ERISA-Seventh Circuit Upholds District Court’s Order Of Contempt Issued For Failure To Comply With Its Earlier Order Requiring Health Plan Participant And Her Attorney To Place Funds In Attorney’s Trust Fund Account For The Plan’s Subrogation Lien

In Central States, Southeast and Southwest Areas Health and Welfare Fund v. Lewis, No. 13‐2214 (7th Cir. 2014), the defendants were appealing an order of the district court holding them in contempt. In this case, defendant Beverly Lewis had been injured in an automobile accident in Georgia, and her health plan (the principal plaintiff in this case) paid about $180,000 for the cost of her medical treatment. Represented by the other defendant in the present suit, Georgia lawyer David T. Lashgari, Lewis brought a tort suit in Georgia state court against the driver of the car involved in the accident (her son-in-law), and obtained a $500,000 settlement, under a settlement agreement. The plan had–and Lashgari knew it had–a subrogation lien: that is, a right, secured by a lien, to offset the cost that the plan had incurred as a result of the accident against any money that Lewis obtained in a suit arising out of the accident.

The lien was thus a secured claim against the proceeds of the settlement. But when Lashgari received the settlement proceeds in June 2011, instead of giving $180,000 of the $500,000 to the plan he split the proceeds between himself and his client. Lashgari’s refusal to honor the subrogation lien precipitated the present suit, filed in July 2011, a suit under ERISA to enforce the lien, under Section 502(a)(3) of ERISA. The defendants argued in the district court that because the settlement funds have been dissipated, this really is a suit for damages–that is, a suit at law rather than in equity–and therefore not authorized by Section 502(a)(3). But, according to the Seventh Circuit Court of Appeals (the “Court”), the defendants are wrong. The plan wasn’t required to trace the settlement proceeds. Its equitable lien automatically gave rise to a constructive trust of the defendant’s assets.

In February 2012, the district court granted a preliminary injunction against the defendants’ disposing of the settlement proceeds, until the health plan received its $180,000 share. The district judge also ordered the defendants to place at least $180,000 in Lashgari’s client trust fund account pending final judgment in the case. The defendants complied with neither order. They said they couldn’t pay $180,000, but offered no evidence of their inability to do so. As a result, the district court issued an order holding them in contempt. Does the order stand? Yes, said the Seventh Circuit Court, since the defendants willfully ignored the plan’s subrogation lien and offered no evidence as to why. Further, the Seventh Circuit Court issued an order to the defendants to show cause why they should not be sanctioned under Rule 38 for filing a frivolous appeal, and it remanded the case, directing the district court to determine whether defendants should be jailed, until they comply with the order to deposit the settlement proceeds in a trust account.

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