These articles have been published in “The Advocate”, a monthly publication of the Arizona Association for Justice/Arizona Trial Lawyers Association, March/April and May/June 2012 issues, @2012 by Steven J. Bruzonsky, Esq.
ERISA LIENS – Equitable Defenses Including the Make-Whole Rule, Part 1:
(This is the first part of a two part series discussing the application of equitable defenses and the make-whole rule to ERISA lien claims, discussing the Ninth Circuit 1995 Barnes case; the U.S. Supreme Court decisions in Sereboff, 2006 and Cigna Corp. v. Amara, 2011; and the most recent Third Circuit decision in U.S. Airways v. McCutcheon, 2011. Our Ninth Circuit is now considering the application of equitable defenses in CGI v. Rose,with a decision expected in the coming months.)
There have been many cases in federal courts involving employer ERISA health or disability plans, particularly employers seeking to enforce ERISA health plan lien/subrogation provisions and to obtain reimbursement from their insured’s personal injury settlements. These cases have been brought by the ERISA plan fiduciary under § 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3), which provides that a fiduciary may bring a civil action “to enjoin any act or practice which violates - - - the terms of the plan” or “to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce - - - the terms of the plan.”
Barnes, Ninth Circuit, 1995:
In Barnes v. Independent Auto Dealers’ Assoc., 64 F.3d 1389 (9th Cir., 1995), the Ninth Circuit adopted the make-whole rule, that an insured must be made whole before an insurer can enforce its right to subrogation as federal common law. Per the facts of Barnes as discussed by the Ninth Circuit, this rule applies (A) in the absence of a clear contract provision to the contrary; or (B) even if there is a clear “anti” make-whole contract provision ( such as use of the language that the lien applies to “any” or “all” rights of recovery), the rule applies when the circumstances require this, such as when the plan refuses to pay medical benefits and/or fails to join as a party, assist or contribute toward expense of suit.
Susan Barnes incurred $23,075.40 accident-related medical bills, including back surgery and lost wages of $8,906.92. Her ERISA health plan refused to pay medical benefits for her accident-related medical bills, withholding payment citing its subrogation clause, and the plan didn’t participate or intervene in her litigation. In November 1991, the trial court granted Barnes’ motion for good faith settlement, reciting the parties’ agreement that the $25,000 represented general damages only. In August 1992, Barnes filed a state court action against her ERISA health plan to collect payment of $18,075.40, for her outstanding medical bills less the $5,000.00 paid by her auto medical payments coverage. The lawsuit was removed by the plan to federal court. Barnes submitted an affidavit from her attorney that her case was worth at least $65,000.00. The district court granted the plan’s motion for summary judgment that the plan was entitled to decline all payment to Barnes.
The Ninth Circuit reversed and remanded to the district court to enter summary judgment for Barnes and to determine attorney’s fees to be awarded to Barnes. The Ninth Circuit’s states its reasons for this determination: (1) The plan made no payment, so there is no right to subrogation under the plan’s subrogation clause. The plan’s subrogation clause unambiguously provides that “the Plan’s right to subrogation arises only after the Plan makes payment to the insured”; and even if this clause was considered to be ambiguous, the same result is reached (The plan’s subrogation clause provides that the “plan may withhold payment of benefits when a party other than the employee or dependent may be liable for expenses until liability is legally determined. - - - --- However, if this plan makes payment which the employee, dependent or any other party is or may be entitled to recover against any person or organization responsible for an accident or illness, this Plan is subrogated to all rights of recovery to the extent of its payment.”); and (2) That Barnes was not made whole by the settlement, so the plan’s rights are limited by the common law make-whole rule.
The Ninth Circuit explains the “make-whole” rule: “It is a general equitable principle of insurance law that, absent an agreement to the contrary, an insurance company may not enforce a right to subrogation until the insured has been fully compensated for her injuries, that is, has been made whole. See Fields v. Farmers Ins. Co., 18 F.3d 831, 835 (10th Cir.1994) (diversity case listing jurisdictions following the rule); Guy v. Southeastern Iron Workers' Welfare Fund, 877 F.2d 37, 39 (11th Cir.1989) (ERISA case noting that subrogation right not mature until insured is reimbursed for loss). The make-whole principle is a rule of interpretation. No one doubts that the beneficiary of an insurance policy or (as here) an employee welfare or benefits plan can if he wants sign away his make-whole right. The right exists only when the parties are silent. It is a gap filler.Cutting v. Jerome Foods, Inc., 993 F.2d 1293, 1297 (7th Cir.) (citations omitted), cert. denied, ___ U.S. ___, 114 S.Ct. 308, 126 L.Ed.2d 255 (1993).
That rule is supported by substantial authority in existing insurance law, and it is consistent with ERISA's purpose of protecting *1395 participants in employee benefit plans. See Batchelor, 870 F.2d at 1449; Guy, 877 F.2d at 39-40 (allowing subrogation before plaintiff made whole would not be "compatible with the remedial principles of ERISA"). Because the make-whole rule does not permit an insured to recover from the tort-feasor and from her insurance company if the recovery would exceed the damages, it also is consistent with ERISA's related purpose of maintaining the interest of other employees in their benefit plans. See Nachwalter v. Christie, 805 F.2d 956, 960 (11th Cir.1986) (a central goal of ERISA is protection of employees' rights in benefit plans against unwarranted disbursements); Germany v. Operating Eng'rs Trust Fund, 789 F.Supp. 1165, 1171 (D.D.C.1992) (applying make-whole rule to subrogation under ERISA plan as "consistent with the prevention of unjust enrichment"). We adopt as federal common law this generally accepted rule that, in the absence of a clear contract provision to the contrary, an insured must be made whole before an insurer can enforce its right to subrogation.”
The plan argued thatreference in the subrogation clause to “any” or “all” rights of recovery overrides the make-whole rule, as the plan language in this case states that the “Plan is subrogated to all rights of recovery”, citing in support of its position a number of federal cases. However, the Ninth Circuit notes that in those cases, the insurance company already had paid the insured’s claim; the insurance company had already paid the insured’s claim and then cooperated and assisted in the lawsuit against the third parties; or the court avoided the determination whether the make-whole survived by deferring to the interpretion of the plan administrator, when the benefit plan, unlike the one in this case, gave the administrator discretion to interpret its provisions. The Ninth Circuit noted that in contrast to the cases cited by the plan: “Under these circumstances, when the insurance company makes no payment to the injured insured for covered expenses, and places all the cost and risk of seeking recovery from a third party or the injured insured, the make-whole rule remains in place despite the “all rights” language in the contract. See 16 Couch, supra, § 61.47 at 130 (where insurer aware of third-party suit refuses or fails to join as party, assist, or contribute toward expense of suit, insured need only account for surplus remaining after loss and expenses of suit are recovered.” [16 Couch on Insurance 2d (rev. ed. 1983)].
Wasn’t the Ninth Circuit’s decision in Barnes a determination that the ERISA plan had “unclean hands” by not paying the medical benefits and/or by not assisting in the litigation, such that the remedy of the make-whole rule was applied? Shouldn’t other equitable defenses therefore be available to injured parties in ERISA lien cases litigated in the Ninth Circuit?
Note: In Benefit Recovery v. Donelon (No. 07-30414) (5th Cir., 2008), the Fifth Circuit held that a Louisiana Commissioner of Insurance directive requiring that insurers comply with the “make-whole” doctrine is “state law which regulates insurance”, and is thereby saved by ERISA’s Savings Clause and is applicable to insurers providing coverage to ERISA plans.
ERISA LIENS – Equitable Defenses Including the Make-Whole Rule, Part 2:
(This is the second part of a two part series discussing the application of equitable defenses and the make-whole rule to ERISA lien claims, discussing the Ninth Circuit 1995 Barnes case; the U.S. Supreme Court decisions in Sereboff, 2006 and Cigna Corp. v. Amara, 2011; and the most recent Third Circuit decision in U.S. Airways v. McCutcheon, 2011. Our Ninth Circuit is now considering the application of equitable defenses in CGI v. Rose,with a decision expected in the coming months.)
Sereboff, U.S. Supreme Court, 2006:
In Sereboff v. Mid Atlantic Medical Services, Inc.,547 U.S. 356, 126 S. Ct. 1869 (2006),
a unanimous U.S. Supreme Court held that an ERISA plan’s action to collect medical expenses paid on behalf of the plan beneficiary who obtains a recovery from a third party in connection with the injuries requiring the treatment paid for by the ERISA plan is “equitable relief” under 29 U.S.C. §502(a)(3). The make-whole doctrine and other equitable defenses were not considered at the District Court or Court of Appeals, and the U.S. Supreme Court declined to consider these arguments for the first time. The Court stated that: “Mid Atlantic need not characterize its claim as a freestanding action for equitable subrogation. Accordingly, the parcel of equitable defenses the Sereboffs claim accompany any such action are beside the point.2” At footnote 2, the Court notes that: “2 The Sereboffs argue that, even if the relief Mid Atlantic sought was “equitable” under § 502(a)(3), it was not “appropriate” under that provision in that it contravened principles like the make-whole doctrine. Neither the District Court nor the Court of Appeals considered the argument that Mid Atlantic’s claim was not “appropriate” apart from the contention that it was not “equitable,” and from our examination of the record it does notappear that the Sereboffs raised this distinct assertion below. We decline to consider it for the first time here. - - -“
Cigna Corp. v. Amara, U.S. Supreme Court, 2011:
In Cigna Corp. v. Amara, No. 09-804, 563 U.S. ___ , 130 S. Ct. 1754 (5-16-2011), ERISA plan participants filed a class action concerning Cigna’s changing of disability benefits. The U.S. Supreme Court remanded the case to the district court to award relief based on ERISA § 502(a)(3), which authorizes “other appropriate equitable relief” for violations of ERISA (the same provision under which ERISA plans use as a basis to litigate lien/subrogation claims against plan participants/insured in federal courts). The Court further stated that the relevant standard of harm would depend on the equitable theory by which the district court provided relief. The Court discussed injunctions, equitable estoppel, reformation, surcharge, and monetary damages.
U.S. Airways v. McCutcheon, Third Circuit, 2011:
In U.S. Airways v. McCutcheon, No. 10-3836, (3rd Circuit Nov. 16, 2011), the Third Circuit
states that it considers the question that the U.S. Supreme Court in Sereboff (2006) left open, whether ERISA § 502(a)(3)’s requirement that equitable relief be “appropriate” means that an ERISA plan fiduciary, like U.S. Airways in this case, is limited in its recovery from a plan beneficiary, like McCutheon in this case, by the equitable defense and principles that were “typically available in equity”. Or put another way, whether equitable principles limit the scope of an ERISA plan administrator's right to reimbursement as a question of whether federal common law can override the express language of ERISA benefit plans.
The Third Circuit three judge panel unanimously vacated the district court’s order, which had required full payment of the U.S. Airways ERISA health plan lien, and remanded the case for the district court to fashion “appropriate equitable relief” for U.S. Airways, because under§ 502(a)(3) of ERISA U.. Airways claim for reimbursement is subject to “equitable limitations”.
The ERISA participant, McCutcheon was “grievously injured” in a car accident, after surviving emergency surgery, requiring months of physical therapy and a hip replacement. Due to multiple injured claimants and one wrongful death, McCutcheon settled with the adverse driver’s liability insurance for $10,000, and also obtained his $100,000 Uninsured Motorist policy limits, for a total of $110,000. After paying a 40% contingency attorneys’ fee and expenses, his recovery was less than $66,000. His attorney held $41,500.00 in Trust (after reducing the lien for procurement costs), and the ERISA plan claimed a constructive trust or equitable lien on the $41,500 held in Trust, and sought the remaining $25,366.00 personally from McCutcheon.The district court granted summary judgment for the ERISA plan for the full amount of the claimed lien of $66,866, requiring McCutcheon to sign over the $41,500 held inTrust, and requiring him to pay the remaining $25,366 from his own funds.
The Third Circuit cites the recent U.S. Supreme Court Cigna Corp. v. Amara (2011) decision, wherein the U.S. Supreme Court “interpreted the term ‘appropriate equitable relief’ under § 502(a)(3) of ERISA 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” and that equity courts possessed the power to prevent a trustee’s unjust enrichment. The Third Circuit found that “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”, including the power of the Court to prevent a trustee’s “unjust enrichment”. The Court held that the lower court’s ruling was “inappropriate and inequitable” and that the lower court’s award amounted to a “windfall” for U.S. Airways.
Note that U.S. Airways had cited cases from other Courts of Appeals, some of which
were decided after Sereboff (but all of which were decided prior to Cigna Corp. v. Amara)
to support its position that equitable doctrines that might limit its reimbursement recovery are not applicable under § 502(a)(3). See Zurich Am. Ins. Co. v. O'Hara, 604 F.3d 1232 (11th Cir. 2010); Admin. Comm. Of Wal-Mart Stores, Inc. Assoc. Health & Welfare Plan v. Shank, 500 F.3d 834 (8th Cir. 2007); Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot & Wansbrough, 354 F.3d 348 (5th Cir. 2003); Admin. Comm. of the Wal-Mart Stores, Inc. Assocs.' Health & Welfare Plan v. Varco, 338 F.3d 680 (7th Cir. 2003).
On 1-4-2012, the 3rd Circuit unanimously denied US Airway’s Petition for rehearing en banc in this case. It is expected that the ERISA plan will file a Petition for Writ of Cert in the U.S. Supreme Court.
Meanwhile in our Ninth Circuit, similar issues have been heard in CGI v. Rose, Nos. 11-35127, oral argument having been heard on 2-9-2012, with a decision expected in coming months. I am hopeful that the Ninth Circuit will follow the lead of the Third Circuit in McCutcheon.