On June 9, 2014, the United States Supreme Court declined to review a decision by the Second Circuit Court of Appeals regarding the enforcement of an equitable lien by agreement under ERISA § 502(a)(3). In Thurber v. Aetna Life Ins. Co., 712 F.3d 654 (2d Cir. 2013), the Second Circuit found that a fiduciary could enforce an equitable lien by agreement and recover overpaid benefits under ERISA § 502(a)(3), even if the overpayments no longer remained in the participant’s possession. The participant had argued that Supreme Court review was necessary because the First, Second, Third, Sixth and Seventh Circuits permit a fiduciary to enforce an equitable lien by agreement in such a situation, while the Eighth and Ninth Circuits do not. The Solicitor General had recently urged the Court not to take the case, claiming that it provided a “poor vehicle” for resolving the circuit split because of “case-specific” issues involving the language of the relevant ERISA plan. Interestingly, in February 2013, the Supreme Court denied a similar petition for certiorari in First Unum Life Ins. Co. v. Bilyeu, which sought review of the Ninth Circuit’s decision that an equitable lien by agreement cannot be enforced under ERISA § 502(a)(3), when, after the lien attaches, the participant dissipates the sought-after overpayment.

Background

Sharon Thurber was injured in a car accident and submitted a claim for long-term disability (“LTD”) benefits to Aetna Life Insurance Company (“Aetna”), which administered and insured her employer’s disability plan. Prior to submitting her claim for LTD benefits, Thurber received short-term disability (“STD”) benefits for six months. In her application for LTD benefits, Thurber advised Aetna that she had received “other income” in the form of no-fault insurance payments while receiving STD payments. Under the plan, Aetna was entitled to reduce benefits if a participant received other income, including no-fault insurance payments. The plan also authorized Aetna to: (1) require the return of the overpayments; (2) discontinue benefits until the overpayments are recovered; (3) pursue legal action to recover the overpayments; or (4) place a lien in the amount of the overpayments on the proceeds of any other income.

After Aetna denied Thurber’s claim, she filed suit for wrongful denial of benefits under ERISA § 502(a)(1)(B). Aetna filed a counterclaim to recover the overpaid benefits under ERISA § 502(a)(3), which permits a fiduciary to file a civil action “to obtain other appropriate relief” to enforce the terms of the plan. The district court dismissed Aetna’s counterclaim, holding that it lacked subject matter jurisdiction under ERISA, because the counterclaim sought legal, rather than equitable relief.

The Second Circuit’s Opinion

The Second Circuit reversed, finding that Aetna’s counterclaim was viable under ERISA § 502(a)(3). The court noted that what constitutes “appropriate equitable relief” under § 502(a)(3) “continues to perplex courts despite efforts by the Supreme Court during the past decade to shed light in the matter.” After analyzing these cases -- Sereboff v. Mid. Atl. Servs., Inc., and Great-West Life & Annuity Ins. Co. v. Knudson, -- the Second Circuit found that Aetna’s counterclaim was for appropriate equitable relief because it sought to enforce an equitable lien by agreement on its property -- the overpaid benefits that Thurber received. The court explained that the counterclaim was equitable because the insurer sought to recover specific funds (the overpayment occasioned by Thurber’s simultaneous receipt of no-fault insurance benefits and STD benefits) in a specific amount (the total amount of the overpayment) as authorized by the plan. The court noted the existence of a circuit split on this issue and explicitly rejected the approach recently adopted by the Ninth Circuit. In Bilyeu v. Morgan Stanley Long Term Disability Plan, the Ninth Circuit suggested that an action for overpaid LTD benefits was not equitable because it did not seek a particular fund, but, rather, a specific amount of money within a particular fund -- the LTD benefits paid to the beneficiary. The Ninth Circuit also held that where the overpayment has been spent, the claim is not equitable in nature and, thus, unenforceable under ERISA § 502(a)(3). The Second Circuit disagreed with the Ninth Circuit on both points, explaining that the overpayments constituted “particular identifiable sums” over which the plan authorized an equitable lien by agreement. The court explained that the “literal segregation of funds is irrelevant” when the participant has been placed on notice of her reimbursement obligations under the terms of the plan. The court also explained that the fact that Thurber spent the overpayments was insufficient to void Aetna’s right to enforce the plan and the resulting equitable lien by agreement that Aetna entered into with Thurber. Accordingly, the Second Circuit reversed the dismissal of Aetna’s counterclaim and directed the district court to enter judgment in Aetna’s favor.

What The Supreme Court’s Ruling Means For ERISA Plan Administration

The Second Circuit’s decision in Thurber joined the majority of circuit courts in allowing ERISA fiduciaries to recover overpaid benefits under ERISA § 502(a)(3) even if those funds have been dissipated. This is good news for plan administrators and fiduciaries as overpayment claims can often have a large impact on ERISA litigation. However, in refusing to grant certiorari, the Supreme Court allowed a circuit split to remain on this issue, which serves as an important reminder that there is not uniformity among the circuits on the enforceability of an equitable lien by agreement under ERISA. Therefore, the ability of ERISA plan administrators and fiduciaries to recover overpayments may vary depending on the location of the case.