The Ninth Circuit Court of Appeals just made it a little more difficult for long term disability (LTD) carriers to successfully sue LTD beneficiaries for reimbursement of benefits paid once they receive a Social Security Disability Income (SSDI) benefits Award (or a Workers’ Compensation lump sum settlement). Most LTD policies contain a provision that allows the carrier to offset what they typically refer to as “other income” meaning, the carrier will reduce the amount of LTD benefits it pays by the amount of “other income” received. Typically, carriers have beneficiaries sign reimbursement agreements under which the beneficiary agrees to repay the LTD benefits it receives once the SSDI award is paid. Sometimes, when LTD benefits have been terminated and a beneficiary sues to get them reinstated, the carrier will file a counterclaim seeking reimbursement for the “other income” derived from the award of SSDI. To accomplish this, carriers file a counterclaim under ERISA seeking repayment of the LTD benefits pursuant to and equitable lien by agreement. Carriers are forced to seek an equitable remedy because a breach of contract claim would be pre-empted by ERISA, which does not allow such a claim by carriers.
In Bilyeu v. Morgan Stanley, the Court, in interpreting Sereboff v. Mid. Atl. Med. Servs., Inc., 547 U.S. 356 (2006), states that there are three criteria for establishing an equitable lien by agreement in an ERISA case. __F.3d __(9th Cir. 2012), 2012 WL 2333629 (C.A. 9 (Ariz.)) p. 8. Those three criteria are: “First, 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. Second, the reimbursement agreement must ‘specifically identif[y] a particular fund, distinct from the [beneficary’s] general assets,’ from which the fiduciary will be reimbursed. Id. at 364. Third, the funds specifically identified must be ‘within the possession and control of the [beneficiary].’ Id. at 363.”
It is the manner in which the court interpreted the second and third requirements that made it more difficult for the carrier to establish that it is entitled to an equitable lien by agreement.
Specifically, with regard to the second requirement for an equitable lien by agreement, the court said that while the insurer showed that it had a reimbursement agreement signed by the plaintiff-beneficiary and that the agreement specified the insurer was to be reimbursed ‘any overpayment resulting from my receipt of benefits from other sources,'” the problem was that “the overpaid disability benefits are not a particular fund, but a specific amount of money encompassed within a particular fund – the long term disability benefits Unum paid to Bilyeu.” Bilyeu v. Morgan Stanley, 2012 WL 2333629 (C.A. 9 (Ariz.)) p. 8. The court held that the insurer did not satisfy the second requirement. Id.
As for the third requirement, the court in Bilyeu held that the insurer failed to establish the third element because the plaintiff had already spent some of her Social Security Disability Income benefits before Unum filed its counterclaim for an equitable lien by agreement. Bilyeu v. Morgan Stanley, 2012 WL 2333629 (C.A. 9 (Ariz.)) pp. 9. Therefore, the court held, Unum was not seeking the recovery of a specified fund that was preserved and in the plaintiff’s possession; rather, Unum sought a judgment that would have required the plaintiff to pay money out of her general assets. The Court said that Unum sought “the imposition of personal liability,” instead of the “enforcement of an “equitable lien on particular property.” Id. Accordingly, the court held that the insurer did not satisfy the third requirement. Id.
The manner in which the Ninth Circuit interpreted these requirements for establishing an equitable lien by agreement has made it more difficult for carriers to establish that they are entitled to such a remedy in court, based on the way most of their reimbursement agreements are currently written.