Ninth Circuit Holds ERISA Health Plan’s Self-Help Provision Is Enforceable

The Ninth Circuit Court of Appeals recently decided Mull v. Motion Picture Indus. Health Plan, No. 20-56315, __F.4th__, 2022 WL 2912475 (9th Cir. July 25, 2022). This matter involves a self-funded health plan’s years-long effort to recoup plan benefits it paid to cover medical expenses caused by a third party against which the plan beneficiary secured a third-party settlement and did not repay the plan as required by the plan’s terms. The Ninth Circuit held that under the clear terms of the Motion Picture Industry Health Plan Summary Plan Description for Active Participants (“SPD”), Plaintiff Norman Mull is liable for the reimbursement of his daughter’s benefits, and the Plan is authorized to recoup those benefits through its self-help provision because ERISA does not limit the use of such self-help remedies, and neither contractual doctrines nor res judicata prevent the Plan from enforcing its recoupment provision.

Plaintiffs are Norman Mull, a participant in the Motion Picture Industry Health Plan (the “Plan”), and his dependents, his wife Danielle Mull and daughter Carson Mull. His daughter Lenai Mull is no longer party to this action but was a formerly covered dependent of Norman. In 2010, when Lenai was a covered dependent, she was involved in a motor vehicle accident. The Plan agreed to pay for her medical expenses if she and Norman completed and returned a Third Party Liability Statement Form, wherein they agree that if they receive any money from a third party related to her injuries that they will pay the Plan back for medical expenses it pays on Lenai’s behalf. Norman and Lenai signed and returned the form. Lenai got a settlement from the third party (less than what the Plan paid in her expenses), she dissipated her settlement funds, did not reimburse the Plan, and then filed for bankruptcy. The bankruptcy court discharged her debt to the Plan. The Plan began withholding payment for medical expenses for Norman and his beneficiaries in order to recoup the un-reimbursed benefits it paid for Lenai. The Mulls then filed suit against the Plan for payment of their medical expenses.

The SPD contains two relevant terms. The first is a Reimbursement Clause that states that if a Plan participant or beneficiary suffers an injury, the Plan will pay benefits only if the participant agrees to reimburse the Plan from any amount he or his eligible dependent subsequently recovers from a third party. It also requires that any such recovery be kept separate from other funds and be held in trust until it is paid to the Plan. The second provision is a Recoupment Clause that establishes a self-help remedy that may be used if a participant fails to comply with the Reimbursement Clause. If a participant does not reimburse the Plan from a third-party recovery, the amount of the un-reimbursed benefit payments will be deducted from all future benefit payments to or on behalf of the participant or any dependent until the overpayment is resolved.

This is this case’s second trip to the Ninth Circuit. In the court’s first decision it vacated and remanded the district court’s decision finding that the SPD did not constitute a formal part of the Plan and the Reimbursement and Recoupment Clause were unenforceable since it was contained only in the SPD. The court held that the Trust Agreement and the SPD together constitute the Plan. On remand, the district court initially granted summary judgment for the Plan but then reversed course after the Mulls filed a motion for reconsideration. It rested its decision on four conclusions which the Ninth Circuit addressed in overturning the district court’s decision.

First, the court held that contractual defenses cannot defeat the Plan’s self-help remedy. The district court concluded that the Plan should not be permitted to use self-help measures to terminate plan benefits of family members who did not recover anything and do not have a way to pay the Plan back. Plaintiffs invoked the doctrines of illegality, impossibility of performance, and unconscionability. The Ninth Circuit explained that in the past, based on now overturned case law, parties could assert a range of equitable defenses to defeat the terms of an ERISA plan. Although the Supreme Court in US Airways, Inc. v. McCutchen, 569 U.S. 88, 133 S.Ct. 1537, 185 L.Ed.2d 654 (2013) did not address whether contractual defenses such as unconscionability, illegality, or impossibility of performance can defeat the clear terms of an ERISA plan, the court did not decide that issue to resolve this appeal. Assuming these defenses survive US Airways, the court concluded that they still cannot override the Plan’s terms under the facts in this case. That the recoupment provision eschews reliance on Section 502(a)(3) does not make it an illegal undertaking. Impossibility is not an available defense where the contract provides for the contingency in question, that is, Lenai’s decision to dissipate her settlement funds rather than repay the Plan. The Plan terms are neither procedurally nor substantively unconscionable where Norman agreed to the provision in exchange for medical benefits his daughter received, and numerous courts have upheld similar recoupment provisions. Because Norman signed the reimbursement agreement and accepted the Plan’s payment of benefits, he is bound by the Plan’s terms.

Second, the court held that the requirements for establishing a claim for equitable relief under ERISA Section 502(a)(3) do not bar the Plan from exercising its self-help remedy. Fiduciaries cannot use Section 502(a)(3) to impose personal liability on a plan beneficiary based on a contractual obligation to pay money. However, the Plan is not prosecuting a claim under Section 502(a)(3), rather it is defending an action brought by the Mulls to recover plan benefits. Even if the Plan could not prevail against the Mulls in an action for equitable relief under Section 502(a)(3), it can use self-help measures as an alternative means for recouping overpaid benefits.

Third, the court held that the Plan’s self-help remedy does not violate ERISA’s civil enforcement scheme. The court rejected the Mulls’ argument that if a plan fiduciary wishes to enforce the terms of a plan, it can only do so by bringing an action for equitable relief under Section 502(a)(3). Plan fiduciaries may bargain for and implement self-help remedies that do not require judicial enforcement.

Lastly, the court held that res judicata does not bar the Plan’s use of its self-help remedy. The district court previously dismissed the Plan’s counterclaim against Norman and Lenai. The court found that the district court erred in concluding that the Plan’s counterclaim under ERISA Section 502(a)(3) is identical to the “claim” it has raised as a defendant in this action. The Plan’s argument it raised as a defendant in the case that it is entitled to enforce the self-help provision is not a “claim.” Neither the bankruptcy court nor the district court ever ruled on whether Norman was liable to the Plan, let alone whether the Plan’s self-help provision was valid and enforceable. Thus, there is no claim or issue preclusion.

The court reversed and remanded for further proceedings with instructions to the district court to enter an order granting summary judgment in favor of the Plan.