Courts Grow Impatient with Participants' Attempts to Thwart Plans’ Subrogation Rights.

Courts in both the Fourth and Eleventh Circuit have recently spoiled participants’ efforts at escaping their plan’s enforcement of subrogation rights for medical expenses paid.

In the Fourth Circuit, the case involved Mr. Hutchins, who was seriously injured in an automobile accident. A participant in his employer’s health benefit plan, Hutchins sought payment of his medical expenses under the Plan, but he refused to sign documents that acknowledged the Plan’s reimbursement/ subrogation rights from third-parties. When the Plan declined to pay the medical benefits without his signature, Hutchins brought a lawsuit, resulting in the Plan paying almost $200,000.00 in medical benefits.

Subsequently, Hutchins filed a lawsuit against the driver of the vehicle that allegedly caused the automobile accident, collecting $ 850,000.00 in a settlement. In connection therewith, Mr. Hutchins told his attorney “to not withhold or pay any monies to any party who may have paid any of my medical bills as a result of my employment … and to not respond to any inquiries as to the amount of any settlement and/or judgment. …”

The Plan filed an action against Mr. Hutchins for reimbursement. After the Court granted summary judgment in favor of the Plan, K-VA-T Foot Stores, Inc., Hutchins, 2012 U.S. Dist. LEXIS 6409 (W.D. Va., Jan 20, 2012), both parties requested attorneys’ fees. Hutchins’ theory for recovery was based upon the “common fund doctrine,” arguing that he, through his personal injury lawsuit, established the means by which the Plan could recover its medical expenses in full. In rejecting Hutchins’ theory, the Court noted that Hutchins had “fought [the plan’s] subrogation rights every step of the way without any apparent basis for such resistance.” In granting the Plan’s request for attorneys’ fees, the Court, using the Quesinberry factors, found that: (1) Hutchins’ degree of culpability was high; (2) he had the ability to pay through his settlement funds; (3) an award would be a “deterrent by encouraging beneficiaries not to resist the subrogation rights … without a reasonable basis”; and (4) Hutchins’ position was “entirely without merit.” In a final lesson, the Court made sure the Plan was reimbursed for every bit of its attorneys’ fees, including an additional three hours of briefing that was not included on the Plan’s final accounting. 2012 U.S. Dist. LEXIS 26575 (W.D. Va., Mar. 1, 2012).

In the Eleventh Circuit, the case of Schwade v. Total Plastics, Inc., 2012 U.S. Dist Lexis 37091 (M.D. Fla. 2012) involved the Plan’s refusal to pay medical expenses incurred by a participant’s son unless the participant, Ms. Schwade, signed the subrogation agreement. Ms. Schwade refused, and the Plan denied the medical claims. Ms. Schwade failed to appeal within 180 days. For another year and a half after the appeal deadline, Ms. Schwade’s attorney sent letters to the Plan, requesting that it compromise its contractual right to subrogation. On at least two occasions, the Plan responded with a refusal. When Schwade filed a lawsuit, the Court held in favor of the Plan, finding that Schwade’s failure to timely appeal was a bar to her claim, and in any event, the Plan was correct in denying her claim.

When Ms. Schwade filed a motion for reconsideration, the Court used the opportunity to criticize a new decision in the 3rd Circuit, U.S Airways, Inc. v. McCutchen, 663 F. 3d 671 (3rd Cir. 2011), in which the Court limited the plan’s recovery, despite its subrogation rights under the Plan’s terms. The McCutchen Court focused on what was meant by “appropriate,” under ERISA Sec. 502(a)(3), which provides for “appropriate equitable relief,” and concluded that the Plan received a “windfall” when it obtained the first dollar of any third-party recovery until satisfied in full, when it did not contribute to the legal costs. The Schwade Court lambasted the McCutchen Court’s reasoning, finding that a court’s power to provide “appropriate equitable relief” was limited to enforcing the terms of the Plan, as Sec. 502(a)(3) provides, rather than allowing the beneficiary to escape the terms of the Plan: “For each person whom a court in ‘fairness’ allows to skip re-payment there will blossom many lawsuits from others who aspire to skip repayment, (and why not, they may get lucky; under McCutchen, all depends - the ERISA plan aside - on the contingency of a court’s conscience).” The Schwade Court also pointed out the benefit provided by a medical plan to its participants in having medical expenses paid certainly and immediately, without the risk of whether they will recover from a third-party. Rejecting McCutchen as “irreconcilable” with 11th Court precedent under Zurich American Ins. Co. v. O’Hara, 604 F. 3d 1232 (11th Cir. 2010), the Court denied Ms. Schwade’s motion for reconsideration.