Member Services Life Insurance v. American National Bank & Trust Co. of Sapulpa Ex Rel. Balthis , 130 F.3d 950 ( 1997 )

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH DEC 15 1997
PATRICK FISHER
UNITED STATES COURT OF APPEALS Clerk
TENTH CIRCUIT
MEMBER SERVICES LIFE INSURANCE
COMPANY, doing business as MEMBER
SERVICE ADMINISTRATORS, as Third
Party Administrator of the LIBERTY
GLASS COMPANY ERISA QUALIFIED
EMPLOYEE BENEFIT PLAN,
Plaintiff-Appellee,
v.
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF SAPULPA, as
guardian of William Brooks Balthis, Debra Nos. 96-5122
Leanne Balthis, and David Douglas 96-5183
Balthis,
Defendant-Appellant,
and
E. TERRILL CORLEY, THOMAS F.
GANEM, STEVEN R. CLARK,
BRADFORD J. WILLIAMS, and
WALTER M. JONES,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Oklahoma
(D.C. No. CIV-95-27-H)
Sam T. Allen IV of Loeffler, Allen & Ham, Sapulpa, Oklahoma (Sam T. Allen III
with him on the briefs), for Defendant-Appellant.
E. Terrill Corley of Corley & Ganem, Tulsa, Oklahoma (Thomas F. Ganem with
him on the brief for Defendants-Appellees), for Defendants-Appellees.
Phil R. Richards of Richards, Paul & Richards, Tulsa, Oklahoma, (Thomas D.
Hird with him on the brief), for Plaintiff-Appellee.
Before SEYMOUR, Chief Judge, EBEL and BRISCOE, Circuit Judges.
SEYMOUR, Chief Judge.
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Member Services Life Insurance Company, doing business as Member
Services Administrators (MSA), brought this action under section 502(a)(3) of the
Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1132(a)(3), and
federal common law to recover payments it made under an ERISA welfare benefit
plan to American National Bank and Trust Company of Sapulpa (ANB), the
guardian of minor children who were beneficiaries of the plan. MSA claimed the
right to recoupment based on the contract as well as on principles of unjust
enrichment, restitution, and equitable subrogation. The district court granted
summary judgment for MSA, ruling that it was entitled to recovery under an
amendment to the plan providing for subrogation. ANB appeals and we reverse.
I
The underlying facts are undisputed. MSA administers a self-funded
ERISA welfare benefit plan established by the Liberty Glass Company. Jeff
Balthis, the father of the minor children for whom ANB is the guardian, is an
employee of Liberty Glass and his minor children are beneficiaries under the plan.
In February 1988, the minor children suffered severe injuries in a fire caused by a
BIC lighter, and the plan thereafter paid $570,368.75 in medical expenses
incurred by the children. At the time these benefits were paid, the plan did not
contain a provision permitting the recoupment of benefits from funds obtained by
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a beneficiary from a third party tortfeasor. Although the plan from its inception
had provisions permitting it to be amended or modified, it had no provision
addressing whether such amendments could be given retroactive effect. In
October 1988, the plan was amended to add a provision giving MSA a right of
recoupment if a beneficiary received money from a negligent third party as a
result of injuries for which the plan had paid benefits. The amendment provided
that it was retroactively effective as of March 1, 1988.
ANB as guardian of the minor children brought an action against the BIC
Corporation on April 1, 1990, alleging that BIC was liable under the doctrine of
product liability for the injuries to the children. ANB was represented in its suit
against BIC by E. Terrill Corley, Thomas F. Ganem, Stephen R. Clark, and
Bradford Williams (the attorneys) pursuant to a court-approved attorney fee
contract under which the attorneys were to receive a fee of fifty percent of all
amounts collected after the deduction of case expenses. While the lawsuit was
pending, MSA made a demand under the 1988 amendment for reimbursement of
the medical expenses MSA paid on behalf of the children from any judgment or
settlement in the suit. The attorneys rejected the claim, pointing out that the
amendment upon which MSA relied allowed recoupment from a recovery based
on negligence, and the claim against BIC was based only on the theory of product
liability. A judgment was entered against BIC on October 26, 1992, for actual
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and punitive damages, and ANB ultimately recovered $19 million on behalf of the
minor children. BIC was held liable solely on the basis of product liability and
was specifically found not to have been negligent.
On January 1, 1993, the 1988 amendment was modified to authorize
recoupment of any monies received by a beneficiary from a third-party tortfeasor
held liable under any theory of law or equity. This amendment required that such
funds be held in trust until paid in satisfaction of the plan’s right of recoupment,
and further provided that the amendment was retroactively effective as of August
1, 1987, the date of the plan’s inception. Contemporaneously with the payment of
the judgment by BIC, $570,368.75 was placed into escrow pending a
determination of MSA’s ability to enforce its right of recoupment under the 1993
amendment.
MSA brought the instant action against both ANB and the attorneys to
recover the funds placed in escrow, as well as interest and attorneys fees
expended in obtaining the funds. Defendants responded that the plan, as a
contract between the parties, could not be retroactively amended to deprive the
minor children of benefits. As an alternative counterclaim, defendant attorneys
asserted that if MSA were awarded the escrowed funds, the attorneys were
entitled to fifty percent in accordance with their fee contract. Although MSA
recognized that the fee agreement between the attorneys and ANB could generate
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a claim by the attorneys to some or all of the escrow funds, MSA asserted that its
claim was superior to that of both ANB and the attorneys and that it was therefore
entitled to the entire amount. MSA also sought an adjudication that the minor
children were not entitled to the payment of future benefits from the plan until
each child’s expenses equaled the amount of the judgment awarded to that child.
The district court ruled in favor of MSA, holding that the 1993 amendment
could be applied retroactively to enable MSA to recoup payments paid to the
beneficiaries before the amendment was enacted. The court also ruled that
MSA’s obligation to pay future benefits on behalf of each child would not arise
until that child had exhausted the amount of his or her judgment. 1 Finally, the
court held that the attorneys were entitled to receive a fee in connection with the
escrowed funds. Although the court observed that “if the attorneys had been
unsuccessful in prosecuting the state court lawsuit, [MSA] would not receive any
recoupment whatsoever,” the court nonetheless held that “[t]o the extent that the
payment of the attorneys’ fees decreases the escrowed amount available for
recoupment, [MSA] will be entitled to recoupment from the portion of the
1
ANB concedes that the 1993 amendment applies to those medical benefits
that would otherwise have been paid by the plan after the date the amendment was
enacted. Accordingly, any expenses incurred after that date must be paid out of
the children’s judgments until those judgments are exhausted. We are concerned
in this opinion only with recoupment of those benefits paid by the plan before
enactment of the 1993 amendment.
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judgment not currently held in escrow.” Supp. App. of Atty. Aplees. at 182-83.
The court’s ruling in effect relieved MSA from the obligation to pay any attorneys
fees and placed the entire fee responsibility on ANB, as the court subsequently
held in a supplemental order. Thus, the court awarded fees to defendant attorneys
against their own co-defendant client even though the attorneys had asserted no
claim against their client by way of a cross-claim or otherwise.
On appeal, ANB and the attorneys assert the court erroneously applied the
1993 amendment retroactively to allow MSA to recover expenses it had paid prior
to adoption of the amendment. ANB alternatively raises several challenges to the
district court’s ruling that the attorneys fee award must be paid out of funds not
held in escrow. ANB argues in essence that this ruling granted the attorneys
relief they did not request against their own client, whom they did not sue.
Specifically, ANB contends the entry of this judgment violated its due process
rights, was based upon a misreading of the fee agreement, and deprived it of its
right to a jury trial. The attorneys argue alternatively that if MSA prevails, MSA
should share in the payment of the attorneys fees for services rendered on its
behalf and with its knowledge and approval. We hold the district court erred in
determining that the 1993 amendment could be applied retroactively to allow
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recoupment of benefits already paid, and we therefore need not consider the
propriety of the fee ruling. 2
II
ERISA regulates two types of benefit plans, pension benefit plans that
create vested rights and welfare benefit plans that need not create vested rights.
See Chiles v. Ceridian Corp., 95 F.3d 1505, 1510 (10th Cir. 1996). The plan at
issue here is a welfare benefit plan. As such it is “exempt from the statutory
vesting requirements that ERISA imposes on pension benefits. Accordingly, an
employer may amend the terms of a welfare benefit plan or terminate it entirely.”
Wheeler v. Dynamic Eng’g, Inc., 62 F.3d 634, 637 (4th Cir. 1995) (citations
omitted).
“However, benefits under a welfare benefit plan may vest under the terms
of the plan itself.” Id. at 637-38. Because, as MSA agrees, an amendment to any
ERISA plan may not operate retroactively if that amendment deprives a
beneficiary of a vested benefit, see Chiles, 95 F.3d at 1510; Wheeler, 62 F.3d at
640, we must ascertain whether the medical benefits here were vested at the time
MSA sought to recoup them under the 1993 amendment. In making this
ANB concedes that if the children are entitled to the funds in escrow, the
2
attorneys will receive 50% of the amount as their fee.
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assessment, we apply “the principles of contract interpretation.” Chiles, 95 F.3d
at 1515. We are also guided by the Supreme Court’s admonition that “ERISA was
enacted to promote the interests of employees and their beneficiaries in employee
benefit plans, and to protect contractually defined benefits.” Firestone Tire &
Rubber Co. v. Bruch, 489 U.S. 101, 113 (1989) (internal quotations and citations
omitted). In general,
[c]overage under a medical insurance policy or plan is normally
triggered by one of two events. If a policy insures against illness,
coverage for all medical costs arising from a particular illness vests
when the illness occurs. If a policy insures against expenses,
coverage vests when the expenses are incurred.
Wheeler, 62 F.3d at 638 (citation omitted). We need not determine whether the
plan here vests coverage on the basis of illness or on the basis of expenses. Even
adopting the construction most favorable to MSA and construing the plan as
vesting coverage at the time expenses are incurred, the medical expenses MSA
seeks to recoup were incurred and paid, and therefore vested, before the plan was
modified by the 1993 amendment. Accordingly, retroactive application of the
amendment in these circumstances would impermissibly destroy vested rights.
The cases relied on by the district court are distinguishable because none of
them approved the retroactive application of an amendment to allow a plan to
recover benefits that had vested through payment. In Dyce v. Salaried
Employees’ Pension Plan, 15 F.3d 163 (11th Cir. 1994), for example,
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beneficiaries of a pension benefit plan sought early retirement benefits based on
the claim that the merger of their company with another terminated their
employment with the old company and resulted in their automatic retirement even
though they remained employed by the new company. Their claims were
administratively denied on the basis of an amendment formally adopted after the
merger that made participants ineligible for early retirement benefits as long as
they were employed by the surviving company. Id. at 164. The court held that
under the plain language of the plan, the merger did not result in the automatic
retirement of these employees because the plan required them to “elect to retire,”
which none of them had done. Id. at 166. As the court pointed out, the
employees were free both before and after the merger to elect early retirement and
receive benefits under the plan. The court concluded that the amendment was
properly applied retroactively because it did not deprive the employees of a
benefit to which they were otherwise entitled. Id. Although the facts in Dyce are
too dissimilar to the instant case to be particularly helpful, we find it significant
that the retroactive application of the amendment there did not take away benefits
that had already been paid.
Electro-Mechanical Corp. v. Ogan, 9 F.3d 445 (6th Cir. 1993), did involve
facts somewhat analogous to those before us. In Ogan, the beneficiary was born
in July 1986 with severe disabilities. In August 1987, a medical malpractice suit
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was brought on his behalf and was settled for over $1,000,000. At the time of the
beneficiary’s birth, the plan in effect did not contain a subrogation clause
authorizing the recovery of benefits in the event the beneficiary recovered from a
third person. Before settlement was reached, a new plan providing the right of
subrogation was adopted in 1988. The court upheld enforcement of the clause.
Id. at 447. Significantly, however, when the district court opinion in Ogan is read
in conjunction with the circuit court opinion, it is clear that the plan sought to
recover only those benefits paid after the subrogation clause was adopted. 3
Likewise in Owens v. Storehouse, Inc., 984 F.2d 394, 397 (11th Cir. 1993),
although the plan at issue was modified to cap benefits for an illness that the
beneficiary had previously contracted and for which the plan had already paid
benefits, the plan applied the cap prospectively only and did not seek to recoup
benefits already paid.
Indeed, we have found no case in which a court has allowed retroactive
recoupment under circumstances similar to those present here. To the contrary,
courts, including this one, have in a variety of contexts rejected attempts to apply
3
The circuit court opinion states that the plan sought reimbursement of
medical expenses paid on behalf of the beneficiary in the amount of $139,783.70.
Electro-Mechanical Corp. v. Ogan, 9 F.3d 445, 447 & n.2 (6th Cir. 1993). The
district court opinion states that the plan had paid that same amount, $139,783.70,
as medical expenses from August 22, 1988, the date on which the subrogation
clause was added, to the date of the court’s ruling. See Electro-Mechanical Corp.
v. Ogan, 820 F. Supp. 346, 348 (E.D. Tenn. 1992).
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plan modifications retroactively to affect benefits that had already become due.
In Filipowicz v. American Stores Benefit Plans, 56 F.3d 807 (7th Cir. 1995), the
court refused to give retroactive effect to a life insurance plan modification that
would have taken away benefits owed on the insured’s death. The court
acknowledged that the plan was a welfare benefit plan not subject to vesting
requirements under ERISA, but nonetheless held that because the right to the
insurance benefits vested at the insured’s death under general insurance law, “[a]
later modification, even one which is retroactive, can have no effect on a
beneficiary’s claim to benefits.” Id. at 815. The court rejected the plan’s
argument that it could “retroactively modify a life insurance policy after the
insured’s death so as to take away the life insurance proceeds due a beneficiary at
the date of the insured’s death.” Id. The court applied insurance contract
principles to determine that the claim had vested and accordingly held, as we do,
that a subsequent modification could not be applied to those vested benefits.
Similarly, in Bartlett v. Marietta Operations Support, Life Ins., 38 F.3d 514(10th Cir. 1994), we considered whether a summary plan description redefining
eligibility for life insurance benefits applied when the insured had elected
coverage and had died before the summary had been distributed or made available
to him. We held that the district court had “properly decided to disregard the
subsequent language of the summary plan description because it was not printed
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or made available to employees until after [the insured’s] death. The court
reasoned that [the insured], through his beneficiary, could not be bound to terms
of the policy of which he had no notice.” Id. at 517. We agreed with
the district court’s conclusion that the language had no effect
because it had not been published and distributed until after [the
insured’s] death. Subsequent modifications to the plan, through the
drafting of the summary plan description, do not effect the terms of
the written plan in existence when the [beneficiary’s] claim arose.
Id.In Confer v. Custom Eng’g Co., 952 F.2d 41 (3d Cir. 1991) (per curiam),
the court addressed the effect of an oral announcement excluding motorcycle
accidents from coverage under a welfare benefits plan. The beneficiary sought
coverage for a motorcycle accident that had occurred after the oral announcement
but before a written amendment had been executed and backdated to an effective
date prior to the accident. Id. at 42-43. The court held that the oral
announcement was not effective and that the formal written amendment operated
prospectively only. Id. at 43.
Finally, we view as instructive the court’s discussion in McGann v. H & H
Music Co., 946 F.2d 401 (5th Cir. 1991). There an employee was a beneficiary
under a welfare benefits plan that originally provided for lifetime medical
benefits of $1,000,000. The employee contracted AIDS and informed his
employer. The plan was thereafter amended to provide a lifetime maximum
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limitation of $5000 on benefits payable for AIDS-related claims. The employee
brought an action asserting that the amendment violated section 510 of ERISA, 29
U.S.C. § 1140, which prohibits interference with protected rights. Id. at 403. The
court rejected this argument, holding that section 510 protected only rights “to
which an employee may become entitled pursuant to an existing, enforceable
obligation assumed by the employer.” Id. at 405. The court pointed out that the
plan never guaranteed the continued availability of the original $1,000,000 limit.
While the $1,000,000 limit was in effect, the employee had been fully reimbursed
for all claimed expenses incurred. Moreover, after the date of the amendment
imposing the $5,000 limit on AIDS-related claims, the employee had been
reimbursed for up to $5,000 of all such expenses. Thus, the employer had at all
times honored the existing, enforceable obligations it had assumed. Id. at 405 &
n.5.
The results in the above opinions rest on two interrelated principles
relevant to contract law and to ERISA claims in particular. The notion of
protecting vested rights prevents one party to a contract from unilaterally
changing the terms of performance after that performance has become due. While
it is true that benefits need never vest prospectively under an ERISA welfare
benefit plan, the above cases and general principles of insurance contract law
hold that such benefits do vest when performance is due under the contract. At
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that point, the contract is no longer executory and must be performed in
accordance with the terms then in existence.
The second and related principle underlying the above cases is that of
notice. As we stated in Bartlett, a beneficiary can “not be bound to terms of the
policy of which he had no notice.” 38 F.3d at 517. “[O]ne of ERISA’s central
goals is to enable plan beneficiaries to learn their rights and obligations at any
time.” Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 83 (1995). This
goal is implemented by a scheme “built around reliance on the face of written
plan documents.” Id.The basis of that scheme is another of ERISA’s core functional
requirements, that “[e]very employee benefit plan shall be
established and maintained pursuant to a written instrument.” In the
words of the key congressional report, “[a] written plan is to be
required in order that every employee may, on examining the plan
documents, determine exactly what his rights and obligations are
under the plan.”
Id. (citations omitted)
In order to effectuate reliance upon written plan documents, ERISA
requires plan administrators to furnish beneficiaries with summaries of new
amendments no later than 210 days after the end of the plan year in which the
amendment is adopted. See 29 U.S.C. § 1024(b)(1). This automatic notice
requirement does not, as MSA suggests, authorize a plan administrator to apply an
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amendment retroactively under the circumstances present here. As the Supreme
Court pointed out in Curtiss-Wright,
independent of any information automatically distributed to
beneficiaries [under section 1024(b)(1)], ERISA requires that every
plan administrator make available for inspection in the
administrator’s “principle office” and other designated locations a set
of all currently operative, governing plan documents, see §
1024(b)(2), which necessarily includes any new, bona fide
amendments. As indicated earlier, plan administrators appear to have
a statutory responsibility actually to run the plan in accordance with
the currently operative, governing plan documents and thus an
independent incentive for obtaining new amendments as quickly as
possible and for weeding out defective ones.
514 U.S. at 84 (emphasis added) (citation omitted). Because plan administrators
have an obligation imposed by ERISA to operate the plan according to current
plan documents, a post hoc amendment clearly cannot alter a plan provision in
effect at the time performance under the plan became due.
MSA argues, and the district court agreed, that allowing recoupment here
would not deprive the beneficiaries of benefits to which they were otherwise
entitled because they received payment of their medical expenses when they were
due and would simply be repaying them out of their judgments. As our discussion
makes clear, however, this argument is fundamentally flawed in several respects.
At the time MSA was required to perform under the plan, the plan documents then
in existence not only provided the beneficiaries the right to payment of their
medical expenses, it did so unencumbered by any duty to reimburse MSA.
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Allowing retroactive application of the 1993 amendment here would therefore
deprive the beneficiaries of the unencumbered right to which they were entitled at
the time of performance. Moreover, allowing recoupment on the basis of a later
amendment would bind the beneficiaries to a contract provision of which they had
no notice when performance was due, contrary to our holding in Bartlett, and
would violate the duty imposed on MSA by ERISA to operate the plan in
accordance with the plan provisions currently in force. Accordingly, we hold that
the 1993 amendment may not be applied retroactively to permit MSA to recoup
payments made before the amendment was enacted.
III
MSA also contends it is entitled to recoupment as a matter of equity, asking
this court to exercise its equitable powers to prevent unjust enrichment. The
courts are in some disarray on the circumstances in which the doctrine of unjust
enrichment may be invoked with respect to claims arising under ERISA. See,
e.g., Provident Life & Accident Ins. Co. v. Waller, 906 F.2d 985, 992-93 (4th Cir.
1990) (discussing cases). We have concluded that “the weight of authority
supports the application of federal common law to ERISA disputes.” Resolution
Trust Corp. v. Financial Insts. Retirement Fund, 71 F.3d 1553, 1556 (10th Cir.
1995). In so doing, however, we cautioned that “‘the power [of the federal
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courts] to develop common law pursuant to ERISA does not give carte blanche
power to rewrite the legislation to satisfy [the court’s] proclivities.’ Instead, the
courts must continue to implement the policies of ERISA.” Id. (citation omitted).
We begin our consideration of the propriety of equitable relief by pointing
out the hornbook rule that quasi-contractual remedies such as those MSA seeks
are not to be created when an enforceable express contract regulates the relations
of the parties with respect to the disputed issue. See 1 J OSEPH M. P ERILLO ,
C ORBIN ON C ONTRACTS § 1.20, at 64-65 (rev. ed. 1993). Courts have recognized
this principle and have stated their unwillingness to resort to the doctrine of
unjust enrichment to override a contractual plan provision. See, e.g.,Singer v.
Black & Decker Corp., 964 F.2d 1449, 1452 (4th Cir. 1992); Cummings v. Briggs
& Stratton Retirement Plan, 797 F.2d 383, 390 (7th Cir. 1986); Van Orman v.
American Ins. Co., 680 F.2d 301, 312 (3d Cir. 1982). Concomitantly, courts have
held that enrichment is not unjust when authorized by an express provision of the
plan. See Ryan v. Federal Express Corp., 78 F.3d 123, 127 (3d. Cir. 1996);
Cummings, 797 F.2d at 390. Finally, courts have resorted to equitable federal
common law principles only when to do so “would be consistent with ERISA’s
scheme and further its purposes.” Diduck v. Kaszycki & Sons Contractors, Inc.,
974 F.2d 270, 280 (2d Cir. 1992); see also Ryan, 78 F.3d at 126 (application of
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federal common law to ERISA claim appropriate only when necessary to
effectuate the statutory pattern); Singer, 964 F.2d at 1452 (same).
These principles unequivocally indicate that consideration of the unjust
enrichment doctrine would not be proper here. At the time the benefits at issue
were paid by the plan, the beneficiaries had a contractual right to payment
unburdened by any right to subrogation or recoupment. Application of the
doctrine would therefore override an express contractual provision. Moreover, as
we have noted, ERISA requires plan administrators to operate the plan in
accordance with current plan documents. Allowing recoupment on the basis of an
amendment not contained in the documents at the time of performance would be
directly contrary to this statutory duty. Moreover, as one court has pointed out,
“ERISA says nothing about subrogation provisions. ERISA neither requires a
welfare plan to contain a subrogation clause nor does it bar such clauses or
otherwise regulate their content.” Ryan, 78 F.3d at 127. Resort to common law is
thus not necessary to secure a statutory policy, because ERISA embodies no
policy on the matter. Recourse to federal common law is improper when it would
be used to rewrite ERISA rather than to implement its policies. Id. at 126;
Financial Insts. Retirement Fund, 71 F.3d at 1556; Diduck, 974 F.2d at 281. We
therefore reject MSA’s argument that we apply federal common law to impose a
right of recoupment under the circumstances here.
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We REVERSE the judgment of the district court granting MSA a right to
recoup the medical expenses it paid on behalf of the minor children, and
REMAND the case for further proceedings in accordance with this opinion.
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