Employment Law | Expert Legal Commentary

January 24, 2012

US Airways, Inc. v. McCutchen: Third Circuit Limits ERISA Fiduciary Relief; Allows Equitable Reformation

US Airways, Inc. v. McCutchen

By Jeremy Gray of Zuber Lawler & Del Duca

US Airways, Inc. v. McCutchen: Third Circuit Limits ERISA Fiduciary Relief; Allows Equitable Reformation

In a split with other circuits, the Third Circuit recently limited relief available to benefit plan administrators under ERISA. In US Airways, Inc. v. McCutchen, 663 F.3d 671 (3d Cir. 2011), the Third Circuit held that the “appropriate equitable relief” available under ERISA § 502(a)(3) to plan administrators can be limited by equitable defenses, such as unjust enrichment. The Court also held that such defenses can override express terms of benefit plans which, would otherwise allow full reimbursement from beneficiaries, regardless of whether the beneficiary was made whole.

Background

While driving, McCutchen was struck by two other cars.  He endured surgeries and physical therapy.  His health benefit plan offered by US Airways paid medical expenses of $66,866.  He later sued the at-fault parties and recovered a total of $110,000.  After his attorneys’ contingency fees, his net recovery was less than $66,000.  Id. at 673.

US Airways demanded $66,866 in reimbursement from McCutchen, citing terms of the benefit plan which require reimbursement “for amounts paid for claims out of any monies recovered from a third party.”  McCutchen refused, as his net recovery was less than the amount demanded, thus leaving him worse off than if he had not sued at all.  Further, US Airways did not factor in the legal costs McCutchen bore himself.  US Airways sued for appropriate equitable relief under ERISA and won a judgment for the full $66,866 in the district court.  McCutchen appealed to the Third Circuit. Id. at 674.

Court Limits Equitable Relief by Allowing the Application of Equitable Defenses

Under the federal Employee Retirement Income Security Act (ERISA), plan fiduciaries can enforce plan terms pursuant to § 502(a)(3), which allows an injunction or “appropriate equitable relief”.  Id.  The issue on appeal was whether the term “appropriate” limited administrators’ potential relief by allowing beneficiaries to apply equitable defenses.  Id. at 675-76.  If so, McCutchen could proceed with his argument that US Airways would be unjustly enriched if he reimbursed the full $66,866.

The Court first found that unjust enrichment is “broadly applicable” to equitable claims.  Id. at 677.  Further, the Court cited a similar case, CIGNA, which demonstrated that “[e]quity courts possessed the power…to prevent a trustee’s unjust enrichment.”  Id. (citing CIGNA Corp. v. Amara, 131 S.Ct. 1866, 1880 (2011)).  Thus, the Court found that unjust enrichment was applicable to a trustee’s claim for reimbursement from its beneficiary.  Id.

Court Allows Equitable Reformation of Express Terms

The Court then disagreed with appellate cases cited by US Airways, which asked whether federal common law could override the express terms of benefit plans.  The Court found issue with other courts’ interpretation of “appropriate equitable relief”.  Specifically, the Court noted that “they appear to reason that its requirement has been met so long as the suit can be properly characterized as an equitable action, without also asking wither the relief sought in the action is “appropriate” under traditional equitable principles and doctrines.”  Id. at 678.

The Court went further in citing the Supreme Court, which earlier spoke that benefit plan terms are not inviolable, but are “subject-based upon equitable doctrines and principles-to modification and, indeed, even equitable reformation under § 502(a)(3).” Id. (citing CIGNA, 131 S.Ct. at 1879).  While the Court recognized ERISA’s purpose in ensuring the integrity of written plan terms, the Court argued that Congress’ tempering of the statute by specifying “appropriate equitable relief” invoked “principles that it surely knew are sometimes less deferential to absolute freedom of contract.”  Id. at 679.

Thus, the Court concluded that forcing McCutchen to reimburse US Airways for the full $66,866 would leave McCutchen worse off than if he had sued at all and would leave him less than full payment for his hospital bills, which undermines the purpose of the plan.  Further, US Airways would receive a windfall as it did not contribute to the costs of McCutchen’s recovery nor did it exercise its subrogation rights. Id.  The Court vacated the award and remanded, telling the district court to examine the costs and risks between the parties in order to create “appropriate equitable relief.”  Id.

Conclusion

The Third Circuit’s interpretation of ERISA and its split case law has limited fiduciaries’ ability to make full recoveries otherwise available under plans’ express terms.  While the split invites future examination from the Supreme Court, parties currently involved in ERISA reimbursement litigation must be aware of the varying interpretations of different circuits.  Parties facing ERISA litigation should contact experienced counsel to see how McCutchen may affect your case.

About the Author

Jeremy Gray is a Partner of Zuber Lawler & Del Duca, focusing on employment law.

Image Credit: ©iStockphoto.com/courtneyk

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Companies Mentioned

Rosen Louik & Perry, P.C.

U.S. Airways, Inc.

Also See:

Sutherland v. Ernst & Young LLP: Second Circuit Denies Class Arbitration for Low-Value Employment Claims

Sun Capital Partners III, LP v. New England Teamsters: First Circuit Targets Private Equity Funds for Pension Withdrawal Liability

Univ. of Tex. Southwestern Med. Ctr. v. Nassar: Supreme Court Mandates Strict Burden for Title VII Retaliation Plaintiffs

Vance v. Ball State University: Supreme Court Limits Employer Exposure to Strict Liability Under Title VII

Parisi v. Goldman Sachs & Co.: Second Circuit Upholds Arbitration Clause Barring Title VII ‘Pattern-or-Practice’

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