Court Opinion

ID: 155709
Source: CourtListenerOpinion
Date Created: 2010-08-14 04:22:28+00
Date Added: 2024-06-11T12:18:35.216707
License: Public Domain

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.

                                      -2-
      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

                                         -3-
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

                                         -4-
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

                                          -5-
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.

                                         -6-
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

                                         -7-
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.

                                         -8-
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,

                                         -9-
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

                                          -10-
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).

                                          -11-
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

                                         -12-
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

                                         -13-
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

                                         -14-
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

                                         -15-
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.

                                        -16-
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

                                        -17-
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

                                          -18-
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.

                                        -19-
      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.

                                       -20-