In US Airways, Inc. v. McCutchen, 2011 WL 5557411 (3rd Cir. Nov. 16, 2011), an ERISA plan sought reimbursement of 100% of what it had paid for medical bills for a car crash victim even though the victim had not been fully reimbursed because of limited liability coverage. The lawyers for the car crash victim claimed that the ERISA plan should reduce its claim pro rata for attorneys fees and costs. The ERISA plan administrators refused, and demanded reimbursement of 100% of what it had spent.
The ERISA plan eventually filed a lawsuit against the plan beneficiary seeking 100% reimbursement. The language of the plan states that the ERISA plan was entitled to reimbursement “for amounts paid for claims out of any monies recovered from a third party….”
Section 502(a)(3) of the ERISA Act allows an ERISA Plan to sue plan beneficiaries in cases like this, but they can only sue for “appropriate equitable relief.” The District Court determined that based on the Plan language that the ERISA Plan was entitled to 100% reimbursement. The District Court based its decision on the language of the Plan and refused to apply traditional equitable defenses to the Plan’s claims, such as the defenses of unjust enrichment and windfall. The plan beneficiary appealed to the 3rd Circuit.
The 3rd Circuit reversed. Citing the U.S. Supreme Court’s recent holding in Cigna Corp. v. Amara, ____ U.S. ____ (2011), the Court noted that an ERISA Plan’s ability to recover was statutorily limited to “appropriate equitable relief.” According to the Court, “appropriate equitable relief” required the District Court to apply defenses that are available in equity actions. The Court held:
Applying the traditional equitable principle of unjust enrichment, we conclude that the judgment requiring McCutchen to provide full reimbursement to U.S. Airways 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.
Two important points need to be mentioned. First, the McCutchen Court specifically recognized that its holding conflicted with the 11th Circuit’s holding in Zurich American Ins. Co. v. O’Hara, 604 F.3d 1232 (11th Cit. 2010) which required 100% reimbursement from a tort victim. In rejecting the 11th Circuit’s reasoning, the 3rd stated:
While our sister circuits pay homage to this language, they appear to reason that its requirement has been met so long as the suit can be properly characterized as an equitable action, without also asking whether the relief sought in the action is “appropriate” under traditional equitable principles and doctrines. But the Supreme Court has rejected a permissive reading of this language that would mean “all relief available for breach of trust at common law” because “[t]he authority of courts to develop a ‘federal common law’ under ERISA is not the authority to revise the text of the statute.” Mertens, 508 U.S. at 258–59 (citation omitted). By categorically excluding the equitable limitations that § 502(a)(3)’s reference to equitable remedies necessarily contains, the Shank and O’Hara courts depart from the text of ERISA. See Knudson, 534 U.S. at 211 n. 1.
Moreover, as the Supreme Court recently demonstrated in Cigna, 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). 131 S.Ct. at 1879 (finding that the District Court’s “reformation of the terms of the plan, in order to remedy the false or misleading information CIGNA provided …. [was within] a traditional power of an equity court”). While the basis for the reformation in Cigna was intentional misrepresentations by the employer and fiduciary, the broader and more relevant point is that when courts were sitting in equity in the days of the divided bench (or even when they apply equitable principles today) contractual language was not as sacrosanct as it is normally considered to be when applying breach of contract principles at common law. We do not suggest that U.S. Airways’ conduct was fraudulent or dishonest in the way that Cigna’s was, but equitable principles can apply even where no one has committed a wrong.
Second, the plan language in the O’Hara case specifically stated that the Plan would not reduce its claim by its pro rata portion of attorneys fees and costs. Whereas, the McCutchen Plan language did not specifically address fees and costs, but only stated that the Plan was entitled to be reimbursed out of “any monies recovered.” Thus, depending on the language of the ERISA Plan, a court could still follow the 3rd Circuit while still bound by the 11th Circuit’s holding.
However, in truth, such a distinction is not really intellectually honest. In reality, the 3rd and the 11th Circuits have addressed this important issue in two divergent ways. The 11th Circuit has thus far said that courts must follow the specific plan language; while the 3rd Circuit has said that the plan language is tempered by traditional equitable defenses.
Hopefully, the Supreme Court’s holding in Cigna v. Amara coupled with the 3rd Circuit’s decision in McCutchen will cause the 11th Circuit to revisit its decision in O’Hara.