U.S. Supreme Court Decision in McCutchen Leaves 11th Circuit Precedent Unscathed.

In its decision published yesterday in U.S. Airways, Inc. v. McCutchen, 2013 U.S. LEXIS 3156 (April 16, 2013), the United States Supreme Court said what the Eleventh Circuit has been saying all along:  Recovery through (and defenses to) ERISA Sec. 502(a)(3) are limited to enforcement of the terms of the plan, and cannot be crafted in contradiction of clear plan terms.  

The issue in McCutchen was the enforcement of a reimbursement clause in an ERISA health benefit plan.  The plan provided that, if the participant recovered from a third party for injuries, he must reimburse the plan for any medical benefits paid to treat the injuries, out of "any monies recovered."  Because the avenue of recovery for a plan's reimbursement claim is  "appropriate equitable relief" under ERISA Sec. 502(a)(3), the participant argued that equitable defenses such as the make-whole doctrine and the common fund doctrine could be applied as well.   

The Third Circuit Court of Appeals agreed with the participant, allowing these doctrines to reduce the amount of the reimbursement to the plan, even if these doctrines contradicted the terms of the plan.  (The Third Circuit's holding was recently lambasted by a District Court in the 11^th Circuit in Schwade v. Total Plastics, Inc., 2012 U.S. Dist Lexis 37091 (M.D. Fla. 2012) (See April 5, 2012 blog for a more detailed discussion) and was directly contrary to the Eleventh Circuit's holding in Zurich American Ins. Co. v. O’Hara, 604 F. 3d 1232 (11th Cir. 2010))

The Supreme Court reversed the Third Circuit.   The Court recognized that the equitable doctrine by which the plan sought recovery under ERISA 502(a)(3) was most akin to an equitable lien by agreement, which "arises from and serves to carry out a contract's provisions." Because the boundaries of relief under ERISA § 502(a)(3) are limited to enforcing plan terms, any equitable defenses that resulted in undermining the plan terms could not be used to defeat the plan terms. 

Applying its holding to the plan in its case, the Supreme Court found that the "make-whole" doctrine could not defeat the terms of the plan to be reimbursed first-dollar from any recovery.  However, it found that the plan did not specifically address the apportionment of attorneys' fees; therefore, the common fund doctrine could be used as a default rule to require the plan to contribute to those fees.  (In contrast, the plan provision at issue in Zurich specifically disavowed the common fund doctrine; accordingly, it appears that Zurich would be factually distinguishable on this point and, under the McCutchen analysis, the plan provision in Zurich would not be subject to the common fund defense.)

Creditors Can Reach Benefits under “Top Hat” Plan, United States District Court of Maryland Rules.

     A familiar feature of ERISA is its protection of a participant’s retirement savings from creditors; ERISA requires that pension plans contain an anti-alienation provision.  However, unfunded deferred compensation plans for high-level executive employees, generally known as “top hat” plans, are exempt from ERISA’s mandate.  But what if a “top hat” plan has an anti-alienation provision in it anyway?  Can this provision trump state garnishment laws under the ERISA preemption umbrella? 

     The United States District Court for the District of Maryland answered “No.”   In Sposato v. First Mariner Bank, 2013 WL 1308582 (D. Md. March 29, 2013), Plaintiff, a former executive of Cecil Bank, was a participant of Cecil Bank’s Supplemental Executive Retirement Plan, a “top hat” plan.   The Plan provided that benefits “under the Plan may not be alienated, assigned, [or] transferred …. Benefits shall be exempt from the claims of creditors or other claimants of the Participant … and from all … garnishment or execution …..”   

     The defendant, a creditor of Plaintiff, sought to garnish Plaintiff’s benefits under the Plan.  After recognizing that the Plan was exempt from ERISA’s anti-alienation provision mandate, the Court went on to address whether the terms of the Plan controlled over Maryland’s garnishment laws by virtue of ERISA’s preemption section 514.  In holding in favor of the creditor, the Court relied upon the United States Supreme Court decision of Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825, 108 S. Ct. 2182 (1988), which held that ERISA did not preempt state garnishment laws that simply provided a procedural device for enforcing a judgment.   As to the Participant’s argument that garnishment would violate the terms of the Plan, the Court held that the creditor’s rights were not subject to the terms of the Plan, which was a contract solely between the Plan sponsor and the Participant.         

     Because the creditor in Sposato sought garnishment of benefits as they become due and payable to the Participant, the Court resisted speculating about the issues that could arise if a participant’s creditor sought to collect before the deferred compensation was due, leaving that question for another day.