Third Circuit Limits Scope of ERISA Liens

By: Chris Placitella @ May 25, 2012

Written by James P. Goslee, Esquire

Lawyers representing injured plaintiffs receiving medical benefits pursuant to an employee benefits plan are frequently confronted with issues arising from the fact that any recovery they secure for their client is subject to a lien for medical expenses paid by the plan. Because expense reimbursement can compromise a significant amount of recoveries, as a matter of practice, lawyers need to be aware of any potential liens before engaging in settlement discussions, and should also attempt to negotiate a reduction in the amount of the lien with the plan administrator. With respect to negotiating with plan administrators, a recent Third Circuit opinion provides significant ammunition to lawyers seeking to reduce the size of an ERISA reimbursement lien.

By way of background, when Congress passed the Employee Retirement Income Security Act of 1974 (“ERISA”), it preempted a large body of state common law, including laws restricting plans from seeking subrogation and reimbursement rights in personal injury actions. As a result, ERISA plans began inserting provisions in their plan agreements requiring beneficiaries to reimburse the plan for amounts recovered from third parties in personal injury claims. In recent years, ERISA plans have become increasingly aggressive in pursuing reimbursements from injured members who collect from third parties.

Under ERISA, plan administrators may seek an injunction or “other appropriate equitable relief” to enforce the terms of the plan. 29 U.S.C. § 1132(a)(3). Many courts have interpreted this language to allow plans to seek reimbursement for the entire amount of benefits paid, without requiring plans to contribute to the legal fees and costs of securing the third party recovery. In other words, ERISA plans can recover all of their expenses from the proceeds of a personal injury settlement, without having to pay a proportionate amount of attorneys’ fees and costs. Although clearly inequitable, for years courts have supported this result and held that although ERISA plans may seek “equitable relief” such as reimbursement, they are not subject to “equitable defenses” such as unjust enrichment. See, e.g., Bollman Hat Co. v. Root, 112 F.3d 113 (3d Cir. 1997).

A few months ago, the Third Circuit issued an opinion overturning its precedent and holding that ERISA plans seeking expense reimbursements are subject to equitable defenses after all. In US Airways, Inc. v. McCutchen, 663 F.3d 671 (3d Cir. 2011), the Third Circuit was confronted with a particularly egregious set of facts where an ERISA plan sought to to fully recoup benefit payments from a limited recovery for a grievously injured member without even contributing to the cost of litigation that gave rise to the recovery. In McCutchen, the defendant, John McCutchen, was grievously injured when a motor vehicle driven by third party crossed a median in the road and struck McCutchen’s car. McCutchen survived the accident, but required emergency surgery. He eventually needed complete hip replacement and was left permanently disabled. His medical bills were paid by US Airways, an ERISA benefits plan. Because the party who caused the accident had limited insurance coverage, McCutchen only recovered a little over $100,000 for his injuries, forty-percent of which went to his attorneys.

After McCutchen settled the suit, the US Airways benefit plan demanded reimbursement for the entire $66,866 it paid for his medical bills. When McCutchen refused to pay the entire amount, the plan sued him for reimbursement. The issue before the district court was whether McCutchen’s plan agreement allowed the plan to recover all of the medical bills it paid in connection with his injury. The district court concluded that it did, and, following Third Circuit precedent, concluded that the plan was not required to pay a portion of the attorneys’ fees and costs because the ERISA statute does not subject plans to equitable defenses.

On appeal, McCutchen argued that the plan was unjustly enriched because it was permitted to recoup all of the expenses it paid on his behalf, without contributing to the costs of recovering those expenses. In short, he argued that the plan should not be permitted “to reap what McCutchen had sown.” Id. at 674.

The Third Circuit agreed with McCutchen. It framed the issue as follows: “whether §502(a)(3)’s requirement that equitable relief be ‘appropriate’ means that a fiduciary like US Airways is limited in its recovery from a beneficiary like McCutchen by the equitable defenses and principles that were ‘typically available in equity.'” Id. at 675-676. Construing the text of the statute, the court concluded that the term “appropriate equitable relief” must be something less than all equitable relief.” Id. (emphasis in original). It then noted that remedies under traditional equitable relief “would typically have been defeated by equitable . . . defenses,” and that it “would be strange for Congress to have intended that relief under § 502(a)(3) be limited to traditional equitable categories, but not limited by . . . equitable . . . defenses that were traditionally applicable to those categories.” Id.

Based on its interpretation of the statutory text, the Third Circuit held that “Congress intended to limit the equitable relief available under § 502(a)(3) through the application of equitable defenses,” including unjust enrichment. Id. at 676-77. Therefore, because the US Airways plan did not contribute to the costs of recovering damages from the third party, “[a]pplying the traditional equitable principle of unjust enrichment . . . the judgment requiring McCutchen to provide full reimbursement to US Airways constitutes inappropriate and inequitable relief.” Id. at 679. To hold otherwise, stated the Court, would have allowed US Airways to realize a windfall, and “[e]quity abhors a windfall.” Id.

Perhaps the most interesting aspect of the Third Circuit’s decision in McCutchen was that in rather biting language, the Court scoffed at the plan’s suggestion that any windfall it received from recoveries such as McCutchen’s helps it lower premiums for other beneficiaries. In dicta, the Third Circuit stated:

Finally, US Airways raises a practical concern that the application of equitable principles will increase plan costs and premiums. This concern does not address the statutory language and is, in any event, unsubstantiated by the circumstances of this case. US Airways cannot plausibly claim it charged lower premiums because it anticipated a windfall.
Id. at 679.

The Third Circuit’s decision in McCutchen is a significant decision for plan beneficiaries as it restores an element of fairness to ERISA liens. Practitioners should be aware of this new development in the law and would be wise to utilize the McCutchen decision in negotiations with ERISA lien holders.