
12(b)(1) or 12(b)(6), we apply the same standard as does the district
court: “[A] claim may not be dismissed unless it appears certain that
party seeks a construction of the Plan’s terms, we need not engage
in application of the deference principles articulated by the
Supreme Court in Firestone Tire and Rubber Co. v. Bruch, 489 U.S.
101 (1989).
5
See St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425,
440 n.8 (5th Cir. 2000).
5
the plaintiff cannot prove any set of facts in support of her claim
which would entitle her to relief.”6
B. Subject Matter Jurisdiction
To determine whether the district court properly exercised
subject matter jurisdiction over the instant action, we first must
decide whether § 502(a)(3) authorizes the Plan’s suit for a
constructive trust over the funds held in the law firm’s trust
account.7 The law firm and Mestemacher assert two bases for holding
that § 502(a)(3) does not authorize the Plan’s suit. They first
contend that, because the law firm was not a signatory to the Plan,
it is not a fiduciary; thus the Plan cannot maintain an action for
equitable relief against the law firm under § 502(a)(3). They contend
secondly that the Plan’s action for a constructive trust is not one
“typically available in equity” and thus falls outside § 502(a)(3)’s
jurisdictional grant.
1. The “Universe of Possible Defendants” under § 502(a)(3).
Section 502(a)(3) authorizes a civil action “by a participant,
beneficiary, or fiduciary (A) to enjoin any act or practice which
6
Benton v. United States, 960 F.2d 19, 21 (5th Cir. 1992);
see also St. Paul Mercury Ins. Co., 224 F.3d at 440 n.8 (“[T]he
central issue [in reviewing a motion to dismiss] is whether, in the
light most favorable to the plaintiff, the complaint states a valid
claim for relief.”).
7
See Bauhaus USA, Inc. v. Copeland, 292 F.3d 439, 442 (5th
Cir. 2002)(“ERISA grants the federal courts “exclusive jurisdiction
of civil actions under this title brought by . . . [a]
fiduciary.”). The parties agree that the Plan is governed by ERISA
and that the Plan is a “fiduciary” under ERISA.
6
violates any provision of this title or the terms of the plan, or (B)
to obtain other appropriate equitable relief (i) to redress such
violations or (ii) to enforce any provisions of this title or the
terms of the plan.”8 The law firm and Mestemacher contend that this
authorization is contingent on the existence of a professional or
contractual relationship between the Plan and the particular defendant
that is subject to suit. In other words, according to them, an entity
must owe a duty to an ERISA plan before it can properly be named as
a defendant in a § 502(a)(3) suit for equitable relief. Because it
is not a signatory of the Plan, insists the law firm, it owes no
fiduciary duty to the Plan, and thus no cause of action can be
maintained against it under § 502(a)(3).9 We disagree.
Although neither we nor the Supreme Court has squarely addressed
the question whether a plan participant’s or beneficiary’s attorney
who possesses disputed settlement funds on his client’s behalf can be
subject to suit under § 502(a)(3), the Supreme Court has ruled that
§ 502(a)(3) liability is not dependent on an entity’s status as a plan
fiduciary. In Harris Trust and Savings Bank v. Salomon Smith Barney,
Inc.,10 the Court squarely held that § 502(a)(3) authorizes suit
8
29 U.S.C. § 1132(a)(3).
9
For purposes of this case, a person is a plan fiduciary to
the extent that he exercises discretionary authority or control
over the management or administration of the plan or its assets, or
renders investment advice to the plan for compensation. See 29
U.S.C. § 1002(21)(A). The parties agree that the law firm is not
a plan fiduciary.
10
530 U.S. 238 (2000).
7
against a non-fiduciary “party in interest” to a transaction
prohibited under § 406(a).11 In so holding, the Court rejected the
Seventh Circuit’s holding that no cause of action exists under §
502(a)(3) absent a substantive provision of ERISA expressly imposing
a duty on the party being sued. The Court observed that § 502(a)(3)
“admits of no limit (aside from the ‘appropriate equitable relief’
caveat...) on the universe of possible defendants.”12 Indeed, the
Court noted that, in contrast to other provisions of ERISA which
expressly delineate the entities subject to suit,13 Ҥ 502(a)(3) makes
no mention at all of which parties may be proper defendants.”14 This
is because “502(a)(3) itself imposes certain duties, and
therefore...liability under that provision does not depend on whether
ERISA’s substantive provisions impose a specific duty on the party
being sued.”15
11
See id. at 241. ERISA both imposes a general duty of
loyalty on plan fiduciaries, § 406(a); 29 U.S.C. § 1104,
and,“categorically bar[s] certain transactions deemed ‘likely to
injure the pension plan.’” § 406(a)(1); 29 U.S.C. § 1106.
12
Id. at 244-246.
13
For example, the following ERISA provisions explicitly
delineate the entities subject to suit: (1) “§ 409(a), 29 U.S.C. §
1109(a)(“Any person who is a fiduciary with respect to a plan who
breaches any of the responsibilities, obligations, or duties
imposed upon fiduciaries by this subchapter shall be personally
liable”);” and (2) “§502(l), 20 U.S.C. § 1132(1)(authorizing
imposition of civil penalties only against a ‘fiduciary’ who
violates part 4 of Title I or ‘any other person’ who knowingly
participates in such a violation).” Id. at 246-47.
14
Id. at 246.
15
Id. at 245.
8
The litigation in Harris Trust arose out of a soured business
deal between an ERISA plan and a “party in interest.” National
Investment Services of America (“NISA”) had been hired by the plan’s
administrator to act as an investment manager for the plan.16 Because
it had “discretionary control” over plan assets, NISA qualified as a
plan fiduciary.17 Salomon Smith Barney, Inc. (“Salomon”) furnished
the plan with broker-dealer services at the direction of the
fiduciaries, thus qualifying under § 3(14) as a “party in interest.”18
During the relevant time, Salomon sold to the plan, through NISA,
interests in several motel properties that later turned out to be
worthless.19
On learning of the nature of this transaction, the plan’s
administrator and its trustee filed suit against Salomon under §
502(a)(3), claiming, inter alia, “that NISA, as plan fiduciary, had
caused the plan to engage in a per se prohibited transaction under §
406(a) in purchasing the motel interests from Salomon.”20 Salomon
countered that § 502(a)(3) authorizes suit “only against the party
expressly constrained by 406(a),” namely, the fiduciary who caused the
party to enter into the prohibited transaction, and not the
16
See id. at 242-43.
17
Id. at 243.
18
See id. at 242.
19
Id. at 243.
20
Id.
9
“counterparty to the transaction.”21 The Seventh Circuit agreed with
Salomon, but the Supreme Court reversed for the reasons stated
above.22 Therefore, even though, in the instant litigation, the law
firm is not a “party in interest,” as that term is defined by ERISA,23
the Supreme Court’s reasoning in Harris Trust influences us to
conclude today that § 502(a)(3) authorizes a cause of action against
a non-fiduciary, non-“party in interest” attorney-at-law when he holds
disputed settlement funds on behalf of a plan-participant client who
is a traditional ERISA party. As Harris Trust makes clear, an entity
need not be acting under a duty imposed by one of ERISA’s substantive
provisions to be subject to liability under § 502(a)(3).
To this end, we note that the law firm’s reliance on the Seventh
Circuit’s opinion in Health Cost Controls of Illinois, Inc. v.
Washington24 in support of the law firm’s contrary position —— that an
entity must be a plan fiduciary before it can be properly named as a
defendant in a § 502(a)(3) action —— is badly misplaced. The question
before the Health Cost court was not, as here, which entities can be
subject to suit under § 502(a)(3), but rather which entities are
21
Id.
22
See id. at 244-45.
23
The term “‘party in interest’...encompasses those entities
that a fiduciary might be inclined to favor at the expense of the
plan’s beneficiaries.” Harris Trust, 530 U.S. at 242. Finding
nothing in the record that would suggest that the law firm is an
entity likely to be favored by the plan’s fiduciaries, we will
assume that the law firm is not a “party in interest.”
24
187 F.3d 703 (7th Cir. 1999).
10
entitled to bring suit under § 502(a)(3). In Health Cost, the Seventh
Circuit addressed, inter alia, whether the assignee of an ERISA plan’s
reimbursement claims qualified as an ERISA fiduciary and thus as a
proper plaintiff in a suit for a constructive trust under § 502(a)(3).
Although the court noted that a lawyer hired by an ERISA plan to bring
suit on the plan’s behalf is not an ERISA fiduciary, and thus not a
proper plaintiff to a § 502(a)(3) action, it held that, because an
assignee of a plan’s reimbursement claims exercises greater discretion
over the plan’s assets than does the plan’s lawyer, the assignee
qualified as a fiduciary and thus as a proper plaintiff under §
502(a)(3).25
Without a doubt, the text of § 502(a)(3) places limits on the
proper plaintiffs to a suit for equitable relief: As the language of
that provision expressly states, a civil action for equitable relief
may be brought only by a “participant, beneficiary, or fiduciary” of
an ERISA plan.26 Congress did not see fit, however, to include a
similar limitation on the set of proper defendants to a § 502(a)(3)
action, and we decline the law firm’s invitation to impose such limits
judicially today.27
25
See id. at 709.
26
See Harris Trust, 530 U.S. at 248 (“502(a) itself
demonstrates Congress’ care in delineating the universe of
plaintiffs who may bring certain civil actions.”).
27
The other cases cited by the law firm in support of its
proposition that it must be a plan fiduciary to be a proper
defendant under § 502(a)(3) are equally inapposite. The issue in
each of these cases was whether the plan could properly maintain an
11
In sum, the law firm’s status as a non-fiduciary would have some
relevance to this case if the Plan were seeking to saddle the lawyers
with personal liability for the breach of a fiduciary duty. As it
stands, however, the only action that the Plan asserts is one for
equitable in rem relief under § 502(a)(3). As liability under that
provision does not depend on whether a substantive provision of ERISA
imposes a duty on the particular defendant subject to suit, we hold
that the law firm, as counsel for the plan participant and stake
holder of specifically identifiable settlement funds in a trust
account —— on that beneficiary’s behalf —— fits comfortably within the
“universe of possible defendants” subject to suit under that
provision.
2. “Appropriate Equitable Relief” under § 502(a)(3)
The law firm and Mestemacher contend next that, despite styling
its action as one for a “constructive trust” over the funds contained
in the law firm’s trust account, the Plan actually seeks to impose
action against the defendant-attorney for either breach of contract
or breach of fiduciary duty — not for equitable relief under §
502(a)(3). See Southern Council of Indus. Workers v. Ford, 83 F.3d
966, 969 (8th Cir. 1996)(subject matter jurisdiction exists over
plan’s claim for breach of fiduciary duty against beneficiary’s
attorney who signed the plan’s subrogation agreement); Witt v.
Allstate Ins. Co., 50 F.3d 536, 538 (8th Cir. 1995)(beneficiary’s
insurer is not a fiduciary subject to liability to the plan for
breach of fiduciary duty); Hotel Employees & Rest. Employees Int’l
Union Welfare Fund v. Gentner, 50 F.3d 719, 721 (9th Cir.
1994)(beneficiary’s attorney is not liable for breach of fiduciary
for failing to reimburse plan prior to distributing settlement
funds to the beneficiary); Chapman v. Klemick, 3 F.3d 1508, 1508-09
(11th Cir. 1993)(beneficiary’s attorney is not a fiduciary subject
to liability to the plan for breach of fiduciary duty).
12
personal liability on the defendants to enforce Mestemacher’s
contractual reimbursement obligation to the Plan for the amount he
received in benefits. Thus, they argue, the Plan’s suit is
essentially legal in nature —— as distinguished from equitable —— and
falls outside the scope of “appropriate equitable relief” permitted
by § 502(a)(3). The Plan responds —— correctly, we conclude —— that
because it seeks to recover specifically identifiable funds that are
in the constructive possession and the legal control of the
participant but belong in good conscience to the Plan, its action for
a constructive trust in no way seeks to impose personal liability on
either defendant. Instead, the Plan continues, it seeks relief that
indeed is equitable in nature and thus authorized by § 502(a)(3).
In Mertens v. Hewitt Associates, the Supreme Court interpreted
“appropriate equitable relief” under § 502(a)(3) to include only
“those categories of relief that were typically available in
equity.”28 Subsequently, the Court, in Great-West Life & Annuity
Insurance Co. v. Knudson, elaborated on the distinction between
“legal” and “equitable” relief, stating that “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.”29 On
28
508 U.S. 248, 256 (1993).
29
534 U.S. 204, 213 (2002)(citations omitted). In Knudson,
the plan administrator sought to recover benefits paid to a
13
the other hand, reasoned the Court, if “‘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 of or an
equitable lien upon other property of the [defendant].’”30 In such an
instance, the plaintiff is seeking a legal remedy —— the imposition
of personal liability on the defendant to pay a sum of money to which
the plaintiff is owed —— so his claim falls outside § 502(a)(3)’s
jurisdictional grant.31
Recently, in Bauhaus USA, Inc. v. Copeland,32 we interpreted
Mertens and Knudson in the context of a plan administrator’s suit to
recover benefits previously paid to a plan beneficiary, after
settlement funds from a third party tortfeasor were received on behalf
of the beneficiary. The administrator of the plan sought the
beneficiary following the latter’s receipt of settlement funds from
a third-party tortfeasor. See Knudson, 534 U.S. at 208. The
funds, however, had been placed in a Special Needs Trust for the
beneficiary to provide for her medical care pursuant to California
law. See id. at 207-08. The Supreme Court rejected the plan
administrator’s argument that it sought equitable relief under §
502(a)(3), stating that “the funds to which [the plan] claims an
entitlement under the Plan’s reimbursement provision . . . are not
in the [beneficiary’s] possession.” Id. at 214. As the plan
essentially sought “the imposition of personal liability [upon the
beneficiary] for the benefits” it had conferred, the Court held
that its claim was legal, rather than equitable, in nature and thus
fell outside the scope of relief authorized by § 502(a)(3). Id.
30
Id. at 213-14 (citing RESTATEMENT (FIRST) OF RESTITUTION § 215
(1937)).
31
See id. at 210 (citing Mertens, 508 U.S. at 256.)
32
292 F.3d 439 (5th Cir. 2002).
14
imposition of a constructive trust over the portion of the funds that
had been placed in the registry of the Mississippi Chancery Court,
pursuant to the terms of a tort settlement agreement, to satisfy any
liens against the funds.33 Focusing on the language in Knudson
regarding the beneficiary’s possession of the disputed funds, the
panel majority in Bauhaus found the facts of the case before it
legally indistinguishable from those considered by the Supreme Court
in Knudson.34 The court observed that the disputed funds in Knudson
were outside the “possession and control” of the beneficiary, having
been placed in a Special Needs Trust to cover the beneficiary’s
medical expenses.35 Reasoning that funds placed in the court registry
were just as much beyond the “possession and control” of the
beneficiary as those placed in a Special Needs Trust, the panel
majority held that the plan’s suit did not lie in equity and was
therefore unauthorized by § 502(a)(3).36
Although the facts of Knudson and Bauhaus resemble those in
Mestemacher’s case in several respects, those cases are significantly
distinguishable from Mestemacher’s. To verify this conclusion, one
need only compare the facts of these three cases by answering the
relevant three-part inquiry: Does the Plan seek to recover funds (1)
33
See id. at 441.
34
See id. at 445.
35
See id.
36
See id.
15
that are specifically identifiable, (2) that belong in good conscience
to the Plan, and (3) that are within the possession and control of the
defendant beneficiary? In both Knudson and Bauhaus, as in the instant
case, the benefit plans sought to recover funds from a specifically
identifiable corpus of money that they had paid out previously as
benefits. Likewise, in each case, the plan’s terms contained an
express, unambiguous reimbursement provision which made the disputed
funds “belong in good conscience” to the plan. It is, however, the
third element of the inquiry —— the defendant-beneficiary’s
“possession and control” over the disputed funds —— that distinguishes
Knudson and Bauhaus from the case before us today.
In Knudson and Bauhaus, the beneficiary had neither actual nor
constructive possession or control over the funds. In Knudson, the
funds had been placed in a Special Needs Trust, as mandated by
California law, to provide for the beneficiary’s medical care, and the
trustee was totally independent of the plan beneficiary. Similarly,
in Bauhaus, the funds had been deposited in the state court’s registry
in anticipation of an interpleader action to determine their
ownership. Obviously, that court was totally independent of the plan
beneficiary. Here, in stark contrast, the funds that the Plan is
seeking to recover belong to the participant and are simply being held
in a bank account in the name of the participant’s attorneys, who are
indisputably his agent. Unlike the beneficiaries in Knudson and
Bauhaus, the Plan’s participant, Mestemacher, has ultimate control
over, and thus constructive possession of, the disputed funds. The
16
law firm and Mestemacher concede that the law firm is merely holding
the funds in its trust account on Mestemacher’s behalf —— as
Mestemacher’s agent —— and is legally obligated to disburse the funds
to Mestemacher the moment he directs their release. This crucial
distinction is more than sufficient to warrant a finding that the
Plan’s action is indeed “equitable” in nature.
The Seventh Circuit’s recent opinion in Administrative Committee
of the Wal-Mart Stores, Inc. Associated Health and Welfare Plan v.
Varco offers further support for our determination that the Plan’s
action for a constructive trust lies in equity.37 In Varco, the ERISA
plan sought to enforce the provisions of a subrogation clause against
a participant through imposition of a constructive trust over
settlement funds from a third party tortfeasor.38 The participant’s
attorney had accepted delivery of the funds from the tortfeasor on the
participant’s behalf prior to the plan’s filing suit and, after taking
out an amount sufficient to cover his fees, the lawyer had placed the
remaining funds in a reserve account in the participant’s name.39
Noting that (1) the participant had “control” over the disputed funds,
(2) the funds were “identifiable, and [had] not been dissipated,” and
(3) the funds, “in good conscience,” belonged to the plan, the Seventh
37
338 F.3d 680 (7th Cir. 2003).
38
See id. at 683-84.
39
See id. at 684.
17
Circuit held that the plan’s action for a constructive trust was
equitable in nature and therefore authorized by § 502(a)(3).40
In making the same determination today, we remain unpersuaded by
the contention voiced by the law firm during oral argument to the
effect that Mestemacher lacks “possession and control” over the one-
third share of the $18,500 contained in the trust account to which the
law firm asserts ownership by virtue of its contingent fee agreement
with Mestemacher. This assertion ignores Mestemacher’s pre-existing
contractual reimbursement obligation to the Plan, which requires him
to reimburse the Plan the full amount of the benefits that he had
received from the Plan and to do so out of any third-party recovery,
without deduction for attorney’s fees and costs. This pre-existing
reimbursement obligation to the Plan precluded Mestemacher from
contracting away to the law firm that which he did not own himself,
namely, the right to all or any portion of the $13,643.63 that
rightfully belonged to the Plan. In essence, Mestemacher could not
create a greater right in the funds by virtue of entering the
contingent fee arrangement with the law firm than Mestemacher had
himself.
In addition, Mestemacher’s contingent fee agreement does not
restrict his obligation to compensate the law firm solely to the
proceeds of his recovery. Rather, that agreement creates an in
personam obligation, requiring Mestemacher to pay counsel an amount
40
See id. at 687-88.
18
equivalent to one-third of his recovery. Mestemacher is personally
responsible to the law firm for its attorneys’ fees in an amount equal
to one-third of his recovery. The fact that he may have to satisfy
some part or even all of this personal obligation out of his own
pocket in no way diminishes his pre-existing reimbursement obligation
to the Plan vis-à-vis the funds recovered from his tortfeasor. We are
satisfied that neither Mestemacher’s contingency fee agreement with
the law firm nor the location of the settlement funds in the trust
account affects his legal “possession and control” over the disputed
$13,643.63. Our conclusion in this regard is consistent with Judge
Posner’s opinion for the Seventh Circuit in Wal-Mart Stores, Inc.
Assoc. Health and Welfare Plan v. Wells,41 in which that court held,
on substantially similar facts, that a plan administrator’s §
502(a)(3) suit for a constructive trust over settlement funds presumed
to be held in escrow by the participant’s attorney “nestle[d]
comfortably” within “ERISA’s concept of equity.”42
Having closely examined the substance of the relief sought in the
case before us, we are convinced that, in its efforts to recoup the
amount paid to Mestemacher in benefits, the Plan does not seek to
impose personal liability on either Mestemacher or his counsel. Thus,
we hold the Plan’s requested relief —— the imposition of a
constructive trust over specifically identifiable settlement funds
41
213 F.3d 398, 401 (7th Cir. 2000).
42
Id.
19
held in the trust account of the law firm as agent for Mestemacher ——
to be equitable in nature. Accordingly, we further hold that §
502(a)(3) authorizes the Plan’s claim for relief, and we affirm the
district court’s exercise of subject matter jurisdiction over this
action.43
C. Actual Fraud and Unjust Enrichment
We turn next to the question whether a showing of either actual
fraud or unjust enrichment, or both, on the part of Mestemacher and
the law firm is required before a constructive trust can be imposed
on the disputed funds. Noting correctly that ERISA does not specify
the elements of a constructive trust in a § 502(a)(3) action,44 the
law firm and Mestemacher maintain that this lacuna in the statutory
text should be filled by Texas law. Under that State’s law, a
plaintiff seeking a constructive trust must establish, inter alia, (1)
43
We recognize that our holding today is at variance with the
Ninth Circuit’s recent opinion in Westaff (USA), Inc. v. Arce. See
298 F.3d 1164 (9th Cir. 2002). In Westaff, the Ninth Circuit held
that a plan administrator’s suit to recoup benefits paid to a
beneficiary upon the beneficiary’s receipt of settlement funds from
a third party tortfeasor was essentially legal in nature, even
though the beneficiary had placed the funds in an escrow account in
the beneficiary’s name pending a determination of to whom the money
was owed. See id. at 1167. Acknowledging that the disputed funds
held in escrow were “specifically identifiable,” the Ninth Circuit
nevertheless held that the funds were “a legitimate personal injury
settlement to which the beneficiary is entitled” and that the
administrator’s action was essentially “one for money damages”
falling outside the jurisdictional grant of § 502(a)(3). Id. We
perceive that decision to depart from the Supreme Court’s opinions
in Mertens and Knudson, and from our own precedent in Bauhaus, so
we decline to follow the Ninth Circuit’s more restrictive view of
the scope of “appropriate equitable relief” under § 502(a)(3).
44
See 29 U.S.C. § 1132(a)(2).
20
the breach of a fiduciary relationship or, alternatively, actual
fraud, and (2) unjust enrichment of the wrongdoer.45
In recognition of ERISA’s overarching aim of national uniformity,
we have consistently held that any hiatus in ERISA’s text must be
filled by application of federal common law rather than the law of any
particular state.46 Accordingly, Texas law is not directly applicable
45
See, e.g., Haber Oil Co. v. Swinehart, 12 F.3d 426, 437 (5th
Cir. 1994). We recognize in passing that our precedent
interpreting Texas law as it relates to constructive trusts has not
been altogether consistent. In some cases, we have interpreted
Texas law as requiring a showing of actual fraud or breach of
fiduciary duty prior to imposition of a constructive trust. See
id. at 437 (the elements of a constructive trust under Texas law
include, inter alia, “breach of a fiduciary relationship, or in the
alternative, actual fraud....“)(citing In re Monnig’s Dept. Stores,
Inc. v. Azad Oriental Rugs, Inc., 929 F.2d 197, 201 (5th Cir.
1991)). More recently, we held that it was sufficient under Texas
law for a plaintiff to show merely constructive fraud, as opposed
to actual fraud or wrongdoing. See Burkhart Grob Luft und
Raumfakrt GmbH & Co. v. E-Systems, Inc., 257 F.3d 461, 469 (5th
Cir. 2001)(the elements of a constructive trust under Texas law
include a showing of either actual or constructive fraud)(citing
Haber Oil Co., Inc. v. Swinehart, 12 F.3d 426, 437 (5th Cir.
1994)). If indeed constructive fraud is all that is required under
Texas law, then the district court clearly did not err in not
making a finding of fraud, for the requirement of “constructive
fraud” is “merely an expression of the idea that a constructive
trust may arise in the absence of fraud.” SCOTT ON TRUSTS § 462 (4th
ed. 2001). Nevertheless, because some confusion exists as to this
issue, and because the issue was not briefed by the parties, we
will assume arguendo for purposes of the instant analysis that
Texas law requires a showing of actual fraud or breach of fiduciary
duty prior to imposition of a constructive trust.
46
See Jamail, Inc. v. Carpenters Dist. Council of Houston
Pension & Welfare Trusts, 954 F.2d 299, 303 (5th Cir. 1992)(“Both
the legislative history and the case law pursuant to ERISA validate
our application of federal common law to ERISA.”); see also
Rodrigue v. Western and Southern Life Ins. Co., 948 F.2d 969, 971
(5th Cir. 1991)(“Congress intended that federal courts should
create federal common law when adjudicating disputes regarding
ERISA.”).
21
to the Plan’s claim, and the Plan will not be required to establish
actual fraud and unjust enrichment —— unless, that is, some basis
exists for concluding that these elements are required under a federal
common law standard for the imposition of a constructive trust.
Although the law firm and Mestemacher argue alternatively that
we should incorporate the Texas law elements of actual fraud and
unjust enrichment into the federal common law rule, federal common law
—— like gaps in ERISA’s statutory provisions —— cannot be defined
solely by reference to the law of but a single state. This is
especially true when adherence to the strictures of Texas law would
require the Plan to establish actual fraud on the part of either
Mestemacher or the law firm, an element that has never been required
by the Supreme Court or this Circuit. Indeed, as discussed in the
preceding section, Knudson requires a § 502(a)(3) plaintiff seeking
a constructive trust to show only the existence of “money or property
identified as belonging in good conscience to the plaintiff [that can]
clearly be traced to particular funds or property in the defendant’s
possession,” and makes no mention of the necessity of showing actual
fraud or wrongdoing on the part of the defendant.47 Neither does
Bauhaus, which contains our most recent discussion of the
circumstances in which a constructive trust may be imposed under §
47
Knudson, 534 U.S. at 213.
22
502(a)(3), suggest that a showing of actual fraud or wrongdoing is
required.
Further, as did the Knudson Court in its efforts to define the
contours of “appropriate equitable relief” under § 502(a)(3), we look
to “standard current works, such as Dobbs, Palmer, Corbin, and the
Restatements” in ascertaining the federal common law rule to be
applied.48 Of those works, two that have squarely considered whether
a showing of fraud or wrongdoing is required for imposition of a
constructive trust have concluded that such a trust may properly be
imposed in the absence of fraud.49 Based on these expressions, as
well as the absence of any indication in our precedent or that of the
Supreme Court to the effect that federal common law requires that
actual fraud be established before a constructive trust can be imposed
under § 502(a)(3),50 we hold today that federal common law does not
48
Id. at 716.
49
SCOTT ON TRUSTS § 462 (4th ed. 2001)(“[T]here are numerous
situations in which a constructive trust may be imposed in the
absence of fraud.”); 1 DOBBS LAW OF REMEDIES § 4.3(2)(2d ed.
1993)(“Sometimes it is still said that the constructive trust
applies only to misdealings by fiduciaries or in cases of fraud .
. . but this is a misconception.”).
50
In considering whether federal common law permits imposition
of a constructive trust in the absence of a showing of actual fraud
or other wrongdoing, the Seventh Circuit has also answered the
question in the negative. See Health Cost Controls, 187 F.3d at
711. Writing for the panel in Health Cost, Judge Posner noted that
although the Ninth Circuit appears to believe that the
imposition of a constructive trust in an ERISA case is
permissible only when there has been a breach of trust,
FMC Medical Plan v. Owens, 122 F.3d 1258, 1261 (9th Cir.
1997), it has given no reason for this belief and there
23
require a plaintiff in a § 502(a)(3) action to show that he was the
victim of actual fraud or wrongdoing as a prerequisite to obtaining
a constructive trust.51
As for the additional requirement of Texas law that the defendant
must have been unjustly enriched at the expense of the plaintiff, it
is axiomatic that a party who retains funds “belonging in good
conscience to another” is unjustly enriched at that other party’s
expense. None disputes that the Plan’s terms unambiguously state a
right to recover benefits that it has previously paid, up to the full
extent of any settlement proceeds obtained by the participant or
beneficiary. Thus, the disputed funds “belong in good conscience” to
the Plan, and the law firm’s and Mestemacher’s continued retention of
these funds would unjustly enrich them at the Plan’s expense.
is no basis for it either in ERISA or in the principles
of equity. Granted that in times of yore the
constructive trust was available only as a remedy
against trustees and other fiduciaries, 1 Dobbs, supra,
§ 4.3(2), p. 597, there is nothing to suggest that
ERISA’s drafters wanted to embed their work in a time
warp.
Id.
51
As today we hold that actual fraud is not an element
required in a § 502(a)(3) action for a constructive trust, we do
not reach the question whether the Plan has demonstrated actual
fraud on the part of Mestemacher and the law firm. We note,
however, that at least one other circuit has observed, on nearly
identical facts, that the refusal of a participant’s lawyer to turn
over settlement proceeds that rightfully belonged to the plan
constituted wrongdoing on the part of the lawyer. See Wal-Mart
Stores, Inc. Assoc. Health and Welfare Plan v. Wells, 213 F.3d 398,
401 (7th Cir. 2000)(lawyer’s refusal to hand over settlement check
to which plan claimed entitlement by virtue of its unambiguous
reimbursement provision was “clearly wrongful”).
24
Accordingly, even if we assume arguendo that unjust enrichment is a
prerequisite, the Plan has produced sufficient evidence that the
defendants would be unjustly enriched, entitling the Plan to have a
constructive trust imposed on the disputed settlement funds.
D. Common Fund Doctrine
Finally, we consider whether the Plan’s claim is subject to
either the Texas or the federal “common fund” doctrine. There is no
substantive difference between the Texas and federal versions of this
doctrine; in essence, both provide that “a litigant or lawyer who
recovers a common fund for the benefit of persons other than himself
or his client is entitled to a reasonable attorney’s fee from the fund
as a whole.”52 “The doctrine rests on the perception that persons who
obtain the benefit of a lawsuit without contributing to its costs are
unjustly enriched at the successful litigant’s expense.”53 In the
instant case, the district court found this doctrine inapplicable to
the Plan’s claim for benefits because the language of the Plan
expressly provided —— long before Mestemacher was injured and long
52
Boeing Co. v. Van Gemert, 444 U.S. 47, 478 (1980); compare
Lancer Corp. v. Murillo, 909 S.W.2d 122 (Tex. App. — San Antonio
1995, no writ)(“Under the [Texas] common fund doctrine, the court
may allow reasonable attorney’s fees to a litigant who, at his own
expense, has maintained a suit which creates a fund benefitting
other parties as well as himself.”)(cites omitted).
53
Boeing, 444 U.S. at 478; compare Lancer Corp., 909 S.W.2d
at 126 (“The common fund doctrine is based on the principle that
those receiving the benefits of the suit should bear their fair
share of the expenses.”)(citing Trustees v. Greenough, 105 U.S.
527, 532-37 (1881); Knebel v. Capital Nat’l Bank, 518 S.W.2d 795,
799-801 (Tex. 1974)).
25
before he retained the law firm on a contingent fee basis —— that
“[a]ttorney’s fees and court costs are the responsibility of the
participant, not the Plan.” We agree.
Although we have yet to address whether equitable fee sharing is
warranted under the common fund doctrine when the Plan language
expressly provides to the contrary, we held in Walker v. Wal-Mart
Stores, Inc. that, when a plan’s terms give it the right to recover
benefits “to the extent of any and all” settlement payments, but fail
to specify who bears the responsibility for fees and costs, the plan
is nevertheless entitled to full recovery of the amount of the
benefits paid without offset for fees and costs.54 Here, the Plan’s
terms not only give it the right to recover benefits “to the extent
of any and all” settlement payments, but explicitly state that the
participant must bear the fees and costs associated with his tort
action. Our holding in Walker thus supports our determination here
that neither the federal nor Texas common fund doctrine may be invoked
to prevent or reduce the Plan’s recovery of the funds that it advanced
54
159 F.3d 938, 940 (5th Cir. 1998). Interpreting the plan’s
“‘any and all’ language,” the Walker panel held that such language
“plainly means the first dollar of recovery (any) and 100% recovery
(all) of the funds received by the plaintiff in the settlement, up
to the full amount of the benefits paid.” Id. The panel further
noted that the fact that the plan did not “specifically mention
attorneys’ fees or set out detailed distribution procedures d[id]
not constitute silence or ambiguity on behalf of the plan,”
reasoning that ERISA plans should not be labeled “silent or
unambiguous” simply for lack of “technical precision.” Id.
26
to Mestemacher, up to the full amount of his recovery from the
tortfeasor.
The Seventh Circuit’s Varco opinion further supports this
conclusion.55 The Varco court refused to apply either the Illinois or
federal common fund doctrine to defeat an ERISA plan’s express
provision that fees and costs were the sole responsibility of the
participant.56 Considering the Illinois doctrine first, the court
held that, because application of that doctrine would contradict the
express terms of the Plan, it was preempted by § 514 of ERISA.57
Turning next to the federal common fund doctrine, the Varco court
declined to offset the plan’s recovery on that basis as well, noting
that application of “federal common law to override the Plan’s
reimbursement provision would contravene, rather than effectuate, the
underlying purposes of ERISA because the express terms of the Plan
provided for the appropriate distribution of attorney’s fees.”58
Thus, reasoned the Seventh Circuit, the federal common fund doctrine
should only be applied to offset an ERISA plan’s recovery in the
55
338 F.3d 680 (7th Cir. 2003)
56
See id. at 692-93.
57
See id. at 690. In addition to complete preemption under
§ 502(2), ERISA § 514 provides for conflict preemption when a state
statute “directly conflicts with ERISA’s requirements that the
plans be administered, and benefits be paid in accordance with plan
documents.” Egelhoff v. Egelhoff ex rel. Breiner, 532 U.S. 141,
150 (2001); 29 U.S.C. 1144(a).
58
Varco, 338 F.3d at 692.
27
absence of controlling plan language that specifies the manner in
which the costs of the underlying litigation are to be distributed.59
We agree with the Seventh Circuit’s determination in Varco that
the state and federal common fund doctrines are inapplicable when, as
here, the controlling plan language clearly and unambiguously
expresses that fees and cost are the sole responsibility of the
participant. Accordingly, we hold that the district court correctly
refused to apply either the Texas or federal common fund doctrines to
allow a deduction from the Plan’s recovery of a pro rata share of
Mestemacher’s attorney’s fees and costs.
III. CONCLUSION
We affirm the district court’s exercise of subject matter
jurisdiction based on ERISA § 502(a)(3) over the Plan’s action for a
constructive trust because it is equitable in nature. Further,
because federal common law does not require a showing of actual fraud
or wrongdoing as an element of imposing a constructive trust, we
affirm the district court’s grant of the Plan’s requested relief,
despite an absence of such a showing. Finally, we affirm the district
court’s holding that neither the federal nor Texas common fund
doctrine trumps the Plan’s express language specifying that all fees
and costs associated with the underlying tort litigation are to be
59
Id. (citing McIntosh v. Pacific Holding Co., 120 F.3d 911,
917 (8th Cir. 1997); Waller v. Hormel Foods Corp., 120 F.3d 138,
141 (8th Cir. 1997)).
28
born by the participant. Accordingly, the district court’s decision
is, in all respects,
AFFIRMED.
29