Finally, defendant has moved for summary judgment on its counterclaim seeking reimbursement for certain overpayments of the initial short term disability benefits. Plaintiff admits that the overpayments were made, but argues that defendant’s claim is subject to exhaustion. Although there is little support for plaintiff’s argument, there is a more fundamental problem with the counterclaim.

Raybourne v. Cigna Life Ins. Co., 2008 U.S. Dist. LEXIS 48341 (N.D. Ill. June 24, 2008)

I recently noted what appears to be a tendency in disability cases to permit counterclaims against benefit claimants to proceed without significant analysis of the counterclaims’ theoretical basis. (See, :: Seventh Circuit Holds That Sereboff Supports Disability Carrier’s Counterclaim) In the recent decision in Raybourne v. Cigna, however, the court gives the issue more detailed analysis and is therefore worthy of note.

The district court dispatched the carrier’s counterclaim with this analysis:

The counterclaim itself asserts no basis for this court’s jurisdiction. It is a straightforward claim for money damages under the policy and thus does not fall within § 503(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3), which confers jurisdiction over claims for equitable relief. See Fregeau v. Life Ins. Co. of North America, 490 F. Supp. 2d 928, 929 (and cases cited therein).

Unlike in Fregeau, defendant cannot assert an equitable lien over any specific funds, rendering unavailable any assertion of jurisdiction under § 503. It is possible that jurisdiction could be asserted under 28 U.S.C. § 1367(a), but as noted above, defendant has not invoked any grounds for jurisdiction and “jurisdiction may not be sustained as a theory that the plaintiff has not advanced.” Leipzig v. AIG Life Ins. Co., 362 F.3d 406, 410 (7th Cir. 2004). Accordingly, the court dismisses defendant’s counterclaim without prejudice for lack of jurisdiction.

Fregeau v. Life Ins. Co. of North America, 490 F. Supp. 2d 928 (N.D. Ill. 2007), noted by the court in Raybourne, also rendered a considered judgment as to the scope of counterclaim relief in terms of Sereboff principles, though it left open the possibility that the carrier could prevail on its claims. While the Fregeau court found that the carrier had stated a claim sounding in equity, it did not do so without a careful comparison of the facts to those presented in Knudson and Sereboff.

The comparison is reflected in the following excerpt:

In both Knudson and Sereboff the plans provided for a lien on funds received by the beneficiary from third party sources. The insurer in those cases had paid benefits directly to medical service providers. No money was paid directly from the insurer to the beneficiary.

In the instant case, the Plan created the lien not on a fund received from a third party, but on a fund advanced directly to plaintiff by defendant in excess of what plaintiff would be ultimately entitled. At the time defendant paid the LTD benefits to plaintiff, defendant was entitled to reduce those payments by an estimate of the amount plaintiff was assumed to receive from other sources. In a separate agreement defendant agreed not to reduce the benefits by that estimated amount, in exchange for plaintiff’s agreement to reimburse the full amount of any overpayment. That agreement creates an equitable lien by agreement on the excess funds paid to plaintiff by defendant in advance of plaintiff’s receipt of funds from other sources, not on the funds actually received from those other sources.

Note: On an often related issue of whether liens may be asserted on SSD benefits, the Fregeau court made this distinction:

Therefore, because the lien is on the money paid by defendant to plaintiff, not on SSD benefits received by plaintiff, § 407(a) does not apply. Additionally, because the lien was created by agreement, under Sereboff defendant does not have to trace the specific funds to any particular account or property.

Exhaustion Requirement – Note that the Raybourne court placed little value on the suggestion that the counterclaim was subject to the exhaustion requirement, stating “Plaintiff admits that the overpayments were made, but argues that defendant’s claim is subject to exhaustion. Although there is little support for plaintiff’s argument, . . .”

Mote v. Aetna – The Fregeau court did not accept the plaintiff’s argument that Mote v. Aetna compelled dismissal of the counterclaim, stating:

Plaintiff’s reliance on Mote v. Aetna Life Insurance Co., 435 F. Supp. 2d 827 (N.D. Ill. 2006), in which the court suggested that any funds placed in an account in which SSD benefit funds have been placed are protected by § 407(a) is misplaced.

First, it is entirely possible that plaintiff has funds in accounts untainted by SSD benefits, something that cannot be determined on a motion to dismiss. Moreover, Mote’s conclusion that all commingled funds are protected are protected by § 407(a) has been questioned in Smith v. Accenture United States Group Long-Term Disability Insurance Plan, 2006 U.S. Dist. LEXIS 68971, 2006 WL 2644957 at *4 (N.D. Ill. 2006). Therefore, the court concludes that it has subject matter jurisdiction over the counterclaim under 29 U.S.C. § 1132(a)(3) , and that a claim is stated.

On the 42 U.S.C. § 407 issue, it appears that the law is in conflict (though the trend is running against the ERISA claimants). The Fregeau opinion left the issue open. I previously observed:

Another important issue in the disability cases lies in the construction of 42 U.S.C. § 407. See, Mote v. Aetna Life Ins. Co.435 F.Supp.2d 827 (N.D.Ill.) (June 26, 2006) (holding that 42 U.S.C. § 407 prevented carrier’s counterclaim to Social Security benefits); accord Ross v. Pennsylvania Mfrs. Ass’n Ins. Co., WL 1390446 (S.D.W.Va.) (May 22, 2006); Kay v. American Elec. Power Service Corp. 2006 WL 2228992 (S.D.W.Va.) (August 3,2006) (plan requests an action, the imposition of a constructive trust on future SSDI benefits, that is not permitted); but see, Smith v. Accenture U.S. Group Long-Term Disability Ins. Plan 2006 WL 2644957 (N.D.Ill.) (September 13, 2006) (”respectfully disagrees with Mote“)

[For subsequent history on the primary claims in Mote, see Mote v. Aetna Life Ins. Co., 502 F.3d 601, 2007 U.S. App. LEXIS 21825, 42 Employee Benefits Cas. (BNA) 1599 (7th Cir. Ill. 2007)]

Additional Cases – Fregreau was followed in another counterclaim dispute which arose in United Air Lines, Inc. Ret. & Welfare Admin. Comm. v. Van Slyck, 2008 U.S. Dist. LEXIS 22464 (N.D. Ill. Mar. 19, 2008):

In Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356, 363, 126 S. Ct. 1869, 164 L. Ed. 2d 612 (2006) (Sereboff), the United States Supreme Court held that to invoke jurisdiction under § 502(a)(3)(B), a plan administrator must seek a category of relief available in equity. In general, equitable relief in the form of restitution is only appropriate where “money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession.” Great-West Life & Annuity Insurance Co. v. Kundson, 534 U.S. 204, 213, 122 S. Ct. 708, 151 L. Ed. 2d 635 (2002). However, in Sereboff, the Court held that there is no tracing requirement where there is an equitable lien by agreement. See Sereboff, 547 U.S. at 364-65, citing Barnes v. Alexander, 232 U.S. 117, 123, 34 S. Ct. 276, 58 L. Ed. 530 (1914). In Fregeau v. Life Ins. Co. of North America, the court held that an equitable lien by agreement was created by a plan provision that provided for repayment of any overpayment of benefits. 490 F. Supp.2d 928, 931 (N.D. Ill. 2007); see also Rogozinski v. Hartford Life and Accident Ins. Co., 2007 U.S. Dist. LEXIS 61637, 2007 WL 2409810 *8-9 (N.D. Ill. Aug. 21, 2007) (holding that [*9] plan provision requiring the offsetting of benefits created an equitable lien by agreement; and, thus, relief sought was appropriate under ERISA).

In that case, the court permitted an unjust enrichment claim to go forward under Seventh Circuit law as well:

The Seventh Circuit holds that “restitution by pension and welfare funds is governed by federal common law in the shadow of ERISA.” Central States v. Pathology Laboratories, 71 F.3d 1251, 1254 (7th Cir. 1995) (Central States) . . . In the case at bar, UALRWAC seeks relief for unjust enrichment under the federal common law of ERISA. UALRWAC seeks a repayment of benefits that were allegedly mistakenly overpaid. Based on Seventh Circuit precedent, this is a viable claim; and Van Slyck’s argument to the contrary is unsupported by the case law. Therefore, Van Slyck is not entitled to judgment on the pleadings as to Count II.

The carrier prevailed in the recent case, UNUM Life Ins. Co. of Am. v. Harper, 2008 U.S. Dist. LEXIS 36261 (M.D. Ga. May 2, 2008), where the district court, noting the Eighth Circuit decision in Dillard’s Inc. v. Liberty Life Assur. Co. 456 F.3d 894 (8th Cir. 2006),for the plan notwithstanding the SSD co-mingling argument, went on to state:

In Smith v. Accenture United States Group Long-term Disability Insurance Plan, 2006 U.S. Dist. LEXIS 68971, 2006 WL 2644957 (N.D. Ill., Sept. 13, 2006), an Illinois district court found that the insurer was entitled to recover its overpayments, notwithstanding that the funds might have been commingled with SSDI payments that were protected from levy or attachment under 42 U.S.C § 407(a). The court noted the reasoning in Sereboff that “funds need not be traceable in the event of a lien by agreement.” 2006 U.S. Dist. LEXIS 68971, [WL] at *5. Similarly, in Bosin v. Liberty Life Assurance Co. of Boston, 2007 U.S. Dist. LEXIS 26697, 2007 WL 1101187 (W.D. Mich., April 11, 2007), a district court in Michigan held that the insurer was entitled to recover overpayments and that its claim for restitution was not barred by the anti-assignment provisions of 42 U.S.C. § 407(a). Section 407(a) did not bar recovery where the insurer did not seek to attach future benefits from SSDI.

In this case, Unum seeks to recover its overpayments to Defendant as a result of Defendant’s receipt of SSDI payments. Under ERISA, Unum is entitled to equitable restitution of these funds. 29 U.S.C. § 1132(a)(3)