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) (lexis.com
subscribers may access Supreme Court briefs and the 3rd Circuit opinion under review).
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 Agreement
"Six years ago, this Court, in Sereboff [v. Mid
Atlantic Medical Servs., Inc. (547 U.S. 356 ); 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 enrichment."
"[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
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.
Representing McCutchen, 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
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.
'Appropriate Equitable Relief'
In vacating the judgment, the Third Circuit concluded
that US Airways' claim for reimbursement under Section 502(a)(3) was subject to
equitable limitations, specifically the principle of unjust enrichment.
"[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 reasoned.
In addition, the Third Circuit said the Supreme Court
found in Cigna Corp. v. Amara (131 S.Ct. 1866 ; 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 § 502(a)(3)."
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
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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