On February 19, 2013, the U.S. Supreme Court declined to review the Ninth Circuit’s decision in Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F. 3d 1083 (2012), thereby maintaining a split among the federal circuit courts related to a plan sponsor’s reimbursement rights in an action for equitable relief under ERISA § 502(a)(3) for plan overpayments. The Ninth Circuit’s decision in Bilyeu places more onerous requirements on plan sponsors than several other sister circuits. In the Ninth Circuit, unlike the First, Second, Third, Sixth, Seventh and Eighth Circuits, a plan sponsor seeking an equitable lien to recover amounts owed must specifically identify and trace the particular funds sought for recovery.

Factual Background

Plaintiff Leah Bilyeu was employed by Discover Financial Services. Bilyeu filed for long-term disability benefits under the Morgan Stanley Long-Term Disability Plan (the “Plan”), which provided long-term disability benefits to Discover employees. First Unum Life Insurance Company (“Unum”), the Plan’s administrator, approved Bilyeu’s claim subject to a mental illness limitation that limited disability benefits arising from mental illness to 24 months.

Once Bilyeu’s benefits were terminated after 24 months, Bilyeu launched a lawsuit against Unum in federal district court claiming wrongful termination of her long-term disability benefits under ERISA. Unum countered that Bilyeu had not fully exhausted all of her administrative remedies to appeal the denial under the plan’s claims procedures as required under ERISA, and also sought restitution of overpaid benefits totaling approximately $36,000 as a result of Social Security benefits that Bilyeu had received while she was receiving disability benefits from the Plan. The Plan specifically required Bilyeu to repay “any overpayment resulting from my receipt of benefits from any other source.” Bilyeu argued that Unum could not recover the overpaid amounts by equitable lien because it could not establish that the overpaid benefits remained in Bilyeu’s possession.

Upon review, the district found that Bilyeu had failed to exhaust her administrative remedies and dismissed Bilyeu’s claim with prejudice. In addition, the court held that Unum had satisfied the requirements for an equitable lien and accordingly granted Unum’s motion for summary judgment on its counterclaim for reimbursement of overpaid benefits. Bilyeu filed an appeal with the Ninth Circuit, which was decided on June 20, 2012.

The Ninth Circuit’s Decision on the Requirements for Securing an Equitable Lien

Holding that Bilyeu was excused from exhaustion due to an ambiguous termination of benefits letter, the Ninth Circuit focused on Unum’s claim for reimbursement. In determining whether Unum had satisfied the requirements for an equitable lien, the Ninth Circuit reviewed the U.S. Supreme Court’s holding in Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), which established three criteria for securing an equitable lien:

• There must be a promise by the beneficiary to reimburse the fiduciary for benefits paid under the plan in the event of a recovery from a third party.
• The reimbursement agreement must specifically identify a particular fund distinct from the beneficiary’s general assets.
• The fund specifically identified by the fiduciary must be within the possession and control of the beneficiary.

The court determined that Unum had satisfied the first criterion – a promise to reimburse the fiduciary for benefits in the event of recovery from a third party – because Bilyeu did not dispute that she promised to reimburse Unum for an overpayment of disability benefits arising from her receipt of benefits from other sources.

With respect to the second criterion – to specifically identify a particular fund distinct from the beneficiary’s general assets – the court was less certain that Unum had met its obligations. Unum argued that the particular fund was the “overpaid long-term disability benefits.” The court, however, held that the overpaid disability amount was not a particular fund, but a specific amount of money encompassed within a particular fund – the long-term disability benefits. The court held that as an amount of money, the overpayment was specific, but that as property or a fund, the overpayment lacked specificity because it was undifferentiated from a larger fund. The court noted that, unlike in Sereboff where there was a third-party recovery that served as a particular fund upon which an equitable lien could be placed, Unum could not identify a particular fund to serve as security for the overpayment because under the Social Security Act, Bilyeu could not assign her Social Security benefits and Unum could not attach them.

Even assuming that Unum could satisfy the second criterion, the court determined that Unum clearly did not satisfy the third criterion – that the beneficiary have possession and control of the particular fund. In other words, the court found that Unum had failed to trace the overpaid amount to funds or property within Bilyeu’s possession or control. In fact, the parties did not dispute that Bilyeu had spent the overpaid benefits. Unum instead sought judgment requiring Bilyeu to pay the money out of her general assets. The court, departing from the position of the First, Second, Third, Sixth, Seventh and Eighth Circuits, held that Unum’s imposition of a lien on Bilyeu’s general assets was not an equitable recovery, but rather a legal one. The court reasoned that the requirement for the recovery to be from a specifically identified fund within the beneficiary’s possession and control, rather than just from the beneficiary’s general assets, was consistent both with case law and the traditional doctrine governing equitable liens by agreement, that require the particular fund to be traced to the beneficiary.

The Ninth Circuit’s position on identifying a particular fund and strict tracing marks a split in the federal circuits on the issue of what is required to secure an equitable lien on an ERISA benefit plan overpayment. Other circuit courts have found that the fiduciary may identify the benefit overpayment amount as the particular fund from which reimbursement is sought. In addition, these courts do not require fiduciaries to strictly trace the fund to the possession and control of the beneficiary, and will allow recovery from general assets. See, e.g., Thurber v. Aetna Life Ins. Co., 2013 WL 950704 at *8 (2d Cir. March 13, 2013) (disagreeing with the Ninth Circuit’s decision in Bilyeu in finding that the particular fund [the overpayments] does not lack specificity by virtue of being undifferentiated from a larger fund [total benefits] and finding that if there is an equitable lien by agreement, dissipation of the particular fund is immaterial); Funk v. CIGNA Grp. Ins., 648 F.3d 182, 194 n. 14 (3d Cir. 2011) (stating that Sereboff “strongly implies that…the defendant need not possess the property at the time relief is sought in order for relief to be equitable”); Cusson v. Liberty Life Assurance Co., 592 F.3d 215, 231 (1st Cir. 2010) (holding that the insurer’s claim was for equitable relief even though the insurer “has not identified a specific account in which the funds are kept or proven that they are still in [the participant’s] possession”); Longaberger Co. v. Kolt, 586 F.3d 459, 466 (6th Cir 2009) (holding that under ERISA an equitable lien by agreement does not require tracing or maintenance of a fund); Gutta v. Standard Select Trust Ins. Plans, 530 F.3d 614, 621 (7th Cir. 2008) (allowing a claim under ERISA § 502(a)(3) even if the benefits paid are not traceable to the beneficiary).

Due to this split, the issue appears ripe for resolution by the Supreme Court, but the court has declined to hear an appeal from the Ninth Circuit’s decision.

Practical Implications for Plan Sponsors and Insurers

As a result of the Ninth Circuit’s decision in Bilyeu, ERISA plan sponsors and insurers in this circuit (California, Washington, Hawaii, Arizona, Oregon, Alaska, Idaho, Montana and Nevada) should be prepared to face stricter requirements when attempting to recover benefit overpayments. In particular, plan sponsors and insurers should be prepared to:

• identify a particular fund apart from the benefit overpayment amount from which recovery is sought; and
• trace that particular fund to the beneficiary’s possession and control, and not attempt to secure repayment from the beneficiary’s general assets.

To achieve that end, plan sponsors and insurers faced with the prospect of recovering a benefit overpayment should attempt to segregate the overpaid amounts as quickly as possible into a separate account through cooperation with the participant or his or her attorney.