High Court Considers Whether Participant Must Reimburse Health Plan Under ERISA

High Court Considers Whether Participant Must Reimburse Health Plan Under ERISA

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.).

(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 Agreement

"Six years ago, this Court, in Sereboff [v. Mid Atlantic Medical Servs., Inc. (547 U.S. 356 [2006] [enhanced version available to lexis.com subscribers], 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."

Government Position

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.

Equitable Remedies

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 three."

Agreement

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 [2011] [enhanced version]) 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 said.

Counsel

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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