From the Editor Equitable Reflux: Bright Line Rule Needed for Whether a Fiduciary Can Sue a Participant he ERISA world would be a better place if there was a clear set T of rules regarding whether a plan can recoup an overpayment of benefits. This spring, the Supreme Court in Sereboff v. Mid Atlantic Medical Services gave a partial answer—a participant who directly received an overpayment can be sued for equitable restitution under ERISA 502(a)(3)—but it left unresolved key aspects of this complex issue. Here is a view of where we are and a workable solution that the Court (or Congress) could adopt to keep this issue from endlessly repeating itself. As readers of Benefits Law Journal know, ERISA Section 502(a)(3) allows a plan fiduciary to sue a participant to obtain “appropriate equitable relief” to enforce a provision of ERISA or the plan terms. On its face, this phrase could be interpreted simply as meaning the relief must be fair and reasonable. According to the Supreme Court’s 1993 decision in Mertens v. Hewitt Associates , however, equitable relief refers only to those types of relief that typically were available in courts of equity—such as injunction, mandamus, and restitution—in the days of the divided bench. Given that the melding of law and equity into a single legal system began more than 150 years ago, it takes a fair amount of mental gymnastics to apply 18th and 19th century standards for determining what is equitable to 21st century employee benefit plan litigation. A fiduciary’s ERISA action against a plan participant to recover a payment first reached the Supreme Court four years ago in Great West v. Knudson , a suit to enforce a health plan’s subrogation clause. In Knudson , a plan participant sustained some $411,000 of medical costs from an auto accident that left her a paraplegic. The participant eventually recovered $650,000, to be divvied up as such: $256,000 for a special needs trust to cover her future medical costs, $5,000 to reimburse state Medicaid, and the remainder for attorney fees. Having been stiffed, Great West, as assignee of the health plan’s subrogation rights, sued the participant for reimbursement of the entire $411,000 it had covered. The company lost. The Supreme Court found that Great West was basically seeking legal restitution for money it was owed, and it ruled this was not an available remedy under ERISA Section 502(a)(3). To bring an action for equitable relief under ERISA, the Court said Great West would need to demonstrate that it was seeking to impose a constructive trust on identifiable assets in the participant’s possession. Since the participant never directly received a dime, Great West was out of luck. BENEFITS LAW JOURNAL 1 VOL. 19, NO. 3, AUTUMN 2006
From the Editor Knudson illustrates the common sense notion that insurance com- panies should not sue destitute paraplegics advised by clever lawyers. Legally speaking, it left in its wake a sea of confusion in the lower courts. The Sixth and Ninth Circuits (as well as various District Courts) read Knudson to mean that a strict tracing of funds rightfully owing to the plan is necessary for a fiduciary to compel equitable restitution. Since funds from a tort settlement typically are quickly commingled with a participant’s other funds, this position effectively stymied all efforts to compel subrogation, even if the participant received a direct recovery for his injuries. In contrast, the Fifth, Seventh, and Tenth Circuits took a more lenient position, allowing ERISA Section 502(a)(3) actions to proceed if the participant directly received the funds. This split went beyond subrogation claims and prevented some actions by a plan against a participant to recoup a mistaken overpay- ment of health, pension, disability, or other benefits. Enter Serebof. Marlene Sereboff and her husband were covered by a health plan sponsored by Mid Atlantic, Marlene’s employer. The plan provided that if a participant was injured in an accident, any medical expenses paid by the plan must be reimbursed from “all recoveries from a third party.” The plan language was clear that the plan was entitled to a first dollar recovery from the proceeds of any tort litigation, settle- ment, or other award unless Mid Atlantic agreed to take a lower amount. The Sereboffs were involved in an auto accident where they incurred $75,000 in medical expenses that were fully paid by the plan. Mid Atlantic sent the Sereboffs’s plaintiff’s lawyer several letters reminding his clients of the subrogation clause. The Sereboffs eventually recovered $750,000 from the accident, but they refused to reimburse the plan its $75,000. Mid Atlantic, as plan fiduciary, sued the Sereboffs on the grounds that it was entitled to the money as “appropriate equitable relief” under ERISA Section 502(a)(3). The Sereboffs countered that Mid Atlantic was merely seeking monetary damages, and both Mertens and Knudson ruled monetary damages were not available under ERISA. Citing precedents dating back almost as far as the Civil War, the Supreme Court ruled for Mid Atlantic. Because the health plan had specifically provided for subrogation and the proceeds of the settle- ment from the auto accident were paid directly to the Sereboffs, the Court said its claim was an action for equitable restitution permit- ted under ERISA Section 502(a)(3). In the words of the Court, the plan language created “an equitable lien by agreement” that allowed Mid Atlantic “to follow . . . the recovery into the Sereboffs’ hands.” Dancing on the head of a pin, the unanimous Court distinguished the Mid Atlantic’s claim from Great West’s efforts in Knudson —char- acterized as an improper attempt to seek legal restitution of funds that could not be strictly traced to the participant. According to the BENEFITS LAW JOURNAL 2 VOL. 19, NO. 3, AUTUMN 2006
From the Editor Court, once the Sereboffs touched the money, equitable restitution was available. The Supreme Court dropped a footnote at the end of Sereboff not- ing, without further guidance, that there is an issue of what types of equitable relief would be “appropriate” under ERISA Section 502(a)(3). For example, could the common law make-whole doctrine be applied to reduce the plan’s recovery? The facts of Knudson offer a perfect illustration of the problem. If Great West had prevailed, it would have been entitled to a $411,000 reimbursement of the medi- cal expenses it paid out. Netting out the legal fees, this would have amounted to more than $150,000 in excess of the participant’s total tort recovery. To fully reimburse Great West, this amount would have had to come from the participant’s own pocket, a substantial reduc- tion in legal fees, or both. A fiduciary should not expect an injured participant to endure the travails of litigation, or for attorneys to work pro bono, merely to satisfy a health plan’s subrogation rights. The Supreme Court missed an opportunity to state, even in dicta , that an ERISA version of the make-whole doctrine is “appropriate.” Regrettably, Sereboff left unresolved this and many other issues that are likely to haunt us for years to come. For example, had the Sereboffs been more devious, could they have prevailed by funneling their tort recovery directly to their kid’s college fund, their favorite charity, or perhaps the local Lexus dealer? Can a fiduciary follow the money and proceed against a third party? What if the portion of the participant’s recovery allocated to medical costs is insufficient to cover all of the bills paid by the plans? What if the participant directly receives the funds but blows them all in Vegas? Lacking guidance, plans, participants, and lower courts will continue to struggle for a solution. Inevitably, there will be a spilt among the Circuits, putting ERISA Section 502(a)(3) back before the Supreme Court. While Supreme Court Justices may enjoy debating the intricacies of equitable doctrines, the rest of us just need a fair and user-friendly rule to follow. Here are suggested rules for putting this matter to bed: 1. Whether the participant spends, gifts, or gambles away the money he or she actually receives is not relevant to whether an ERISA Section 502(a)(3) action can proceed to recover those funds. 2. Suits may proceed against the special needs trust, college fund, or other third party direct recipient of the funds. 3. The allocation of the tort recovery by the parties should be ignored since, as the Supreme Court Justices noted in oral BENEFITS LAW JOURNAL 3 VOL. 19, NO. 3, AUTUMN 2006
From the Editor argument during Sereboff , the plaintiffs would then simply opt to allocate as little as possible towards past medical expenses. 4. Trial courts should have wide latitude in applying equitable principles, such as the make-whole doctrine, by reducing the plan’s share of any recovery. Plaintiff’s lawyers are entitled to be paid and plan participants should not be expected to undertake litigation without a meaningful share in the recovery. A final note: until we have a full set of workable rules, it would be prudent for plan sponsors to include a provision in every plan document giving the administrator the right (but not the obligation) to recapture any overpayment or third party payment. Equally impor- tant, I would advise both fiduciaries and participants to be reasonable in resolving subrogation or overpayment issues. In other words, don’t be a pig. Editor’s note: For more on the landmark Sereboff case, please see the analysis on page 5, and the Federal Benefits Developments column on page 58. David E. Morse Editor-in-Chief Kirkpatrick & Lockhart Nicholson Graham LLP New York, NY BENEFITS LAW JOURNAL 4 VOL. 19, NO. 3, AUTUMN 2006
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