Sixth Circuit Finds Health Plan Forfeited Argument Supporting Equitable Claim Over Personal Injury Settlement Funds

In Sheet Metal Workers’ Health and Welfare Fund of North Carolina, v. Law Office of Michael A. Demayo, LLP, No. 21-5011, __F.4th__, 2021 WL 5984357 (6th Cir. Dec. 17, 2021), involving a subrogation dispute, the Sixth Circuit declined to address whether a district court must apply the lowest intermediate balance test when determining whether an equitable claim may attach to dispersed settlement funds. In side-stepping the foray of complicated ERISA remedial issues under ERISA Section 502(a)(3), the Sixth Circuit opened its opinion with:

For those who enjoy unsettled legal questions, who would not welcome the opportunity to navigate a labyrinth of ancient equitable doctrines nested within a federal statute, with little precedent to inform that review? All of that is presented in this appeal. Add to that the amici participation of a federal agency, and the table seemingly is set for a jurisprudential feast. But resolution of those issues must remain on ice, so to speak, because they were not preserved for appellate review. On that basis, we affirm the judgment of the district court.

Plaintiff-Appellant Sheet Metal Workers’ Health and Welfare Fund of North Carolina (“the Fund”) paid $16,225 in medical costs for one of its participants, Courtney Simpson, after she was injured in a car accident. Defendant-Appellee Law Office of Michael DeMayo, LLP (“the Firm”) represented Simpson in a personal injury lawsuit and settled her suit for $30,000. The Firm paid $9,817.33 to Simpson, $1,000.82 to other lienholders, and $10,152.67 to the Firm for fees and expenses. The Fund claimed an equitable lien to the entire $16,225 it paid in medical expenses, but the Firm only paid the Fund $9,029.18. After disbursement of the funds, the district court issued a TRO requiring the Firm to maintain at least $7,497.99 in its operating account until the resolution of the dispute. The parties filed cross-motions for summary judgment and disputed whether the Fund sought an equitable remedy. The Firm claimed that the Fund sought an unavailable legal remedy under ERISA because the Firm no longer possessed the settlement funds: it commingled the funds by depositing them into its operating account and dissipated the funds before the district court issued the TRO by spending them on its own general expenses. For the first time in its reply brief, the Fund argued that the lowest intermediate balance test applies. That is, a defendant fully dissipates a plaintiff’s claimed funds only if the balance in the commingled account dipped to $0 at any point between the date of commingling and the date the plaintiff asserts its right to the funds. The district court ultimately granted summary judgment to the Firm because it concluded that the Firm dissipated the funds prior to the issuance of the TRO and the money it held in the operating account pursuant to the TRO was not the settlement funds.

The Sixth Circuit declined to address whether the lowest intermediate balance test applies in this case because the Fund failed to preserve this argument. First, the Fund’s “central theme” was that the Firm possessed the settlement funds in its operating account in accordance with the TRO. It did not argue that the lowest intermediate balance test applied. Second, the Fund did not mention this test in response to the Firm’s motion for summary judgment, which the district court later granted. The Fund invoked the test in its reply brief but only to argue that commingling does not bar recovery under ERISA Section 502(a)(3) and that the Firm did not dissipate the money it held pursuant to the TRO. Third, the Fund offered no evidence supporting the application of the test. The Fund did no discovery regarding the Firm’s bank statements, it did not hire a forensic accounting expert, and the Fund did not contest the Firm’s argument that it dissipated the funds before the TRO was issued. For these reasons, the Sixth Circuit found that the Fund’s argument is barred by the forfeiture rule.