:: Third Circuit Finds Place For Equitable Defenses To Subrogation Claims
Applying the traditional equitable principle of unjust enrichment, we conclude that the judgment requiring McCutchen to provide full reimbursement to US 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 US Airways, which did not exercise its subrogation rights or contribute to the cost of obtaining the third-party recovery. Equity abhors a windfall. See Prudential Ins. Co. of America v. S.S. American Lancer, 870 F.2d 867, 871 (2d Cir. 1989).
U.S. Airways v. McCutcheon, No. 10-3836, (3rd Circuit Nov. 16, 2011)
Apparently, inspired by the recent Supreme Court decision in CIGNA v. Amara, the Third Circuit has held that the “appropriate equitable relief” qualifier in the grant of civil remedies under ERISA’s Section 501(a)(3) allows for the application of equitable defenses to plan reimbursement claims in – shall we say – “appropriate” situations. (I reviewed the lower court’s opinion previously.)
The facts were the sort of egregious facts that invite adventuresome opinions. The plan participant was seriously injured in a devastating automobile accident which was not his fault. The recovery was relatively meager and the plan sought 100% reimbursement without regard to attorneys’ fees. (The facts are related in more detail in my previous post.)
The Court focuses on the key issue in this excerpt:
Thus, the Court held that the plan administrator in Sereboff properly sought “equitable relief” under § 502(a)(3). Id. at 369. However, it expressly reserved decision on whether the term “appropriate,” which modifies “equitable relief” in § 502(a)(3), would make equitable principles and defenses applicable to a claim under that section.
This case squarely presents the question that Sereboff left open: 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.”
The Third Circuit answered the question as follows:
Applying the traditional equitable principle of unjust enrichment, we conclude that the judgment requiring McCutchen to provide full reimbursement to US 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 US Airways, which did not exercise its subrogation rights or contribute to the cost of obtaining the third-party recovery. Equity abhors a windfall. See Prudential Ins. Co. of America v. S.S. American Lancer, 870 F.2d 867, 871 (2d Cir. 1989).
In my opinion, this conclusion is at odds with Sereboff.
In the Sereboff opinion, 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.”
Recall that the plan in Sereboff sought to enforce an “equitable lien by agreement” – which the Court pointed out in stating the equitable defenses were “beside the point”.
The footnote in Sereboff did not suggest that further consideration of equitable defenses was in the future. That issue was settled in Sereboff. At most, the footnote suggested that further consideration of what “appropriate” had been reserved for further consideration, but that is disputable.
There is a good discussion of this opinion on erisaboard.com. Thanks to Roger Baron for alerting me to this case.
Note: The Sereboff footnote reads as follows:
fn2: 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 not appear that the Sereboffs raised this distinct assertion below. We decline to consider it for the first time here. See National Collegiate Athletic Assn.
v. Smith, 525 U. S. 459, 470 (1999).
