From the Editor
Equitable Reflux: Bright Line Rule
Needed for Whether a Fiduciary Can
Sue a Participant
T
he ERISA world would be a better place if there was a clear set
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.
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From the Editor
Knudson illustrates the common sense notion that insurance companies 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 overpayment 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, settlement, 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 settlement from the auto accident were paid directly to the Sereboffs, the
Court said its claim was an action for equitable restitution permitted 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—characterized as an improper attempt to seek legal restitution of funds
that could not be strictly traced to the participant. According to the
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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 noting, 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 medical 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 reduction 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
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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 important, 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
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