ERISA: Update subrogation post Serboff

By Eric Buchanan and Amanda Scales

I. Introduction: Types of claims subject to ERISA subrogation or overpayment recovery clauses.

Employees are often provided health insurance, life insurance, long-term disability insurance and other benefits by their employers. Most of the time, disputes over these benefits fall under the Employee retirement Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et. seq.. Many of these plans contain terms that allow an insurance company or plan administrator to recover benefits that have been "overpaid." This paper discusses how such claims are handled under ERISA.

A. Health insurance subrogation clauses:

When your client suffers a personal injury caused by a third party, your client's health insurance will normally pay the medical expenses related to your client's injuries. Most of our clients who have medical insurance are covered by an insurance policy through work, or through an employer's self-funded plan.

When you and your client later recover from the third-party tortfeasor, the insurance company will claim that person should have paid your client's medical bills. The insurance company will claim that it can recover all of the money paid fro medical expenses to cover the medical bills paid by the insurance company. If you and your client do not pay the insurance company back, the insurance company will usually sue both of you.

B. Long-term disability overpayment recovery clauses:

Also, many people who become disabled file claims for both Social Security benefits and for benefits under long-term disability policies provided by their employers. In order to best advise the disabled person, an attorney who handles either type of case should have a working understanding of how the two benefits are coordinated.

II. The rights of ERISA Plans. A. Is it an ERISA Plan?

ERISA applies in almost every case involving benefits provided by an employer. ERISA preemption means that almost all employee benefits plans that provide such benefits as health insurance, life insurance or disability insurance are preempted by Federal ERISA law; however, plans sponsored by governmental employers and churches are not usually preempted by ERISA. ERISA § 4(a), 29 U.S.C. § 1003(a) provides that ERISA

shall apply to any employee benefit plan if it is established or maintained-

1. by any employer engaged in commerce or in any industry or activity affecting commerce; or
2. by any employee organization or organizations representing employees engaged in commerce or in any industry or activity affecting commerce; or
3. by both.

However, ERISA does not apply to all employee benefit plans. ERISA § 4(b), 29 U.S.C. § 1003(b) provides:

(b) The provisions of this subchapter shall not apply to any employee benefit plan if--

1. such plan is a governmental plan (as defined in §3(32) [29 U.S.C. § 1002(32) of this title);
2. such plan is a church plan (as defined in §3(33) [29 U.S.C. § 1002(33) of this title) with respect to which no election has been made under section 410(d) of the Internal Revenue Code of 1954 [Title 26];
3. such plan is maintained solely for the purpose of complying with applicable workmen's compensation laws or unemployment compensation or disability insurance laws;
4. such plan is maintained outside of the United States primarily for the benefit of persons substantially all of whom are nonresident aliens; or
5. such plan is an excess benefit plan (as defined in § 3 [29 U.S.C. § 1002(36)] of this title) and is unfunded.

Courts have interpreted ERISA's preemption provisions very broadly, such that ERISA preemption has been referred to as "super preemption." For example, ordinarily, determining whether a particular case arises under federal law turns on the " 'well-pleaded complaint' " rule, looking only to those claims raised in the Plaintiff's allegations. Franchise Tax Bd. of Cal. v. Construction Laborers Vacation Trust for Southern Cal., 463 U.S. 1, 9-10, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983). Also, the existence of a federal defense does not provide Federal Court jurisdiction, Louisville & Nashville R. Co. v. Mottley, 211 U.S. 149, 29 S.Ct. 42, 53 L.Ed. 126 (1908), and "a defendant may not [generally] remove a case to federal court unless the plaintiff's complaint establishes that the case 'arises under' federal law." Franchise Tax Bd., supra, at 10, 103 S.Ct. 2841. As the Supreme Court recently re-affirmed, ERISA's preemption is so broad, it is an exception to those rules:

"[W]hen a federal statute wholly displaces the state-law cause of action through complete pre-emption," the state claim can be removed. Beneficial Nat. Bank v. Anderson, 539 U.S. 1, 8, 123 S.Ct. 2058, 156 L.Ed.2d 1 (2003). This is so because "[w]hen the federal statute completely pre-empts the state-law cause of action, a claim which comes within the scope of that cause of action, even if pleaded in terms of state law, is in reality based on federal law." Ibid. ERISA is one of these statutes.

Aetna Health Inc v. Davila, ___ U.S. ___, ___ S.Ct. ___, 2004 WL 1373230, slip op. p. 5 (2004) (Holding that a Texas state law, allowing a participant in an employer sponsored HMO to sue the HMO for damages if the HMO unreasonably denied coverage, to be preempted by ERISA.) Most Courts have held that a claim by a plan administrator to enforce the terms of an ERISA plan are preempted by ERISA. ERISA preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." ERISA § 514, 29 U.S.C. §1144. However, by statute, ERISA does not apply to governmental employees, or to church employees, unless the church "opts in" to ERISA. ERISA § 4, 29 U.S.C. § 1003. If ERISA does not apply to an insurance company's claim, then ordinary state contract law applies, and the insurer may recover the benefits to the extent permitted by state law (except as prohibited by Social Security's anti-assignment provision. 42 U.S.C. § 407, discussed below).

B. What does ERISA allow?

1. Language of ERISA statute

ERISA itself only provides for certain remedies. ERISA § 502, 29 U.S.C. § 1132 states who may bring a cause of action under ERISA and what causes of action may be brought:

(a) Persons empowered to bring a civil action
A civil action may be brought--
(1) by a participant or beneficiary--
(A) for the relief provided for in subsection (c) of this section, or
(B) to recover benefits due to him under the terms of his plan, to enforce his rights under
the terms of the plan, or to clarify his rights to future benefits under the terms of the
plan;
(2) by the Secretary, or by a participant, beneficiary or fiduciary for appropriate relief
under section 1109 of this title;
(3) by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which
violates any provision of this subchapter or the terms of the plan, or (B) to obtain other
appropriate equitable relief (i) to redress such violations or (ii) to enforce any
provisions of this subchapter or the terms of the plan;

[Subsections 4-9 all give a cause of action only to the Secretary of Labor, not individuals]

(emphasis added). Congress, in passing ERISA, "set forth a comprehensive civil enforcement scheme" that included Congress's choice to allow certain remedies related to employee benefits plans and to prohibit others. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 54, 107 S.Ct. 1549 (1987).

In recent years, the remedies available to a plan have swung back and forth like a clock pendulum; currently the pendulum has swung back to the side of the insurance companies. In Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 122 S.Ct. 708, 151 L Ed 2d 635 (2002), the Court held that a claim by an ERISA plan to recover a subrogation claim was not one for which a remedy was provided under ERISA. However, more recently, the Supreme Court issued another decision, allowing ERISA Plans and Plan Administrators to recover in most cases. See, Sereboff v. Mid Atlantic Medical Services, Inc., __ U.S. __, 126 S.Ct. 1869, 37 Employee Benefits Cas. 1929 (May 15, 2006). In order to understand the current law, plaintiff's lawyers should be familiar with the development of this area of the law.

2. Sixth Circuit/Tennessee ERISA subrogation law Pre-Knudson

In Marshall v. Employers Health Insurance Co., 1997 WL 809997 (6th Cir. 1997), the Court of Appeals for the Sixth Circuit established that the made-whole doctrine is, as a matter of federal common law, the default rule in our circuit. The "made whole" doctrine holds that a victim must recovery all his own losses and be "made whole" before he is obligated to re-pay a third party. As the court explained in Marshall, the made-whole rule "is consistent with the equitable principle that the insurer does not have a right of subrogation until the insured has been fully compensated, unless the agreement itself provides to the contrary." However, "if a plan sets out the extent of the subrogation right or states that the participant's right to be made whole is superseded by the plan's subrogation right, no silence or ambiguity exists" and the Plan may recover, even if the plaintiff is not made whole.

In Copeland Oaks v. Haupt, 209 F.3d 811 (6th Cir. 2000), the Court of Appeals for the Sixth Circuit recognized that that the "made whole" doctrine is the default rule in ERISA cases, and that for the plan language to "conclusively disavow the default rule" of the made whole doctrine, "it must be specific and clear in establishing both a priority to the funds recovered and a right to any full or partial recovery." The plan language in that case read as follows:

The Covered Person agrees to recognize the Plan's right to subrogation and reimbursement. These rights provide the Plan with a priority over any funds paid by a third party to a Covered Person relative to the Injury or Sickness, including a priority over any claim for non-medical or dental charges, attorney fees, or other costs and expenses.

While the plan in Copeland Oaks established its right to priority, it did not do so explicitly with regard to a partial recovery, and thus the made whole doctrine applied. It is thus important to scrutinize the plan language to determine whether the plan has completely and unambiguously renounced the made whole doctrine. Also, the made whole doctrine applies in ERISA-covered subrogation and reimbursement claims. See, also, Phillips v. Humana Health Plans of Kentucky, 2000 WL 1872058 (6th Cir. 2000) (the made whole doctrine applied because the ERISA plan language did not sufficiently establish the plan's priority over a partial recovery.)

Unless the Plan language allows an attorney to be paid for a recovery or otherwise has language protecting the attorneys' fees, an attorney has no implied or common law right to be paid attorneys' fees out of a subrogation recover. Smith v. Wal-Mart Associates Group Health Plan, 2000 WL 1909387 (6th Cir. 2000).

Smith v. Wal-Mart Associates Group Health Plan is an unreported opinion, but it offers the Sixth Circuit's analysis whether the plan's interest could be reduced to account for reasonable attorney's fees where the plan was silent as to such fees. The plaintiff suffered injuries to her neck and back in a car wreck. The plan paid for medical bills relating to the wreck. After the plaintiff settled her tort case, her attorney disbursed two-thirds of the settlement to her and retained one-third for himself. The plan argued that it was entitled to the full amount of its interest, even though the plaintiff's settlement proceeds were not enough to pay the plan in full.

In dissecting the plan, the court found that the language unambiguously required the plaintiff to fully reimburse the plan. Because the plan was clear on this point, the court concluded that the absence of an attorney's fee provision was unimportant. The Court held:

A fair interpretation of this language is that full reimbursement is required without a deduction for attorneys' fees expended to obtain a settlement. See Wal-Mart Stores, Inc. Associates' Heath and Welfare Plan v. Scott, 27 F.Supp.2d 1166, 1174 (W.D.Ark.1998). The language of the Plan does not limit or restrict its right to full reimbursement in any manner. Of course, it would have been preferable for the Plan to state specifically that it does not permit a deduction in reimbursement amounts for attorneys' fees expended to obtain a settlement; nonetheless, when a plan is clear and unambiguous, we cannot apply a common-law rule of interpretation but, instead, must give the plain language of a plan its natural meaning.

In Qualchoice Inc. v. Williams, 2001 WL 856951 (6th Cir. 2001), the Court of Appeals found that an ERISA plan "did not establish in specific and clear terms that the Plan had either a priority over any funds recovered or a right to any full or partial recovery;" therefore, the made whole doctrine applied. The Court also reiterated that the made whole rule applies to reimbursement provisions.

In Hiney Printing Co. v. Brantner, 243 F.3d 956 (6th Cir. 2002), the Court of Appeals applied the holding of Copeland Oaks v. Haupt, 209 F.3d 811 (6th Cir. 2000), and found that the ERISA subrogation and reimbursement provisions were ambiguous because they failed to clearly establish a right to priority over a partial recovery from a third party, thus the made-whole default rule was not overcome.

In another case involving a "Reimbursement Agreement ," Hamrick's, Inc. v. Roy, 2002 WL 753208 (Tenn. Ct. App. 2002), the plaintiff and her lawyer signed a reimbursement agreement, but settled and distributed the money without paying the ERISA plan back. Specifically, Roy sustained injuries in a wreck caused by Nguyen. Roy's employer, Hamrick's, paid her health care expenses through a self-insured ERISA plan. Roy and her lawyer signed a "Reimbursement Agreement" in which they agreed to reimburse Hamrick's out of any recovery. Without the knowledge of Hamrick's, Roy accepted a settlement of $25,000 from Nguyen. Roy took two-thirds of the settlement, and her lawyer kept one-third. Hamrick's then filed suit against Roy and her lawyer seeking to enforce the reimbursement agreement and recover the sums it paid on Roy's behalf.

Attempting to reduce the amount of the reimbursement claim, Roy argued on appeal that only certain medical bills paid by Hamrick's were related to the wreck. The court gave deference to the trial court's conclusion, however, that most of the bills were related to the wreck. Roy also argued that she had not been made whole by the $25,000 settlement, but the court agreed that Roy had not proved this contention in the trial court. The court agreed that Roy was required to execute the reimbursement agreement under the terms of the benefit plan. Interestingly, the court of appeals held that Roy's suit could proceed in state court. In so holding, the court relied upon the U.S. Supreme Court's decision in Great West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 203 (2002), which barred claims for legal relief for contractual damages. The court did not discuss ERISA preemption of Roy's claims and apparently this issue was not raised.

In Rodriguez v. Tennessee Laborers Health & Welfare Fund, 89 Fed. Appx. 949 (6th Cir. 2004), the Court of Appeals again read the language of an ERISA plan very strictly to determine the made-whole doctrine still applied. The Court of Appeals also ruled that, a "subrogation agreement" sent to the participant by the plan did not disavow the made-whole doctrine.

Relying on the ERISA statutory scheme, the U.S. District Court for the Middle District of Tennessee has held that the lawyer for the injured person has a legal duty to send the portion of settlement funds owed to the plan under the subrogation clause. Greenwood Mills v. Burris, 2001 WL 92117 (M.D. Tenn. 2001). In this case, the court agreed that a lawyer does not have a fiduciary duty to an ERISA plan, even though the lawyer is aware of the existence of a subrogation agreement between the plan and the beneficiary. ERISA, the court concluded, "requires that a fiduciary exercise 'authority or control respecting management or disposition' of plan assets." Because the settlement funds received by the lawyer did not become 'plan assets' when he received them, he did not fall within the definition of a fiduciary.

However, the judge found the lawyer and his firm liable for violating the plan's terms under Section 1132(a)(3), which provides:

A civil action may be brought . . . by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of this plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations of (ii) to enforce any provisions of this subchapter or the terms of the plan.

The court relied on Tennessee law on this topic since it did not contradict the policies of ERISA. Under such law, a Tennessee lawyer 'will be held civilly liable to a non-client where he knowingly participates in the extinguishment of a subrogation interest of a non-client third party and delivers to his client funds that he knows belong to the third party and knows or should know, that he has already placed the funds beyond the reach of the third party." For that reason, the court ruled that the plaintiff's lawyer was liable for failing to honor his client's obligation under the ERISA plan to pay the subrogation interest.

3. ERISA subrogation law Post-Knudson

The Supreme Court addressed what remedies were available to an ERISA plan administrator in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 122 S.Ct. 708, 151 L Ed 2d 635 (2002), a case that, for a while, changed the landscape of the ability of an ERISA LTD plan to seek and pursue claims for the recovery of money properly paid in the first instance from an ERISA beneficiary. Great West paid over $411,000 to medical providers treating injuries sustained by Janette Knudson. Ms. Knudson also sued Hyundai on a products liability theory for her injuries. Ms. Knudson settled with Hyundai for $650,000, allocating as part of the judicially supervised settlement a little more than $13,800 to repay Great West for its plan created lien on her personal injury claims. Great West sued for recovery of the entire amount of its lien, refusing to negotiate the check payable to it pursuant to the terms of the judicially supervised settlement. The Supreme Court held inter alia that ERISA did not permit Great West to pursue a legal remedy to enforce the terms of the plan. Great-West Life, 534 U.S. at 220-221 citing 29 U.S.C. § 1132(a)(3) (ERISA § 502(a)(3)). The Court's rationale rested on the form of restitution sought by Great West, a money judgment from undifferentiated assets of Ms. Knudson. Because that action is classified as "legal" rather than "equitable" the limited grant of authority given to plans and their fiduciaries by 29 U.S.C. § 1132(a)(3) deprived Great West of a cognizable theory of equitable relief under ERISA. The majority opinion written by Justice Scalia clearly states the law:

We have observed repeatedly that ERISA is a "'comprehensive and reticulated statute,' the product of a decade of congressional study of the Nation's private employee benefit system." Mertens v. Hewitt Associates, 508 U.S. 248, 251 (1993) (quoting Nachman Corp. v. Pension Benefit Guaranty Corporation, 446 U.S. 359, 361 (1980)). We have therefore been especially "reluctant to tamper with [the] enforcement scheme" embodied in the statute by extending remedies not specifically authorized by its text. Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 147 (1985). Indeed, we have noted that ERISA's "carefully crafted and detailed enforcement scheme provides `strong evidence that Congress did not intend to authorize other remedies that it simply forgot to incorporate expressly.'" Mertens, supra, at 254 (quoting Russell, supra, at 146-147).

In sum, Knudson stands for the following proposition: If an insurance company or other ERISA Plan Administrator provides benefits under plan that is preempted by ERISA, and the administrator is seeking to recover from a beneficiary of the plan, the only cause of action available to the administrator is one found in ERISA. Under ERISA, the only cause of action available to the administrator is ERISA § 502(a)(3), which limits remedies to "equitable" remedies. The Supreme Court held that "equitable remedies" were the narrow set of remedies available in a court sitting in equity prior to the merger of equity and law courts. Thus, if an administrator is seeking to enforce the term of an insurance policy or similar document, the administrator is really seeking to enforce a contract, which is a cause of action at law, and not available under ERISA. However, the Court reserved the question whether or when equitable remedies are available to administrator.

4. Sereboff and ERISA subrogation

In the recent ERISA case of Sereboff v. Mid Atlantic Medical Services, Inc., __ U.S. __, 126 S.Ct. 1869, 37 Employee Benefits Cas. 1929 (May 15, 2006) , the pendulum swung almost all the way back to the insurance companies. The Sereboffs were involved in an automobile accident in California and suffered injuries; Mid Atlantic provided medical benefits to the Sereboffs totaling $74,869.37. Sereboffs filed a lawsuit against the tortfeasors. Mid Atlantic notified Sereboffs' attorney of its asserted a lien on the anticipated proceeds from the suit over the two and a half years the case was pending; however after the case settled for $750,000 neither the Sereboffs or their attorney sent any money to Mid Atlantic.

Mid Atlantic filed a claim as an ERISA fiduciary under ERISA § 502(a)(3) to enforce the terms of the Plan, which gave Mid Atlantic a subrogation right. The Supreme Court distinguished Great West v. Knudson on the grounds that, in Knudson, the recovery in the underlying tort case was placed directly in a special needs trust, and was never in the hands of the Knudsons. Then, despite the clear language in Knudson that only equitable causes of action can provide an equitable remedy, the Court in Sereboff held that the character of the underlying cause of action does not "prove relief is not equitable; that would make § 502(a)(3)(B)(ii) an empty promise." Sereboff, 126 S.Ct. at 1874.

The Court relied on a 90 year old case, Barnes v. Alexander, 232 U.S. 117, 34 S.Ct. 276, 58 L.Ed. 530 (1914), for the proposition that equity provides for a rule "that a contract to convey a specific object even before it is acquired will make the contractor a trustee as soon as he gets a title to the thing." Id., at 121, 34 S.Ct. 276. The Court then explained that, the Court's previous analysis in Knudson that equity only provided for certain remedies where the specific assets could be traced to specific funds did not provide a complete list of all available equitable remedies. The Court explained that:

Knudson simply described in general terms the conditions under which a fiduciary might recover when it was seeking equitable restitution under a provision like that at issue in this case. There was no need in Knudson to catalog all the circumstances in which equitable liens were available in equity; Great-West claimed a right to recover in restitution, and the Court concluded only that equitable restitution was unavailable because the funds sought were not in Knudson's possession.

Sereboff at 1876. Thus, while the Court does not explicitly overrule Knudson, Sereboff effectively overruled most of Knudson, in that a Plan administrator or ERISA fiduciary can recover money from a beneficiary to enforce the terms of the plan even without specifically being able to trace identifiable funds into the beneficiaries possession. Thus, the only part of Knudson left is that if the funds are not paid directly to the plaintiff, but are placed in a trust, then either a plan cannot recover, or would need to at least establish a constructive trust over the funds.

Lastly, the Court added insult to injury, by rejecting Sereboff's argument that any equitable claim by the ERISA fiduciary would be subject to equitable defenses. The Supreme Court explained that the fiduciaries claim was not truly an equitable claim, but rather was an ERISA claim to recover under the terms of the plan; therefore, "the parcel of equitable defenses the Sereboffs claim accompany any such action are beside the point." Sereboff, at 1877. Then, in footnote 2, the Court left the door open to arguments that, a recovery by a plan fiduciary that does not take into account equitable defenses, such as the made-whole doctrine, may not be an "appropriate" equitable remedy under ERISA § 502(a)(3), but, because that issue was not raised below, the Supreme Court declined to consider it for the first time. Therefore, the Supreme Court has left open the question whether equitable defenses, such as the made-whole doctrine, that was the rule in the Sixth Circuit prior to Knudson, are still available after Sereboff.

The bottom line holding of Sereboff is that the Plan could recover to "enforce the terms of the plan" and that the relief sought was equitable. Thus, if an ERISA plan allows a recovery from a beneficiary, the likely outcome in most cases will be that the recovery will be allowed. However, ERISA does not provide for general equitable relief to enforce a subrogation claim as a general rule. ERISA's limited remedies only allow a Plan to recover under the terms of ERISA or the terms of a plan. ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3). Therefore, attorneys should carefully review the terms of the relevant ERISA plan documents to ensure that the plan actually allows the recovery sought by the insurance company or ERISA administrator.

5. Sixth Circuit/Tennessee ERISA law post Sereboff.

Since Sereboff has been decided, the Sixth Circuit has not yet addressed whether the presumption of the made-whole doctrine still survives, nor has it addressed what language would allow a plan to overcome the made whole doctrine presumption. In fact, the few cases since Sereboff have been unpublished, and have been related to other aspects of ERISA § 502(a)(3) litigation; however, the reasoning in those cases is still instructive.

In Alexander v. Bosch Automotive Systems, Inc., 232 Fed.Appx. 491 (6th Cir. 2007) (unpublished), the employer had promised certain benefits to its laid-off employees who were laid off within a designated time prior to any plant closure, then failed to follow up on that promise. Employees who had been laid off sought an equitable remedy under ERISA § 502(a)(3) to be allowed the same benefits as other employees who were included on the list of eligible employees. The employer conceded liability, but argued the relief sought was not available under ERISA. The Court of appeals reversed a decision from the Middle District of Tennessee and held that the relief sough by the employees was not equitable under Sereboff, because it did not identify specific funds, but sought recovery out of Defendant's general assets. The Court explained,

We find that any restitutionary-type relief in this case would merely compel the payment of money from a general fund and constitute money damages. It would be a severe contortion of remedies law to characterize as equitable restitution Bosch's payment from an unidentifiable fund source to reimburse Plaintiffs the value of their plant closure benefits. We therefore conclude that Plaintiffs cannot be awarded equitable restitution under the circumstances of this case. In sum, Plaintiffs are left without a remedy that falls under the rubric of "appropriate equitable relief" as permitted under ERISA § 502(a)(3). Such an unsettling phenomenon is not unheard of in ERISA cases. See Aetna Health Inc. v. Davila, 542 U.S. 200, 222, 124 S.Ct. 2488, 159 L.Ed.2d 312 (2004) (Ginsburg, concurring) (noting "a host of situations in which persons adversely affected by ERISA-proscribed wrongdoing cannot gain make-whole relief").

Id, at 501. While this case was one brought by plan participants, not an ERISA fiduciary, this case does make clear that, even after Sereboff, not all remedies are available, and sometimes ERISA does not provide a just result. After Sereboff, a Plaintiff can only recover if the Plaintiff can identify specific funds available to recover. Payment from a Defendant's general assets is not relief available after Sereboff.

In another unpublished Court of Appeals case, Gilchrest v. Unum Life Ins. Co. of America, 2007 WL 3037239 (6th Cir. 2007) (unpublished), the Court of Appeals addressed whether ERISA § 502(a)(3) allowed an insurance company to recover money paid under an LTD plan if the person is paid Social Security benefits. The Court, at p. *8. looked at the language in the plan, which said:

[disability benefits] may be reduced by deductible sources of income, [including the amount the employee receives or is entitled to receive in Social Security disability benefits.]

Unum has the right to recover any overpayments due to:

-fraud;
-any error Unum makes in processing a claim; and
-your receipt of deductible sources of income.

You must reimburse us in full. We will determine the method by which the repayment is to be made. Unum will not recover more money than the amount we paid you.

Based on this language, the Court of Appeals held that "the Plan's overpayment provision asserts a right to recover from a specific fund distinct from Gilchrest's general assets-the fund being the overpayments themselves-and a particular share of that fund to which the plan was entitled-all overpayments due to the receipt of Social Security benefits, but not to exceed the amount of benefits paid." Id. And thus allowed the recovery by the insurance company.

Interestingly, the Court did not address 42 U.S.C. § 407, which is the part of the Social Security Act that precludes anyone from obtaining a judgment against Social Security benefits, except in very narrow circumstances. The interesting question is this: if Gilchrest had already spent the LTD benefits that had been paid, then what specific, identifiable funds could the insurance company recover from? The LTD benefits are gone, and the only other specific, identifiable funds are the Social Security benefits, which are exempt. Hopefully, the Court will address this in the future when the argument is raised.

While the Court of appeals has not addressed what language would still allow for a subrogation claim after Sereboff, it has been addressed at the District Court level in the case of Fleetwood Enterprises, Inc. v. Taylor, 2007 WL 2826180 (W.D.Ky., 2007) (unpublished). In this case, an employer established a self-funded ERISA plan that paid health benefits to an employee who had been in an accident, then the Plan sought to recover its subrogation right under the terms of the Plan.

The court discussed Sereboff, and also found the 11th Circuit case of Popowski v. Parrott, 461 F.3d 1367, 1369 (11th Cir.2006) instructive. The District Court explained,

In Popowski, two plans sought recovery from Defendants under § 502(a)(3) of ERISA for reimbursement for medical expenses paid by each plan on behalf of the respective defendants. 461 F.3d 1367, 1369 (11th Cir.2006). The court, comparing the provisions of the two plans, determined that one plan had stated a claim for appropriate equitable relief whereas the other plan had failed to meet the requirements, as outlined in Sereboff, for the assertion of an equitable lien for the purposes of 29 U.S.C. § 1132(a)(3).

The first plan claimed a lien "on any amount recovered by the Covered Person whether or not designated as payment for medical expenses," and clarified that "[t]he Covered Person ... must repay to the Plan the benefits paid on his or her behalf out of the recovery made from the third party or insurer." Id. at 1373. The Court stated that these provisions specified both the fund--recovery from the third party or insurer--out of which reimbursement is due to the plan and the portion due the plan--benefits paid by the plan on behalf of the defendant. Id. The court found that this plan had stated a claim for appropriate equitable relief under 29 U.S.C. § 1132(a)(3) as the plan sought not to impose personal liability on the defendant, but to restore to the plaintiffs particular funds or property in the defendant's possession." Id.

However, the court found that the second plan failed to meet the requirements for the assertion of an equitable lien. Id. at 1374. The subrogation and reimbursement provisions of this plan claimed a right to reimbursement "in full, and in first priority, for any medical expenses paid by the Plan relating to the injury or illness," but did not specify that the reimbursement be made out of any particular fund. Id. at 1373-74. The court found instead that the receipt of a "settlement, judgment, or other payment relating to the accidental injury or illness" was a trigger for the general reimbursement obligation. Id. at 1374. The court also found that in requiring reimbursement "in full" the plan failed to limit recovery to a specific portion of a particular fund. Id.

Fleetwood Enterprises, Inc. at * 3. Based on its reading of Sereboff and Popowski, the District Court held that the Fleetwood Plan's language did not allow a recovery. The plan language stated, "[t]he Plan shall have the right of first reimbursement from any recovery a covered Member receives, even if the covered Member has not been made whole." Id, at *4. The District Court reasoned that, even thought "the Fleetwood Plan specifies the fund--any recovery a covered Member receives--out of which reimbursement is due to the plan," the language in the Fleetwood Plan "fails to specify the portion due the plan." Id. Thus, because the Plan failed to identify the portion due the plan, if "fails to meet the requirements for the assertion of an equitable lien." Id.

In another case at the District Court level, a court allowed a recovery of an "overpayment" of disability benefits in Disability Reinsurance Management Services, Inc. v. DeBoer, 2006 WL 2850120 (E.D. Tenn 2006)(Unpublished). The Court held, "The relief the plaintiff seeks is equitable in nature and permissible under ERISA. The Plan calls for the deduction of SS benefits from the LTD benefits received under the Plan; thus, the plaintiff seeks a specifically identified fund--all overpayments resulting from the payments of Social Security benefits." Id, at p. 4. However, just like the Gilchrest v. Unum Life Ins. Co. of America, supra, the court did not address 42 U.S.C. § 407 of the Social Security Act, so the Court did not explain what funds the Plan could recover from if the LTD benefits had been spent. That question was not raised in this case because Deboer appeared pro se, and this issue was apparently never brought to the Court's attention.

In the case of Reliance Standard Life Ins. Co. v. Smith, 2006 WL 2993054 (E.D. Tenn, 2006), the insurance company accidentally issued too much in payments under an ERISA life insurance policy to the widow of Smith, who was the beneficiary under the plan. The widow admitted she could trace the funds to specific investments she had made. The Court allowed the insurance company to recover under ERISA S 502(a)(3) and Sereboff.

Reliance does not seek to impose personal liability on Smith. Rather, it seeks relief to restore to itself particular funds or property in Smith's possession. Smith has admitted that the funds have not been dissipated but have been invested in a stock purchase. Accordingly, the court finds that Reliance is entitled to a constructive trust/equitable lien on Smith's stock assets traceable to the overpayment.

Id, at 3. While the Court did not address what language was actually in the Plan, this was a fairly easy case, where Smith still had the money in an identifiable fund, and it was clear that the insurance company had made a mistake in calculating how much to send out to the widow.

6. Predicting the future in the Sixth Circuit.

Now that Sereboff has been decided, I suggest that the Courts have come full circle, allowing subrogation claims where such claims are permitted by ERISA plan. However, I also suggest that the Sixth Circuit's older cases, which suggest that the "made-whole" doctrine applies unless it is overcome by express language in a plan, is still good law.

I am frequently asked whether placing the proceeds of a settlement in a special needs trust will be good enough to avoid the subrogation claim. I think, that under the clear language of Sereboff and Great West, the answer should be "yes." However, the Eight Circuit recently addressed these same questions, and disagreed with me. In Administrative Committee of The Wal-Mart Stores, Inc. Associates' Health and Welfare Plan v. James A. Shank, As Trustee Of Deborah J. Shank Irrevocable Trust, 500 F.3d 834, 835 (8th Cir. 2007), the Court of Appeals for the 8th Circuit held that Wal-Mart could recover the full amount it had paid in medical expenses, despite the fact that the money had been put into a special needs trust and despite the fact the Shanks were not made whole by their settlement. The Court of Appeals explained:

Deborah Shank ("Shank") was a Wal-Mart employee and a member of the Associates' Health and Welfare Plan ("the Plan"), a self-funded employee benefit plan regulated by ERISA. In May 2000, Shank was severely injured in a car accident, and was eventually adjudicated an incompetent. Pursuant to the terms of the Plan, the Committee paid for the full amount of Shank's medical expenses related to the accident, a total of $469,216. Shank eventually filed a lawsuit against the parties responsible for her injuries, and in 2002, she obtained a settlement of $700,000. After deducting attorney's fees and costs, the district court placed the remaining $417,477 from the settlement into a special needs trust, with Shank as the beneficiary and her husband, James Shank, the trustee.

The Court went on to analyze Sereboff and Great West, and held that the funds in the Shank's special needs trust were identifiable and in the possession and control of the Shanks, so that this case was similar enough to the facts of Sereboff that Sereboff controlled. Id, at 836. The Court basically ignored the distinction between a 'separate account" in Sereboff and the special needs trust that was present in this case and in Great West. Despite the fact that the Supreme Court expressly did not overrule Great West in the Sereboff decision, the Court of Appeals in the 8th Circuit ignored any distinction, and allowed Wal-Mart to recover the full $469,216 it had paid in medical expenses. Id.

The Court also discussed whether the relief sought was "appropriate." The Shanks argued that either the "make whole" doctrine should be applied, or the settlement proceeds should be distributed pro rata. Id, at 837-9. The Court rejected these arguments and held that under the language of ERISA, a Plan's language should control. Id. The Court of Appeals recognized this was "difficult" in this situation, and explained:

We acknowledge the difficulty of Shank's personal situation, but we believe the purposes of ERISA are best served by enforcing the Plan as written. Shank would benefit if we denied the Committee its right to full reimbursement, but all other plan members would bear the cost in the form of higher premiums. See Harris v. Harvard Pilgrim Health Care, Inc., 208 F.3d 274, 280-81 (1st Cir.2000). Reimbursement and subrogation provisions are crucial to the financial viability of self-funded ERISA plans, and, as a fiduciary, the Committee must "preserve assets to satisfy future, as well as present, claims," and must "take impartial account of the interests of all beneficiaries." Varity Corp., 516 U.S. at 514, 116 S.Ct. 1065.

Id, at 838.

III. So, since the terms of the Plan are so important, how do you get the Plan documents?

Administrators have an obligation to provide information, and participants and beneficiaries have a cause of action if they don't provide the information. Because ERISA only allows ERISA fiduciaries to recover under the terms of ERISA or the ERISA plan, ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3), attorneys for employees or beneficiaries should know that ERISA provides useful tools to obtain copies of the relevant ERISA documents

A. The duties of the Administrator

As part of the reform of employee benefits law when Congress enacted ERISA in 1974, Congress placed emphasis on employers' or other plan sponsors' obligations to provide information about employee benefits. One aspect of this is the duty of a plan administrator to respond to written requests for information. ERISA § 502(c), 29 U.S.C. § 1132(c) provides for penalties for an administrator's refusal to supply required information. Under that section of ERISA,

(1) Any administrator .[who fails to provide certain information] . . (B) who fails or refuses to comply with a request for any information which such administrator is required by this subchapter to furnish to a participant or beneficiary (unless such failure or refusal results from matters reasonably beyond the control of the administrator) by mailing the material requested to the last known address of the requesting participant or beneficiary within 30 days after such request may in the court's discretion be personally liable to such participant or beneficiary in the amount of up to $100 a day from the date of such failure or refusal, and the court may in its discretion order such other relief as it deems proper. For purposes of this paragraph, each violation described in subparagraph (A) with respect to any single participant, and each violation described in subparagraph (B) with respect to any single participant or beneficiary, shall be treated as a separate violation.

B. A participant's or beneficiary's rights to enforce this obligation.

As a matter of technical pleading, if an administrator violated ERISA § 502(c), "a civil action may be brought (1) by a participant or beneficiary (A) for relief provided for in subsection (c) of this section." In other words, an ERISA § 502(c) claim is properly pled under the cause of action granted under ERISA § 502(a)(1)(A).

C. The statute of limitations in a plan documents penalties claim.

ERISA often adopts the analogous state statue of limitations. Because a participant or beneficiary seeking a penalty for failure to provide plan documents, attorneys for the ERISA administrator can argue that the analogous statute of limitations is one for punitive damages, which are often a very short statute.

IV. Ethical concerns in subrogation situations.

Formal Ethics Opinion No. 87-F-109 requires plaintiff's attorneys to recognize the lien of an insurance company or health care plan, and would make it an ethical violation for the attorney to release all of the recovery directly to the client in a manner that would interfere with the health care lien. The opinion reads, in part:

This ethics opinion holds that a lawyer who has notice that a creditor or the client has a lien or assignment to the funds held on behalf of the client is ethically obligated to segregate and retain the disputed funds until the dispute is resolved. Payment of the disputed amount into court for a resolution of the matter is permissible after the parties have had a reasonable opportunity to resolve the dispute.

Formal Opinion 95-F-136 provides that a lawyer may represent both the injured person and her health insurer if there is full disclosure to both clients. If a conflict arises (as when the made-whole doctrine raises its head), significant problems may result. The authors' best advice is that a plaintiff's attorney should represent only the injured person, but will honor the legal and contractual rights of the subrogated carrier consistent with applicable law. The underlying theory is that, because the carrier simply stands in the shoes of the client, the carrier should reduce its claim to account for the applicable fees just as the client must do. The carrier should not be unjustly enriched by your work.

V. What documents must be provided?

A. Plan documents must be provided.

Basically, it is generally accepted that the Plan Administrator must provide the controlling plan documents. ERISA § 104(b)(4), 29 U.S.C. § 1024(b)(4) states, "The administrator shall, upon written request of any participant or beneficiary, furnish a copy of the latest updated summary, plan description, and the latest annual report, any terminal report, the bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated."

B. Arguably, ERISA § 502(c) penalties should be available for any documents a claimant is entitled to under the Department of Labor's regulations.

While it is generally accepted by Courts that Plan Administrators must provide the ERISA plan documents that are expressly required in ERISA, there are arguments that can be made that administrators must provide all the documents relevant to a claim that are required to be provided by the Department of Labor's ERISA claims regulations. ERISA § 502(c) (quoted in section I, supra), states that a penalty is due to be paid by any administrator who fails or refuses to comply with a request for information "which such administrator is required by this subchapter to furnish to a participant or beneficiary."
In addition to the specific documents described in the ERISA statute itself, at ERISA § 104(b)(4), 29 U.S.C. § 1024(b)(4), such as the summary plan descriptions and other documents under which the plan is operated, the ERISA statute, at § 109(c), 29 U.S.C. § 1029(c) provides that the Secretary of Labor may also prescribe what other documents should be furnished:
(c) Format and content of summary plan description, annual report, etc., required to be furnished to plan participants and beneficiaries. -- The Secretary may prescribe the format and content of the summary plan description, the summary of the annual report described in section 1024(b)(3) of this title and any other report, statements or documents (other than the bargaining agreement, trust agreement, contract, or other instrument under which the plan is established or operated), which are required to be furnished or made available to plan participants and beneficiaries receiving benefits under the plan.

Here, the key words are that "The Secretary may prescribe the format and content of . . . any other . . .documents . . .which are required to be furnished or made available to plan participants and plan beneficiaries." Thus, reading sections §109(c) and 502(c) together, the Secretary is given authority to establish the format and content of what documents are required to be produced "by this subchapter." Therefore, "Any administrator . . . (B) who fails or refuses to comply with a request for any information which such administrator is required by this subchapter to furnish to . . .may in the court's discretion be personally liable" for a § 502(c) penalty.
The Secretary of Labor's ERISA claim procedures regulations, set out in 29 C.F.R. § 2560.503-1 (h)(2)(iii) describe what documents an administrator must provide. The regulations state that, in order to provide a full and fair review, the Plan must:

Provide that a claimant shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant's claim for benefits. Whether a document, record, or other information is relevant to a claim for benefits shall be determined by reference to paragraph (m)(8) of this section.

The Secretary explains at Paragraph (m)(8) what documents are relevant to the claim, and are thus required to be produced under ERISA:

A document, record, or other information shall be considered "relevant" to a claimant's claim if such document, record, or other information.

(i) Was relied upon in making the benefit determination;

(ii) Was submitted, considered, or generated in the course of making the benefit determination, without regard to whether such document, record, or other information was relied upon in making the benefit determination;

(iii) Demonstrates compliance with the administrative processes and safeguards required pursuant to paragraph (b)(5) of this section in making the benefit determination; or

(iv) In the case of a group health plan or a plan providing disability benefits, constitutes a statement of policy or guidance with respect to the plan concerning the denied treatment option or benefit for the claimant's diagnosis, without regard to whether such advice or statement was relied upon in making the benefit determination.

The view that ERISA's disclosures provisions should be read broadly is supported by a court in Bartling v. Freuhauf Corp., 29 F.3d 1062 (6th Cir. 1994) (holding that, because ERISA requires a plan to maintain actuarial reports, that such documents must be provided to a participant on request.). Other circuits, analyzing § 502(c) claims under ERISA § 104(b)(4), applying the law before the new claims regulations were adopted, have read ERISA § 104(b)(4) and 502(c) more strictly. See Faircloth v. Lundy Packing Co., 91 F.3d 648 (4th Cir. 1996) (appraisal and stock evaluation reports were not instruments under which the plan was operated) and Board of Trustees of CWA/ITU Negotiated Pension Plan v. Weinstein, 107 F.3d 139 (2d Cir. 1997) (holding actuarial reports need not be provided.)

VI. Who may be sued under ERISA § 502(c)?

A. In most circuits, only the designated Plan Administrator is liable for a penalty under ERISA § 502(c).

ERISA § 502(c)(1) provides that "any administrator" who "fails or refuses to comply with a request for any information which such administrator is required by this title to furnish to a participant or beneficiary" shall be, in the court's discretion, liable to the participant or beneficiary in the amount up to $110 a day from the date of such failure or refusal.
Unfortunately, most circuits have read into ERISA an additional implied term that the language "any administrator" actually means only the Plan Administrator. For example,

It is well-settled in the Sixth Circuit that only plan administrators can be held liable for statutory penalties under 29 U.S.C. § 1132(c). Caffey v. UNUM Life Ins. Co., 302 F.3d 576, 584 (6th Cir.1989); Hiney Printing Co. v. Brantner, 243 F.3d 956, 960 (6th Cir.2001); VanderKlok v. Provident Life & Accident Ins. Co., 956 F.2d 610, 618 (6th Cir.1992). Furthermore, the Sixth Circuit has expressly held that "an insurance company, which is not a plan administrator cannot be held liable for statutory damages [under § 1132(c) ] for failure to comply with an information request." Caffey, 302 F.3d at 58 (citing VanderKlok, 956 F.2d at 618).

Addison v. Hartford Life and Accident Insurance, 32 Emp. Ben. Cas. 1640, 2003 WL 23413737 (E.D.Tenn. 2003) (unpublished). See e.g, Lee v. Burkhart, 991 F.2d. 1004 (2d Cir. 1993); Coleman v. Nationwide Life Ins. Co., 969 F.2d 54 (4th. Cir. 1992); Anweiler v. American Electric Power Service Corp., 3 F.3d 986 (7th Cir. 1993); Moran v. Aetna Life Insurance Co., 872 F.2d 296 (9th Cir. 1989), (the insurance company was not the "plan administrator" of an ERISA plan); McKinsey v. Sentry, 986 F2d 401, 404-05 (10th Cir 1993); Davis v. Liberty Mutual Ins. Co., 871 F.2d 1134 (D.C. Cir. 1989).
It may be time for claimants' attorneys to re-visit the arguments that an insurance company, acting as a claims administrator of a plan cannot be held liable for penalties under ERISA § 502(c). The new Department of Labor claims regulations describe a list of documents that must be provided to a claimant upon request. Many of the documents referred to in the regulations are normally in the hands of the insurance company that decides a claim, not the named "Plan Administrator" who is normally the employer. It is clear that the Department of Labor intends for the party with control over those documents to provide those documents described in the regulations. According to the statute, an administrator may avoid the penalty if the administrator fails to produce the documents, and "such failure or refusal results from matters reasonably beyond the control of the administrator." ERISA § 502(c)(1)(B). Thus, under the current law in most circuits, if the claimant requests the documents from the insurance company, and they refuse to produce them, they cannot be held liable for a penalty because they are not a "Plan" administrator. On the other hand, if you ask for the documents from the employer, who is technically the "plan" administrator, the employer can claim the defense that the employer has no control over the requested documents. This leaves no mechanism to enforce the Department of Labor claims regulations.
The plain language of the statute supports the argument that an insurance company can be held liable for the penalties. The language of ERISA § 502(c)(1) does not refer to a "Plan Administrator," but rather to "any administrator." ERISA participants and beneficiaries can argue that, had Congress intended § 502(c)(1) to apply only to titular "Plan Administrators" as that term of art is defined under the statute, rather than to parties who actually administer and control the documents a Plaintiff seeks, Congress would surely have said so. Compare § 502(c)(1) ("any administrator" subject to $110 per day penalty for failure to provide documents to participant) with § 502(c)(2) (Secretary of Labor may assess penalty of $1000 per day against "any plan administrator" (emphasis added) for failure to file annual report). The key should not be who is named "plan administrator," but rather who in fact acts as administrator.

B. Sometimes, a de facto plan administrator may be liable for a penalty.

At least two circuits have been willing to agree that § 502(c)(1) allows penalties against de facto plan administrators. In Law v. Ernst & Young, 956 F.2d 364 (1st Cir. 1992), the First Circuit held:

If, to all appearances, Arthur Young acted as the plan administrator in respect to dissemination of information concerning plan benefits, it may properly be treated as such for purposes of the liability provided under § 1132(c). To be sure, § 1002(16)(A)(i) states that the plan administrator is the party "specifically so designated" by the plan documents, and those documents named the Arthur Young Retirement Committee. But 29 U.S.C. § 1025 also confers upon plan participants and beneficiaries an absolute right to receive from the administrator information of the type sought here . . .
To hold that an entity not named as administrator in the plan documents may not be held liable under § 1132(c), even though it actually controls the dissemination of plan information, would cut off the remedy Congress intended to create.

956 F.2d at 373. The key factor in finding a de facto plan administrator, according to Law, is control: both control over the plan generally; and specifically, control over dissemination of the information and documents underlying the § 502(c)(1) claim. The Eleventh Circuit has explicitly noted its agreement with the First Circuit's holding in Law. See Rosen v. TRW, Inc., 979 F.2d 191, 193-94 (11th Cir. 1992) ("We agree with the reasoning of the First Circuit and we hold that if a company is administrating the plan, then it can be held liable for ERISA violations, regardless of the provisions of the plan document"). Additionally, the Fifth Circuit has stated the idea that someone other than the statutory administrator could be liable for § 502(c) penalties has "intuitive appeal." Fisher v. Metropolitan Life Ins. Co., 895 F.2d 1073 (5th Cir. 1990).
Insurance companies often act as the "plan administrators." For example, by regulation, decisions and notices regarding ERISA rights are required to be sent by the plan administrator. 29 C.F.R. § 2560.503-1(f), (j). This information is usually provided to a claimant by the insurance company when they deny a claim, which give the appearance that the insurance company has taken on many of the roles and attributes of a plan administrator.

VII. How does a court determine the appropriate penalty?

A. Factors in Determining Awards and Amounts Awarded

It is up to the discretion of the district courts to award penalties under 29 U.S.C. § 1132(c). While some circuits have no reported cases involving § 502(c) penalties, the federal circuits which have addressed these claims use a variety of factors to decide whether to award penalties under § 502(c).

The five factors most commonly used by the courts in assessing § 502(c) penalties are: "(1) bad faith or intentional conduct of the plan administrator, (2) length of delay, (3) number of requests made, (4) documents withheld, and (5) prejudice to the participant." Gorini v. AMP Inc., 94 Fed. Appx. 913, 919-920 (3d Cir. 2004). The Second and Third Circuit Courts have adopted these factors, as have several district courts in the Seventh Circuit. See McDonald v. Pension Plan of the Nysa-Ila Pension Trust Fund, 320 F.3d 151, 163 (2d Cir. 2003); Jackson v. E.J. Brach Corp., 937 F. Supp. 735, 741 (N.D. Ill.1996); Blazejewski v. Gibson, 1999 U.S. Dist. LEXIS 18028 at 9-10 (N.D. Ill. 1999). Other circuits use some of these factors to varying degrees. The Eleventh Circuit, for example, has cited these five factors, but noted that they are not prerequisites for imposing civil penalties. Curry v. Contract Fabricators Inc. Profit Sharing Plan, 891 F.2d 842, 847 (11th Cir. 1990). In the Fourth Circuit, the Eastern District of Virginia has considered bad faith and length of delay, but awarded penalties even though neither of these factors was in the plaintiff's favor. Freitag v. Pan Am. World Airways, Inc., 702 F. Supp. 128, 132 (E.D. Va., 1988).

The First, Fifth, and Sixth Circuits focus on bad faith and prejudice to the plaintiff. Bartling v. Fruehauf Corp., 29 F.3d 1062, 1066-1067 (6th Cir. 1994); Rodriguez-Abreu v. Chase Manhattan Bank, N.A., 986 F.2d 580, 588-89 (1st Cir. 1993); Godwin v. Sun Life Assurance Co. of Canada, 980 F.2d 323, 328-29 (5th Cir. 1992).

However, in these circuits, neither bad faith nor prejudice is required; they are merely considerations in determining the amount of penalties awarded. Bartling, 29 F.3d at 1066. In fact, the Sixth Circuit has affirmed a penalty against a plan administrator when neither prejudice nor bad faith was present. McGrath v. Lockheed Martin Corp., 48 Fed. Appx. 543, 557 (6th Cir. 2002).

Lampkins v. Golden, 1996 WL 729136 at p. 3 (6th Cir. 1996) (discussing why prejudice need not be present before a court should award penalties and affirming a penalty of $75 per day for 438 days of delay, or a total penalty of $32,850.) explains:

We cannot find that the district court abused its discretion in imposing a $75 per day penalty against Golden for failing to timely provide Lampkins with the [requested plan documents] . . .Golden argues that the district court abused its discretionary authority because it assessed a penalty without finding that his delay caused Lampkins any prejudice. In support of this argument, Golden notes that some district courts have declined to impose a penalty unless the participant can show that the administrator's failure to deliver the documents within thirty days adversely affected the participant's rights in some fashion. See, e.g., Wesley v. Monsanto Co., 554 F.Supp. 93 (E.D.Mo.1982), aff'd, 710 F.2d 490 (8th Cir.1983); Pollock v. Castrovinci, 476 F.Supp. 606 (S.D.N.Y.1979), aff'd, 622 F.2d 575 (2d Cir.1980). The statute, however, does not require a finding of prejudice, and "[t]he circuits are in general accord that neither prejudice nor injury are prerequisites to recovery under the penalty provisions of the statute." Moothart v. Bell, 21 F.3d 1499, 1506 (10th Cir.1994) (citing Sage v. Automation, Inc. Pension Plan & Trust, 845 F.2d 885, 894 n. 4 (10th Cir.1988); see Faircloth v. Lundy Packing Co., 91 F.3d 648, 659 (4th Cir.1996) (noting that "prejudice to the party requesting the documents is not a prerequisite to the imposition of penalties...."); Gillis v. Hoechst Celanese Corp., 4 F.3d 1137, 1148 (3d Cir.1993), cert. denied, 114 S.Ct. 1369 (1994); Daughtrey v. Honeywell, Inc., 3 F.3d 1488, 1494 (11th Cir.1993); Rodriguez-Abreu v. Chase Manhattan Bank, N.A., 986 F.2d 580, 588 (1st Cir.1993)); see, e.g., Bartling v. Fruehauf Corp., 29 F.3d 1062 (6th Cir.1994). In fact, prejudice to the party requesting the documents is merely one factor that a district court may consider in imposing a penalty. See Faircloth, 91 F.3d at 659; Moothart, 21 F.3d at 1506; see, e.g., Bartling, 29 F.3d at 1068-69 (affirming a statutory penalty where, despite the lack of bad faith or prejudice, the district court had imposed the penalty "only because of the [large] number of Plaintiffs that were involved."); see also Daniel v. Eaton Corp., 839 F.2d 263, 268 (6th Cir.1988) (affirming an assessment of penalties against a plan administrator even though there was no evidence that the delay was deliberate or that any prejudice had resulted), cert. denied, 488 U.S. 826 (1988).

Furthermore, the district court's decision to impose the statutory penalty without a finding of prejudice comports with the general intent of the statute. The purpose of the statutory penalty is not to compensate participants, but to induce administrators to expeditiously provide requested plan documents by punishing those who fail to comply. See Faircloth, 91 F.3d at 659; Bartling, 29 F.3d at 1068; Daughtrey, 3 F.3d at 1494 (noting that the purpose of the statutory penalties is to punish because the penalty range of up to $100 per day is unrelated to any injury suffered by a plan participant). Thus, the district court acted well within its discretion in imposing a penalty without first requiring a showing of prejudice.

Id, at p. 3. When arguing these cases, Plaintiff's attorneys can argue that nothing in ERISA § 502(c) requires a showing of prejudice before a court should assess a penalty under that part of the ERISA statute. The purpose of the statute is to ensure that plan Administrators expeditiously produce plan documents. Rather, courts have repeatedly held that such factors may be considered by a court, but are not dispositive, and it is in a court's discretion to award such a penalty without those factors.

However, because courts and defense counsel often focus on prejudice as the most important factor, the Plaintiff should be prepared to show prejudice. Many courts have stated that prejudice is at least an "important factor" to consider when determining the applicability of § 502(c) penalties. See, e.g., Bartling v. Fruehauf Corp., 29 F.3d 1062, 1067 (6th Cir. 1994). For most courts, however, it is not determinative. Even so, some courts refuse to impose penalties or give "token" penalties in the absence of prejudice. Patterson v. Ret. & Pension Plan for Officers & Employees of the N.Y. Dist. Council of Carpenters and Related Orgs., 2001 U.S. Dist. LEXIS 15949 at 22 (S.D.N.Y. 2001); Hackett v. Xerox Corp. Long-Term Disability Income Plan, 2001 U.S. Dist. LEXIS 21305 at 68-70 (N.D. Ill. 2001).

Fortunately, prejudice is not a particularly difficult thing to show. In addition, in the Sixth and Eleventh Circuits, the burden is on the plan administrator to prove that there is no prejudice. Knickerbocker v. Ovako-Ajax, Inc., 1999 U.S. App. LEXIS 16982 at 20 (6th Cir. 1999). Often the fact that the plaintiff had to seek the advice of counsel and institute a lawsuit in order to determine his or her rights under the plan is sufficient "prejudice." Courts imposing penalties under this interpretation of "prejudice" often focus on the time and effort expended and the aggravation experienced by the plaintiff in hiring a lawyer or bringing the suit. Almonte v. GMC, 1997 U.S. Dist. LEXIS 9271 at 14-16 (S.D.N.Y. 1997); Jackson v. E.J. Brach Corp., 937 F. Supp. 735, 742 (N.D. Ill. 1996). Another way to look at this interpretation is that if the suit commences before the administrator has furnished the requested information, the plaintiff may have brought a suit for benefits without knowing the merits of his or her position. Patterson, 2001 U.S. Dist LEXIS 15949 at 22. On the other hand, the plaintiff should not argue prejudice merely as a result of hiring an attorney, since attorney's fees can be recovered under ERISA. Geary v. Chicago Tile Inst. Welfare Trust, 1995 U.S. Dist. LEXIS 4921 at 19 (N.D. Ill. 1995). In addition, courts have found seeking counsel and filing suit to be inadequate prejudice when the case was primarily based on other grounds such as interpretation of the plan or discrimination by the former employer. Patterson, 2001 U.S. Dist LEXIS 15949 at 22; LaCoparra v. Pergament Home Ctrs., Inc., 982 F. Supp. 213, 230 (S.D.N.Y. 1997).

B. Sample Penalties that are Awarded.

When courts do award penalties, they seldom award the maximum amount. In fact, out of fifty or so reported cases in which courts have awarded statutory penalties, the plaintiffs received the maximum penalty only three times. See Keogan v. Towers, 2003 U.S. Dist. LEXIS 7999 at 35 (D. Minn. 2003); Freitag, 702 F. Supp. at 132; Villagomez v. AT&T Pension Plan, 1991 U.S. Dist. LEXIS 1788 at 5 (N.D. Ill. 1991). Awards typically range from ten to fifty dollars a day, with an average award of about $33.63/day. Kascewicz v. Citibank, N.A., 837 F. Supp.1312, 1323-24 (S.D.N.Y. 1993).

A breakdown of the cases where courts have awarded § 502(c) penalties and the amounts awarded follows. In the Second Circuit, the cases are McDonald v. Pension Plan of the Nysa-Ila Pension Trust Fund, 320 F.3d 151, 163 (2d Cir. 2002)($15/day for 71 days; $1065 total); Reid v. Local 966 Pension Fund, 2004 U.S. Dist. LEXIS 18600 at *32 (S.D.N.Y. Sept. 14, 2004)($20/day for 151 days; $3020 total); Patterson v. Ret. & Pension Plan for Officers & Employees of the N.Y. Dist. Council of Carpenters and Related Orgs., 2001 U.S. Dist. LEXIS 15949 at 22 (S.D.N.Y. 2001)(token penalty of $0.10/day for an unspecified number of days); Proujansky v. Blau, 2001 U.S. Dist. LEXIS 12694 at 41 (S.D.N.Y. 2001)($20/day for 2272 days; total penalty of $45,440); Almonte v. GM Corp., 1997 U.S. Dist. LEXIS 9271 at 16 (S.D.N.Y. 1997)($10/day for 235 days; $2350 total); Scarso v. Briks, 909 F. Supp. 211, 215 (S.D.N.Y. 1995)($50/day for approximately 450 days); Pagovich v. Moskowitz, 865 F. Supp. 130, 138 (S.D.N.Y. 1994)($75/day for 187 days; $14,025 total); Kascewicz v. Citibank, N.A., 837 F. Supp. 1312, 1324 (S.D.N.Y. 1993)($25/day for 891 days; $22,275 total); Kulchin v. Spear Box Co., 1978 U.S. Dist. LEXIS 16265 at 7 (S.D.N.Y. 1978)($10,000 total penalty); and Austin v. Ford, 1998 U.S. Dist. LEXIS 2157 at 19 (S.D.N.Y. 1998)($10/day; $3870 total penalty).

In the Third Circuit, Gorini v. AMP, Inc., 94 Fed. Appx. 913, 916 (3d Cir. April 16, 2004)(award of $160,780 for an unnamed amount of time); Colarusso v. Transcapital Fiscal Sys., 227 F. Supp. 2d 243, 262 (D.N.J. 2002)($50/day for 928 days; $46,400 total); Boyadjian v. CIGNA Cos., 973 F. Supp. 500, 507 (D.N.J. 1997)($75/day for 773 days; total of $57,975); Porcellini v. Strassheim Printing Co., 578 F. Supp. 605, 616 (E.D. Pa 1983)($25/day for 60 days; $1500 total); Henczel v. Amstar Sugar Corp., 1991 U.S. Dist. LEXIS 10740 at 12-13 (E.D. Pa. 1991)($100/day; total of $18,800); and Conowall v. Admin. Comm. for General Instrument Corp. Pension Plan, 1989 U.S. Dist. LEXIS 7997 at 11 (E.D. Pa. 1989)($5/day penalty for nearly five years; total of $8790).

In the Fourth Circuit, Faircloth v. Lundy Packing Co., 91 F.3d 648, 659 (4th Cir. 1996)($2500 for each of three plaintiffs for a delay of about 90 days); Shade v. Panhandle Motor Serv. Corp., 1996 U.S. App. LEXIS 16703 at 12(4th Cir. 1996)($5/day; total of $4035); Freitag v. Pan Am. World Airways, Inc., 702 F. Supp. 128, 132 (E.D. Va. 1988)($100/day for 100 days; $10,000 total); Jackson v. Coyne & Delany Co., 2004 U.S. Dist. LEXIS 11230 (W.D. Va. June 17, 2004)($25/ day for 93 days; total of $2325). Cases in the Sixth Circuit include McGrath v. Lockheed Martin Corp., 48 Fed. Appx. 543, 550 (6th Cir. 2002)($50/day for 154 days; $7700 total); Bartling v. Fruehauf Corp., 29 F.3d 1062, 1067 (6th Cir. 1994)($25,200 for a group of 78 plaintiffs); Daniel v. Eaton Corp., 839 F.2d 263, 268 (6th Cir. 1988)($25/day for 278 days; $6950 total); and Dooley v. GMC, 1997 U.S. Dist. LEXIS 13168 at 6 (E.D. Mich. 1997)($1500 for a delay of about one year).

In the Seventh Circuit, Blazejewski v. Gibson, 1999 U.S. Dist. LEXIS 18028 at 14 (N.D. Ill. 1999)($10/day for about 400 days); Jackson v. E.J. Brach Corp., 937 F. Supp. 735, 742 (N.D. Ill. 1996)($10/day for 692 days; 6920 total); Harsch v. Eisenberg, 1994 U.S. Dist. LEXIS 21235 at 22 (E.D. Wis. 1994)($4089 total penalty for four plaintiffs); Thomas v. Jeep-Eagle Corp., 746 F.Supp. 863, 864-865 (E.D. Wis. 1990)($50/day for 129 days; $6450 total); Mitchell v. Am. Hardware Mfrs. Ass'n, 1985 U.S. Dist. LEXIS 15990 at 33 (N.D. Ill. 1985)($1000 total penalty); Lowe v. SRA/IBM Macmillan Pension Plan, 2003 U.S. Dist. LEXIS 4519 at 10 (N.D. Ill. 2003)($50/day; $35, 050 total); Knipe v. Reuters Am., 1997 U.S. Dist. LEXIS 4675 at 6 (N.D. Ill. 1997)(penalty of $2000); Villagomez v. AT&T Pension Plan, 1991 U.S. Dist. LEXIS 1788 at 5 (N.D. Ill. 1991)($100/day for 144 days; $14,400 total); and Piggot v. Livingston Co., 1989 U.S. Dist. LEXIS 11155 at 8 (N.D. Ill. 1989)(nominal penalty of $2/day for 309 days). In the Eighth Circuit, Keogan v. Towers, 2003 U.S. Dist. LEXIS 7999 at 34 (D. Minn. 2003)($100/day for 649 days; $64,900 total); Garred v. General American Life Ins. Co., 774 F. Supp. 1190, 1201 (W.D. Ark. 1991)($25/day; total penalty of $15,775).

In the Ninth Circuit, Advisory Comm. for Stock Ownership & Trust for Employees of Montana Bancsystem, Inc. v. Kuhn, 1996 U.S. App. LEXIS 2273 at 22-23 (9th Cir. 1996)($33/day for 586 days; total of 19,338); Paris v. F. Korbel & Bros., Inc., 751 F. Supp. 834, 840 (N.D. Ca. 1990)($10/day); Chaganti v. Sun Microsystems, 2004 U.S. Dist. LEXIS 24243 at 19 (N.D. Ca. Nov. 23, 2004)($12/day for 191 days; $2292 total); Berry v. Wise, 2004 U.S. Dist. LEXIS 16897 at 1 (D. Or. Aug. 17, 2004)(total award of $2640).

In the Tenth Circuit, Dehner v. Kansas City S. Indus., Inc., 713 F. Supp. 1397, 1402 (D. Kan. 1989)($20/day for 84 days; $1680 total).

In the Eleventh Circuit, Curry v. Contract Fabricators, Inc. Profit Sharing Plan, 891 F.2d 842, 848 (11th Cir. 1990)($3/day for 240 days; $800 total); Hamilton v. Mecca, Inc., 930 F. Supp. 1540, 1557 (S.D. Ga. 1996)($5000 penalty awarded).

About the authors:
Eric Buchanan is founding partner of the firm of Eric Buchanan and Associates, PLLC, a firm that represents disabled people in claims for disability insurance and Social Security Disability, as well as individuals and policyholders who have been denied ERISA benefits and other insurance benefits. In 2007 Eric Buchanan was certified as a specialist in Social Security Disability law by the Tennessee Commission on Continuing Legal Education and Specialization.

Eric Buchanan is past President of the Chattanooga Trial Lawyers. He is also immediate past-chair of the Tennessee Bar Association Disability Law Section. He was also elected to two positions within the American Association of Justice (AAJ) (Formerly the Association of Trial Lawyers of America (ATLA)); Mr. Buchanan is immediate past chair of the AAJ ERISA Health Care and Disability Litigation Group and currently chair of the AAJ Social Security Disability Section. Eric Buchanan is a sustaining member of NOSSCR. He is a regional representative for the Board of Governors of Tennessee Association for Justice (TAJ) (formerly the Tennessee Trial Lawyers Association (TTLA)), as well as a member of the executive committee and is a lifetime member of TAJ.

Eric Buchanan, along with co-author John Wood, has written numerous articles on ERISA law for this publication. He is also a frequent speaker on ERISA law, Subrogation, and disability law at both the state and national levels.

Eric Lane Buchanan is a 1989 graduate of The Virginia Military Institute, and a 1997 magna cum laude graduate of the Washington and Lee School of Law. In law school, he was inducted in the ODK honorary leadership fraternity in January 1997 and inducted into Order of the Coif upon graduation.
Prior to attending law school, Eric Buchanan served as an officer and naval aviator in the United States Navy, serving as a pilot of P3-C "Orion" aircraft. He served in the East Coast of the U.S., in the Atlantic, Mediterranean, and Arctic Oceans, and was deployed throughout Europe, including eleven months spent in Iceland. Amanda E. Scales is a 2005 graduate of Vanderbilt University Law School, and was admitted to the Tennessee Bar in November 2005. While at Vanderbilt, Ms. Scales was a member of the Vanderbilt Journal of Entertainment Law and Practice. Her note "Sola, Perduta, Abbandonata: Are the Copyright Act and Performing Rights Organizations Killing Classical Music?" was published in the Spring 2005 issue of that journal.

Ms. Scales practices in the areas of Social Security Disability and ERISA welfare benefits. She is already an experienced ERISA attorney, having pursued over one hundred claims for benefits before claims administrators and in federal court. She has also successfully represented many Social Security claimants at the administrative and District Court levels. She is admitted to practice in the courts of the State of Tennessee, as well as the United States District Courts for the Eastern, Middle and Western Districts of Tennessee. She is a member of NOSSCR, the Tennessee Bar Association, the Chattanooga Bar Association and the Chattanooga Trial Lawyers Association. Amanda Scales may be reached at ascales@buchanandisability.com.