3rd. Circuit Court of Appeals erodes ERISA plan's right to full reimbursement

The 3rd. Circuit Court of Appeals, has entered a decision under principals of fairness and equity that erodes an ERISA plans right to full reimbursement.  US Airways, Inc. v. McCutchen (3rd. circuit 2011).

This case stemed from a tragic car accident in which James McCutchen was grievously injured and survived only after emergency surgery. He spent several months in physical therapy and ultimately underwent a complete hip replacement. Post accident, McCutchen, who had a history of back surgeries and associated chronic pain, became unable to effectively treat his pain with medication. The accident 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 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. Soon after, McCutchen's attorneys placed $41,500 in a trust account, reasoning that any lien found to be valid would have to be reduced by a proportional amount of legal costs. 

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 "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.

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. US Airways claimed that this language permited it to recoup the $66,866 it provided for McCutchen's medical care out of the $110,000 total that he recovered regardless of his legal costs. 

McCutchen argued that it was unfair and inequitable to reimburse US Airways in full when he had not been fully compensated for his injuries, including pain and suffering. He also argued that US was not out  time or money in pursuing the third party.  To permit US full recovery would be unjustly enrich it. In other words, the ERISA plan was "reaching  into its beneficiary's pocket, putting him in a worse position than if he had not pursued a third-party recovery at all."

The trial court rejected McCutchen's arguments and granted summary judgment to US Airways. The Court required McCutchen to sign over the $41,500 held in trust and to pay $25,366 from his own funds. 

^{ERISA DISCUSSED}

The Court stated:  "Congress designed ERISA to protect employee pensions and benefits by providing pension insurance, enumerating certain specific characteristics of pension and benefit plans, and setting forth fiduciary duties for the managers of both pension and nonpension plans. Varity Corp. v. Howe, 516 U.S. 489, 496 (1996). The Supreme Court has repeatedly observed that "ERISA is a comprehensive and reticulated statute, the product of a decade of congressional study of the Nation's private employee benefit system." Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 209 (2002) (quoting Mertens v. Hewitt Assocs., 508 U.S. 248, 251 (1993)) (internal quotation marks omitted). Courts have therefore been reluctant to tamper with its carefully crafted and detailed enforcement scheme. Id. Under this scheme, Congress gave plan beneficiaries greater rights than plan fiduciaries to enforce the terms of a benefit plan. A beneficiary has a general right of action "to enforce his rights under the terms of the plan." Knudson, 534 U.S. at 221 (quoting 29 U.S.C. § 1132(a)(1)(B)). By contrast, 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); Knudson, 534 U.S. at 221; Sereboff v. Mid Atlantic Medical Servs., Inc., 547 U.S. 356, 361 (2006). It is under this provision that US Airways seeks to enforce the Plan's subrogation and reimbursement provision against McCutchen.

The Supreme Court has explained that the modifier "appropriate equitable relief" is not superfluous. Mertens, 508 U.S. at 257-58. Rather, "Congress's choice to limit the relief available under § 502(a)(3) to `equitable relief' requires us to recognize the difference between legal and equitable forms of restitution." Knudson, 534 U.S. at 218. 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." Cigna Corp. v. Amara, 131 S. Ct. 1866, 1878 (2011) (quoting Sereboff, 534 U.S. at 361) (internal quotation marks omitted)."

By applying the equitable principle of unjust enrichment, the Court of Appeals stated that the trial court's decision constituted inappropriate and inequitable relief. Because the the judgment exceeded the net amount of McCutchen's third-party recovery, it left him with less than full payment for his emergency medical bills, thus undermining the entire purpose of the Plan. The Court of Appeals also stated that it amounted to a windfall for US Airways, which did not exercise its subrogation rights or contribute to the cost of obtaining the third-party recovery. The Court of Appeals stated that "Equity abhors a windfall. See Prudential Ins. Co. of America v. S.S. American Lancer, 870 F.2d 867, 871 (2d Cir. 1989)."

^{The trial court's decision was vacated and remanded to determine what was "appropriate equitable relief."}

^{I hope this gives you ammunition going forward to help prevent the injustices of of past ERISA inflexability.}