KOLBE & KOLBE HEALTH & WELFARE BENEFIT PLAN v. THE MEDICAL COLLEGE OF WISCONSIN, INC. (September 2, 2011)
Scott Gurzynski worked for the Kolbe & Kolbe Millwork Co. and participated in its welfare benefit plan. His daughter K.G. was born in 2007. Although he submitted an enrollment change to the Plan in mid-2007, it was incomplete. For example, he neglected to indicate whether K.G. lived with him and whether he claimed her as a tax exemption. It was not until late November that he admitted that she did not live with him and that he was not claiming her as an exemption. The Plan requested additional information without success. It eventually denied enrollment status to K.G. in June 2008. Meanwhile, K.G. had received over $1.5 million in medical care from the Medical College of Wisconsin and the Children's Hospital of Wisconsin, all paid for by the Plan. After its decision denying K.G. enrollment status, the Plan asked the Medical College and the Children's Hospital to refund the money the Plan had paid. They refused. In a second amended complaint, the Plan seeks recovery under three theories: a) ERISA § 502(a)(3) equitable relief, b) unjust enrichment under federal common law, and c) breach of contract. Judge Crabb (W.D. Wis.) dismissed each of the claims and awarded attorneys fees to the defendants. The Plan appeals.
In their opinion, Seventh Circuit Judges Flaum and Williams and District Chief Judge Herndon affirmed in part and reversed and remanded in part. The Court addressed each theory in turn. ERISA § 502(a)(3) allows a Plan fiduciary to bring an equitable claim to enforce a term of the Plan. Here, the Plan seeks to enforce the Plan's overpayment provision. Under that provision, the Plan is entitled to seek recovery of payments it has made in error. However, the Plan limits that right to recovery from a "Covered Person." Although that term is not defined in the Plan, it is clear that neither the defendants, who provided the medical services, nor K.G., who was denied enrollment in the Plan, is a "Covered Person." The ERISA count was properly dismissed. In fact, in addressing the unjust enrichment count, the Court noted that ERISA had nothing to do with the case. K.G. was never covered by the Plan -- there is no need to interpret ERISA or the Plan. Therefore, there is also no ERISA unjust enrichment claim. The Court turned to the state law breach of contract claims. First, it concluded that the claims were not preempted by ERISA since the claims do not relate to the terms of the Plan. Instead, they relate to the contracts between the Plan and the defendants. The Court therefore remanded the state law claims to the district court, with the comment that the normal practice would be to decline to exercise supplemental jurisdiction over the claims. With respect to attorney's fees, the Court stated that the basic question, after the prevailing party's showing of some degree of success on the merits, is whether the losing party's position was substantially justified or merely harassment. The district court had concluded that the ERISA and state law claims were not substantially justified. The Court concluded that that was an abuse of discretion. It found all of plaintiffs claims to be substantially justified and taken in good faith – and reversed the fee award.