Great-West Life & Annuity Insurance Company v. Knudson
by

Simeon D. Rapoport
srapopor@standard.com

Director of Litigation, Standard Insurance Company, Portland, Oregon
and
David A. LeMaster
dlemaster@porterkohli.com

Porter, Kohli & LeMaster, P.S., Seattle, Washington 

        As lawyers who practice in the Life, Health & Disability arena, we are all familiar with the Employee Retirement Income Security Act, 29 U.S.C. 1001 et seq., and the impact ERISA has on the typical claim by a plan participant or beneficiary for benefits under the Plan. On January 8, 2002, the United States Supreme Court decided Great-West Life & Annuity Insurance Company v. Knudson, 534 U.S. 204, 122 S.Ct. 708 (2002) -- which dealt with the reverse situation where a Plan was attempting to get money back from a plan beneficiary -- and created significant hurdles for the Plan. This article will discuss how courts have applied Knudson and offer some ideas on how an ERISA fiduciary can get recovery from a plan participant or beneficiary in a post-Knudson world. 

        In Knudson, the claimant was seriously injured in a car accident and incurred substantial medical expenses, which were paid by her husband's ERISA Health Plan. The Plan was funded by an insurance policy issued by Great-West Life & Annuity Insurance Company. The Knudsons brought a tort action in state court and ultimately settled the case. The settlement was approved by the state court and the settlement proceeds were disbursed. 

        The Plan contained a reimbursement provision, which gave the Plan the right to recover from the [beneficiary] any payment for benefits paid by the Plan from any proceeds that the beneficiary recovered from a third party. 122 S.Ct. at 711. Great-West filed an action in federal court seeking to enforce the reimbursement provision under 1132(a)(3) of ERISA, which authorizes actions by fiduciaries to enjoin any act or practice which violates ERISA or the terms of the plan, or to obtain other appropriate relief to redress such violation or enforce any provision of ERISA. 

        After the settlement funds from the tort action were disbursed, the district court granted the Knudsons' motion for summary judgment based on its determination that the Plan's reimbursement right was limited to the amount received by the plan beneficiary for past medical treatment, which the state court had already calculated and allocated to Great-West. The United States Court of Appeals for the Ninth Circuit affirmed on different grounds, holding that judicially decreed reimbursement for payments made to a beneficiary of an insurance plan by a third party was not equitable relief and was therefore not authorized by 1132(a)(3). Great-West appealed and the Supreme Court granted certiorari. 

        In its decision in Knudson, the Supreme Court reaffirmed its holding in Mertens v. Hewitt Associates, 508 U.S. 248 (1993), that the term "equitable relief" in 1132(a)(3) means those categories of relief that were typically available in equity. . . . 122 S.Ct. at 712, quoting Mertens, 508 U.S. at 256. The Court then explained that an action falls into this category of relief only if it seeks to restore to the plaintiff particular funds or property in the defendant's possession rather than the imposition of personal liability on the defendant. Id. at 714-15. The Court concluded that what Great-West really was seeking was legal relief by imposing personal liability on the Knudsons for a contractual obligation to pay money. Accordingly, the Court held that 1132(a)(3) did not authorize the action. 122 S.Ct. at 719. In other words, Great-West could not reach the money under ERISA.

Is The Relief Sought Equitable Or Legal? 
        In determining whether to classify relief as equitable or legal, the Knudson Court revived the law-equity dichotomy and directed the courts and lawyers to review the standard current works of Dobbs, Palmer, Corbin, and the Restatements, which the Court says make the answer clear. 122 S.Ct. at 716. Despite access to these legal tomes, the courts have developed a body of cases that has been described as a Gordian knot. Alves v. Harvard Pilgrim Health Care, Inc., 204 F.Supp.2d 198, 207 (D. Mass. 2002). 
        So, what causes of action constitute "equitable relief" under Knudson? Not all courts have felt it necessary to analyze the issue in detail.
For instance, in Unum Life Ins. Co. of America v. White, Case No. MO-01-CA-128 (W.D. Tex., Midland‑Odessa Div., April 17, 2002), an LTD policy/Social Security overpayment case, the district court did not delve deeply into the equitable versus legal issue, and held that the plaintiff insurer could "seek restitution of the amount Defendant was unjustly enriched under a federal common law claim," reasoning that "[a]llowing an insured to forgo a reduction in payments if he promises to repay any overpayment should be encouraged because it provides him with his full entitlement earlier than he would otherwise receive it." 
        Similarly, in Provident Life and Accident Ins. Co. v. Cohen, 2002 WL 497035, *6 (D. Md., March 28, 2002), another LTD case, the district court concluded that the disability insurer's "unjust enrichment claim for restitution is viable," without a lengthy discussion of the Knudson Court's distinction between legal and equitable claims. 
        In other cases, however, the courts have more fully examined the question. 
        In both Hotel & Restaurant & Bar Employees Fringe Benefit Funds v. Trong, 2002 WL 171725 (D. Minn., January 31, 2002), and Primax Recoveries, Inc. v. Sevilla, 2002 WL 58816 (N.D. Ill., January 15, 2002), the plaintiffs were seeking subrogation or reimbursement, and in both cases they lost because the district court held that they were seeking nothing more than damages, a legal remedy. 
        Likewise, in Moffett v. Halliburton Energy Services, Inc., 291 F.3d 1227 (10th Cir 2002), the plaintiff plan participant sought a remedy "in the form of monetary compensation for economic or other harm suffered because of the delay in his receipt of his [LTD] benefits." The Tenth Circuit held that such a remedy was legal and therefore not available under ERISA and Knudson. This decision is noteworthy for the fact that the Knudson decision was used against the plan participant rather than the Plan. 
        In another interesting decision, Bauer v. Gylten, 2002 WL 664034 (D.N.D., April 22, 2002), the original complaint sought the impermissible remedy of legal restitution, but the plaintiffs then amended their complaint to seek an equitable constructive trust. The district court held that the action for imposition of a constructive trust was permissible because defense counsel stipulated with plaintiffs that he would hold the funds at issue. 
       Finally, a number of years before Knudson was decided, the Ninth Circuit held that "ill‑gotten" gains were a requirement for constructive trusts. FMC Medical Plan v. Owens, 122 F.3d 1258, *3, n.1 (9th Cir. 1997). As a district court in that Circuit has observed, "[i]t appears, however, that the Ninth Circuit's requirement in this regard has been altered." The district court first pointed out that "[t]he Supreme Court ruled in [Knudson] that 'rarely will there be need any more for "antiquarian inquiry" . . . than consulting, as we have done, standard current works such as Dobbs, Palmer, Corbin and the Restatements . . . ." The district court then went on to explain that "[t]hese treatises reject the argument that wrongdoing or misconduct is a prerequisite to the imposition of a constructive trust." Great‑West Life & Annuity Ins. Co. v. Perkins, 2002 WL 1816438 (W.D. Wash., July 9, 2002). 
        The Ninth Circuit, in an unpublished decision, has also expressly stated that notwithstanding Knudson, "there is no bar to plan provisions requiring reimbursement or to demands for reimbursement." Meek v. Standard Ins. Co., 2002 WL 1417600 (9th Cir., July 1, 2002). As discussed in the next section, however, plans seeking reimbursement through litigation may encounter substantial hurdles as a result of recent post-Knudson decisions. A key factor in determining whether the relief is equitable is determining who has the money.

Who Has The Money?

Crucial to the Knudson Court's determination that the relief sought was equitable was the fact that the Knudsons did not have possession of the settlement funds. Their portion of the settlement proceeds was deposited directly into a Special Needs Trust to provide for Ms. Knudson's medical care. 122 S.Ct. at 715. It is therefore important to find out where the money is and to assert a right to or ownership interest in those funds. 
        A number of cases have focused on this issue in determining whether there was a viable cause of action under 1132(a)(3), with varying results. 
        In Neidich v. Estate of Neidich, 2002 WL 31014831, *15 (S.D. N.Y., September 6, 2002), a plan beneficiary sought relief under 1132(a)(3) seeking recoupment of benefits distributed to two of the other beneficiaries of the plan under a theory of unjust enrichment. The court held that since the funds sought by the plan beneficiary had been distributed to the two individuals and could no longer be traced to a particular fund, her claim was that of a creditor seeking legal, not equitable, restitution. She therefore could not maintain an action under 1132(a)(3). 
        In Sheet Metal Local #24 v. Newman, 2002 WL 1033739 (6th Cir., May 21, 2002), a union worker agreed to pay the union for training she had received, but then changed her mind. The trustee of the ERISA trainee fund sought relief under 1132(a)(3). The court held that the trustee's claim failed because it was not for equitable relief. The holding was based on the fact that the union had not actually given the worker money, just training, and it did not allege that she was in possession of particular funds that belonged to the union. Rather, the union had advanced her the costs of her training by not charging her for it. The claim was therefore a legal claim, which sought to impose personal liability on the plan participant for money damages, and, as such, was not available under 1132(a)(3). 
        These two cases are consistent with Knudson in that they apply the Mertens standard by looking at the underlying relief sought. Because the plaintiffs could not assert any title or claim to specifically identifiable funds, any award for money damages would have to be based on the personal liability of the defendants and paid from the defendant's own funds, thereby making it a claim for legal relief. 
        In Bauhaus USA, Inc. v. Copeland, 292 F.3d 439 (5th Cir. 2002), the settlement proceeds sought by the Plan were deposited into the registry of the state court. The court concluded that the plan participants, like the plan participants in Knudson, were not in possession of the disputed funds. The Court therefore dismissed the case. This case focused on the narrow issue of whether the plan participants had possession of the money, rather than the nature of the relief sought by the Plan, which arguably was to assert a right to the settlement funds which could clearly be traced to the court registry. Since the Plan was only after these specific funds, and not seeking to impose personal liability on the plan participants, the Mertens' standard appears to have been met, a point made in a thorough dissent by Judge Wiener. 
        Other courts have also taken the same approach by either taking an almost cursory look at whether the plan participant or beneficiary had possession of the funds or by ignoring the issue altogether and concluding that the possession of the funds was irrelevant. In Westaff (USA) Inc. v. Arce, 298 F.3d 1164 (9th Cir. 2002), the funds at issue had been placed in escrow pending a determination as to distribution rights and the Plan had brought an action seeking a declaration that the funds belonged to it. The court held that despite the fact that the money was in escrow and remained specifically identifiable, the action remained one for money damages and cannot be maintained. 298 F.3d at 1167. In Great-West Life & Annuity Ins. Co. v. Berlin, 2002 WL 2017076 (9th Cir., August 30, 2002), the court, in an unpublished decision, cited to the Westaff decision and held that the fact that the funds being sought by the Plan had been placed in a trust account and were specifically identifiable did not transform the action into one for equitable relief. 
        In Primax Recoveries Inc. v. Sevilla, 2002 WL 58816, *4, n.1 (N.D. Ill., January 15, 2002), the settling party made a check out in the amount of the Plan's claimed lien and forwarded it to the Plan. The check was made payable to the plan participant, his attorney and the Plan. The plan participant and his attorney refused to endorse it. The court concluded that the Plan could not assert a constructive trust claim because the funds sought by the Plan were not in the plan participant's possession; rather, the Plan had the check. This conclusion does not make much sense under the Mertens standard because the ability to trace and identify the funds and assert title to them does not get much clearer than in this situation. 
        In Primax Recoveries Inc. v. Carey, 2002 WL 1968339 (S.D. N.Y., August 23, 2002), the Plan filed suit and sought a lien on any recovery the plan participant received in his tort action, which was pending when the court decided both parties' motions for summary judgment. The court held that since the plan participant did not yet possess the funds, the relief sought by the Plan was not equitable in nature. The court stated that the settlement proceeds were not in anyone's possession and were at that point entirely hypothetical. It held that under Knudson, since the plan participant did not yet possess funds to which the Plan claimed it was entitled, any lien would require the imposition of personal liability on the plan participant. Accordingly, the court held that the Plan's action was not authorized by ERISA and entered summary judgment for the plan participants. 2002 WL1968339 at *3. 
        Other courts have reached the opposite result. In the unpublished decision In re Carpenter, 2002 WL 1162277 (4th Cir., June 3, 2002), the settlement proceeds were received while the Plan beneficiary was in bankruptcy. She amended her bankruptcy schedules to include the settlement proceeds as an asset. The Plan filed an adversary proceeding seeking a declaratory judgment that it had an equitable lien on the settlement proceeds and an order requiring that the money be paid to it. The bankruptcy court agreed and ordered that the proceeds be paid to the Plan. The Fourth Circuit affirmed, holding that the suit was authorized by 1132(a)(3) because the plan administrator was seeking an equitable lien on particular property in the hands of the plan beneficiary. The Court stated that the bankruptcy and district court's conclusion that the Plan had an enforceable equitable lien on the settlement proceeds was correct and not affected by Knudson. 2002 WL 1162277 at *2. 
        In Great-West Life & Annuity Ins. Co. v. Brown, 192 F.Supp.2d 1376 (M.D. Ga. 2002), the court concluded that Knudson was distinguishable because, unlike the situation in Knudson, the defendant in Brown had placed the funds, which came directly from the settlement, in a non-interest bearing trust account. The Court held that since the funds were identified and clearly traceable to the award from third parties, the Plan could seek restitution in equity. 192 F.Supp.2d at 1381. 
        In IBEW-NECA Southwestern Health & Benefit Fund v. Douthitt, 211 F.Supp.2d 812 (N.D. Texas 2002), the Plan sought to impose a constructive trust over funds currently being held by the plan participant's attorney in his client trust account. The court held that these funds were clearly traceable to the plan participant and in good conscience belonged to the Plan pursuant to the terms of the reimbursement agreement. The court noted that, unlike Knudson, the Plan did not seek to impose personal liability on the plan participant. Instead, the Plan sought to impose a constructive trust over particular funds, separate and apart from the plan participant's personal resources, and only to the extent of the benefits it had provided. In addition, unlike Knudson, the proceeds were actually within the plan participant¿s possession and control. 211 F.Supp.2d at 816. 
        In Primax Recoveries Inc. v. Duffy, 204 F.Supp.2d 1111 (N.D. Ill. 2002), the court reached a somewhat unusual conclusion. It held that although Knudson barred the Plan's action insofar as it sought to require the plan participants to repay money already received in a settlement, it did not appear to bar a lien on specific funds not yet received in the claim for underinsurance. The court then held that the Plan was entitled to a lien if it can identify a specific fund from which reimbursement is appropriate. 204 F.Supp.2d at 1113. 
        One option available to a Plan to increase its chances of getting a court to find that the relief sought is equitable, particularly where the funds at issue have been distributed to the plan participant, is to seek a temporary restraining order and preliminary injunction. In Administrative Committee of the Wal-Mart Stores, Inc., Assoc. Health v. Varco, 2002 WL 47159 (N.D. Ill., January 14, 2002), the Plan successfully obtained a temporary restraining order and preliminary injunction restraining the participant from further disbursing the funds at issue until the Plan's lien claim could be resolved. The Court held that, unlike in Knudson, the Plan had sued the individuals who had possession of the funds and the court had assumed control of those funds by imposing a constructive trust by virtue of the preliminary injunction. Accordingly, the court found that a "res" existed over which it had jurisdiction. The Plan's action to impose a constructive trust was therefore equitable relief. 2002 WL 47159 at *3. 
        In Great-West Life & Annuity Ins. Co. v. Perkins, 2002 WL 1816438 (W.D. Wa., July 9, 2002), the court granted the Plan's motion for a preliminary injunction. The court held that Knudson authorized the action because the disputed funds were being held by the plan participant and that the Plan had a strong likelihood of success on the merits under 1132(a)(3). The Court also concluded that the Plan had established that the defendant's actions, unless enjoined, would likely cause the Plan to suffer immediate and irreparable injury because the defendant had the ability to place the funds beyond the reach of the court and the Plan, thereby preventing the court from imposing final equitable relief in this matter. 2002 WL 1816438 at 3.

What Options Are There For Seeking Reimbursement Outside of ERISA? 

        The Knudson Court left open several other potential avenues that Great-West could have pursued, by specifically stating that it expressed no opinion as to whether Great-West could have intervened in the state court tort action or whether a direct action by petitioners against respondents based upon state law claims for breach of contract would have been pre-empted by ERISA. 122 S.Ct. at 718. 
        Although an unpublished decision, the Ninth Circuit has also expressly left open the question of whether a state law cause of action is available. See Meek v. Standard Ins. Co., 2002 WL 1417600 (9th Cir., July 1, 2002) ("we have no jurisdiction to decide whether ERISA preempts . . . a state‑law [breach of contract] cause of action" because the defendant LTD insurer did not assert a breach of contract claim or any counterclaim). 
        Two trial courts in Oregon, a Ninth Circuit state, have split on the issue. 
        In Providence Health Plan v. McDowell, Case No. 01‑1704‑JE (D. Or., January 29, 2002), the federal court held that ERISA preempted a plan's state law contract claim for reimbursement, even though it meant that the plan may be without a remedy. 
        Just several weeks later, however, in Liberty Northwest Ins. Corp. v. Kemp, Case No. 01‑03‑02636 (Multnomah County, Oregon, Circuit Court, February 18, 2002), the state court held that the plaintiff insurer's state law breach of contract claim was not preempted, expressly rejecting the Providence Health Plan holding. 
        Other state courts have also allowed such claims to go forward. 
        For instance, in Hamrick's, Inc. v. Roy, 2002 WL 753208 (Tenn. Ct. App., April 29, 2002), the defendant plan participant moved to dismiss the state court action on jurisdictional grounds arguing that the federal courts had exclusive jurisdiction. The state appellate court rejected the plan participant's argument, reasoning that under Knudson the claim could not be brought in federal court because it was a legal reimbursement claim. 2002 WL 753208 at *7. The court then went on to reach the merits of the plaintiff plan's claim, without any discussion of whether the claim might be preempted, apparently because the plan participant did not raise the issue. 
        In Yerby v. United Healthcare Ins. Co., 2002 WL 595122 (Miss., April 18, 2002), the Mississippi Supreme Court, in an unpublished decision, observed that in Knudson the U.S. Supreme Court expressly stated that it was not deciding the issue of whether a state law cause of action was available. 2002 WL 595122 at *7. In a somewhat unusual opinion, the Yerby court appeared to conclude that the Plan could seek reimbursement under the rubric of 1132(a)(1)(B). 
        Notwithstanding such decisions, it is likely that a majority of courts would conclude that a state law breach of contract cause of action is preempted by ERISA. Perhaps more importantly, in looking at the Big‑Picture, a plan or plan's insurer may want to give serious thought to whether it makes sense to assert that a state law cause of action is available and not preempted. While it may be tempting to try to go down this road in a particular case, this temptation should be weighed against the possible erosion of ERISA preemption, a principle that generally works in favor of plans. In other words, "be careful what you wish for."

Counterclaim versus Affirmative Defense

There is also the option of asserting the reimbursement as an affirmative defense instead of a counterclaim.
Assume you are an LTD plan or its insurer and you have been sued after you closed the plan particpant's claim, a claim you paid for a period of time. There exists a Social Security overpayment and, for settlement leverage at least, you would like to assert that you are entitled to that overpayment. In light of Knudson, what might you want to do?
You might consider asserting a setoff by affirmative defense rather than trying to bring a counterclaim. Knudson itself seems to support such a defense. 122 S.Ct. at 717-18. You would not be running afoul of the prohibition against seeking legal relief. Rather, you would simply be asserting your right to offset any judgment against you by the amount of the overpayment.
What is the downside? If you win the case rather than settle, you will not get a judgment against the claimant. But is that even something you really want, or would you instead be satisfied with a judgment where you do not pay anything? And, in any event, would a judgment against a claimant really be worth much in most cases?

Conclusion

The application of the Knudson decision has been inconsistent, but it does allow a Plan to recover its funds under ERISA 1132(a)(3) as long as the Plan can (1) show the court where the money is, and (2) convince the court that the relief sought is equitable in nature. The developing case law provides several additional options, including the possibility of a federal common law claim for unjust enrichment, a state law action, or asserting a right to a setoff