Where a claimant succeeds in obtaining a settlement or award following an injury, fiduciary Health Benefit Plans that paid for the claimant's immediate healthcare needs are limited in recovering their costs from that claimant by equitable principles. Thus, in this case, US Airways was not permitted to recover the $66,866 it spent on McCutchen's medical bills when he - on his own - successfully sued the driver who hit and injured him.
FACTS.
This case stems from a tragic car accident in which a young driver lost control of her car, crossed the median of the road, and struck a car driven by 51-year-old James McCutchen. Then the truck traveling behind McCutchen also slammed into his car. The accident killed one person and left two others with severe brain injuries. McCutchen himself was grievously injured and survived only after emergency surgery. He spent several months in physical therapy and ultimately underwent a complete hip replacement. Since the accident, McCutchen, who had a history of back surgeries and associated chronic pain, has also become unable to effectively treat that pain with medication. The accident has rendered him functionally disabled. McCutchen’s Health Benefit Plan (the “Plan”), administered and self-financed by US Airways, paid medical expenses in the amount of $66,866 on his behalf.
After the accident, McCutchen, through his attorneys at Rosen Louik & Perry, P.C., filed an action against the driver of the car that caused the accident. Because she had limited insurance coverage, and because three other people were seriously injured or killed, McCutchen settled with the other driver for only $10,000. However, with his lawyers’ assistance, he and his wife received another $100,000 in underinsured motorist coverage for a total third-party recovery of $110,000. After paying a 40% contingency attorneys’ fee and expenses, his net recovery was less than $66,000. US Airways demanded reimbursement for the entire $66,866 that it had paid for McCutchen’s medical bills.
When McCutchen did not pay, US Airways, in its capacity as administrator of the ERISA benefits plan, filed suit in the District Court under § 502(a)(3) of ERISA, seeking “appropriate equitable relief” in the form of a constructive trust or an equitable lien on the $41,500 held in trust and the remaining $25,366 personally from McCutchen.
The Summary Plan Description describing the US Airways benefits plan covering McCutchen contained the following paragraph, entitled “Subrogation and Right of Reimbursement”:
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.Thus, under the Plan Description, a beneficiary is required to reimburse the Plan for any amounts it has paid out of any monies the beneficiary recovers from a third party.
QUESTION.
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.”
ARGUMENTS.
McCutchen says that it would be unfair and inequitable to reimburse US Airways in full when he has not been fully compensated for his injuries, including pain and suffering. He argues that US Airways, which made no contribution to his attorneys’ fees and expenses, would be unjustly enriched if it were now permitted to recover from him without any allowance for those costs, in essence to reap what McCutchen has sown. Indeed, if legal costs are not taken into account, US Airways will effectively be reaching into its beneficiary’s pocket, putting him in a worse position than if he had not pursued a third-party recovery at all.
DISCUSSION.
A fiduciary’s right to enforce plan terms is governed by ERISA’s § 502(a)(3), which limits the available relief to an injunction or “other appropriate equitable relief.” 29 U.S.C. § 1132(a)(3).
The Supreme Court has explained that the modifier “appropriate equitable relief” is not superfluous. Rather, Congress’s choice to limit the relief available under § 502(a)(3) to ‘equitable relief’ requires courts to recognize the difference between legal and equitable forms of restitution.” Thus, the Supreme Court has “interpreted the term ‘appropriate equitable relief’ in § 502(a)(3) as referring to those categories of relief that, traditionally speaking (i.e., prior to the merger of law and equity) were typically available in equity.”
The Supreme Court has twice considered what this limitation means in the context of a fiduciary’s action for reimbursement from a beneficiary under an ERISA plan. In Great-West Life & Annuity Insurance Co. v. Knudson, the Court first considered whether an ERISA plan administrator’s claim for reimbursement was equitable in nature. To decide this question, the Court examined cases and secondary legal materials to determine whether the relief would have been equitable “[i]n the days of the divided bench.” As the Court explained, one feature of equitable restitution was that it sought to impose a constructive trust or equitable lien on “particular funds or property in the defendant’s possession.” The Court held that this requirement was not met in Knudson because the funds to which the plan claimed an entitlement had been placed in a “Special Needs Trust” under California law.
In Sereboff v. Mid Atlantic Medical Services, Inc., the Court again considered an ERISA plan administrator’s claim for reimbursement under the terms of the plan and § 502(a)(3). This time the plan administrator was able to overcome the initial hurdle of identifying specific funds within the beneficiary’s possession and control. Accordingly, the Court proceeded to consider whether there was a basis in equity for the administrator’s reimbursement claim. It held that the claim could be based on an equitable lien by agreement. Such a lien is not subject to the asset tracing requirements imposed on liens sought as a matter of equitable restitution. Nor is it inherently subject to the particular equitable defenses that accompany a freestanding action for equitable subrogation, which may only be asserted after a victim has been made whole for his injuries. Thus, the Court held that the plan administrator in Sereboff properly sought “equitable relief” under § 502(a)(3). However, it expressly reserved decision on whether the term “appropriate,” which modifies “equitable relief” in § 502(a)(3), would make equitable principles and defenses applicable to a claim under that section.
This case squarely presents the question that Sereboff left open: 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.”
The Third Circuit Court of Appeals concluded that it did. Specifically, it concluded 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 that were traditionally applicable to those categories. “[S]tatutory reference to [an equitable] remedy must, absent other indication, be deemed to contain the limitations upon its availability that equity typically imposes.” Accordingly, in light of the foregoing reasoning, and in the absence of any indication in the language or structure of § 502(a)(3) to the contrary, 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. On this basis, the Court held that US Airways was precluded from recovering by the doctrine of unjust enrichment.
HOLDING.
Applying the traditional equitable principle of unjust enrichment, the Court concluded that the judgment requiring McCutchen to provide full reimbursement to US Airways constitutes inappropriate and inequitable relief. 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 the third-party recovery. Equity abhors a windfall.
Therefore, the Court vacated the lower court's final judgment. It did not decide on appeal what would constitute appropriate equitable relief for US Airways because “equity calls for full factual findings rather than our speculation.”
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