Amicus Curiae Brief — Sereboff v. Mid Atlantic Medical Services, Inc.

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FEB 7 3 20

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Supreme Court of the Gnited States

JOEL SEREBOFF and MARLENE SEREBOFF,

‘ Vv.

MID-ATLANTIC MEDICAL SERVICES, INC.,

LITIGATION CENTER, INC.

1615 H Street, N.W.

Washington, DC 20062

(202) 4638-5337

*Counsel of Record Counsel for Amici Curiae

COCFLS LAW BRIEF PRINTING CO. (900) 225-0864

' OR CALL COLLECT (403) 342-2831

TABLE OF CONTENTS

Page

, Ft gs, ONIN il

STATEMENT OF INTEREST .................ccccsesccesseeeees 1

SUMMARY OF ARGUMENT ......0............ccccceeeeeceeee ee 2

IU sinicrinihelishacekanaieieihebatichdiia icing anni idatisb dal 5

A. The Remedies of Constructive Trust and

Equitable Lien Constitute Appropriate Eq-

uitable Relief under ERISA §502(a)(3) ......... 5

B. Reimbursement Provisions Serve Impor-

tant Purposes Which Benefit Employers,

Participants and Beneficiaries................. 13

C. If Plan Reimbursement and Subrogation

Provisions Cannot Be Enforced, Plan

Sponsors May Simply Amend Plans to

Exclude Benefits for Which Third Parties

BI TY TTI cn cncidicsincknsanensantesndakiotndenstes 16

D. If Fiduciaries Seek to Enforce the Plans’

Reimbursement and Subrogation Provi-

sions in State Courts, Their Claims May

Be Denied as Preempted by ERISA or

Subject to the Vagaries of State Laws...... 18

enn twinsiabhininidacieadsienasindiieniaecnebinbiaseienial 21

TABLE OF AUTHORITIES

Page

FEDERAL CASES

Admin. Comm. of Wal-Mart Assocs. Health &

Welfare Plan v. Willard, 393 F.3d 1119 (10th Cir.

IIIT snsstnacreeciensniinscigundenpanineosiecissnenitinnstnatinienncndiasepaeteieeaeeonn 2

Admin. Comm. of Wal-Mart Stores, Inc. Assocs.

Health & Welfare Plan v. Varco, 338 F.3d 680 (7th

SR ERG Aig aT eee OES Se a re an

Arana v. Ochsner Health Plan, 338 F.3d 433 (5th

gE SRE REE Me NS SR SPI Wh Ses er 19

Bombardier Aerospace Employee Welfare Benefits

Plan v. Ferrer, et al., 354 F.3d 348 (5th Cir. 2003).... 2, 10

Community Insurance Co. v. Morgan, 54 Fed. Appx.

RES EEE ES SCR ae ORNL EES ——

Curtis-Wright Corp. v. Schoonejongen, 514 U.S. 73

es hiclctieahididhcudchiiena isnicscecliabiabdmatia shiphapinatinddislionbinessauedes 17

Egelhoff v. Egelhoff, 432 U.S. 141 (2001)................ cc. 20

FMC Corp. v. Holliday, 498 U.S. 52 (1990) .............0.000.. 20

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1

ERR AE I ae ORO PERL ae AED aA ie ee SO A A PO 20

Great West Life & Annuity Insurance Co. uv.

Knudson, 534 U.S. 204 (2002)..........000000000.. 7, 8,9, 19, 21

Harris Trust and Savings Bank v. Salomon Smith

SE, Tiree ee SIU I ec ctnclerecsicicnientbcitvwenentinvssinicctncneten 6

Health Costs Controls of Ili. v. Washington, 187

EAE SRE eat RON OR 9,11

Hughes Aircraft Co. v. Jacobsen, 525 U.S. 432

(RESET EL IE ere ot as A oak ee IO 17

il

TABLE OF AUTHORITIES — Continued

Page

Infinity Insurance Companies v. Copeland, 2005

U.S. Dist. LEXIS 30018 (M.D. Ga. November 18,

STITT cecal siibelecesiandciaiaphchdealoeomesdaidiicessbbeiieteanabiinaiiaaaiaedadeiitiees 19

Liming v. Check Free Services Corp., 2005 U.S.

_- Dist. LEXIS 39155 (D. Ariz. 2005) ........ cece: 19

Lockheed Corp. v. Spink, 517 U.S. 882 (1996).................. 17

McIntyre v. Carpenters Health & Security Trust of

Western Washington, 2006 U.S. Dist. LEXIS 3759

NETRA FEROS bk CO 18, 19

Mertens v. Hewitt, 508 U.S. 248 (1993)... ee eeeeeeeeees 5

- Mid-Atlantic Medical Services, LLC v. Sereboff, 407

F.3d 212 (4th Cir. 2005)................04. seteresnevens 4, 10, 20, 21

Qualchoice, Inc. v. Rowland, 367 F.3d 638 (6th Cir.

RAR SE ae LEE SI Aaa ON" ae OE ER MP Eee 3

Reich v. Continental Casualty Co., 33 F.3d 754 (7th

I I eiinheis cratic ec cieneaci dat etl a allaaeialiabintegcbaotsinaalicanth 7

Scholastic Corp. v. Najah Kassem & Casper & De

Toledo LLC, 389 F. Supp. 2d 402 (D. Conn. 2005)........ 12

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983) ............ 17

Varity Corp. v. Howe, 516 U.S. 489 (1996).................... 6,15

Wal-Mart Stores Health and Welfare Plan v. Wells,

ee ee CF I CID vcscacccecocenncovicnenseeerccesescecstens 11

Westaff (USA) Inc. v. Arce, 298 F.3d 1164 (9th Cir.

STII aciiashaiilasiahinchbasscicslibaisiciheiaslacdeneiadldadiehicamidsntiinsbedaseiniteisenalimdideipeibints 3

iv

TABLE OF AUTHORITIES -— Continued

Page

STATE CASES

Board of Trustees of San Diego Electrical Health

and Welfare Trust, 2003 Cal. App. Unpub. LEXIS

Ue 6 Gere. LA, CIE. ED snsnstniderpsitvsvconssesenriciiadaiuninuadina 19

Brodzik v. Szpakowicz, 2002 Conn. Super. LEXIS

GRE GU GU. GT: TEU ccccciivcesnisceisicestnscnininicenncnieiinns 20

Hamrick’s Inc. v. Roy, 115 8.W.3d 468 (Ct. App.

I, SIEED ceescvicsvinecsesissscncissinantbtsiaiilpiaiiubisipintamelneaeacnlans 20

Liberty Northwest Insur. Corp. v. Kemp, 192 Ore.

App. 181, 85 P.3d 871 (Ct. App. Ore. 2004)..............0... 19

MEBA Medical & Benefits Plan v. Tracey Lago, 867

So. 2d 1184 (Ct. App. Fla. 2004)... ceececssseesseeeees 19

Palmerton v. Associates’ Health and Welfare Plan,

260 Wis. 2d 179, 659 N.W.2d 183 (Ct. App. 2003)......... 20

Uber v. TIG Specialty Inc. Co., 2003 Mich. App.

LEXIS 262 (Ct. App. Mich. 2003)..................cccsssesessseees 19

FEDERAL STATUTES

Se Weis See Ds cvevciassssscsecsislessnsncsiutsbinsintioeidaieiaiannn 2

MISCELLANEOUS

1 D. Dobbs, Law of Remedies (2d ed. 1993)

SIP PETEI <scvnsisediteniensenbdedionsiantitabaiaanaiisnididmanaiiidiacsaaiiann 9

SUUALTICUD soccesconssisnsnesieuentieitenssiihdatethedusiiaasbamseaiiiasaaaeeenn 12

ii ansiicevsosovsnncopeconnievsnansiehelnniienéausistesiadaisiuaadaitaddasaiiaann nn )

SEMAN GEED whstinsdoscevssnnshennedinnsuesebdesinuuidbienaddbadiadseaalanannn 8,12

SLANTED cvcsicnéonisauadesidentgetievinnaedsineiieneleiesihisiseidammadiadassasaananan 9

PRET ED <ntovscrnasenscopecneiocessonsenintindsanaenmbiiaaiammnmaiannae 12

TABLE OF AUTHORITIES - Continued

Page

4 J. Pomeroy, Equity Jurisprudence §1047 (Symons

er 9, 12

16 L. Russ, Couch on Insurance, $222.22 (3d ed.

RE ae 13

Employee Retirement Income Security Act of 1974,

ca id an raearitsrenatmedaneainiobiides 2,13

adi nantemereatonnanci veseeeepassim

I sspencbiconii 6

1 G. Palmer, Law of Restitution §1.4 (1978) ........ccccccccccc0ees 8

RELISTS NTE LSE ea ee a 8

Restatement of Restitution §160, cmt. a (1936)................... &

R. Goff & G. Jones, The Law of Restitution §3-004

REESE ELIE SSIS RT Ce CO COO 13

The Henry J. Kaiser Family Foundation & Health

Research & Education Trust, Summary of Find-

ings, Employer Health Benefits 2005 Annual

Survey 1 (2005), available at http://www.kff.org/

insurance/7315/sections/upload/7316. pdf ..................... 15

STATEMENT OF INTEREST

The Society for Humah Resource Management

(“SHRM”) is the world’s largest association devoted to

human resource management. Representing more than

200,000 individual members, the Society’s mission is to

serve the needs of HR professionals by providing the most

essential and comprehensive resources available. As an

influential voice, the Society's mission is also to advance

the human resource profession to ensure that HR is

recognized as an essential partner in developing and

executing organizational strategy. Founded in 1948,

SHRM currently has more than 550 affiliated chapters

and members in more than 100 countries. SHRM’s mem-

bership comprises HR professionals who work for employ-

ers that sponsor health plans for their employees.

The Chamber of Commerce of the United States of

America (“the Chamber”) is the world’s largest business

federation, representing an underlying membership of

over three million businesses and organizations of every

size and in every industry sector and geographical region

of the country. A principal function of the Chamber is to

represent the interests of its members by filing amicus

curiae briefs in cases involving issues of vital concern to

the nation’s business community.

This case involves a plan fiduciary’s attempt to re-

cover under ERISA the medical expenses advanced by the

‘ Pursuant to Supreme Court rule 37.6, no counsel for any party

authored this brief in whole or in part, and no person or entity, other

than the amici curtae and their members, made a monetary contribu-

tion to the preparation or the submission of this brief. The brief is filed

with the consent of the parties and copies of the consent letters have

been filed with the Clerk.

2

plan under its subrogation/reimbursement provisions. The |

court decision will have a direct impact on a substantial

number of the members of SHRM and the Chamber. From

the largest to the smallest of businesses, those that spon-

sor health plans covered by the Employee Retirement

Income Security Act of 1974 (“ERISA”) containing subro-

gation and reimbursement provisions have a vital interest

in the outcome of this case.

+

SUMMARY OF ARGUMENT

This case involves the extent of equitable relief avail-

able to a fiduciary under ERISA §502(a)(3)’ to enforce the

reimbursement and subrogation provisions of an em-

ployer-sponsored health plan. The Fourth Circuit (follow-

ing the lead of the Fifth, Seventh, and Tenth Circuits)’ has

held that a plan fiduciary may seek under ERISA equita-

ble restitution and impose a constructive trust or equitable

lien on a portion of the settlement funds that are within

the possession and control 5f a participant. The Sixth and

Ninth Circuits have reached the opposite conclusion,

finding that the plan fiduciary cannot seek a constructive

trust or equitable lien on a participant’s settlement pro-

ceeds that are held in an identifiable account since the

claim simply seeks to enforce a contractual provision in a

* 29 USC. §1132(aX3).

* See Admin. Comm. of Wal-Mart Assocs. Health & Welfare Plan v.

Willard, 393 F.3d 1119 (10th Cir. 2004); Bombardier Acrospace Em.

plovee Welfare Benefits Plan v. Ferrer, et al., 354 F.3d 348 (5th Cir.

2003), Admin. Comm. of Wal-Mart Stores, Inc. Assocs.’ Health & Welfare

Plan v. Varco, 338 F.3d 680 (7th Cir. 2003).

3

plan document to require the payment of money which is a

classic action at law, not an equitable claim.‘

~The Sixth and Ninth Circuits’ rationale must be

rejected. The Fourth Circuit decision was properly decided

in accordance with Supreme Courts’ rulings construing the

remedies available under ERISA §502(a)(3). The circum-

stances of the case warrant the imposition of a construc-

tive trust or equitable lien remedy which was available in

the traditional equity courts. The meaning of “appropriate

equitable relief’ as described by the majority of the Su-

preme Court embraces the imposition of a constructive

trust or equitable lien on monies received from a tortfeasor

being held in an account under the control of the partici-

pant. The plan fiduciary is seeking an equitable right

based on unjust enrichment to some or all of the money

held in the account which is derived solely from the

participant’s state court settlement with the tortfeasor.

This right is well recognized in traditional equity courts

and is independent of any contractual rights between the

parties. Equitable relief is particularly appropriate here

because plan fiduciaries do not have a right under ERISA

to enforce the terms of the plan through direct recovery

from the participant, so there is no adequate remedy at

law.

Subrogation and reimbursement provisions are found

in, and used by, virtually all insured and self-funded health

plans. The denial of the enforcement of subrogation/

reimbursement provisions contained in most health plans

will result in increased costs for the provision of medical

* Qualchowe, Inc. v. Rowland, 367 F.3d 638 (6th Cir. 2004), Westaff

(USA) Inc. v. Arce, 298 F.3d 1164 (9tn Cir 2002).

benefits to plan participants and beneficiaries. With

medical costs already skyrocketing, an adverse ruling in

this case will encourage more employers to not offer

healthcare plans or pass the increased costs onto partici-

pants in the plan.

Further, if plan fiduciaries are unable to enforce these

subrogation/reimbursement provisions, plan sponsors will

amend their plans to eliminate benefits for injuries and

illnesses arising out of accidents for which third parties

may be liable. In the event that such benefits are not

provided, plan participants and beneficiaries will have to

either pay medical providers directly for such services or

wait to pay medical providers from their recoveries from

tortfeasors. This would impose uncertainties and hard-

ships on participants and beneficiaries and result in a less

efficient means of paying medical benefits.

Finally, if Sereboff is overturned, plan fiduciaries will

be forced into state courts to attempt to enforce the plans’

subrogation and reimbursement clauses. The result of

such efforts will vary depending on the jurisdiction in

which the claims are heard, contrary to one of the princi-

pal purposes of ERISA which is to promote uniformity in

administration of ERISA plans.

In sum, the Fourth Circuit's decision should be up-

held. Plan fiduciaries do have a cause of action under

ERISA §502(a)(3) for restitution to prevent unjust enrich-

ment by the imposition of a constructive trust or equitable

lien on the participant’s settlement proceeds held in a

separate identifiable account under the participant’s

actual or constructive control. To hold otherwise would: (1)

hinder the enforcement of subrogation/reimbursement

provisions; (2) allow plan participants and beneficiaries to

5

defeat the plan’s interest in being reimbursed by the

tortfeasor whose actions caused the illness or injury; (3)

create an administrative burden for plan fiduciaries by

requiring them to go into state court and bring suits

against potential liable third parties; (4) encourage plan

sponsors to eliminate coverage now extended to partici-

pants for their convenience; and (5) increase health plans

costs, which may result in discouraging employers to

maintain plans or shifting the additional costs to partici-

pants and beneficiaries.

ARGUMENT

A. THE REMEDIES OF CONSTRUCTIVE TRUST

AND EQUITABLE LIEN CONSTITUTE APPRO-

PRIATE EQUITABLE RELIEF UNDER ERISA

$502(a)(3).

The Supreme Court has interpreted ERISA $502(a)(3)

in at least four cases. In Mertens v. Hewitt,’ the partici-

pants’ cause of action against the nonfiduciary was main-

tained under §502(a)(3) to obtain “other appropriate

equitable relief” to redress fiduciary violations of ERISA.

The Court held that ERISA does not authorize suits for

money damages against the nonfiduciaries who knowingly

participate in a fiduciary’s breach of fiduciary duty. The

Court opined that the relief sought (/.e., monetary dam-

ages against the nonfiduciary for losses to the plan) was

not a remedy traditionally viewed as equitable, since

money damages are the classic form of legal relief. Fur-

ther, the Court declined to rule that al/ relief available for

* 508 U S. 248, 254-57 (1993).

6

breach of trust that could have been obtained in a court of

equity was available under §502(a\3). To read the statute -

otherwise would “render the modifier — equitable - as

superfluous.” The Court noted that at common law, equity

courts could establish legal rights and grant legal reme-

dies for breach of trust, as well as grant traditional equi-

table relief (such as injunction and restitution).

The second case addressing the parameters of

§502(a\(3) relief is Varity Corp. v. Howe,’ wherein the

Court agreed that a claim for individual relief against

fiduciaries to redress breaches of fiduciary duties could be

maintained under §502(a)(3). In so holding, the court

described the language in §§502(a)(3) and 502(a)(5) as two

“catchalls,” acting as a “safety net” and “offering appropri-

ate equitable relief for injuries caused by violations that

§502 does not elsewhere adequately remedy.” The Court

did not elaborate, however, on what relief would be avail-

able to the individual plaintiffs to redress the breaches of

fiduciary duty.

In Harris Trust and Savings Bank v. Salomon Smith

Barney,’ the Court permitted a cause of action under

§502(a\(3) against a nonfiduciary party-in-interest broker

to obtain “appropriate equitable relief” to redress a violation

of the prohibited transaction rules of ERISA. The Court

found that a §502(a)(3) cause of action was appropriate to

redress violations or enforce any provisions of ERISA or an

* Id. at 258.

” 516 US. 489 (1996).

* Id. at 512.

* 530 U.S. 238 (2000).

ERISA plan and the only limit in §502(a)(3) is the “appro-

priate equitable relief” caveat. In so finding, the Court

relied on the common law of trusts, which allowed an

action for restitution of property or disgorgement of

proceeds and profits through the imposition of a construc-

tive trust in situations where property was obtained by

another by fraud or other means which would render it

unconscionable for the holder of legal title to retain and

enjoy the beneficial interests.”

The final case, which is a prequel to the case below, is

Great West Life & Annuity Insurance Co. v. Knudson." The

court declined to allow a plan fiduciary to enforce the

plan’s subrogation and reimbursement provision against a

plan participant under ERISA §502(a)(3). The court held

that: (1) “equitable relief” in §502(a)(3) refers only to

those categories of relief that were typical/y available in

equity; (2) “an injunction to compel the payment of money

past due under a contract or specific performance of past

due monetary obligation was not typically available in

equity”; and (3) not all relief characterized as restitution

- was available in equity — i.e., it is a legal remedy when

ordered in a case at law and an equitable remedy when

ordered in an equity claim."

The Supreme Court proceeded to provide a framework

for courts to determine which type of case it may be.

“ Id. at 250-51. ~

"534 U.S. 204 (2002).

" Id. at 209-10 (citing Mertens).

" Id. at 211.

" Id. at 212, citing Judge Posner's decision in Reich v. Continental

Casualty Co., 33 F.3d 754, 756 (7th Cir. 1994).

8

Courts were instructed to ascertain the basis for the claim

and the nature of the underlying remedies sought.” If

plaintiff’s claim was to obtain a judgment imposing

personal liability on defendant to pay money, it was

restitution at law. If, on the other hand, it was an action in

the form of a constructive trust or an equitable lien, it was

restitution in equity and a court could order the defendant

to transfer title to property or give a security interest to

plaintiff in money or property in defendant’s possession

which in good conscience belonged to Plaintiff. However,

in Knudson, the Supreme Court declined to impose a

constructive trust or an equitable lien on settlement

proceeds because the funds to which the plan fiduciary

sought entitlement were not in the participant's posses-

sion, but had been placed in a special needs trust and

given to the attorney.”

The Supreme Court’s discussion in Knudson delineat-

ing the circumstances in which restitution could be char-

acterized as equituble was derived from treatises

describing equity actions at the time of the divided bench.”

In traditional equity courts, where a defendant has gained

a benefit that in good conscience belonged to plaintiff,

plaintiff could assert a claim for unjust enrichment and

seek restitution in the form of a constructive trust or

* Id. at 213.

" Id. at 213-14.

" Id at 214.

* Knudson, 534 U.S. at 213-14, crting 1 D. Dobbs, Law of Remedies

$4.3(1) at 587-88 (2d ed. 1993), Restatement of Restitution $160, cmt. a,

at 641-42 (1936); and 1 G. Palmer, Law of Restitution §1.4 at 17; §3.7 at

262 (1978).

9

equitable lien.” Plaintiff would seek these remedies to

require disgorgement of specific real or personal property

unjustly held by the defendant. The constructive trust

remedy world provide an in personam order requiring the

defendasi co turn over property to a plaintiff.” Prior to

making the order, the court would decide if restitution was

proper, and, if so, would declare the defendant to be a

constructive trustee and order him as trustee to transfer

the property.” Constructive trust may only be had if

defendant can be said to possess the property which in

good conscience belongs to plaintiff.” If the property is sold

and the money dissipated, then plaintiff would only have

legal relief.”

The difference between legal and equitable restitution

is the focus of the remedy. Legal restitution is a general

claim for money to recoup plaintiff’s losses (i.e., plaintiff is

seeking a judgment imposing personal liability on defen-

dant for money owed), while equitable restitution is a

claim for return of specific property, including money, that

in good conscience belongs to plaintiffs.“ Petitioners even

* Supra {n. 17. See also 4 J. Pomeroy, Equity Jurisprudence $1047

at 101-02 (Symons 5th ed. 1994) (1941) An equitable lien is a special

form of constructive trust and would be applied where the plaintiff was

not claiming rightful ownership over the entire res sought for attach-

ment. The plaintiff receives a security interest in the property See 1 D.

Dobbs, Law of Remedies §4 3 at 249.

* 1D Dobbs, Law of Remedies §4 3(2) at 590-91 (2d ed. 1993).

* Td at 591.

1D. Dobbs, Law of Remedies §4.3(2) at 242 (1973).

* 1D. Dobbs, Law of Remedies §4.3(2) at 591 (2d ed. 1993)

* 1D. Dobbs, Law of Remedies §2.6(3) at 157 (2d ed. 1993),

Knudson, 534 U.S. at 213-14; Health Costs Controls of Ill v Washing-

ton, 187 F3d 703, 710-11 (7th Cir. 1999) (discussing the differences

between legal and equitable restitution).

8

10

concede that “a breach of contract may occasionally entitle

plaintiff to seek equitable relief, in the form of money.”

The Fourth Circuit in Sereboff properly found that the

basis of the plaintiff’s claim and the nature of remedy

were equitable. The court upheld the equitable restitution

claim finding that plaintiff was seeking the settlement

funds which proper], belonged to the plan and those funds

were specifically identifiable and in the defendants’ pos-

session.” The court rejected the Ninth and Sixth Circuits’

“more restrictive view” of what constituted “other appro-

priate equitable relief.”

Petitioners argue that equitable remedies of construc-

tive trusts and equitable liens are not available because

plaintiff was not seeking the return of particular funds

that the plan paid to them and that they retain, or the

profits that they may have made from the use of those

funds, but rather is seeking to recover new money paid to

plaintiff by third parties.” A constructive trust is not

limited to situations where plaintiff is seeking the res

personally given to defendant, but encompasses property

which defendant takes that belongs to plaintiff, even

though plaintiff never held title.“ Petitioners misconceive

the property interest that the plan fiduciary was asserting

belonged to the plan. The plan fiduciary was not seeking

the monies paid to medical providers. Rather, the property

* See Petitioners’ Brief at *9.

* Mid-Atlantic Medical Services, LLC v. Sereboff, 407 F 3d 212,

218-19 (4th Cir 2005).

* Id. at 219-20, fn. 7 (relying on the reasoning in Bombardier, 354

F.3d at 358 n.43 and Willard, 393 F.3d at 1125).

* See Petitioners’ Brief at *20-21.

* 1D. Dobbs, Law of Remedies §4.3(2) at 590 (2d ed. 1993).

11

interest in which the plan claimed to have a beneficial

interest was the settlement monies received from a third

party or insurer. This is exactly what the plan subrogation

reimbursement provision provided.” When petitioners

accepted the payment of medical expenses relating to their

accident and then sued the tortfeasor in state court, they

agreed to hold the recovery (or a portion thereof) in trust

for Respondent MAMSI. Thus, the funds which the Fourth

Circuit awarded to the plan were clearly “traceable” and

recoverable through the imposition of a constructive trust

or equitable lien.”

Moreover, this equitable interest does not rest only on

the contractual relations of the parties, but on the court's

determination that “in good conscience,” the settlement

funds belonged to the plan to prevent unjust enrichment.

The plan fiduciary agreed to make payment in reliance on

petitioners’ misrepresentation that the funds petitioners

received from the tortfeasor would be held for the benefit

of the plan.

Petitioners also argue that the equitable remedies

cannot be granted in this case because the plan fiduciary

has an adequate legal remedy.” Although equity courts

“ See Jont Appendix Exhibit 1 to Joint Stipulation of Facts at 75.

* See Health Costs Controls of Ill. v. Washington, 187 F 3d at 710-

11 (plan fiduciary is seeking a constructive trust in participant's claim

. to tort settlement held in an escrow account), Wal-Mart Stores Health

and Welfare Plan v. Wells, 213 F.3d 398, 401 (7th Cir. 2000) (the

question is whether the participant or the plan is the beneficial owner

of the monies held in a lawyer’s escrow).

“ See Petitioners’ Brief at *23. Petitioners assert that the plan

administrator could have directly intervened as a subrogee in the

Sereboffs’ state court action to collect the monies owed to“it. See

Petitioner's Bnef at *21, fn. 8. The remedy of subrogation is equitable,

(Continued on following page)

12

would not normally award relief if plaintiff had an ade-

quate remedy, the treatises on remedies indicate that,

even when a legal remedy may be available, a plaintiff

may maintain an equitable claim if the remedy is more

advantageous.” In the case below, the Fourth Circuit’s

affirmation of the equitable remedy of constructive trust or

equitable lien was clearly preferable because, under the

facts of the case, it was the only way the plan fiduciary

could obtain monies which in good conscience belong to the

plan. Thus, there is no reason to deny the remedy sought

not legal. See 1 D. Dobbs, Law of Remedies, §4.3(1) at 587-88 (2d ed.

1993) (listing subrogation as a “major restitutionary remedy in equity”),

§4.3(4) at 604 (“subrogation is another equitable remedy in which

trading is used to prevent unjust enrichment and to give effective relief

to the plaintiff”); Scholastic Corp v Najyah Kassem & Casper & De

Toledo LLC, 389 F. Supp 2d 402, 413 (D. Conn. 2005) (subrogation is a

“creature of equity” and is “enforced solely for the purpose of accom-

phshing the ends of substantial justice”). In Scholastic Corp., the court

permitted an employer to proceed with a claim for an equitable lien

over funds held in a designated account that had been paid by third

party tortfeasors in settlement of litigation over an accident for which

the employer paid the injured employee's medical benefits pursuant to

its ERISA plan. The court found that the employer had a subrogation

right under the terms of the plan to reimbursement of the medical

benefits expended by the plan in the event that the employees recov-

ered against a third party at fault. See id. at 412. The court further

found that such a night was inherently equitable, and that an action for

an equitable lien was a proper vehicle for enforcing the subrogation

right independent of any contract action the employer may also be

entitled to bring. See id. at 412-14.

* See, e.g., 1 D. Dobbs, Law of Remedies $4 1(1) at 556 §$4.3(2) at

595-96 (2d ed. 1993) (some authorities support the view that a claim for

a constructive trust may be pursued even if the legal remedy is

adequate and even if the trust would yield only money that could be

recovered at law); 4 J. Pomeroy, Equity Jurisprudence §1047 (Symons

5th ed. 1994) (1941) (constructive trust may be applied “wherever it is

necessary for the obtaining of complete justice, although the law may

also give the remedy of damages against the wrongdoer”).

13

by the plan administrator because ERISA §502 does not

elsewhere provide an adequate remedy.

B. REIMBURSEMENT PROVISIONS SERVE [MPOR-

TANT PURPOSES WHICH BENEFIT EMPLOY-

ERS, PARTICIPANTS AND BENEFICIARIES.

Subrogation/reimbursement provisions are found

exclusively in, and used by, both insured and self-funded

health plans. They are cost-shifting measures. Reim-

bursement and subrogation provisions operate very

differently, but essentially serve the same purpose (i.e., to

prevent unjust enrichment). Reimbursement provisions

require the participant or beneficiary to reimburse the

plan for medical expenses paid by the plan in the event

there is a recovery for the same injuries from a responsible

third party through judgment or settlement. Subrogation,

on the other hand, allows the plan to step in the shoes of

the injured participant and sue the tortfeasor directly.

Subrogation is a more expensive alternative for plan

fiduciaries since the plans would have the burden of suing

the tortfeasor and proving the liability for the injury.”

Subrogation/reimbursement provisions are similar to

other cost-shifting measures commonly found in health

plans. For example, plan administrators have to deter-

mine benefits in dual or triple coverage situations (“coor-

dination of benefits”) and also coordinate with Medicare

“ See R. Goff & G. Jones, The Law of Restitution §3-004 at 1230

(6th ed. 2002); 16 L. Russ, Couch on Insurance, §222.22 at 222-13 to

222-14 (3d ed. 2000) (noting distinctions among subrogation, liens and

assignments).

14

under the Medicare Secondary Payer Rules. The purpose

for these rules is to shift the costs of the medical expenses

on the plans to other persons or entities who are primarily

liable for the expenses.

The subrogation/reimbursements provisions (and the

other coordination of benefit provisions) serve important

goals, including: (1) preventing participants and benefici-

aries from retaining recoveries which were meant in part

to reimburse for medical expenses already paid by the

plan; (2) shifting the costs to the tortfeasor or another

responsible party who is primarily liable for those costs;

and (3) preventing participants, beneficiaries and others

from defeating the plan’s recovery of the advanced medical

expenses by creatively structuring settlements to foreclo-

sure recovery of those expenses.

When participants bring claims to recover for injuries

or illnesses sustained as a result of a liable third party,

such claims almost uniformly seek recovery of damages for

the medical expenses that the plans have paid or may be

obligated to pay to the plaintiffs in the future. When funds

are recovered through judgments or settlements, it can

reasonably be assumed that they include amounts for all

or part of the medical expenses incurred or anticipated to

be incurred in the future by the injured participant. Thus,

the imposition of a constructive trust or equitable lien on

the settlement recoveries prevents double recoveries by

participants for medical expenses.

Moreover, another policy underlying the enforcement

of subrogation and reimbursement provisions is to assure

that the tortfeasors or other responsible parties, rather

than the plans, employers, participants and beneficiaries,

15

would ultimately bear the medical expenses resulting

directly from their wrongful conduct.

Allowing enforcement of these provisions would

likewise discourage participants through post-settlement

maneuvers from attempting to fashion settlement agree-

ments so as to exclude therefrom any recovery for the

medical expenses paid by the plans, and for which plain-

tiffs originally demanded recovery.

Most importantly though, enforcement of subroga-

tion/reimbursement provisions serves to reduce the health

plans’ and insurers’ costs of providing health benefits and,

thus, conserve limited plan funds.” Unfortunately, even

with cost saving measures in place, the skyrocketing costs

of employer-sponsored health coverage in this country has

resulted in fewer employers extending health coverage and

fewer employees being covered.”

Millions and potentially billions of dollars are re-

couped annually by health plans.” If this court were to

* Varity, 516 US. at 497.

* The Employer Health Benefits 2005 Annual Survey reports that

from 2000 through 2005, average premiums for family coverage

increased by 73% (for both insured and self-funded plans) and, in 2005,

the average annual premium for a family of four was $10,880.00, which

almost equals the full-time earnings of a minimum wage worker. The

Henry J. Kaiser Family Foundation & Health Research & Education

Trust, Summary of Findings, Employer Health Benefits 2005 Annual

Survey 1 (2005), available at http://www.kff.org/insurance/73 15/sections/

upload/7316.pdf. Additionally, over the past five years, the percentage of

employers offering health benefits have decreased from 69% to 60% and

the percentage of workers covered has fallen from 63% to 60%. See id.

* One of the largest private healthcare claims recovery services

in the United States recovered $239.9 million in health claims in 2003.

See Trover Solutions, Inc., Form 10-K (FY 2003) at 29. Based on the

recoveries made by this service, it is estimated that more than $1

billion is recovered annually on behalf of all plans.

16

hold that §502(a\(3) does not permit enforcement of plan

reimbursement/subrogation provisions to recover amounts

paid out to participants injured by liable third parties, it

will inevitably adversely impact the financial viability of

health plans, increase the costs of providing health bene-

fits, and cause employers to: (1) drop coverage altogether;

(2) decrease benefits provided to all employees; or (3) pass

those increased costs onto workers.

C. IF PLAN REIMBURSEMENT AND SUBROGA-

TION PROVISIONS CANNOT BE ENFORCED,

PLAN SPONSORS MAY SIMPLY AMEND PLANS

TO EXCLUDE BENEFITS FOR WHICH THIRD :

PARTIES MAY BE LIABLE.

Petitioners Joel and Marlene Sereboff recovered

$750,000 in settlement of a personal injury action against

third party tortfeasors for injuries sustained in an auto-

mobile accident. The Sereboffs were covered at the time of

the accident by MAMSI Life and Health Insurance PPO

Plan, and the plan paid nearly $75,000 in medical benefits

on behalf of the Sereboffs as a result of the accident. The

plan contained a subrogation provision giving MAMSI the

right to recover medical benefits paid to participants as a

result of any injury caused by a third party. Though

MAMSI made a formal demand on the Sereboffs for

recognition of the plan’s subrogation rights during the

settlement process, the Sereboffs refused to comply with

the subrogation provision and did not reimburse the plan.

The Court of Appeals for the Fourth Circuit affirmed the

District Court’s award reimbursing the plan-out of the

monies recovered in settlement of the Sereboff’s personal

injury action.

17

Plans provide for the payment of participants’ medical

expenses relating to illnesses and injuries for which a

third party may be liable as a convenience to their partici-

pants and to assist in prompt payments to medical provid-

ers. If this court overturns the Sereboff decision, plan

sponsors will amend their health plans to discontinue this

accommodation and exclude payments for illnesses or

injuries for which third parties may be liable. The employ-

ers’ decisions regarding the design of the plan itself — e.g.,

who is entitled to benefits, in what amounts and how

the benefits are calculated - are settlor functions.”

“(E]mployers or other plan sponsors are generally free

under ERISA, for any reason at any time, to adopt, modify

or terminate welfare plans.”” Indeed, ERISA does not

require that an employer provide any particular benefits

or any benefits at all.“ Thus, employers may legitimately,

without incurring any fiduciary liability, amend their

health plans to exclude the payment of benefits for which

a third party may be liable.

Unless the participant is able to prove to the plan

fiduciary that the exclusion did not apply, the participant

would be primarily responsible for the medical bills. For

example, in this case, $74,869.37 of the Sereboffs’ medical

bills were paid directly by the plan. Likewise, in the

* When employers undertake to adopt, modify or terminate plans,

their actions are analogous to settlors of a trust. See Hughes Aircraft

Co v. Jacobsen, 525 U.S 432, 443-44 (1999); Lockheed Corp v. Spink,

517 U.S. 882, 889-90 (1996); Curtis-Wright Corp. v. Schoonejongen, 514

U.S. 73, 78 (1995).

* Curtis-Wnght, 514 U.S. at 78 (“ERISA does not create any

substantive entitlement to employer-provided health benefits or any

other kind of welfare benefits”).

“ Shaw v. Delta Aur Lines, Inc., 463 U.S. 85, 91 (1983).

18

Knudson case, medical bills amounting to $411,157.11

were paid by the insurance plan. If the health plans

expressly excluded these benefits, the Sereboffs and the

Knudsons would have had to pay the medical bills out of

their own pockets.

If a participant was unable (or unwilling) to pay the

medical expenses, the expenses would not be paid until

he/she was able to recover from the liable third party.

Prior to recovery, the unpaid medical providers may bring

suits against the participants. This would result in par-

ticipants being burdened by state court collection actions

and providers not being paid in a timely manner, causing

even more havoc on the court system.“ Upholding the

Sereboff decision and allowing plan fiduciaries to obtain

recoupment of monies in limited circumstances will

facilitate, rather than impede, the system of claims pay-

ments.

D. IF FIDUCIARIES SEEK TO ENFORCE THE

PLANS’ REIMBURSEMENT AND SUBROGA-

TION PROVISIONS IN STATE COURTS, THEIR

CLAIMS MAY BE DENIED AS PREEMPTED BY

ERISA OR SUBJECT TO THE VAGARIES OF

STATE LAWS.

Whether a plan fiduciary can sue for damages for

breach of contract or otherwise seek to enforce the plan’s

subrogation and reimbursement provisions under state

law without running afoul of ERISA’s broad preemption

* See, e.g., Mcintyre v. Carpenters Health & Security Trust of

Western Washington, 2006 U.S. Dist. LEXIS 3759 (W.D. Wash. 2006)

(participant sued plan and plan administrator requesting an order for

payment of claims excluded under plan).

19

provisions was left open in Knudson.” Since Knudson, the

courts’ rulings on this issue have been mixed. Some courts

have held that state law claims by plan fiduciaries are

preempted, even though there may be no available federal

remedy.” In at least three cases, federal courts have held

that participants’ state law declaratory actions to deter-

mine the rightful ownership of tort recoveries are pre-

empted by ERISA (although the state courts may have

concurrent jurisdiction with federal courts to decide

them).” A number of courts, on the other hand, have

entertained state law claims by plan fiduciaries seeking to

enforce reimbursement and subrogation plan provisions.”

“” 534 U S. at 220

“ See, eg., Infinity Insurance Companies v. Copeland, 2005 US

Dist. LEXIS 30018 at 3 (M.D. Ga. November 18, 2005) (insurer’s

subrogation claim is based on and arises out of ERISA and, thus, is

under the exclusive jurisdiction of federal courts); Liberty Northwest

Insur. Corp. v Kemp, 192 Ore. App 181, 85 P.3d 871 (Ct. App. Ore.

2004) (ERISA preempts the insurer’s state common-law breach of

contract claim because it references an ERISA plan and interferes with

one of Congress’s most important objectives in enacting ERISA), MEBA

Medical & Benefits Plan v. Tracey Lago, 867 So. 2d 1184 (Ct. App. Fla.

2004) (trust’s action is preempted because it relies upon state law for

alternative enforcement of its claim for reimbursement of benefits);

Board of Trustees of San Diego Electrical Health and Welfare Trust,

2003 Cal. App. Unpub. LEXIS 2377 (Ct. App. Cal. 2003) (same);

Community Insurance Co. v. Morgan, 54 Fed. Appx. 828 (6th Cir 2002)

(plan fiduciary’s action seeking a declaration under state law of its

entitlement of funds based on its subrogation interest is preempted).

“ See McIntyre v. Carpenters Health and Security Trust of Western

Washington, 2006 U.S. Dist. LEXIS 3759 (W.D. Wash. 2006), Liming v.

Check Free Services Corp., 2005 U.S. Dist. LEXIS 39155 (D. Ariz 2005);

and Arana v. Ochsner Health Plan, 338 F.3d 433 (5th Cir. 2003) ‘en

banc).

_ © See, eg., Uber v TIG Specialty Inc. Co., 2003 Mich. App. LEXIS

262 (Ct App. Mich. 2003) (court held that plan fiduciary could assert a

lien on the settlement proceeds recovered in the participant's state law

(Continued on following page)

20

~

If this Court were to reverse Sereboff, it is uncertain

whether plan fiduciaries could maintain state court

actions to enforce the plan’s subrogation and reimburse-

ment rights. If they cannot bring state actions because of

ERISA preemption, then there will be no enforcement

remedy. If the plan fiduciaries can maintain state claims,

the plans would be subject to varying laws. State court

actions may or may not be successful depending upon the

jurisdictions in which the actions are brought. The various

state courts may apply federal law or they may apply

unique state statutes and common law. This would frus-

trate Congress’s primary goal in enacting ERISA - i.e,

uniform administration of employee benefit plans, includ-

ing uniform legal obligations.

Several of this Court’s opinions have emphasized that

Congress intended to enable employers “to establish a

uniform administrative scheme, which provides a set of

standard procedures to guide processing of claims and

disbursement of benefits," and that such “[u]niformity

is impossible, however, if plans are subject to different

legal obligations in different states.” Moreover, plan

suit against tortfeasor’s insurer); Palmerton v. Associates’ Health and

Welfare Plan, 260 Wis 2d 179, 659 N.W. 2d 183 (Ct. App. 2003) (af-

firmed the award of a judgment based on state law subrogation claim to

the plan); Brodzik v. Szpakowiez, 2002 Conn. Super. LEXIS 3417 (Sup.

Ct. Conn. 2002) (approved the plan's lien and ordered it paid from the

judgment); Hamrick’s Inc. v. Roy, 115 S.W. 3d 468 (Ct App. Tenn. 2002)

(affirmed the plan’s judgment against the participant and her attorney

in a state law suit to enforce reimbursement agreement).

“ Fort Halifax Packing Co. v Coyne, 482 U.S. 1, 9 (1987).

” Egelhoff v. Egelhoff, 432 U.S. 141, 148 (2001). See also FMC

Corp. v. Holliday, 498 U.S. 52, 60 (1990) (“|tlo require plan providers to

design their programs in an environment of differing state regulations

(Continued on following page)

21

administration would become increasingly inefficient and

costly if plans are forced in each and every potential third

party liability claim to go into state courts and file actions

against potential liable third parties to recover advanced

medical expenses.

-

¢

CONCLUSION

The Sereboff decision (following the lead of other

Circuits) was correctly decided under this Court’s Knudson

opinion. The traditional equity courts were empowered to

deliver justice when relief at law was inadequate or not as

favorable. Providing plan fiduciaries with an equitable

remedy under ERISA §502(a)(3) to enforce the terms of the

plan and to prevent unjust enrichment will encourage the

participants to live up to their commitments, promote

Congress’s goal of uniformity in administration, and

inevitably reduce the costs of providing health care costs.

For the above reasons, Amici respectfully request that

this Court affirm the decision of the Court of Appeals for

the Fourth Circuit.

would complicate the administration of nationwide plans, producing

inefficiencies that employers might offset with decreased benefits”).

22

Respectfully submitted,

TERESE M. CONNERTON, Esq.

SCHMELTZER, APTAKER & SiTEPARD, PC

2600 Virginia Ave., N.W., Suite 1000

Washington, DC 20037

(202) 333-8800

Counsel of Record

KENYA N. WILEY, Esq.

SOCIETY FoR HUMAN RESOURCE

MANAGEMENT

1800 Duke Street

Alexandria, VA 22314-3499

(703) 535-6026

STEPHEN A. BoKat, Esq.

ROBIN S. CONRAD, Esq.

ELLEN DUNHAM BRYANT, Esa.

NATIONAL CHAMBER LITIGATION

CENTER, INC.

1615 H Street, N.W.

Washington, DC 20062

(202) 563-5337

Counsel for Amici Curiae