U.S. Airways vs. McCutcheon 1 -Third Circuit Unanimously holds ERISA Subrogation Limited by Equitable Defenses

The Plaintiff's Resource's rising star Clayton Starnes abhors a windfall to the ERISA Plan and so does the 3rd Circuit. His comments on a recent decision are below:

“Equity abhors a windfall.” The Court in U.S. Airways v. McCutcheon, No. 10-3836 (3^rd Circuit Nov. 16, 2011) held that it is not “appropriate” to allow an ERISA plan 100 percent reimbursement when the employee only recovers a fraction of their claim. James McCutcheon was “grievously injured and survived only after emergency surgery.” Due to limited insurance, McCutcheon’s recovery was limited to only $110,000, resulting in a net recovery of less than $66,000. The ERISA Plan sought 100 percent reimbursement of $66,864.

The key issue in this case is the meaning and limitation of “appropriate” in “appropriate equitable relief”:

This case squarely presents the question that Sereboff left open: whether § 502(a)(3)’s requirement that equitable relief be “appropriate” means that a fiduciary like US Airways is limited in its recovery from a beneficiary like McCutchen by the equitable defenses and principles that were “typically available in equity.”

Recall that the footnote in Sereboff stated:

fn2: The Sereboffs argue that, even if the relief Mid Atlantic sought was “equitable” under §502(a)(3), it was not “appropriate” under that provision in that it contravened principles like the make-whole doctrine. Neither the District Court nor the Court of Appeals considered the argument that Mid Atlantic’s claim was not “appropriate” apart from the contention that it was not “equitable,” and from our examination of the record it does not appear that the Sereboffs raised this distinct assertion below. We decline to consider it for the first time here. See National Collegiate Athletic Assn. v. Smith, 525 U. S. 459, 470 (1999).

In denying the ERISA Plan’s claim and remanding to the District Court to exercise its discretion to fashion “appropriate equitable relief”, the Court held:

Applying the traditional equitable principle of unjust enrichment, we conclude that the judgment requiring McCutchen to provide full reimbursement to US 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 US Airways, which did not exercise its subrogation rights or contribute to the cost of obtaining the third-party recovery. Equity abhors a windfall. See Prudential Ins. Co. of America v. S.S. American Lancer, 870 F.2d 867, 871 (2d Cir. 1989).