An attorney represents a woman seriously injured by a third party. Medical bills incurred by the plaintiff exceed $400,000 and are paid by the plaintiff's ERISA-qualified health plan. Ultimately, the plaintiff accepts a $650,000 settlement offer. When an allocation of $13,828 is approved by the state trial court as full reimbursement of the health insurer's lien, the plan's putative fiduciary brings an action in federal court, pursuant to ERISA § 502 (a)(3), seeking to enjoin the plan beneficiary from violating the terms of the plan, which call for reimbursement of benefits paid. The Supreme Court held that seeking money due under a contract is not an equitable
remedy available under § 502 (a)(3).
On Jan. 8, 2002, the U.S. Supreme Court brought much needed clarification to the highly ambiguous "other appropriate equitable relief" available to ERISA plan participants, beneficiaries, and fiduciaries pursuant to the Employee Retirement Income Security Act of 1974 (ERISA), § 502(a)(3).2 Prior to Great-West Life & Annuity Insurance Company v. Knudson, 534 U.S. 204 (2002), practitioners' sole guidance in determining what remedies they could seek to enforce provisions of an ERISA-qualified benefits plan was found in Mertens v. Hewitt Associates, 508 U.S. 248 (1993). In Mertens, the Supreme Court held that "other appropriate equitable relief" available under § 502(a)(3) included those remedies typically available in equity. See Mertens at 258. What those "typical" equitable remedies included was the challenge faced by attorneys representing plan participants, beneficiaries, or fiduciaries. Did "other appropriate equitable relief" expand or limit the range of remedies available to plan beneficiaries and participants under ERISA? In Great-West Life & Annuity Insurance Company v. Knudson, 534 U.S. 204 (2002), the U.S. Supreme Court addressed the issue of "other appropriate equitable relief", and in its wake, left even more unanswered questions.
When the decision in Knudson was first released, many practitioners all too quickly interpreted the court's decision as signaling an end to ERISA-based liens and an end to the right to reimbursement from plan beneficiaries [tort plaintiffs] who successfully recovered damages from third parties. A closer examination of Knudson, however, reveals a very different outcome.
Janette Knudson was seriously injured in a car accident and incurred $411,157.11 in medical expenses. Pursuant to the terms of the Health and Welfare Plan that provided health insurance benefits (the plan) available through her husband's employer, the majority of Knudson's medical bills were paid by Great-West Life & Annuity Insurance Company, pursuant to a "stop-loss" insurance agreement with the plan. According to the terms of this agreement, the plan assigned to Great-West all of their "rights to make, litigate, negotiate, settle, compromise, release, or waive, any claim under the reimbursement provision" of the plan.
Knudson filed a tort action in state court to recover damages from third party tortfeasors. Ultimately, Knudson entered into a settlement agreement with the third parties in the gross amount of $650,000, of which $256,745.30 was allocated to a Special Needs Trust, $373,426.00 was allocated to attorney's fees and costs, and $13,828.70 was allocated to reimburse Great-West for past medical expenses. The state court approved the settlement agreement, and Knudson's attorney mailed a check to Great-West as full and final payment of past medical expenses. Instead of simply cashing the check, however, Great-West challenged the allocation of settlement proceeds, which provided for reimbursement of a mere fraction of the total medical expenses paid on behalf of Knudson. Great-West filed a federal action seeking injunctive and declaratory relief to enforce the reimbursement provisions under the plan. The District Court upheld the allocation. The 9th Circuit affirmed the lower court's ruling, but did so on different grounds, holding that, under these circumstances, the plan could not seek reimbursement for payments made to a beneficiary of an insurance plan by a third party because that action did not constitute "other appropriate equitable relief" (emphasis added). 208 F.3d 221 (9th Cir. 2000).
The Supreme Court, in a 5-4 vote, affirmed the lower court decision holding that (1) an action seeking injunctive relief to compel the payment of money due under a contract is not an equitable remedy; (2) restitution predicated on the payment of money due, pursuant to a contract, is not restitution that lies in equity; and (3) the common law of trusts does not expand the remedies available under § 502(a)(3).
Justice Scalia, who was joined by Justices Rehnquist, O'Connor, Kennedy and Thomas, authored the majority's opinion, which reaffirmed the court's reluctance to tamper with the language of ERISA, describing it as a "comprehensive and reticulated statute." The majority was unpersuaded by the plan's attempts to characterize their remedies as equitable in nature.
First, the majority rejected Great-West's argument that, because its action sought injunctive relief to enjoin a plan beneficiary from violating the terms of the plan, its claim should constitute "other appropriate equitable relief." The majority held that injunctive relief compelling the payment of money due under a contract was not a remedy typically available in equity. See Mertens at 258 (holding "other appropriate equitable relief" includes that relief which was typically available in equity). Therefore, because the underlying action was one seeking payment of money due pursuant to a contract, the plan could not pursue equitable remedies to resolve that claim.
The majority similarly rejected the plan's argument that, because it was seeking restitution - a common equitable remedy - it should be permitted to avail itself of the benefits of § 502 (a)(3). The majority noted, however, that "not all relief falling under the rubric of restitution is available in equity." This decision marks the first time the Supreme Court has explicitly drawn a distinction between restitution that lies in equity and restitution that lies in law. Focusing on the nature of the claim, not the relief sought, the court held that, in order for restitution to lie in equity, the action must not seek to impose personal liability on the plan beneficiary. Rather, in order for restitution to lie in equity, it must seek to restore to the plaintiff (in this case, the plan fiduciary) the particular funds or property that are traceable as belonging in good conscience to the plaintiff and that are in the defendant's (i.e. the beneficiary's) possession. The majority concluded that, because the only claim the plan fiduciary asserted was one seeking to impose personal liability on the plan beneficiary to reimburse the plan for money paid on the beneficiary's behalf, such a claim does not constitute restitution that lies in equity.
Finally, the Supreme Court also rejected an argument raised in an amicus brief filed by the United States that argued that plan beneficiaries should be considered akin to beneficiaries under a trust and that, under the common law of trusts, the trustee could bring suit to enforce a beneficiary's agreement to pay money into a trust or to repay an advance made from the trust. The court dismissed this argument based upon its previous holding in Mertens, which rejected the notion that special equity-court powers applicable to trusts defined the reach of §502 (a)(3). In Mertens, the court rejected the argument that "other appropriate equitable relief" included that relief which an equity court is empowered to grant. The court reasoned that, if equitable remedies available under § 502(a)(3) were to include such broad relief, the scope of
§ 502(a)(3) could potentially be expanded to include legal remedies, a result the court has steadfastly rejected.
Application of Knudson
The Knudson decision remains somewhat narrow in its application. Because the state court approved the limited allocation of settlement proceeds to the plan, only a small fraction of the settlement proceeds were traceable as belonging to the plan. In addition, Knudson was never in possession of the balance of the settlement proceeds, because the portion of settlement proceeds that was allocated for her benefit was placed into a special-needs trust. At no time following the settlement with the third party did Knudson retain control over the settlement proceeds. Had Knudson received the settlement proceeds directly, in lieu of placing them in a special needs trust, the plan could most certainly have enforced the provisions of the plan and sought the necessary judicial intervention to recover the full amount of their lien, pursuant to the provisions of §502(a)(3).
Impact of Knudson
The impact of the Knudson decision is at once far-reaching and uncertain. The court reaffirmed its strict adherence to the plain language of ERISA. This approach was followed in a recent 1st Circuit decision, Harris v. Harvard Pilgrim Health Plan, 208 F.3d 274 (2000). In Harris, the 1st Circuit rejected the district court's finding that where an ERISA health plan was silent with respect to attorney's fees, the amount owed to the plan by a beneficiary should be reduced by the plan's proportionate share of attorney's fees.3
In addition to the affirmation of strict conformance to ERISA's statutory language, the majority in Knudson also stated, in dicta, that other avenues of recovery may have been available to Great-West. First, the court suggested, without expressing an opinion, that Great-West could have intervened in the underlying state action to preserve its right to reimbursement from the plan beneficiary. By doing so, Great-West would have then become a party in interest and may have been able to pursue legal remedies available under the law. Second, the court suggested that Great-West also might have asserted a state law claim for breach of contract against the plan beneficiary, but expressed no opinion as to whether such a claim would have been preempted by ERISA.4 Finally, the court stated that the plan also might have been able to obtain equitable relief from the plaintiff's attorney and the trustee of the special needs trust. The validity of this theory of recovery remains untested because courts have yet to decide whether funds placed in a trust following a third-party settlement should be considered res, thereby allowing an equity court to have jurisdiction over the action.
In the aftermath of Knudson, many questions remain unanswered regarding what legal or equitable remedies are available to plan fiduciaries seeking reimbursement from beneficiaries who have recovered money from third-party tortfeasors. Can plan fiduciaries commence federal court actions to enforce their contractual right of reimbursement under their plans? And to what extent would lack of diversity or want of jurisdictional amount impede recovery efforts by plan fiduciaries?
To the chagrin of the plaintiff's bar, it appears clear that the Supreme Court has not brought an end to the right of ERISA-based plan fiduciaries to pursue claims for reimbursement against plan beneficiaries. Yet the precise mechanism for enforcing those rights remains unclear. And while the Knudson decision reaffirmed the high court's reluctance to tamper with, or liberally interpret the plain language of ERISA, the court most certainly emphasized the need for careful analysis when selecting a particular cause of action while seeking to enforce plan language.
1. 534 U.S. 204 (2002).[back]
2. See 29 U.S.C.A. 1132 (a)(3), which states in pertinent part, "Éa civil action may be brought É(3) by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan."[back]
3. In Harris v. Harvard Pilgrim Health Care, Inc., 20 F.Supp.2d 143, Patti B. Saris, J. construed the silence of the Plan with respect to attorney's fees to permit the beneficiary to reduce the amount owed to the Plan by the Plan's proportionate share of attorney's fees. Harris, 20 F.Supp.2d at 153.[back]
4. Recent Massachusetts cases, however, have held that such avenues may not be available to plan fiduciaries as a means of recovery. See Andrews-Clarke v. Lucent Technologies, 157 F.Supp.2d 93, 103 (D.Mass. 2001) (holding that plaintiff's state law claims preempted when they "relate to" the employee benefit plan); Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 139 (1990) (holding that "[a] law relates to an employee benefit plan, in the normal sense of the term, if it has a connection with or referenced to such plan"); Ritter v. Mass. Cas. Ins. Co., 14 Mass.L.Rptr.22 (Mass. Super. 2001) (holding that a state claim for breach of contract predicated upon a violation of employee benefit plan is preempted by ERISA as it "amounts to an alternative enforcement mechanism in ERISA, § 502 (a)(3)").[back]