WASHINGTON, D.C. - (Mealey's) The Third
Circuit U.S. Court of Appeals erred in ruling that a health plan
administrator's claim for reimbursement against a plan participant is subject
to equitable limitations, including unjust enrichment, under Employee
Retirement Income Security Act Section 502(a)(3), where the plan's terms give the
plan an absolute right to full reimbursement, US Airways Inc. told the U.S.
Supreme Court on Nov. 27 (U.S. Airways, Inc. v. James McCutchen, et al.,
No. 11-1285, U.S. Sup.; See November 2012, Page 12).
(Transcript available. Document #54-121211-017T.)
By vacating the U.S. District
Court for the Western District of Pennsylvania's order requiring James
McCutchen, a participant in the U.S. Airways Inc. Employee Benefits Plan, to
reimburse the health plan for the entire amount it paid on McCutchen's behalf
without allowing for the legal costs McCutchen expended in obtaining a
third-party settlement, the Third Circuit misinterpreted Section 502(a)(3),
which authorizes a plan administrator to seek "appropriate equitable relief" to
"enforce . . . the terms of the plan," Neal Kumar Katyal of Hogan Lovells in
Washington argued for US Airways.
Equitable Liens By
"Six years ago, this Court,
in Sereboff [v. Mid Atlantic Medical Servs., Inc. (547 U.S. 356 ) [enhanced version available to lexis.com subscribers];
See June 2006, Page 4], concluded that reimbursement actions by ERISA plans,
such as the one at issue here, seek equitable liens by agreement. And because
the plan's claim here is one for an equitable lien by agreement, that means one
person with equitable defenses, those derived from unjust enrichment, offer no
help to Respondents," Katyal said.
Justice Ruth Bader Ginsburg
said Sereboff contained a footnote "that leaves open the make-whole
doctrine," and Katyal responded that "once the Court has decided that the type
of action that is at issue here is an equitable lien by agreement, the relevant
doctrine . . . that the Court is to look to is how are equitable liens by
agreement evaluated in equity." "And those rules in equity say that . . .
the one set of defenses that aren't governed, are those that sound [in] unjust
"[W]hen we're talking about
equitable liens by agreement, it is the agreement that controls," Katyal said.
Justices Ginsburg and Anthony
M. Kennedy noted that the plan contained a clause labeled "subrogation" but did
not contain a reimbursement clause. Justice Antonin Scalia commented that
the Supreme Court would not have taken the case to determine what the
particular plan in the instant case said, and Katyal argued that McCutchen
waived the argument.
Justice Kennedy later
commented that although the plan labeled the clause "subrogation," he did not
think it meant subrogation. Katyal said the common-fund rule still would
not apply because that doctrine was "based in unjust enrichment."
Assistant to the Solicitor
General Joseph R. Palmore, representing the United States as amicus curiae
in support of neither party, agreed with US Airways' position that "[a]t equity,
. . . an equitable lien by agreement . . . was generally enforceable according
to its terms."
Palmore characterized the
instant agreement as a "reimbursement agreement" and said that the common-fund
doctrine applies, even though the plan said it did not, and that other
equitable doctrines do not apply. "[T]he plan can't divest the Court of
[its] powers," Palmore said.
"[T]o the extent this Court
is willing to look at the - at the - the purposes of ERISA, that the position
that we've advanced strikes the right balance and in particular it avoids the
negative recovery scenario that is a particularly harsh result of Petitioner's
position," Palmore said.
Matthew W.H. Wessler of Public Justice in Washington argued that the agreement was "a
subrogation agreement. The claim, however, that Petitioners have pursued
here, is a reimbursement claim. And - but it's based on an express
subrogation clause. And in equity, reimbursement claims, which to be
clear, are distinct from subrogation claims because they involve a suit
directly against the insured as opposed to against the tortfeasor, are governed
by the same principles of subrogation that equity treated - equity used to
apply to all claims that involved an insurer who is seeking to recover money
from either an insured or a tortfeasor."
"[T]he mere fact that [a
claim for reimbursement is] the form of the action, which in Sereboff this
Court called an equitable lien by agreement, does not alter the underlying rule
that equity courts in the days of the divided bench would have applied to the
claim," Wessler said.
Wessler distinguished between
two-party cases in which the defendant was also the wrongdoer and three-party
cases in which the defendant did not trigger the loss. In two-party
cases, "when courts awarded relief, they awarded relief that was consistent
with the defendant's unjust enrichment, but was also co-extensive with or
consistent with the loss under the contract." In three-party cases, the
courts concluded that "where there is a fund that is insufficient, where it
cannot cover all of the losses suffered by all of the parties, that - that all
of the parties must share equally with - of the loss," Wessler said.
Justice Elena Kagan asked
whether it was "fair to say" that there were no cases similar to the instant
case that occurred in equity courts. Wessler agreed but said that one of
the reasons that it didnot occur was because ERISA Section 502(a)(3) limited a
plan from obtaining "a general right to equitable relief. All that the
Petitioner can . . . seek here is . . . appropriate equitable relief to enforce
the terms of its plan."
On rebuttal, Justice Sonia
Sotomayor expressed concern with how an agreement between the participant and
the plan could bind a lawyer who recovers the fund. Katyal responded that
"it's a mistake to see this as a third-party case. This is really a
situation created by Mr. McCutchen double-promising the same money to two
entities, US Air and to his lawyers. And so it's essentially a dispute
really among two parties, not three."
McCutchen suffered serious
injuries in an automobile accident. The health plan paid $66,866 in
medical expenses on his behalf.
McCutchen recovered $110,000
from third parties. After paying a 40 percent contingency attorney fee
and expenses, McCutchen's net recovery was less than $66,000. US Airways,
which had not sought to enforce its subrogation rights, demanded reimbursement
for the entire amount it paid for McCutchen's medical bills. McCutchen's
attorney placed $41,500 in a trust account.
The benefits plan contained a
subrogation and right of reimbursement clause that required a beneficiary to
reimburse the plan "out of any monies recovered from a third party."
US Airways sued McCutchen and
his attorney under Section 502(a)(3), 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 District
Court granted summary judgment to US Airways [enhanced version available to lexis.com subscribers].
In vacating the judgment, the
Third Circuit concluded [enhanced version available to lexis.com subscribers] that US Airways' claim for reimbursement under Section
502(a)(3) was subject to equitable limitations, specifically the principle of
"[I]t 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," the panel
In addition, the Third
Circuit said the Supreme Court found in Cigna Corp. v. Amara (131 S.Ct.
1866  [enhanced version available to lexis.com subscribers]; See May 2011, Page 4) that "the importance of the written benefit
plan is not inviolable, but is subject-based upon equitable doctrines and
principles-to modification and, indeed, even equitable reformation under §
In the instant case, the
Third Circuit concluded that under "the traditional equitable principle of
unjust enrichment," the District Court's judgment requiring McCutchen to
provide full reimbursement to US Airways without allowance for McCutchen's
legal costs "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 U.S. Airways, which did not exercise its subrogation rights
or contribute to the cost of obtaining the third-party recovery. Equity
abhors a windfall," the panel said.
US Airways is also represented by Catherine E. Stetson,
Dominic F. Perella, Mary Helen Wimberly and Sean Marotta of Hogan Lovells in
Washington, Noah G. Lipschultz of Littler Mendelson in Minneapolis
and Susan Katz Hoffman of Littler Mendelson in Philadelphia.
McCutchen is also represented
by Leah M. Nicholls of Public Justice in Washington;
Leslie A. Brueckner and Arthur H. Bryant of Public Justice in Oakland,
Calif.; Jon R. Perry and Paul A. Hilko of
Rosen, Louik & Perry in Pittsburgh; and
Peter K. Stris and Brendan S. Maher of Stris & Maher in Dallas.
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