The U.S. Supreme Court agreed on June 25 to decide whether an employee health plan is subject to equitable limits when it demands reimbursement of benefits paid to care for a covered employee who also recovers money from third parties.
A 2011 ruling on this issue by the 3rd U.S. Circuit Court of Appeals troubled plan administrators because it allowed plaintiffs to argue that the term “appropriate” in “appropriate equitable relief” authorized courts to override clear plan terms for reimbursement of all costs a plan paid from third-party awards. It seemed to expand the variety of lien reduction arguments available to participants holding on to settlement awards, regardless of ERISA-plan subrogation language.
In US Airways v. McCutchen, 2011 WL 5557411 (3rd Cir., Nov. 16, 2011), the circuit ruled the outcome would not be “appropriate” because the participant would have had to go into his personal funds to completely reimburse the plan, as the ERISA document required.
The Supreme Court will be considering the question of:
Whether the 3rd Circuit correctly held — in conflict with the 5th, 7th, 8th, 11th, and D.C. Circuits — that [ERISA’s enforcement provisions] authorize courts to use equitable principles to rewrite contractual language and refuse to order participants to reimburse their plan for benefits paid, even where the plan’s terms give it an absolute right to full reimbursement.
The Facts
James McCutchen survived a catastrophic auto accident involving two cars and a truck, killing two drivers and rendering him functionally disabled. He underwent emergency surgery, spent several months in physical therapy, underwent a series of back surgeries, and had a complete hip replacement.
He was covered by US Airway’s self-funded ERISA health plan, which paid $66,866 after the accident.
He retained an attorney who agreed to represent him for a contingent fee of 40 percent of any recovery.
But because the driver at fault had minimal liability insurance, and one of the other people responsible for the accident died, he settled the case for only $10,000. He and his wife received another $100,000 in underinsured motorist coverage for a total third-party recovery of $110,000.
Circuit: Make-whole Trumps Plan Language
After paying a 40-percent contingency attorney’s fee and expenses, McCutchen’s net recovery was less than $66,000. It was then that U.S. Airways sought reimbursement for the entire $66,866. McCutchen’s attorneys responded by placing $41,500 in trust, but when McCutchen did not pay, the airline, as administrator of the ERISA benefits plan, sued.
A district court ruled that McCutchen had to pay the plan the full $66,866 based on a clear plan provision calling for complete reimbursement of plan benefits. That would have included the $41,500 from the trust account plus $25,366 from his personal assets.
McCutchen contended the outcome was be unfair and inequitable, and the plan would be unjustly enriched if it got to collect from him without any allowance for those costs, because U.S. Airways made no contribution to his attorney’s fees and expenses.
On appeal, the 3rd Circuit concluded that US Airways’ claim for reimbursement is subject to equitable limitations, and vacated the district court’s judgment, remanding the case for further proceedings.
It harkened to the Supreme Court’s statement in the Great-West Life v. Knudson, 534 U.S. 204 (Jan. 8, 2002) that courts should limit equitable relief to what is “appropriate” under traditional equitable principles. In this case, the principle of unjust enrichment should limit US Airways’ claim, it said.
The 3rd Circuit also hung its hat on the U.S. Supreme Court decision in Cigna Corp. v. Amara,131 S. Ct. 1866 (May 16, 2011), which ordered a plan to rewrite a plan provision that had been misrepresented to the detriment of plan participants. Even though there was no misrepresentation by US Airways in McCutcheon, a court is authorized to refashion a plan provision to achieve an equitable result even in the absence of misrepresentation.