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April 2013

Plan's Terms, Not Equitable Principles, Govern An Action Pursuant to Section 502(a)(3) of ERISA

In US Airways, Inc. v. McCutchen, the U.S. Supreme Court held that, in a Section 502(a)(3) ERISA action based on a reimbursement provision in the plan, the terms of the reimbursement provision, not equitable principles, governed.  However, the Supreme Court further held that, if the reimbursement provision is silent on the allocation of attorney’s fees, the provision is properly interpreted to retain the common-fund doctrine.

James McCutchen, a US Airways employee, suffered injuries in a car accident caused by a third-party tortfeasor.  A health benefits plan established by McCutchen’s employer, US Airways, paid $66,866 for McCutchen’s medical expenses arising from the accident.  The plan contained a provision entitling US Airways to reimbursement if McCutchen recovered money for his injuries from a third party.  McCutchen obtained $110,000 in payments from the tortfeasor and McCutchen’s own automobile insurer; he ultimately received $66,000 after deducting his attorney’s 40 percent contingency fee.

On learning of McCutchen’s recovery, US Airways demanded reimbursement of the $66,866 it paid in medical expenses.  McCutchen refused to pay, and US Airways filed suit under Section 502(a)(3) of the Employee Retirement Income Security Act of 1974 (ERISA), which authorizes health-plan administrators to bring a civil action “to obtain . . . appropriate equitable relief . . . to enforce . . . the terms of the plan.”

McCutchen raised two defenses to US Airways’ request for an equitable lien: 1) absent overrecovery on McCutchen’s part, US Airways had no right to reimbursement; and 2) even if it did have a right to reimbursement, the common-fund doctrine reduced the reimbursement by 40 percent.

The District Court rejected these arguments and granted summary judgment for US Airways.  The 3rd Circuit vacated the District Court’s judgment.  It held that traditional equitable doctrines and defenses applied to Section 502(a)(3) suits.  The principle of unjust enrichment overrode US Airways’ reimbursement clause because the clause would leave McCutchen with less than full payment for his medical bills.

The Supreme Court vacated the 3rd Circuit's decision and remanded the case.  All nine justices agreed that US Airways was allowed under Section 502(a)(3) to enforce the reimbursement provision in its plan because Section 502(a)(3) authorizes the kinds of relief typically available in equity before the merger of law and equity.  US Airways’ claim to enforce its equitable lien clause, the Supreme Court explained, was the modern-day equivalent of an action in equity to enforce an equitable lien by agreement.  Equitable doctrines — such as the double-recovery or common-fund rules — cannot override the explicit terms of a reimbursement provision in an ERISA plan.  

However, five of the nine justices further found that, while equitable rules cannot trump a reimbursement provision, they may aid in interpreting the provision on an issue on which the provision is silent.  US Airways’ reimbursement provision did not address the allocation of attorney’s fees; the majority found the common-fund doctrine provides the appropriate default rule to fill that contractual gap.  A contrary rule, the majority noted, would allow US Airways a free ride on McCutchen’s efforts for recovery from third parties.

Please click here for the opinion.

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com.

ERISA

Courtney Culwell Hill



ERISA
Insurance
Life, Health & Disability

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