US Airways v. McCutchen – Equitable Defenses Limit ERISA’s “Appropriate Equitable Relief”

By Stacey N. Jiunto, Esq. – Staff Lien Counsel

Group health plan descriptions are carefully worded to protect the plan’s reimbursement interests and expand their right of reimbursement. This is often accomplished with provisions stating the plan is entitled to reimbursement from the beneficiary’s recovery without a reduction for procurement costs (the attorney’s fees and litigation costs incurred by the beneficiary to obtain a recovery).

Although most litigation has centered on what qualifies as “appropriate equitable relief,” [1] the U.S. Court of Appeals for the Third Circuit[2] in US Airways, Inc. v. McCutchen, 663 F.3d 671 (3d Cir. Pa. 2011), addressed whether such relief is limited by certain equitable defenses. While the Third Circuit’s approach may be considered novel (at least until adopted by other courts), it presently allows equitable principles to override express plan language when justified by the necessities of the particular case[3]. For attorneys in other jurisdictions representing severely injured beneficiaries against self-funded ERISA liens with strong plan language, referencing the Third Circuit’s logic may prove beneficial.

Facts and Procedural Background

Appellant, James McCutchen, sustained severe injuries as a result of a motor vehicle collision and, with the assistance of counsel, recovered $110,000 from the tortfeasors. Subsequently, US Airways (as administrator for the self-funded ERISA Plan) sought reimbursement for the $66,866 it paid for McCutchen’s medical expenses. The amount demanded did not reflect a reduction for procurement costs.

When McCutchen did not pay, US Airways filed suit in the District Court seeking “appropriate equitable relief” under §502(a)(3) of ERISA. Under the plan description, a beneficiary was required to “reimburse the Plan for amounts paid for claims out of any monies recovered from a third party.” McCutchen argued that US Airways would be unjustly enriched if it were to receive a reimbursement of the entire amount paid, without contributing to his attorney’s fees and expenses, while he failed to be fully compensated for his injuries, pain, and suffering. The District Court granted summary judgment to US Airways based on the language, “any monies recovered,” and ordered McCutchen to turn over the portion of his recovery held in trust ($41,500) and pay the additional $25,366 from his own funds. McCutchen appealed.

Analysis

Looking at ERISA’s legislative intent, it must be noted that §502(a) limits the available relief to “appropriate equitable relief.” Under Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 218 (2002), such a limitation requires the court to recognize the difference between legal and equitable forms of restitution. Thus, the Supreme Court has “interpreted the term ‘appropriate equitable relief’ in §502(a) as referring to those categories of relief that, traditionally speaking (i.e., prior to the merger of law and equity) were typically available in equity.” Cigna Corp. v. Amara, 131 S. Ct. 1866, 1878 (2011). The court in Sereboff v. Mid. Atlantic Medical Services, Inc., 547 U.S. 356 (2006), held that the plan administrator’s claim for reimbursement under the terms of the plan and §502(a)(3) could be based on an equitable lien by agreement but expressly reserved its decision on whether the term “appropriate” would make equitable principles and defenses applicable.

McCutchen argued that “appropriate equitable relief” meant the relief sought must be limited by what is “appropriate” under traditional equitable principles. The Third Circuit agreed, holding that “appropriate equitable relief” must be something less than all equitable belief. US Airways, 663 F.3d at 676. The Third Circuit further acknowledged 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 other equitable doctrines and defenses that were traditionally applicable to those categories.” Id. Specifically, the Third Circuit held that, absent any indication in the language or structure of §502(a)(3) to the contrary, “Congress intended to limit the equitable relief available under §502(a)(3) through the application of equitable defenses and principles that were typically available in equity.” Id.

Upon consulting standard works such as Dobbs, Palmer, Corbin, and the Restatements, the Third Circuit found support for McCutchen’s position that the principle of unjust enrichment is broadly applicable to claims for equitable relief. Id. at 677. US Airways, nevertheless, cited prior decisions (Ryan, Bollman Hat, and Gourley) in which the Third Circuit declined to implement a federal common law rule limiting an ERISA plan administrator’s right to reimbursement under the plan’s terms. However, these decisions came before the Supreme Court’s decisions in Knudson and Sereboff, which clarified the meaning of “appropriate equitable relief” in §502(a)(3) and undermined the reasoning and holdings of the prior decisions.

Moreover, the Third Circuit declared its disagreement with the cases US Airways cited from other Courts of Appeals (O’Hara, Shank, Bombardier Aerospace, and Varco) that refused to apply common law theories to override the express language of benefit plans. The Third Circuit maintained that the written benefit plan is subject to modification or equitable reformation under §502(a)(3). US Airways, 663 F.3d at 678; see Cigna, 131S. Ct. at 1879. Essentially, the notion that plan language can be overcome by equitable principles may serve as additional ammunition in an arsenal of lien reduction arguments.

Applying the principle of unjust enrichment, the Court held that the judgment requiring McCutchen to provide full reimbursement to US Airways constituted inappropriate and inequitable relief. Particularly, “[b]ecause 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 US Airways, which did not exercise its subrogation rights or contribute to the cost of obtaining the third-party recovery.” Id. at 679.

Conclusion

The District Court’s final judgment was vacated and remanded for further proceedings to determine what would constitute appropriate equitable relief for US Airways based on full factual findings. Specifically, factors such as the distribution of the third-party recovery between McCutchen and his attorneys, the nature of their agreement, the work performed, and the allocation of costs and risks between the parties to the suit are pertinent to the determination of “appropriate equitable relief.”