Although Standard’s plan does not use the word “discretion,” it uses a variety of equivalent terms that convey the same meaning. See supra (”full and exclusive authority to control and manage, . . . to administer, . . . and to interpret and to resolve all questions arising in its administration, interpretation, and application”; “[t]he right to determine [e]ligibility [and] entitlement”; “any decision Standard makes in the exercise of our authority is conclusive and binding”).

This is a far cry from the spare language “when Prudential determines” and “satisfactory to Prudential” that this court found inadequate to signal discretion in Diaz, 424 F.3d at 638, 640. The Standard plan’s language unambiguously communicates the message that payment of benefits is subject to Standard’s discretion.

Gutta v. Std. Select Trust Ins. Plans, 2008 U.S. App. LEXIS 13461, 8-10 (7th Cir. Ill. June 26, 2008)

This recent Seventh Circuit opinion in an ERISA disability case addresses the language needed to avoid de novo review, conflicting evidence of disability and an interesting counterclaim argument based upon Sereboff principles. (The district court opinion was discussed in :: Plan Fiduciary Claims For Overpayments, Post-Sereboff)

The Semantic Issue

The Court permits the language cited above to pass as adequate for the purpose of triggering deferential review. The holding of the Court finds support in prior holdings to the extent it had previously signaled that no particular formula should control the invocation of deferential review:

The reservation of discretion must be communicated clearly in the language of the plan, but the plan need not use any particular magic words. See Herzberger v. Standard Ins. Co., 205 F.3d 327, 331 (7th Cir. 2000).

Indeed, “the critical question is whether the plan gives the employee adequate notice that the plan administrator is to make a judgment within the confines of pre-set standards, or if it has the latitude to shape the application, interpretation, and content of the rules in each case.” Diaz v. Prudential Ins. Co. of Am., 424 F.3d 635, 639 (7th Cir. 2005) (emphasis added).

Whether the employee truly has “adequate notice” of the effect of such words, however, is seriously doubtful. So, to that end, the debate remains a sterile one of importance essentially to lawyers and judges.

The Claim Decision

Whether the claimant could engage in gainful employment other than his primary vocation presented one of the most important issues in the case. The specific facts are not so important to note for my purposes – I think the significance of the decision on this point lies in the role the district court and the court of appeals viewed as appropriate.

From the district court’s opinion:

Nevertheless, this court acts in an appellate capacity when it reviews a plan’s decision denying benefits, so it cannot consider evidence which was not before the plan.

And then, from the Seventh Circuit’s opinion:

Thus, we will review Standard’s determination deferentially, to ensure that the ultimate decision was not arbitrary, and we will not consider evidence outside the record that was before the administrator.

So, in effect, the federal judiciary serves as an appellate court for the decision of a commercial insurance carriers claims analyst. ERISA has come to a strange place indeed at this juncture.The district court did review the findings, which the plaintiff challenged, but the collapse of judicial review into the administrative model noted above foreordained the result:

Gutta attacks these findings, and it is possible that we might have found more to criticize if we were conducting de novo review. But we are not. The district court, we conclude, reasonably concluded that Standard’s decision was “based upon substantial evidence because it is consistent with the medical evidence in the record” and “thus easily satisfies the ‘arbitrary and capricious’ standard of review.” See Gutta v. Standard Select Trust Ins., 2006 WL 2644955, at *23.

The Counterclaim

The counterclaim presented one of the most interesting parts of the opinion.

Standard Select’s plan contains an offset for “Income Received From Other Sources,” which is defined as “[t]he amount you receive or are eligible to receive because of your disability under any group insurance coverage, other than group credit insurance or group mortgage disability insurance[.]” Under Sereboff, this clause creates an equitable lien on any monies paid by Standard Select prior to Dr. Gutta’s receipt of benefits from another group plan.

. . .

Thus, Standard Select may seek reimbursement of the benefits paid to Dr. Gutta if the plan created an equitable lien covering these benefits because the plan contains an offset provision preventing plan participants from receiving money from multiple group plans and provides that the participant must immediately reimburse Standard Select for any overpayments. Policy at 13.

The Seventh Circuit viewed Sereboff as settling the question and affirmed the judgment for the carrier.

The Court glossed over the Sereboff requirement that a fund exist, folding the issue into the aspect of Sereboff that disavowed any rule requiring strict tracing, stating:

When the court ruled on Dr. Gutta’s motion to dismiss Standard Select’s counterclaim, Great West was controlling. Thus, the court found that because Dr. Gutta comingled the benefits paid by Standard in with his other assets, the traceability rule explicated in Great West doomed Standard Select’s § 502(a)(3) claim.

However, in the Court’s recent decision in Sereboff, it retreated from a strict traceability rule and held that a plan need not be able to trace “particular funds or property” if a claimed equitable lien by agreement is involved. 126 S.Ct. at 1875-76; Donaldson v. Pharmacia Pension Plan, 435 F.Supp.2d 853, 866 (S.D. Ill. 2006) (Sereboff abrogated the rule in Great West holding that ERISA plans may only seek reimbursement only if the insured possesses clearly identifiable proceeds).

Departure From Sereboff?

No doubt the Court rejected the notion of strict tracing – but it did require the existence of a fund, a res, to which the lien would attach. Consider this excerpt from Sereboff:

Much like Barnes’ promise to Street and Alexander, the“Acts of Third Parties” provision in the Sereboffs’ plan specifically identified a particular fund, distinct from theSereboffs’ general assets—“[a]ll recoveries from a third party (whether by lawsuit, settlement, or otherwise)”—and a particular share of that fund to which Mid Atlantic was entitled—“that portion of the total recovery which isdue [Mid Atlantic] for benefits paid.” App. to Pet. for Cert. 38a.

Like Street and Alexander in Barnes, therefore, Mid Atlantic could rely on a “familiar rul[e] of equity” to collect for the medical bills it had paid on the Sereboffs’ behalf. Barnes, supra, at 121. This rule allowed them to “follow” a portion of the recovery “into the [Sereboffs’] hands” “as soon as [the settlement fund] was identified,” and impose on that portion a constructive trust or equitable lien. 232 U. S., at 123.

(Recall that in Sereboff, the fund existed in the form of an investment account where the tort recovery proceeds were invested pending judicial resolution of the issue.)

Whether the facts in Gutta present a real issue on this point cannot be easily discerned from the opinion, but the opinion of the Court goes too far when it merges the traceability question (rejected in Sereboff) with the question of a res to which the equitable lien can apply.

Note: Both Hertzberger and Diaz are important Seventh Circuit cases on the point, and now should be read in conjunction with Gutta to get a sense of the Court’s view on the necessary language to negate a de novo standard of review.

Procedural Issues – Of course there is no “administrative record” on the counterclaim issue because the carrier asserted that claim in the course of judicial proceedings. Though one might analogize the counterclaim, or offsets, as tantamount to a claims decision in that benefit amounts are potentially adjusted as a consequence, the courts have not been inclined to think this way.

Seventh Circuit View – The Seventh Circuit has proven very unfriendly to participants on offset issues. In a pre-Sereboff decision, the Court characterized recoupment as a contractual issue that does not implicate Section 502(a)(3