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I recently criticized the tendency evidenced in several post-Sereboff opinions to merge the requirement of a fund, separable from the defendant’s general assets, with the abandonment of a strict tracing principle. See, :: Seventh Circuit Holds That Sereboff Supports Disability Carrier’s Counterclaim

Professor Roger Baron calls our attention to another recent counterclaim case in which the district court got the analysis right. The case is Killian v. Johnson & Johnson, 2008 U.S. Dist. LEXIS 49580 (D.N.J. June 23, 2008).

In that case the defendant in a claim for benefits case filed a counterclaim, asserting that social security benefits received by the plaintiff should have been offset from disability benefits paid to her – resulting in her actually owing the plan, on the defendant’s theory, some $45,000.

Defendants sought: (i) “[e]quitable relief under 29 U.S.C. § 1132(a)(3) in the form of . . . a constructive trust or equitable lien on money ‘belonging in good conscience to the Defendants which can be clearly traced to particular funds or property in Killian’s possession . . . .”, and (ii) a finding by the Court that Ms. Killian had been unjustly enriched in the amount of $ 45,439.20 plus interest.

In the context of a motion to dismiss, the court granted the motion as to the unjust enrichment claim, finding that relief must be had, if at all, via 29 U.S.C. § 1132(a)(3). That ruling seems reasonable after Sereboff.

The (a)(3) claim, however, presented a fact question, and as to it, the plaintiff’s motion was denied. This seems proper also. The court opined that the defendant should be allowed discovery to ascertain whether the plaintiff indeed had in her possession funds subject to the (a)(3), as limited in terms of equitable relief. The court interpreted the issue as follows:

Accordingly, “where 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].” Id. at 213-14; see also Unum Life Ins. Co. of Am. v. Laszok, No. 03-1862, 2005 U.S. Dist. LEXIS 42087, at *8 (D.N.J. Sep. 9, 2005) (”reimbursement of overpaid benefits is recoverable . . .if the fiduciary seeks to recover funds (1) that are identifiable, (2) that belong in good conscience to the fiduciary, and (3) that are within the possession and control of the defendant beneficiary, as opposed to dissipated.”) (quotations omitted).

As the Court clarified in Sereboff v. Mid Atl. Med. Servs., however, courts may dispense with the traditional “tracing” requirement when the plan at issue “specifically identifie[s] a particular fund, distinct from the [plan beneficiary’s] general assets” and a particular share of that fund to which the plan administrator [is] entitled. Sereboff v. Mid Atl. Med. Servs., 547 U.S. 356, 364, 126 S. Ct. 1869, 164 L. Ed. 2d 612 (2006) . . .

And, so the specific issue was framed in this way:

Plaintiff repeatedly claims that there is uncontroverted evidence before the Court that the funds awarded to her under the Plan were dissipated long ago, and are therefore untraceable. (Pl. Reply 4, 9.) That is in fact contested by Defendants, who submit that they do not agree with that assertion and have simply not had the opportunity to perform the discovery necessary to properly rebut Plaintiff’s allegations.

The district court agreed with the defendant that they had properly stated a claim. The outcome presumably awaits further argument following discovery on the point outlined above.

Thanks to Professor Baron for pointing out this case.

Note: Not argued in this case were other issues associated with the propriety of claims against social security benefits. See,:: Using The Offset Defense In Recoupment Cases and also:

Another important issue in the disability cases lies in the construction of 42 U.S.C. § 407. See, Mote v. Aetna Life Ins. Co.435 F.Supp.2d 827 (N.D.Ill.) (June 26, 2006) (holding that 42 U.S.C. § 407 prevented carrier’s counterclaim to Social Security benefits); accord Ross v. Pennsylvania Mfrs. Ass’n Ins. Co., WL 1390446 (S.D.W.Va.) (May 22, 2006); Kay v. American Elec. Power Service Corp. 2006 WL 2228992 (S.D.W.Va.) (August 3,2006) (plan requests an action, the imposition of a constructive trust on future SSDI benefits, that is not permitted); but see, Smith v. Accenture U.S. Group Long-Term Disability Ins. Plan 2006 WL 2644957 (N.D.Ill.) (September 13, 2006) (”respectfully disagrees with Mote“)