Appeals Court: Unjust Enrichment Limits Equitable Plan Recovery
Employer’s Guide to Self-Insuring Health Benefits January 2012 | Vol. 19, No. 4
In a surprising decision, the 3rd U.S. Circuit Court of Appeals used the concept of “appropriate equitable relief” to restrict an employer-sponsored health plan’s recovery from a third-party settlement. Full reimbursement of what the plan paid out would have been “inappropriate and inequitable,” even though the plan had asserted recovery rights over any monies collected from a third party. Full recovery would have been unfair because: (1) the plan participant’s recovery ended up being less than what the plan paid after attorney’s fees were deducted; and (2) the plan never intervened in the third-party recovery. The outcome diverges from many recent cases, which upheld plans’ claims on total proceeds, regardless of whether the plan participant was “made whole” or had money to pay attorney’s fees. Appeals Court Carves Into Equitable Relief: Total Plan Reimbursement Was Unjust Enrichment
In a surprising decision, the 3rd U.S. Circuit Court of Appeals used the concept of “appropriate equitable relief” to restrict an employer-sponsored health plan’s recovery from a third-party settlement to less than what the plan paid out in health benefits.
Full reimbursement of expenses to the employer sponsored health plan would be “inappropriate and inequitable relief,” the appeals court held, even though the plan had subrogation reimbursement provisions asserting recovery rights over any monies collected from a third party. The court reasoned that it would be inequitable because full recovery would constitute unjust enrichment for the plan because: (1) the plan participant’s recovery ended being less than what the plan paid after attorney’s fees were deducted; and (2) the plan never intervened in the third-party recovery. The case is US Airways, Inc. v. McCutchen, 2011 WL 5557411 (3rd Cir., Nov. 16, 2011).
The appeals court overturned a U.S. District Court for the Western District of Pennsylvania’s ruling (2010 WL 3420951) requiring the participant to pay the plan the whole amount.
The outcome diverges from most recent cases, which upheld plans’ claims on total proceeds, regardless of whether the plan participant was “made whole” or had money to pay attorney’s fees.
The Facts
James McCutchen survived a serious automobile accident and underwent emergency surgery, which saved his life. He then spent several months in physical therapy and had a complete hip replacement. He retained an attorney who agreed to represent him for a contingent fee of 40 percent of any recovery. The US Airways health plan paid $66,866 for his medical expenses.
Although McCutchen was severely injured and functionally disabled for life, he recovered only $110,000 from third parties ($10,000 from the person who caused the accident and $100,000 from an uninsured motorist policy), with his attorney’s assistance. The plan did not intervene to enforce its subrogation rights.
After paying his attorney 40 percent, McCutchen had less money than the $66,866 the plan spent. The attorney placed $41,500 of the settlement proceeds in a trust account to satisfy a future US Airways lien — assuming that the plan’s recovery would have to be reduced by 40 percent, commensurate with McCutchen’s legal fees. The record was unclear about where the rest of the settlement proceeds went.
When McCutchen refused to pay the plan back in full, US Airways sued McCutchen for “appropriate equitable relief” under ERISA (Section 502(a)(3)), demanding reimbursement of the entire $66,866 (the $41,500 fund plus $25,366 from McCutchen personally) — without allowance for McCutchen’s legal costs.
Plan Reimbursement Clause
US Airways’ summary plan description (SPD) reserved subrogation and reimbursement rights:
The purpose of the Plan is to provide coverage for qualified expenses that are not covered by a third party. If the Plan pays benefits for any claim you incur as the result of negligence, willful misconduct, or other actions of a third party, the Plan will be subrogated to all your rights of recovery. You will be required to reimburse the Plan for amounts paid for claims out of any monies recovered from a third party, including, but not limited to, your own insurance company as the result of judgment, settlement, or otherwise. In addition you will be required to assist the administrator of the Plan in enforcing these rights and may not negotiate any agreements with a third party that would undermine the subrogation rights of the Plan.
US Airways said this language allowed it recover the whole $66,866 from McCutchen’s $110,000 settlement.
Participant Seeks Limit on Recovery
McCutchen countered that it would be unfair and inequitable to reimburse US Airways in full: (1) when he was not fully compensated for his injuries, including pain and suffering; and (2) because the plan would be unjustly enriched if it recovered from him without any allowance for those costs.
Regarding the unjust enrichment argument, McCutchen said that because US Airways made no contribution to his attorney’s fees and expenses, the plan would profit from his work pursuing the $110,000 settlement.
Nevertheless, the district court ruled that McCutchen had to pay the plan the full $66,866 (the $41,500 held in trust plus $25,366 from his own funds), relying on the plan provision as well as other 3rd Circuit opinions. McCutchen appealed.
Appeals Court Ruling
The appeals court broke with the district court, and instead decided that McCutchen could assert certain limitations, such as unjust enrichment, on US Airways’ equitable claim.
Writing for the three-judge panel, Circuit Judge Julio Fuentes first noted that ERISA gives plan beneficiaries broader recovery rights than plan fiduciaries. Fiduciaries are limited to “appropriate equitable relief,” provided under ERISA Section 502(a)(3); while beneficiaries are authorized to enforce plan terms and seek “benefits under the plan,” under ERISA Section 502(a)(1)(B). The court would stress throughout the opinion that it was appropriate equitable relief, not all equitable relief that plans are entitled to when recovering from settlements.
Fuentes noted that the U.S. Supreme Court issued two major rulings on plan recoveries and equitable relief: Knudson and Sereboff.
2) In Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), the Supreme Court moved away from a strict requirement that funds be “traceable” and ruled more liberally in favor of a plan’s right to pursue equity through “liens by agreement.” But it left open the question of the scope of the term “appropriate” in “appropriate equitable relief.”
So the appeals court delved into the questions left open by Sereboff: How can Section 502(a)(3)’s requirement that equitable relief be “appropriate” restrict an ERISA plan’s right to recovery (and whether the principle of unjust enrichment can limit US Airways’ claim on McCutchen’s settlement)?:
McCutchen argues that the phrase “appropriate equitable relief” means more than just the relief that US Airways seeks must be of an equitable type; courts must also exercise their discretion to limit that relief to what is “appropriate” under traditional equitable principles. In particular, he argues that the principle of unjust enrichment frames US Airways’ claim. We agree.
In its rebuttal, US Airways cited three 3rd Circuit cases following the Sereboff decision in which the court declined to limit an ERISA plan administrator’s right to reimbursement under the plan terms. The court said:
While we recognize that the District Court may have considered itself bound by these cases, each came before the Supreme Court’s decisions in Knudson and Sereboff, which clarified the meaning of “appropriate equitable relief” in §502(a)(3), specified its central importance to fiduciaries’ reimbursement suits under ERISA, and thereby undermined the reasoning and holding of our prior decisions. Our prior opinions in [those three cases] did not consider whether the phrase “appropriate equitable relief” in §502(a)(3) limits a fiduciary’s right to relief. In fact, none of those cases even referenced §502(a)(3). These cases are therefore inapposite in light of the Supreme Court’s intervening decisions.
US Airways also cited cases from other appeals courts, some of which were decided after Sereboff, which supported its position. The court disagreed, saying limiting the scope of equitable relief was nothing new.
Congress purposefully limited the relief available to fiduciaries under §502(a)(3) to “appropriate equitable relief.” … While our sister circuits pay homage to this language, they appear to reason that its requirement has been met so long as the suit can be properly characterized as an equitable action, without also asking whether the relief sought in the action is “appropriate” under traditional equitable principles and doctrines.
‘Equity Abhors a Windfall’
The court cited the recent U.S. Supreme Court decision (Cigna Corp. v. Amara, (131 S. Ct. 1866, May 16, 2011) (see the May 2011 newsletter) to say that although US Airways had not engaged in any misconduct, the execution of its contractual right of recovery was limited by the principle of unjust enrichment:
the importance of the written benefit plan is not inviolable, but is subject – based on equitable doctrines and principles — to modification, and indeed, even equitable reformation under §502(a)(3). …While the basis for the reformation in Cigna was intentional misrepresentations by the employer and fiduciary, the broader and more relevant point is that when courts were sitting in equity in the days of the divided bench (or even when they apply equitable principles today) contractual language was not as sacrosanct as it is normally considered to be when applying breach of contract principles at common law. We do not suggest that US Airways conduct was fraudulent or dishonest in the way that Cigna’s was, but equitable principles can apply even where no one has committed a wrong.
In applying the traditional equitable principle of unjust enrichment, the court concluded that full reimbursement would not be “appropriate equitable relief,” consistent with ERISA Section 502(a)(3) because:
the amount of the judgment exceeds the net amount of McCutchen’s third party recovery, it leaves him with less than full payment for his emergency medical bills, thus undermining the entire purpose of the Plan. At the same time, it amounts to a windfall for US Airways, which did not exercise its subrogation rights or contribute to the cost of obtaining a third-party recovery. Equity abhors a windfall.
Accordingly, the appeals court vacated and remanded the district court’s judgment to determine what would be “appropriate equitable relief,” listing various factors for the district court to consider.
Implications
This case leaves open potential issues for discussion on remand.
Enforcement of Rights
In this case, the plan did not make attempts to enforce its rights and recoup funds until after the member settled his claims. This leaves open what, if anything, would have changed if the plan had attempted to intervene in the case prior to settlement.
Demand for Repayment
The plan also sought to recover more than what the member had retained from the settlement for himself. Not only did the plan file suit to recover the funds held in trust ($41,500), but also the balance of its lien. As a result of this demand, the member would have had to pay $25,366 above what was held in trust.
This presented more than a simple “common fund” issue as the plan was attempting to recover funds that represented more than the member’s net recovery after the member paid attorney’s fees and costs.
Applicable Plan Language
In a similar situation, a plan may have benefited from stronger plan language. For example, a plan may have had a stronger argument if the language explicitly disclaimed the made-whole and common-fund doctrines.
However, within the 3rd Circuit, the court presumes these limitations do not apply unless the plan specifically states they will. As a result, the language should have been enough under the deferential standard of review.
Appropriate Equitable Relief
In this case, the court stated that by the use of the word “appropriate,” Congress had intended to provide an injured plan participant with equitable limitations to the plan’s equitable rights. However, in discussing unjust enrichment, the door is opened to discuss the madewhole and common-fund doctrines.
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