ERISA-Third Circuit Rules That Defendant Has Equitable Defenses Against A Claim For Subrogation

In U.S. Airways Inc. v. McCutchen, No. 10-3836 (3rd Cir. 2012), the defendant, James McCutchen (“McCutchen”), had suffered a serious automobile accident. An employee benefit plan (the “Plan”) administered by the plaintiff, U.S. Airways (“Airways”), paid $66,866 for his medical expenses. McCutchen then recovered $110,000 from third parties, with the assistance of counsel. Airways, which had not sought to enforce its subrogation rights, demanded reimbursement of the entire $66,866 it had paid without allowance for McCutchen’s legal costs, which had reduced his net recovery to less than the $66,866 that amount that Airways demanded. Airways filed this suit against McCutchen for “appropriate equitable relief” to collect the $66,866 amount, pursuant to section 502(a)(3) of ERISA. The district court granted judgment to Airways for the $66,866 amount .The issue for the Third Circuit Court of Appeals (the “Court”): may McCutchen assert certain equitable defenses, such as unjust enrichment, against Airways’ claim.

The Court concluded that McCutchen may assert equitable defenses against Airway’s claim. The Plan’s summary plan description requires a participant to reimburse the Plan for any amounts that the Plan has paid out of any monies the participant recovers from a third party. There is no limitation based on the lawyer’s fees the participant incurs to collect those monies. However, the Court said that it must exercise its discretion to limit a plan’s equitable relief to what is “appropriate” under traditional equitable principles, in particular, in view of the unjust enrichment of Airways without the offset for lawyer’s fees. Applying the traditional equitable principle of unjust enrichment, the Court found that the district court’s judgment requiring McCutchen to provide full reimbursement to Airways constitutes inappropriate and inequitable relief. Because the amount of the judgment exceeds the net amount of McCutchen’s third-party recovery, it leaves him with less than full payment for his emergency medical bills, thus undermining the entire purpose of the Plan. At the same time, it amounts to a windfall for Airways, which did not exercise its subrogation rights or contribute to the cost of obtaining the third-party recovery. Equity abhors a windfall. As such, the Court vacated the district court’s order, and remanded the case for the district court to fashion “appropriate equitable relief.”

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