McCutchen may influence other court decisions

McCutchen may influence other court decisions

November 25, 2011
By Mark D. DeBofsky

Mark D. DeBofsky is a name partner of Daley, DeBofsky & Bryant. He handles civil and appellate litigation involving employee benefits, disability insurance and other insurance claims and coverage .

The recent 3rd U.S. Circuit Court of Appeals ruling in U.S. Airways, Inc. v. McCutchen, 2011 U.S.App.LEXIS 22883 (3d Cir. Nov. 16, 2011) dealt with the question of whether the equitable doctrine of unjust enrichment could be used to mitigate an ERISA benefit plan's claim for reimbursement. McCutchen involved a claim brought by a medical plan seeking reimbursement for medical expenses paid after James McCutchen was severely injured in a car accident. McCutchen resisted the plan's demand for recovery of $66,866 paid to reimburse his medical expenses because the plan refused to reduce its claim to account for the legal fees he incurred in pursuing an underinsured motorist claim. McCutchen asserted the plan would be unjustly enriched if he was required to pay the full amount claimed. Although the district court ruled in the plan's favor, the appeals court reversed and remanded, directing the district court to fashion appropriate equitable relief.

McCutchen argued it would be inequitable for U.S. Airways to recover in full, when he recovered less than the amount claimed after deduction of fees and expenses. He maintained that if his legal expenses and costs were not taken into account he would be in a worse position than if he had not pursued the third-party action. The 3rd Circuit agreed. The court began its discussion by citing ERISA's purpose which "gave plan beneficiaries greater rights than plan fiduciaries to enforce the terms of a benefit plan." A plan fiduciary's rights are limited to injunctive relief or "other appropriate equitable relief" pursuant to 29 U.S.C. Section 1132(a)(3), which was the provision under which U.S. Airways brought its claim.

Although the Supreme Court has permitted an action to be brought by a medical plan seeking reimbursement of expenses so long as the plan affords a right of reimbursement, the court has never specified whether such a claim is subject to equitable defenses. The court relied on the same sources referenced by the Supreme Court in Great West Life & Annuity Ins.Co. v. Knudson. 534 U.S. 204 (2002): Dobbs on Remedies, Palmer on Restitution, Corbin on Contracts and the Restatements. Those sources all recognize the principle of unjust enrichment as a limit upon the trustee's powers.

Prior to McCutchen, the 3rd Circuit previously refused to fashion a federal common law rule limiting an ERISA plan administrator's right to reimbursement. However, the court determined the time had come to create such a rule. Even though other circuits refused to place any limits on the right of reimbursement (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)), the 3rd Circuit held otherwise. Since Congress limited the relief available to plan administrators to "appropriate equitable relief," the court found the use of the word "appropriate" meant the available relief had to be limited to what was equitable and just under the circumstances. The court deemed that approach consistent with the Supreme Court's recent ruling in CIGNA Corp. v. Amara, 131 S.Ct 1866 (2011), which found that courts retain equitable powers under ERISA to reform the terms of benefit plans to remedy intentional misrepresentations. Thus, the court determined the contractual language in benefit plans is "not as sacrosanct as it is normally considered to be when applying breach-of-contract principles at common law." So long as there is a wrong, the court found it should be remediable even without intentional or fraudulent conduct by the plan administrator. Because U.S. Airways' assertion of rights would, if approved in full, leave McCutchen without full payment for his medical bills, the court held that result would "undermine the entire purpose of the plan." In addition, U.S. Airways would receive a "windfall" even though it failed to "exercise its subrogation rights or contribute to the cost of obtaining the third-party recovery. Equity abhors a windfall." (citation omitted). Hence, the court vacated the district court's judgment and remanded for a determination of the appropriate amount of recovery due U.S. Airways.

The issue of unjust enrichment described in this case is known as the "common fund" doctrine, an equitable rule created to avoid a situation where a benefit plan receives a "free ride" on the attorney's prosecution of the tort claim. Under the seminal case of Baier v. State Farm Insurance Co., 66 Ill.2d 119, 5 Ill.Dec. 572, 361 N.E.2d 1100 (1977), the common fund doctrine recognizes "that an attorney who performs services in creating a fund should, in equity and good conscience, be allowed compensation from all those who seek to benefit from the fund recovered." 66 Ill.2d at 125. In the 7th Circuit, where the plan is silent on whether the common fund doctrine applies, according to Blackburn v. Sunstrand Corp., 115 F.3d 493 (7th Cir. 1997) and Administrative Committee of the Wal-Mart Stores, Inc. Associates' Health and Welfare Plan v. Varco, 338 F.3d 680 (7th Cir. 2003), the common fund doctrine applies as a default rule. However, Varco further determined that the plan sponsor's inclusion of a provision in the plan disallowing application of the common fund doctrine will be enforced by a court. The Illinois Supreme Court ruled in Bishop v. Burgard, 198 Ill.2d 495, 764 N.E. 2d 24 (Ill. 2002), though, that the common fund doctrine is not pre-empted by ERISA despite express plan terms disclaiming applicability of that doctrine. McCutchen will likely prove influential in leading other courts to apply the common fund doctrine to preclude unjust enrichment and avoid the unfairness of plans leaving claimants with less money than the net proceeds of their third-party actions.