High Court Will Address Tracing Requirement In Case Involving ERISA Benefit Overpayment

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By Jacklyn Wille

March 30 — The U.S. Supreme Court announced that it will address ERISA's tracing requirement, granting review in a case involving a health plan's attempt to recover benefits previously paid to an injured participant who later received a settlement for his injuries.

The case concerns the Employee Retirement Income Security Act's equitable remedies provision, found at Section 502(a)(3). This provision places limits on plan fiduciaries who attempt to sue participants who received erroneous benefit payments or who received plan benefits for injuries later compensated by third-party settlements, as is common in cases involving car accidents.

The circuit courts have split on whether this provision—which requires that any suits by plan fiduciaries seek only “equitable relief”—allows a fiduciary to sue a participant who is no longer in possession of the disputed benefit payments. This is sometimes referred to as ERISA's “tracing requirement,” with courts imposing such a requirement ruling against fiduciaries in cases where participants are no longer in possession of the sought after funds.

Active court watchers won't be surprised by the court's interest in ERISA's tracing requirement.

In 2013, the justices asked the U.S. solicitor general to opine on whether the court should hear a different case involving the ability of plan fiduciaries to recover overpaid benefits).

After the solicitor filed a brief indicating that the Thurber case would be a “poor vehicle” for resolving the circuit split, the justices declined to hear that case, apparently waiting to address the issue until a better case presented itself.

The high court announced its decision granting review March 30.

Attorney Reaction 

Charles F. Seemann III, a shareholder in Jackson Lewis PC's New Orleans office, said it would be interesting to see how the justices approach equitable tracing under ERISA, noting that equitable tracing rules can cut in favor of both plans and plan participants, depending on which party is bringing suit.

“A general tracing requirement can be invoked both by participants and by plan fiduciaries as a defense, depending on the facts of the case,” Seemann told Bloomberg BNA March 30. “The court does seem to recognize that a strongly pro-participant decision in recoupment cases could be invoked on behalf of plan sponsors or fiduciaries later.”

“The struggle that all of the justices face is finding a principled rule that can be applied in any situation involving equitable relief, regardless of whether the plaintiff is a plan or a participant,” he added.

Seemann also noted that the justices have been especially active in ERISA cases in recent years, with multiple ERISA cases being heard over the past several terms.

Seemann attributed this interest to the justices' recognition of the important role the statute plays in the lives of millions of Americans.

“The court recognizes that ERISA touches upon so many important socioeconomic areas—retirement and health care being the big ones—that small shifts in the application of a particular statutory provision can have a large impact down the road,” he said.

Seemann isn't involved in the instant litigation.

Circuit Split 

The instant case comes from the U.S. Court of Appeals for the Eleventh Circuit, which allowed an ERISA-governed health plan to seek reimbursement of benefits it paid to an injured plan participant who later received a settlement from the drunk driver responsible for his injuries, even though the participant had already dissipated the funds.

The majority of courts to have considered this issue have agreed with the Eleventh Circuit and allowed plans to bring these kinds of lawsuits.

In particular, the First, Second, Third, Sixth and Seventh circuits have all rejected the notion of a “tracing requirement,” instead finding that ERISA plans can recover overpaid benefits even if those benefits didn't remain in possession of the defendant participant or beneficiary.

The Eighth and Ninth circuits have gone the other way, rejecting attempts by ERISA plans to recover benefits no longer possessed by the participant or beneficiary. Those courts have found that these lawsuits didn't seek appropriate equitable relief as required by ERISA Section 502(a)(3).

Charting its own course, the Fifth Circuit has drawn a distinction between cases where the plan terms allowed the plan to seek recovery—so-called equitable liens by agreement—and cases without such plan language, which the court described as equitable liens by restitution.

In the Fifth Circuit's view, equitable liens by agreement don't require strict tracing, while equitable liens by restitution still do (Cent. States, Se. & Sw. Areas Health & Welfare Fund v. Health Special Risk, Inc., 756 F.3d 356, 59 EBC 1126 (5th Cir. 2014)).

The U.S. solicitor general has expressed agreement with the minority position. In its brief to the high court in Thurber, the solicitor argued that a plan fiduciary's attempt to recover funds that a participant no longer possessed wouldn't qualify as an equitable action under ERISA Section 502(a)(3).

Arguments on Appeal 

In his petition for Supreme Court review, the participant in the instant case argued that the question dividing the circuit courts was of “extraordinary importance to employers and workers across the country” and required a “uniform national answer” from the Supreme Court.

In particular, the participant argued that a plan fiduciary's suit against a participant or beneficiary “often turns almost entirely on one critical question: may an ERISA fiduciary enforce an equitable lien against a defendant's general assets when specifically identified funds are no longer in his or her possession?”

The participant argued that the majority position—which favors plan fiduciaries by allowing them to bring suit against participants no longer in possession of the disputed funds—conflicts with Supreme Court precedent and “black-letter principles” of equitable relief.

The defendants in this case, the trustees of the National Elevator Industry Health Benefit Plan, agreed with the participant on at least one point: that the Supreme Court should hear the case and resolve the circuit split.

In their reply brief, the trustees agreed that the “deep circuit split” over tracing warranted resolution by the Supreme Court. However, the trustees argued in support of the majority position that allows plan fiduciaries to bring suit even when funds have been dissipated.

According to the trustees, “The Eleventh Circuit got this case exactly right: a plan beneficiary who accepts medical-expense payments from an ERISA plan that requires the beneficiary to reimburse the plan out of any third-party recovery cannot avoid his side of the bargain by spending down and dissipating that recovery.”

Rather, the trustees alleged, “A contrary finding would upend the basic assumptions underlying ERISA plans and the careful balance struck by the reimbursement provisions in those plans.”

The participant is represented by Shaun P. Martin of University of San Diego School of Law, San Diego; Radha A. Pathak of Whittier Law School, Costa Mesa, Calif.; and Peter K. Stris, Brendan S. Maher, Dana Berkowitz and Victor O'Connell of Stris & Maher LLP, Los Angeles.

The health fund trustees are represented by John D. Kolb of Gibson & Sharps PSC, Louisville, Ky., and Neal K. Katyal, Jessica L. Ellsworth, Mary H. Wimberly and Sean Marotta of Hogan Lovells US LLP, Washington.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

Text of the Eleventh Circuit's opinion is at http://www.bloomberglaw.com/public/document/Board_of_Trustees_Natl_Elev_v_Robert_Montanile_Docket_No_1411678_.