Unclean-Hands Doctrine No Defense To Plan's Reimbursement Action, Court Rules

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A long-term disability plan participant cannot use the equitable doctrine of unclean hands to defeat the plan administrator's counterclaim for reimbursement of allegedly overpaid benefits, the U.S. District Court for the Northern District of Illinois ruled July 25 (Makoul v. Prudential Ins. Co. of Am., N.D. Ill., No. 1:12-cv-01240, 7/25/13).

In denying the participant's motion to dismiss, Judge Joan B. Gottschall looked to the U.S. Supreme Court's recent ruling in US Airways v. McCutchen, 133 S.Ct. 1537, 55 EBC 1845 (2013) (74 PBD, 4/17/13; 40 BPR 1004, 4/23/13), which she interpreted as barring the participant's use of the unclean-hands doctrine.

Gottschall also concluded that the plan administrator's reimbursement action sought appropriate equitable relief as allowed by Section 502(a)(3) of the Employee Retirement Income Security Act.

Counterclaim for Overpaid Benefits

Steven J. Makoul worked for Peapod LLC until physical and psychiatric impairments caused him to stop working. In November 2007, Makoul began receiving long-term disability benefits of $5,035 per month from a plan administered by Prudential Insurance Company of America.

Prudential terminated his benefits in April 2010 and, in January 2011, the Social Security Administration awarded Makoul disability benefits retroactive to February 2008.

Makoul filed a lawsuit under ERISA, challenging Prudential's decision to terminate his benefits. Prudential then brought a counterclaim against Makoul, seeking to recover more than $70,000 in allegedly overpaid benefits. According to Prudential, Makoul's benefits under the plan should have been reduced to account for his receipt of disability benefits from the Social Security Administration. Prudential's claim was based on a reimbursement agreement executed by Makoul, in which he agreed to reimburse Prudential for any benefits paid to him by mistake.

Legal Versus Equitable Relief

Makoul moved to dismiss Prudential's counterclaim, arguing that ERISA's equitable-remedies provision, Section 502(a)(3), only permits recovery of “identifiable funds.” Because his SSA benefits had been “mixed in with his other assets,” Makoul argued that a lien on those amounts would be improper legal relief not authorized by Section 502(a)(3).

In support of his position, Makoul cited the U.S. Supreme Court's ruling in Sereboff v. Mid Atlantic Medical Services, 547 U.S. 356, 37 EBC 1929 (2006) (94 PBD, 5/16/06; 33 BPR 1297, 5/23/06). However, the district court found Sereboff “doom[s] Makoul's legal vs. equitable argument,” because the Sereboff court concluded that a health plan's action for subrogation against a participant qualified as equitable relief under ERISA Section 502(a)(3).

In the alternate, Makoul argued that Sereboff was distinguishable from his case, because it involved the receipt of income from other insurance sources, as opposed to benefits from SSA. Makoul emphasized that income received under the Social Security Act “shall not be transferable or assignable, at law or in equity,” but the court was not persuaded. Prudential did not seek Makoul's SSA benefits, the court said, but rather the “overpayments it made due to Makoul's receipt of SSDB.”

Moreover, the court rejected Makoul's argument that Prudential could seek recovery “only as a setoff against any money that Prudential owes him.” The court found that Makoul was “bound by the plain language of the Reimbursement Agreement,” which required him to reimburse Prudential for mistakenly paid amounts without regard to whether he succeeded in seeking reinstatement of his disability benefits.

Court Doubts Viability of Equitable Defenses

As a “fallback argument,” the court said, Makoul asserted that Prudential's counterclaim was barred by the equitable defense of unclean hands. According to Makoul, Prudential's conduct implicated the unclean hands doctrine, because “Prudential seeks to benefit from Makoul's receipt of SSDB but terminated his benefits despite the [Administrative Law Judge's] disability determination.”

The court found this argument “premature.” It said that the unclean-hands doctrine allows a court to deny equitable relief to a party who engaged in unlawful or inequitable conduct in connection with the matter from which it seeks relief. Although Makoul “assumes that Prudential's disability determination was wrong,” the court said that “this issue is not presently before the court.”

To that end, the court found that the Supreme Court's recent ruling in McCutchen cast doubt on Makoul's ability to assert equitable defenses. According to the district court, McCutchen held that, “in an action brought under § 502(a)(3) based on an equitable lien by agreement, the terms of the ERISA plan govern. Neither general principles of unjust enrichment nor specific doctrines reflecting those principles--such as the double-recovery or common-fund rules--can override the applicable contract.”

Further, the district court said, another judge in the Northern District of Illinois recently interpreted McCutchen as barring a disability plan participant's attempt to use the unclean-hands doctrine “to defend against an overpayment counterclaim based on plan language” (O'Brien-Shure v. U.S. Laboratories Inc. Health & Welfare Benefit Plan, N.D. Ill., No. 1:12-cv-06101, 7/1/13 (127 PBD, 7/2/13; 40 BPR 1641, 7/9/13)).

Concluding that “the combination of the language of the Reimbursement Agreement and McCutchen is fatal to Makoul's unclean hands argument,” the court denied Makoul's motion to dismiss Prudential's counterclaim.

Makoul was represented by Marie E. Casciari and Mark D. DeBofsky of DeBofsky & Associates, Chicago. Prudential was represented by Edna S. Kersting and Jason M. Kuzniar of Wilson Elser Moskowitz Edelman & Dicker, Chicago, and Richard S. Siegel of Alston & Bird, Washington.

The full text of the opinion is at http://www.bloomberglaw.com/public/document/Makoul_v_The_Prudential_Insurance_Company_of_America_Docket_No_11/3.