Supreme Court Charts Path to Recovery Under Welfare Plan Reimbursement Provisions
Lawrence Jenab, Thursday, June 01, 2006 | Filed under: ERISA Litigation, Health Plans, Subrogation and Reimbursement
The Supreme Court has just made it easier for ERISA welfare plans to recover from participants who refuse to honor their plans’ reimbursement provisions. Resolving a question that has divided the federal circuit courts of appeals, the Court held in Sereboff v. Mid-Atlantic Medical Services that – under the right plan language and the right facts – a welfare plan’s action to recover such funds constitutes “equitable” relief and is therefore permissible under ERISA. And while the subtleties of the Court’s reasoning might not make spellbinding reading, they nonetheless contain an important message for employers who sponsor such plans.
The Supreme Court has just made it easier for ERISA welfare plans to recover from participants who refuse to honor their plans’ reimbursement provisions. Resolving a question that has divided the federal circuit courts of appeals, the Court held in Sereboff v. Mid-Atlantic Medical Services that – under the right plan language and the right facts – a welfare plan’s action to recover such funds constitutes “equitable” relief and is therefore permissible under ERISA. And while the subtleties of the Court’s reasoning might not make spellbinding reading, they nonetheless contain an important message for employers who sponsor such plans.
THE ISSUE: EQUITABLE VS. LEGAL RELIEF
Employers who sponsor self-funded welfare plans are painfully familiar with the obstacles to recovery from participants who take the money and run. Here is the typical scenario, which summarizes the facts of all the relevant cases:
Mr. Jones, a participant in the Plan, is injured in an accident. The Plan pays Mr. Jones’s medical expenses, after which Mr. Jones recovers again for those same expenses from the third party who was responsible for his injuries. Pursuant to its reimbursement provisions, to which Mr. Jones has agreed, the Plan seeks to recover from Mr. Jones. Mr. Jones refuses, and the Plan sues him to enforce those provisions.
The Supreme Court established the legal framework under which the courts have granted or denied such claims in
Great-West Life & Annuity Insurance Co. v. Knudson. That decision turned on a provision of ERISA that allows plans to seek only “equitable” relief against participants. Such relief tends to be non-monetary (an injunction, for example) and is distinct from “legal” relief, such as the enforcement of an obligation to pay money under a contract.
In Knudson, the Court noted that the imposition of an obligation to pay a fixed sum of money out of a participant’s general assets is legal relief, and held that a jilted plan therefore cannot simply seek to recover the amount the participant owes. Principles of equity would, however, permit the plan to seek the very same money it paid to the participant. Thus, the Knudson court suggested (but did not hold) that a plan could recover if the funds at issue (1) were specifically identifiable, (2) belonged in good conscience to the plan, and (3) were in the defendant’s possession or control (the “Knudson facts”). Such recovery might be possible, the Court opined, under an ancient theory called “equitable restitution.”
THE Knudson HOLDING
The facts at issue in Knudson were essentially the same as those in our typical scenario, with one crucial twist: the trial court had deposited the settlement proceeds in a special needs trust, out of the participant’s reach. Because the specific funds at issue were not in the participant’s possession or control, any recovery by the plan would have to come from the participant’s general assets. Concluding that such recovery would be “legal” relief, the Court held that the plan had no recourse against the participant.
Because the Court merely speculated that a plan might recover if the Knudson facts were present, the opinion resulted in a split among the federal circuit courts of appeals. One camp held that a plan could recover if the Knudson facts were present; the other held that all reimbursement claims pursuant to the “contract” set forth in the plan’s reimbursement provisions sought legal relief and were therefore impermissible under ERISA.
SEREBOFF: RECOVERY IS EQUITABLE RELIEF . . . SOMETIMES
In Sereboff, the Court resolved this dispute among the lower federal courts, holding that a plan can indeed recover – provided that (1) the Knudson facts are present, and (2) the plan contains the right language. And, buried within the Court’s analysis, the opinion provides a roadmap with which a careful plan sponsor can chart a path to recovery.
The facts in Sereboff once again tracked those of our typical scenario. The only functional distinction between them and the facts in Knudson was the location of the funds: the money at stake in Sereboff remained in the “possession or control” of the defendants (pursuant to a stipulation in the district court, it was deposited in a segregated investment account). Because the “impediment” to recovery in Knudson was not present, the Court allowed the plan to recover.
THAT ANTIQUE LEGALESE CAN’T BE IMPORTANT . . . CAN IT?
Chief Justice Roberts’s opinion, however, depends on more than this factual distinction. It articulates a “new” (but actually very old) theory that supports a plan’s right to recovery. Recall the Knudson Court’s suggestion that “equitable restitution” would be a plan’s path to recovery. Mr. and Mrs. Sereboff pointed out that, under the law of equitable restitution, elaborate tracing rules apply to the affected funds. Recovery was impossible under those rules, they argued, because they didn’t possess the disputed funds when they entered into the agreement (i.e., when they became plan participants).
Looking beyond the theory of equitable restitution, the Chief Justice turned to Barnes v. Alexander, a case decided in 1914 (long before the enactment of ERISA), which held that a contingent fee agreement between a client and his attorney created an enforceable “equitable lien by agreement.” Likening a plan’s reimbursement provisions to such a contingent fee arrangement, the Chief Justice reasoned that a plan may “follow” a portion of the participant’s recovery “into the [participant’s] hands” as soon as the settlement proceeds are identified. This theory eliminates the need to trace the money, allowing recovery of a fund (here, the Sereboff’s settlement proceeds) that didn’t even exist when it became subject to the lien. The rub? To rely on this theory, the plan provisions must create an equitable lien by agreement.
WHAT DOES THIS MEAN FOR PLAN SPONSORS?
The Sereboff holding is, as far as it goes, unadulterated good news for plan sponsors. While a plan still cannot impose general indebtedness on a recalcitrant participant, it can recover specifically identifiable funds that remain in his or her possession – as long as its reimbursement provisions create an equitable lien by agreement. The next step is obvious.
To reap the benefit of the Sereboff holding, employers who sponsor self-insured welfare plans should review their plans’ reimbursement provisions and revise them to track the language of the decision. Some plans (especially older ones) contain only subrogation language, rather than explicit language obligating the participant who recovers from a third party to reimburse the plan. Such plans will require a significant update. At the other extreme, some sponsors will want to delete “state of the art” language derived from the Knudson decision’s focus on equitable restitution – a theory the Court now appears to view as a blind alley. Not only should a plan carefully distinguish its subrogation rights from its reimbursement rights, its reimbursement provisions should leave no doubt as to whether they create the sort of “equitable lien by agreement” that the Court has held to be enforceable.
Because the Knudson facts remain a prerequisite to recovery, sponsors should also continue to heed the advice we have consistently stressed: follow the money. That is, rather than mailing out a single “subrogation notice” to a participant who might owe the plan money, plan administrators should actively track any litigation and settlement proceedings between the participant and the third party who caused the injury. It remains unclear whether a segregated account (like the one established by the district court in Sereboff) is a prerequisite to recovery; plan sponsors should nonetheless intervene at the earliest opportunity to ensure that any proceeds the participant obtains are immediately segregated from his or her general assets.
Sereboff falls far short of resolving the uncertainty surrounding equitable remedies and the right to reimbursement under ERISA welfare plans. (Indeed, as we discussed in January’s issue of Benefits in Brief (see “Supreme Court and Congress Weigh In …”), pension reform legislation currently in conference committee could change the landscape yet again by specifically authorizing such suits.) Sereboff does, however, offer plan sponsors concrete steps they can take to maximize their chances of recovery.