Keith Parker, an excellent mediator who specializes in mediating ERISA matters, authored the following article on “Recovery of Overpayments Under ERISA”   We at the McKennon Law Group PC are happy to recommend this outstanding article for your reading.  We include the entire article below with permission from Mr. Parker.

Section 1132(a)(3)(B) of ERISA authorizes participants, beneficiaries and/or fiduciaries to bring civil actions seeking “appropriate equitable relief” to enforce the provisions of an ERISA plan.  Just what constitutes “appropriate equitable relief” has challenged courts and practitioners, in large part because the Supreme Court has interpreted that language to incorporate the “archaic” (Justice Ginsburg’s word) and “obsolete” (Justice Steven’s word) distinction between relief available in equity and that available in law at the time of the so-called divided bench.  While most members of the bar (academics and certain members of the Supreme Court excepted) have no experience with, or interest in, the distinction in this day of the unified bench, the distinction is part of the Federal common law of ERISA and, so, must be considered when dealing with claims for equitable relief under ERISA.

The Ninth Circuit recently considered whether an action by a plan fiduciary to recover an overpayment of disability benefits resulting from an award of Social Security Disability Income (“SSDI”) benefits sought “appropriate equitable relief” under ERISA.  Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (9th Cir. 2012).  The facts presented were typical of those often seen in disability cases:  Bilyeu began receiving benefits under a long-term disability plan which provided that her benefits would be reduced by other income, including SSDI benefits, and that permitted the plan fiduciary to immediately reduce her benefits by an estimate of her potential SSDI benefits.  However, the plan fiduciary agreed not to reduce Bilyeu’s benefits when she agreed in writing to repay any overpayment in plan benefits that might result if she received an award of SSDI benefits.  The plan fiduciary subsequently terminated Bilyeu’s plan benefits; thereafter Bilyeu received an award of SSDI benefits resulting in an overpayment which she refused to repay.  When Bilyeu brought an action under ERISA for improper termination of her benefits, the plan fiduciary filed a counterclaim under Section 1132(a)(3)(B) to recover the amount of the overpayment.  Id. at 1086-88, 1090-91.

The Ninth Circuit relied on two Supreme Court decisions – Sereboff  v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2008) and Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002) – interpreting Section 1132(a)(3)(B) to identify the elements necessary to state a claim for “appropriate equitable relief” under ERISA.  In both those cases the plan participants suffered injuries in automobile accidents and their group medical plans paid for the participants’ subsequent medical care.  In both cases the participants settled actions against third-parties responsible for the accidents and their group medical plans then brought Section 1132(a)(3)(B) actions against the participants seeking to recover the amounts paid for their medical care pursuant to provisions in the plans requiring participants to reimburse the plans from amounts recovered from third-parties responsible for their injuries. Sereboff, 547 U.S. at  359-60; Great-West, 534 U.S. at 207-09.  The difference in the cases arose from the manner in which the participants had handled the proceeds of the settlements:

In Great-West, the participant carefully structured the settlement such that the proceeds never came into her possession, but rather were placed directly into a special needs trust and her attorney’s trust account.  The Supreme Court held that the plan’s claim was not one typically available in equity because the plan had failed to identify a specific fund in the possession of the participant to which an equitable lien attached; the Supreme Court characterized the plan’s claim as one seeking a judgment payable from the participant’s general assets, a garden variety claim at law.  Great-West, 534 U.S. at 207-08, 211-14.  In Sereboff, on the other hand, the participants took possession of the settlement proceeds and, when the plan demanded reimbursement of amounts paid on their behalf, the participants agreed to set aside a portion of the settlement equal to the amount at issue in a separate investment account.  On these facts the Supreme Court held that the plan’s claim was one typically available in equity because the plan sought to recover a specific fund in the possession of the participants to which an equitable lien attached. Sereboff, 547 U.S. at 362-66.

The Ninth Circuit identified three elements necessary to state a claim for “appropriate equitable relief” under ERISA in this context:  (1) A promise by the participant to reimburse the disability plan for excess benefits paid upon the receipt of other income such as SSDI benefits; (2) the promise must identify a specific fund, distinct from the participant’s general assets, from which the plan will be reimbursed; and (3) the specific fund must be in the possession of the participant. Bilyeu, 683 F.3d at 1092-93.  The plan fiduciary’s claim in Bilyeu met the first element, but not the second and third elements:

At the outset, the Ninth Circuit expressed concern that the specific fund identified by the plan fiduciary – the overpaid portion of the periodic disability benefits paid to the participant – was not, in fact, a distinct or separate fund, but rather was an undifferentiated component of a larger fund – the aggregate disability benefits paid to the participant.  Id. at 1093-94.  Although the Ninth Circuit did not fully develop its position, its concern seems consistent with the reasoning of the Supreme Court:  If, as seems likely, the disability benefits were comingled with the general assets of the participant upon receipt, the plan fiduciary’s claim was essentially one for a judgment for a portion of the general assets of the participant, a quintessential claim at law.

A more compelling argument (in my view) that the plan fiduciary’s claim in Bilyeu failed to meet the specific fund element is that at the time the periodic disability payments were received by the participant, she did not (and could not) know whether an overpayment would occur and, if so, the amount of the overpayment because SSDI benefits had not been awarded.  In other words, when the periodic disability benefits were received and comingled with the general assets of the participant, no specific portion of those benefits could be identified as subject to an equitable lien.

The Ninth Circuit did not, however, have to make a definitive ruling on the second element because it found that the plan fiduciary’s claim clearly failed to meet third element – the participant had spent her disability benefits long before she received the SSDI benefits and the plan fiduciary demanded reimbursement of the overpayment and, so, no longer had possession of the specific fund.  That being the case, the Ninth Circuit concluded that the plan fiduciary was simply seeking a judgment payable from the general assets of the participant – a claim at law.  In so holding, the Ninth Circuit acknowledged contrary precedent from other circuits.  Id.at 1094.  Review of those cases, however, suggests that the Ninth Circuit’s decision more closely reflects the reasoning of the Supreme Court:

In Funk v. Cigna Group Ins., 648 F.3d 182 (3d Cir. 2011), for example, the Third Circuit held that an equitable lien by agreement attaches to the “specific fund” as soon as it is received by the participant.  At that moment, according to the Third Circuit, the participant becomes a constructive trustee of the fund and may be compelled in equity to repay it even if he has spent or otherwise converted the fund.  Id. at 194-95.  The flaw in the Third Circuit’s analysis is that the “specific fund” it identified as being received by the participant consisted of the SSDI benefits.  As the Ninth Circuit correctly observed, the Social Security Act prohibits recipients from assigning SSDI benefits or creditors from attaching liens to such benefits.  Bilyeu, 683 F.3d at 1093-94.  And, as discussed above, when the disability benefits (as opposed to the SSDI benefits) were received by the participant, no overpayment existed and, so, no equitable lien could attach to any specific portion of those benefits.

Likewise in Cusson v. Liberty Life Assurance Co., 592 F.3d 215 (1st Cir. 2010), the First Circuit concluded that the reimbursement agreement targeted “specific funds for recovery” and “put [the participant] on notice” that she would be required to repay the amount that she “might get from Social Security.”  Id. at 231.  The problem, however, remains the same – while the participant was receiving her disability benefits, the amount of a potential overpayment, if any, was entirely speculative and, so, no specific fund existed to which an equitable lien attached.  These decisions, and others cited by the Ninth Circuit, while perhaps reaching an equitable result – after all, the participant did agree to reimburse any overpayments resulting from her receipt of SSDI benefits – are not consistent with ERISA because the plan fiduciaries were not seeking relief typically available in equity.

In sum, the Ninth Circuit held that the plan fiduciary had no claim under ERISA to recover the overpayment.  And (although the Ninth Circuit did not reach the issue) because the plan fiduciary’s state law claims were likely preempted by ERISA, the plan fiduciary was left without a remedy to recover the overpayment.  This result is not surprising in light of similar results under ERISA in far more compelling circumstances.  See, e.g., Bast v. Prudential Ins. Co., 150 F.3d 1003 (9th Cir. 1998)(no remedy for participant in ERISA medical plan for delays in approval of potentially life saving treatment, allegedly resulting in her death).

Is the lack of a remedy to recover overpayments a cause for concern?  After all, the typical group disability plan gives the plan fiduciary the authority to reduce a participant’s benefits by an estimate of potential SSDI benefits, and the lack of a remedy to recover overpayments might cause plan fiduciaries to stop offering participants the option of signing a reimbursement agreement.  If such a practice became widespread, participants would certainly suffer as they would not have access to their full disability benefits for the period necessary (often lengthy) to receive a final decision on an award of SSDI benefits.

Another consideration, however, is likely (in my view) to limit the frequency that plan fiduciaries elect to reduce disability benefits by an estimate of potential SSDI benefits.  Plan fiduciaries are, after all, fiduciaries.  As such, before making a decision to offset an estimate of SSDI benefits, plan fiduciaries presumably will be required to engage in some analysis of whether the participant is, in fact, eligible for SSDI benefits.  Such an analysis would require plan fiduciaries to assess whether the participant was disabled under Social Security Act’s broad any occupation standard.  Concluding that a participant is likely entitled to SSDI benefits arguably would limit the plan fiduciary’s flexibility to reach a contrary any occupation decision under the disability plan.  (Plan fiduciaries currently avoid this predicament by requiring participants to apply for SSDI benefits (and, often times, providing representation to do so), but leaving the actual determination on the merits to the Social Security Administration.)  As a result, plan fiduciaries may well decide to accept the risk of the occasional unrecoverable overpayment in lieu of reducing their flexibility to conclude that a participant is not disabled under the any occupation standard.