Since the United States Supreme Court decision of Sereboff v. Mid-Atlantic Medical Services, Inc., 547 US 356 (2006), there has been much debate regarding the scope of an ERISA reimbursement claim. For the first time a federal court has ventured outside the normal analysis of equitable relief under ERISA and examined how the term “appropriate” may affect a reimbursement claim made under ERISA. In this week’s US Airways decision, the Third Circuit found that Congress intended equitable considerations be taken into account when considering the reimbursement claims of ERISA plans, which are based in contractual plan language. The court suggests that in resolving a personal injury claimant’s reimbursement obligation to an ERISA plan, the written plan remains the key factor, but adequate consideration should be given to the facts of the case and whether or not the ERISA plan is being unjustly enriched. We do not believe this case allows for an absolute or overzealous application of equitable considerations, nor does it provide for a systematic reversal of written plan language. Rather, we believe that it allows for an equitable and fact based analysis in the verification and resolution of an ERISA plan’s reimbursement rights.
In US Airways, Inc. v. McCutchen, No. 10-3836, decided November 16, 2011, the Third Circuit Court of Appeals vacated a district court decision (Western District of Pennsylvania), which ordered 100% reimbursement to US Airways (a self-funded ERISA plan). The Third Circuit also remanded the case to fashion “appropriate equitable relief.” This ruling is based on statutory language which states that an ERISA plan’s rights to enforce its plan terms is governed by ERISA’s § 502(a)(3), which limits the available relief to an injunction or “other appropriate equitable relief.” The court ultimately found that Congress intended to limit this relief through the application of equitable defenses and principles.
The Facts
In 2007, James McCutchen, an airline mechanic for US Airways, was injured in a car accident. His health insurance plan, which was sponsored through his employer, paid nearly $67,000 to cover his medical expenses. Mr. McCutchen received a total recovery of $110,000 which was comprised of $10,000 in liability coverage and $100,000 in underinsured coverage. After attorney fees and expenses the net recovery was less than the reimbursement amount claimed by US Airways. Mr. McCutchen’s counsel placed $41,500 in a trust account on the belief that any ERISA lien would be proportionately reduced to reflect procurement costs. When the reimbursement claim was not satisfied, US Airways filed an ERISA claim in federal District Court seeking “appropriate equitable relief” in the form of a constructive trust or equitable lien on the $41,500 held in trust and an additional $25,366 personally from Mr. McCutchen.
US Airways claimed that its reimbursement language, which stated that a plan member is “required to reimburse the Plan for amounts paid for claims out of any monies recovered from a third party”, allowed it to recoup the entire amount of its claim. In turn, Mr. McCutchen argued that it would be inequitable for the plan to recover when he had not been fully compensated for his injuries. Furthermore, the plan would be unjustly enriched if it were able to recover without adequately accounting for procurement costs. The District Court rejected this argument by relying on the “any monies recovered” language contained in the plan and granted summary judgment to US Airways.
The Third Circuit’s Decision
The court sought to answer the fundamental question of whether § 502(a)(3)’s requirement that equitable relief be “appropriate” means that an ERISA plan is subject to the equitable defenses and principles that are “typically available in equity.” In framing this question the court relied on two principles. First, the court noted that Congress gave greater rights to a plan member than the plan itself. A plan member has a general right to enforce the terms of a plan whereas the plan has a limited right to enforce the terms; limited to appropriate equitable relief. Second, the court recognized that the Supreme Court in both Knudson and Sereboff defined whether a claim was equitable in nature in terms of imposing an equitable lien and identifying a specific fund. While these two decisions clarified the nature of an equitable claim, the Third Circuit noted that the Supreme Court expressly reserved the question of the qualifying term “appropriate” and whether this term would allow for the application of equitable defenses to such a claim. Under the context of Mr. McCutchen’s case, the specific issue of appropriate equity was countered with the claim of unjust enrichment.
The court found that Congress intended to limit the equitable relief available under § 502(a)(3) through the application of equitable defenses and principles that were typically available in equity. Interestingly, the court did not end its analysis with this answer. Instead, it proceeded to address two issues of monumental importance which are likely to set the table for years of future ERISA-related debate.
First, the Court tackled the principle of unjust enrichment. On appeal, the unjust enrichment issue centered on a “common fund’ type of argument and whether or not the plan must make some sort of allowance for procurement costs incurred. The court mentioned in footnote 2 of the US Airways decision that the made whole doctrine presented to the District Court was not presented on appeal and thus they declined to address it. The court analyzed “relief typically available in equity” and its interplay with unjust enrichment. The court stated that “unjust enrichment is broadly applicable to claims for equitable relief” citing to 4 Palmer, Law of Restitution § 23.18, which provides that the “principle of unjust enrichment . . . should serve to limit the effectiveness of contract provisions which in terms provide for reimbursement out of the insured’s tort recovery without regard to whether or the extent to which, that recovery includes medical expense.” In short, this court indicates that unjust enrichment is a principle which covers more than a common fund consideration and is applicable when considering any ERISA claim.
Second, and most significantly, the court determined that while the express terms of plan language are important and create the equitable claim, such express terms cannot limit or foreclose the discussion regarding that claim’s appropriateness. This is a departure from other ERISA cases whereby equity is found by applying the express terms of the plan even if in opposition to federal common law (most notably in Zurick Am. Ins. Co. v. O’Hara, 604 F.3d 1232 (11th Cir. 2010)). The Court does not disagree with enforcing the express terms of plan language but rather holds that such enforcement must be subject to a court’s discretion in applying an appropriateness standard.
Nevertheless, the Third Circuit did not define “appropriate equitable relief” as it remanded to the District Court to determine whether US Airways’ claim would constitute appropriate equitable relief based on factual findings. However, the Third Circuit is the first court to tackle the meaning of the term “appropriate” in determining the scope of a plan’s recovery rights under ERISA. Arguably, the court’s discussion and interpretation of appropriate equitable relief would allow for the consideration of equitable defenses even in the face of plan language to the contrary. Consequently, the US Airways decision leaves plenty of room for further debate as the import of equitable remedies (such as applying the concept of unjust enrichment in certain cases) becomes clearer.
The Take Aways
At least in the Third Circuit, to apply equitable principles of recovery, settling parties should strongly consider the need to take into account procurement costs, perhaps in the same manner that Medicare and Medicaid recovery contractors do, regardless of plan language. At the same time, plan language will still control the extent and scope for which plans have recovery rights in third party liability matters, thereby framing the issues that will lead to resolution of ERISA liens. In any event, resolving ERISA liens continues to require the settling parties to take into account inter-related and often competing concepts of asset preservation for plans and equity for the parties. The US Airways decision may lead to a new lien resolution framework, but for now, it serves as another reminder that a formalized process to verify, resolve and satisfy ERISA liens must take into account the various complexities, including the intersection of equitable remedies and equitable defenses.
The Garretson Resolution Group will continue to closely monitor how US Airways may affect the resolution of other ERISA healthcare liens in the Third Circuit, and also, any decisions that result in similar developments among other jurisdictions.
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