December 9, 2011 

By Michael W. DeWitt and Michael R. Fox

This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.

A recent decision by the United States Court of Appeals for the Third Circuit could impact a fiduciary's ability to seek reimbursement of paid medical benefits from beneficiaries receiving monetary damages from third parties. In U.S. Airways v. McCutchen, 2011 WL 55574311 (3d Cir. Nov. 16, 2011), the court ruled that a fiduciary's right to enforce its plan provisions is subject to the application of equitable defenses and principles. The decision makes the Third Circuit the first federal circuit court to determine how the term "appropriate" in ERISA Section 502 (a)(3) may affect a reimbursement claim.

McCutchen's company-sponsored and administered ERISA health benefit plan (the "Plan") paid $66,886 for medical expenses. McCutchen subsequently recovered $110,000 in a civil lawsuit. After deducting attorneys' fees from the settlement, he received less than the amount paid by the Plan. The Plan sued, seeking reimbursement of benefit payments paid on McCutchen's behalf, based on the Summary Plan Description's "Subrogation and Right of Reimbursement" clause and won on summary judgment.

On appeal, the Third Circuit addressed whether Section 502(a)(3)'s requirement that equitable relief be "appropriate" means a fiduciary is limited in its recovery from a beneficiary by the defenses and principles typically available in equity.

McCutchen argued that Section 502(a)(3)'s limiting language not only means the relief sought by defendant must be equitable in nature, but that courts must also use discretion to limit relief to what is "appropriate" under traditional equity principles. The Third Circuit agreed that it would be inequitable to force McCutchen to pay the outstanding lien amount because the settlement was less than full payment of his medical bills (thereby undermining the purpose of the health benefit) and provided a windfall to the Plan.

The court's ruling completely ignored the clear and unambiguous language of the "Subrogation and Right of Reimbursement" clause. As such, the ruling flies in the face of ERISA's mandate that all plan provisions be followed as written. Furthermore, the court adopted the so-called "make-whole" doctrine, which limits the recovery of the Plan to the excess the insured received over the amount of a loss, which is in conflict with the decisions of other circuits. See Zurich Am. Ins. Co. v. O'Hara, 604 F.3d 1232 (11th Cir. 2010) and Adm. Comm. of the Wal-Mart Stores Inc. Associates' Health & Welfare Plan v. Shank, 500 F.3d 834 (8th Cir. 2007). In fact, the court failed to follow its own precedent, set forth in Ryan v. Federal Express Corp., 78 F.3d 123 (3rd Cir. 1996), that specifically rejected the "make-whole" doctrine.

The court's holding seems to open up, at least in the Third Circuit, the possibility that equitable defenses and considerations can trump plan language regarding subrogation and reimbursement, and may have more far-reaching consequences if other circuits adopt its reasoning. In fact, the ruling could potentially lead to a widening of the use of "equitable" considerations in ERISA matters beyond the reimbursement context.