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Holiday Season Hope for Reducing ERISA Subrogation Repayments

By Vice President & Director of Lien Resolution

This holiday season has brought hope that the recovery rights of self-funded ERISA plans will be evaluated in the light of reality, rather than by operation of “magic” language. In Iron Workers v. Dinnigan, (S.D.N.Y. Nov. 21, 2012), 2012 WL 5877426, the court, citing U.S. Airways v. McCutchen, 663 F.3d 671 (3d Cir.2011), chose to apply the “common fund” doctrine and reduced the self-funded ERISA plans recovery to 75 percent.  The court cites the lack of any investment in the case by the self-funded ERISA plan, and confronts the plan with the reality every member of the Plaintiff’s bar knows far too well—

“But for [the] efforts and legal fees and expenses incurred on behalf of the injured girl, [the plan] would have no funds from which to seek reimbursement. In equity and conscience, [the plan]  should bear its fair share of the fees and expenses incurred in creating the funds from which [it] seeks reimbursement.”

One week later, The United States Supreme Court heard oral arguments in U.S. Airways v. McCutchenMcCutchen came up on cert. from the 3rd Circuit’s ruling that despite “magic” plan language to the contrary U.S. Airways’ claim for reimbursement under § 502(a)(3) of ERISA is subject to equitable limitations.  McCutchen and its 9th Circuit corollary, CGI Technologies v. Rose, 683 F.3d 1113 (2012), both applied the common fund doctrine and addressed the reality as expressed by the S.D.N.Y. above to the resolution of self-funded ERISA plan’s subrogation/reimbursement claims.

The theory that the correct “magic” language in a self-funded plan’s Summary Plan Description could overcome reality found strength in a series of cases prosecuted by Wal-Mart’s self-funded ERISA qualified health plan.  These cases, Admin. Comm. of Wal–Mart Stores, Inc. Associates’ Health & Welfare Plan v. Shank, 500 F.3d 834 (8th Cir.2007); Administrative Committee of Wal–Mart Stores, Inc. Assocs.’ Health & Welfare Plan v. Varco, 338 F.3d 680 (7th Cir.2003)(See also,  Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot and Wansbrough, 354 F.3d 348 (5th Cir.2003)) allowed plan language that clearly and expressly disavowed equitable principles to prevail, even in the face of Draconian results.  This line of reasoning culminated in the ruinous holding in Zurich American Insurance Company vO’ Hara, 604 F.3d 1232 (11thCir. 2010).

During the McCutchen oral arguments it became clear that the court was not satisfied with the “magic” language argument presented by counsel for U.S. Airways.  Justice Breyer openly mocked U.S. Airways’ assertion that their express plan language should be interpreted in the most severe sense.  Justice Breyer presented this hypothetical :

JUSTICE BREYER: So if I were — if I were Joe Smith, and a plan — the plan pays me 100 — I have medical expenses of $100,000. And, actually, the -the — there was a driver who caused this problem. And later, I collect $100,000, but I have to pay 50,000 to get the 100,000. So I am left with $50,000 net, because I had to pay my lawyers, I had to pay expert witnesses. There were a lot of different things I had to pay. I’m left with $50,000 now. So in comes the plan and says, we want 100,000. I say what?

-Official transcript U.S. Airways v. McCutchen. SCOTUS No. 11-1285, p. 13

U.S. Airways counsel had attempted to argue that the plan language was clear and said “any” to which Justice Breyer gave the most comical and memorable line of the day.

JUSTICE BREYER: All right. But, I mean, wouldn’t the normal result of such a case, like any contract case, where you have language, even if it was the word “any,” it doesn’t mean wheat grown on Mars, okay?

–          Official transcript U.S. Airways v. McCutchen. SCOTUS o. 11-1285, p. 14

Though it evoked a laugh from the entire chamber, Justice Breyer’s jest accurately describes the position of the self-funded ERISA plans and their recovery vendors.  Plan language is “magic” and even its absurd application cannot be limited.

Justice Breyer continued forcing reality into the equation by presenting yet another hypothetical to Mr. Katyal, counsel for U.S. Airways.

JUSTICE BREYER: What is the issue of law? The issue of law is what happens if we have a plan which says Joe Smith, my employee, if you have to spend $90,000 to get back 92,000, you have to give us back all 92, even though you only have 2 in pocket. And we are supposed to assume that’s what the contract said. Is that right?

–          Official transcript U.S. Airways v. McCutchen. SCOTUS o. 11-1285, p. 15

Unabashedly, counsel for U.S. Airways recited his notion that the plan language is “magic.”

MR. KATYAL: [ ] We’re saying that [if] the plan [has] an abrogation of the common fund [ ] then that is what settles the question.

–          Official transcript U.S. Airways v. McCutchen. SCOTUS o. 11-1285, p. 15

The judiciaries’ growing understanding of the reality that confronts injured ERISA plan participants gives hope that reason will triumph over magic. The Supreme Court should render its opinion in U.S. Airways v. McCutchen by early summer 2013.  With the holiday season upon us, let us hope that other courts will follow the lead of S.D.N.Y. and impose the reality of equity upon unreasonable ERISA plans.

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