:: First Circuit Permits § 502(a)(3) Recoupment Claim Despite Failure To Identify “Specific Account” Holding Funds

We find that Sereboff, rather than Knudson, controls in this case. Here, like in Sereboff,the LTD Plan targets specific funds for recovery — Cusson’s LTD payments — and identifies the specific portion to which Liberty is entitled — the amount of the overpayment while Cusson was receiving benefits under the LTD Plan.

We are persuaded by the Eighth Circuit’s holding in a similar case that a claim such as this is a claim for equitable relief. See Dillard’s Inc. v. Liberty Life Assurance Co.,456 F.3d 894, 901 (8th Cir. 2006) (finding that Liberty’s claim was equitable when it sought “a particular share of a specifically identified fund — all overpayments resulting from the payment of social security benefits”).

Cusson v. Liberty Life Assur. Co., 2010 U.S. App. LEXIS 885 (1st Cir. Mass. Jan. 14, 2010)

The First Circuit adds further impetus to a trend away from requiring a specifically identifiable fund as a prerequisite for “equitable relief” under 29 U.S.C. § 502(a)(3).   Though the context in Cusson was that of a recoupment claim under the terms of a long term disability policy, the decision will likely influence opinions in other contexts, such as ERISA health plan reimbursement claims.

The Facts

After the plaintiff unsuccessfully appealed termination of her disability benefits, she  filed suit against the LTD carrier and the LTD Plan in the District of Massachusetts under ERISA, 29 U.S.C. § 1132(a)(1)(B).  The carrier asserted a counterclaim seeking reimbursement for overpayment of benefits as a result of the plaintiff having received SSDI benefits.

The Counterclaim

Under 29 U.S.C. § 1132(a)(3),  a plan fiduciary may bring a civil action to obtain “appropriate equitable relief “to enforce the terms of the plan.  The policy provided the carrier had the right to recovery of overpayments from any source.  

The overpayment issue arose based upon the claimant’s receipt of SSDI benefits following her initial disability award.

 Although Liberty terminated Cusson’s LTD benefits before Cusson was awarded SSDI benefits, the SSA awarded benefits retroactive to March 15, 2002. Liberty argues that because it paid STD and LTD benefits from this date until December 8, 2004, the SSDI benefits Cusson received for this period are an overpayment, and hence that § 1132(a)(3) allows it to sue to enforce the right to recover the overpayment.

“Legal” Versus “Equitable” Issue

In a now familiar dispute in reimbursement cases, the disability claimant defended against the counterclaim be arguing that the claim was “legal”, not equitable:

Cusson argues that Liberty’s counterclaim is a legal claim, rather than an equitable claim, and hence that it is not permitted under § 1132(a)(3).

Cusson relies on Great West Life & Annuity Insurance Co. v. Knudson, a case involving a similar overpayment provision in an ERISA plan, in which the Supreme Court held that the plan administrator could not use the overpayment provision to recover the proceeds from the plan beneficiaries’ tort suit against a third  party because the claim was a legal claim rather than an equitable claim. 534 U.S. 204, 122 S. Ct. 708, 151 L. Ed. 2d 635 (2002).

The Sereboff “Equitable Lien” Argument

The district court had rejected the Knudson argument based on the subsequent Supreme Court decision in Sereboff Mid Atlantic Medical Services, Inc. 547 U.S. 356(2006):

. . . the district court, in allowing Liberty’s claim, relied on Sereboff v. Mid Atlantic Medical Services, Inc., in which the Court reached the opposite result and allowed a plan to recover for overpayment of medical expenses when the claimant received money from a third party in tort. 547 U.S. 356, 126 S. Ct. 1869, 164 L. Ed. 2d 612 (2006).

The First Circuit agreed, citing Dillard’s Inc. v. Liberty Life Assurance Co., 456 F.3d 894, 901 (8th Cir. 2006)

We find that Sereboff, rather than Knudson, controls in this case. Here, like in Sereboff, the LTD Plan targets specific funds for recovery — Cusson’s LTD payments — and identifies the specific portion to which Liberty is entitled — the amount of the overpayment while Cusson was receiving benefits under the LTD Plan. We are persuaded by the Eighth Circuit’s holding in a similar case that a claim such as this is a claim for equitable relief. See Dillard’s Inc. v. Liberty Life Assurance Co., 456 F.3d 894, 901 (8th Cir. 2006) (finding that Liberty’s claim was equitable when it sought “a particular share of a specifically identified fund — all overpayments resulting from the payment of social security benefits”).

Specific Identification Of Accounts Not Required

The First Circuit then made this important observation:

 It is true that, unlike the insurer in Sereboff, Liberty has not identified a specific account in which the funds are kept or proven that they are still in Cusson’s possession. However, the Court in Sereboff noted “‘the  familiar rul[e] of equity that a contract to convey a specific object even before it is acquired will make the contractor a trustee as soon as he gets a title to the thing.’” 547 U.S. at 363-64 (quoting Barnes v. Alexander, 232 U.S. 117, 121, 34 S. Ct. 276, 58 L. Ed. 530 (1914)).

Here, the contract between Cusson and Liberty put Cusson on notice that she would be required to reimburse Liberty for an amount equal to what she might get from Social Security. We therefore find that Liberty’s counterclaim is an equitable claim and is allowed under 29 U.S.C. § 1132(a)(3).

Note:  The Court did not that “unlike in Knudson,the SSDI benefit was paid to Cusson rather than into a separate trust over which she has no control.”  Whether this is a distinction critical to the outcome is left for speculation.  Also unclear is whether courts that previously applied a strict rule requirement specific identification of funds will follow this trend.  See, e.g., Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot and Wansbrough, 354 F.3d 348 (5th Cir. 2003).

SSDI Benefit Issue – The First Circuit opinion is also significant in its rejection of the claimants defense based upon 42 U.S.C. § 407(a), finding that:

. . .  § 407(a) does not bar Liberty’s claim because Liberty is not attempting  to recover Cusson’s SSDI benefits. Rather, Liberty seeks to recover in equity from funds Liberty itself already paid under the LTD plan. Although the amount in question happens to be the same as the amount of Cusson’s retroactive SSDI payment, the funds Liberty is targeting do not come from SSDI, and thus § 407(a) does not prohibit Liberty’s claim. See Holmstrom v. Metro. Life Ins. Co., 615 F. Supp. 2d 722, 753 (N.D. Ill. 2009) (collecting cases in which courts have held that § 407(a) does not bar recovery for overpayment).