The Supreme Court's recent unanimous decision in Sereboff v. Mid Atlantic Medical Services, Inc. may have restored to ERISA plan participants the ability to obtain meaningful relief for certain fiduciary breaches. Although Sereboff involved the claims of a fiduciary against a participant for reimbursement of plan-paid medical expenses, plan participants can use the same logic to advance their own claims against plan fiduciaries.
The Sereboffs were participants in an ERISA covered health insurance plan that paid their medical expenses after an auto accident. Mid Atlantic administered the plan. The Sereboffs received a $750,000 settlement for their injuries from the driver and his insurer and Mid Atlantic sought to recover from the Sereboffs the medical expenses paid by the plan, filing a lawsuit under section 502(a)(3) of ERISA. The issue was whether Mid Atlantic's claim for reimbursement constituted "equitable relief." Mid Atlantic had to prove that: (1) the nature of recovery sought was equitable; and (2) the basis for the claim was equitable. As to the first point, the Sereboffs had agreed to set aside about $75,000 of the settlement amount in an investment account until all the issues in the case were resolved. (Mid Atlantic's lawsuit included a request for a TRO and injunction, which was resolved by the set aside agreement). Accordingly, the Court held that the nature of the recovery sought was equitable because Mid Atlantic was seeking "specifically identifiable funds" that were "within the possession and control" of the Sereboffs. It did not matter that Mid Atlantic sought an equitable remedy based on the terms of contract (the plan document). ERISA §502(a)(3)(B)(ii) permits fiduciaries and participants to seek equitable remedies to enforce plan terms, "so the fact that the action involves a breach of contract can hardly be enough to prove relief is not equitable." Were it otherwise, "§502(a)(3)(B)(iii) would be an empty promise."
Turning to issue of the whether the claim itself was equitable, the court looked to its own case law "from the days of the divided bench." Specifically, the Court relied on a case from 1914 involving claims by attorneys for a portion of a contingency fee. Attorney Barnes promised two other attorneys working for him on a particular case one-third of a contingency fee he expected to receive. Justice Holmes concluded that Barnes's promise created a lien on the portion of the money due to Barnes from the client, which the two other attorneys could "follow . . . into the hands of . . . Barnes," "as soon as [the fund] was identified."
The Sereboffs' health plan provided that Mid Atlantic had a claim against "all recoveries from third party" for "that portion of the total recovery which was due" to Mid Atlantic for benefits paid. Mid Atlantic could thus "follow" a portion of the recovery into the hands of the Sereboffs as soon as they settled their case and received the settlement funds. Mid Atlantic could impose a constructive trust or equitable lien on that specific portion of the settlement that was equal to the amount of benefits paid.
Importantly, the Court also held that no "tracing requirement" applies to equitable liens by agreement. To impose the lien, the sought after funds did not have to "be in existence when the contract containing the lien provision is executed." It was sufficient that the contract (the plan document) identified the source and amount of money owed to Mid Atlantic.
The result of Sereboff is that a fiduciary is able to collect $75,000 from a participant. So how does the case help plan participants? Participants sometimes have "equitable estoppel" or misrepresentation claims based on misleading statements from plan fiduciaries about various aspects of their benefit plans. In recent years, such claims have faced numerous hurdles, including the argument that, regardless of the whether the fiduciary violated ERISA, there was no remedy because the participants were seeking damages in the form of lost benefits, not equitable relief. Sereboff suggests that participants may now be able to frame their claims against fiduciaries as an "equitable lien by agreement." The participants might argue that the source of the funds was identifiable (the plan and/or trust fund) and that their portion of the fund was the amount of benefits they claim are due to them based on the terms of the plan as represented to them by plan fiduciaries. The fiduciary's promises arguably create a lien on that portion of the fund that the participant claims as benefits due to him or her. As such, the participant could have a remedy under Section 502(a)(3).