The ERISA Litigation Newsletter- December 2012

Editors' Overview

In this month's edition we explore the arguments asserted by the parties in US Airways v. McCutchen as to whether, and under what circumstances, plans may enforce provisions entitling them to reimbursement of previously paid medical benefits where the participant obtains a recovery from another source. The central issue presented by the parties is whether unambiguous written plan provisions may be altered based on the argument that enforcement of these provisions would not constitute ''appropriate equitable relief'' under Seciton 502(a)(3) of ERISA. The Supreme Court heard oral argument on this important and hotly litigated issue on November 27, 2012, and if history repeats itself, the McCutchen opinion could have a much broader impact on ERISA remedies than merely opining as to reimbursement issues presented in the case.

As always, be sure to review the section on Rulings, Filings, and Settlements of Interest.

Supreme Court Revists Meaning of 'Appropriate Equitable Relief' in US Airways v. McCutchen*

Contributed by Howard Shapiro

It is a familiar scenario: a health plan participant sustains serious injuries in an accident caused by a tortfeasor. The tortfeasor has limited or no ability to respond in damages. The health plan pays out substantial benefits covering medical costs for the participant's injuries. The language of the health plan requires reimbursement of all amounts paid to the participant, so that the plan is made whole for the benefits it paid. But the participant does not receive sufficient money from the tortfeasor to be made whole for both his injuries and the medical costs. Thus, if the participant makes the plan whole for the medical costs, the participant will not obtain a full recovery for his injuries.

Reimbursement claims are asserted by the health plan against the participant and, sometimes, the participant's personal injury counsel, under Employee Retirement Income Security Act Section 502(a)(3),1 seeking '"other appropriate equitable relief.'" Twice, the Supreme Court has considered the meaning of relief under these circumstances.2 These past holdings helped shape and define the contours of equitable relief under Section 502(a)(3).

On Nov. 27, 2012, in the case of US Airways v. McCutchen,3 the Supreme Court will hear oral argument again as to what constitutes appropriate equitable relief where a plan asserts a reimbursement claim against a participant and his personal injury counsel. At issue is the meaning of the adjective ''appropriate'' as it applies to equitable relief and equitable defenses. The Third Circuit held that the plan's make-whole relief may not constitute appropriate equitable relief under Section 502(a)(3) because the plan's judgment exceeded the amount of the participant's third-party recovery, net of attorneys' fees. The court reversed and remanded a grant of summary judgment for the plan and held that instead of enforcing the unambiguous written provisions of the plan that compelled such a result, the participant may present traditional equitable defenses to defend against the application of an unambiguous written plan provision.4

This issue is an important one. First, a welfare plan's reimbursement right may have an impact on the financial viability of the plan. Second, a participant's ability to assert equitable defenses to override unambiguous plan language may have major repercussions beyond reimbursement claims. Third, the decision may impact the definition of what constitutes ''appropriate equitable relief'' under Section 502(a)(3). Fourth, the issue has been hotly litigated. The Ninth Circuit recently joined the Third Circuit's minority view in CGI Technologies and Solutions, Inc. v. Rose,5 stating ''We agree with the Third Circuit that under § 502(a)(3), the district court, in granting 'appropriate equitable relief,' may consider traditional equitable defenses notwithstanding express terms disclaiming their application.'' However, construing ''appropriate equitable relief'' under Section 502(a)(3), the Fifth, Seventh, Eighth, and Eleventh Circuits have enforced express plan language, and applied traditional contract principles resulting in full plan reimbursement, precluding a participant's application of equitable defenses.6

Facts of the Case

A multi-vehicle car accident occurred; one person was killed, two suffered severe brain injuries, and McCutchen sustained severe and disabling injuries. The plan paid out $66,866 for McCutchen's medical expenses. The tortfeasor was not well insured. Given the serious injuries sustained by the two other survivors and the death of the third motorist, McCutchen settled for $10,000 from the tortfeasor and an additional $100,000 from his underinsured motorist coverage, a gross settlement of $110,000.

The fee paid to McCutchen's personal injury counsel constituted 40 percent of the settlement amount. McCutchen netted $66,000 and his personal injury counsel placed $41,500 in a trust account. The US Airways plan then demanded reimbursement of the entire $66,866 paid out for McCutchen's medical bills. When McCutchen and his counsel refused to pay that amount, the US Airways plan sued under Section 502(a)(3), seeking appropriate equitable relief in the amount of the $41,500 held in trust by personal injury counsel and $25,366 personally from McCutchen.

Third Circuit Opinion

The court began by analyzing prior Supreme Court precedent: Great–West Life & Annuity Ins. Co. v. Knudson,7 and Sereboff v. Mid Atlantic Medical Servs., Inc.8 In both cases, plans sought reimbursement from participants. In Great-West, the high court held that the fiduciary's right to enforce plan terms was limited to equitable remedies or other ''appropriate equitable relief.'' The court also held that the theory of equitable restitution was limited to recovery of a particular res or fund found in the participant's possession. Because in Great-West, the funds sought by the plan were not in the participant's possession, but were instead placed in a special needs trust under California law, the plan was unable to recover them. In Sereboff, the funds were traceable and in the possession and control of the plan participant. Applying the principle of equitable lien by agreement, in Sereboff, the Supreme Court permitted the plan to seek equitable relief.

In McCutchen, the Third Circuit framed the following issue left open by Sereboff: ''whether § 502(a)(3)'s requirement that equitable relief be 'appropriate' means that a fiduciary like US Airways is limited in its recovery from a beneficiary like McCutchen by the equitable defenses and principles that were 'typically available in equity.'"9 The court observed that ''it would be strange for Congress to have intended that relief under § 502(a)(3) be limited to traditional equitable categories, but not limited by other equitable doctrines and defenses typically applicable to those categories.''10 This observation is the predicate for the court's controlling rationale—namely, that Congress intended that equitable relief includes equitable defenses to unambiguous plan language.

The Third Circuit next considered the uncontested facts that the reimbursement language was unambiguous and that US Airways' conduct was neither fraudulent nor dishonest. Despite these facts, the court relied upon CIGNA Corp. v. Amara,11 for the proposition that while there is an emphatic preference for written plan provisions, that principle is not inviolable. The court noted that CIGNA Corp. recognized that plans could be modified by the application of equitable reformation and held that equitable principles could apply even if defendant has not committed a wrong.12 The court held that the application of the full reimbursement plan provision constituted inappropriate and inequitable relief, because McCutchen would have to pay the plan more than his net recovery from the lawsuit. The court described this event as a windfall for the plan because US Airways did not contribute to the cost of obtaining recovery from the tortfeasor. As to what would constitute appropriate equitable relief and equitable defenses, the court remanded.13

The Parties' Supreme Court Briefs

In its brief to the Supreme Court, petitioner US Airways focuses on the language of Section 502(a)(3), the primacy of written plan documents, and scenarios explaining why enforcement of reimbursement provisions are both equitable and promote the expansion of ERISA coverage. US Airways criticizes the Third Circuit's construction as neglecting the entire text of Section 502(a)(3). Instead of asking what is ''appropriate equitable relief,'' US Airways argues that the statute contemplates ''appropriate equitable relief'' to enforce the terms of the plan. This anchors equitable relief to plan...