Supreme Court Decision Resolves Split Re Whether Relief is Equitable or Legal under ERISA, Finds it Equitable

Here is an excerpt from the syllabus of Sereboff v. Mid Atlantic Medical Services, Inc., 126 S.Ct. 1869, a case the Supreme Court decided last month (May 15, 2006):

Petitioner Sereboffs are beneficiaries under a health insurance plan administered by respondent Mid Atlantic and covered by the Employee Retirement Income Security Act of 1974 (ERISA)…The Sereboffs were involved in an automobile accident and suffered injuries. The plan paid the couple's medical expenses. The Sereboffs sought compensatory damages for the accident from third parties in state court. After the Sereboffs settled their tort suit, Mid Atlantic filed suit in District Court under § 502(a)(3) of ERISA, seeking to collect from the Sereboffs' tort recovery the medical expenses it had paid on the Sereboffs' behalf. The Sereboffs agreed to set aside from their tort recovery a sum equal to the amount Mid Atlantic claimed, and preserve this sum in an investment account pending the outcome of the suit. The court found in Mid Atlantic's favor and ordered the Sereboffs to turn over the amount set aside. The Fourth Circuit affirmed in relevant part, and observed that the Courts of Appeals are divided on the question whether § 502(a)(3) authorizes recovery in these circumstances. This Court granted review to resolve this disagreement.

Held: Mid Atlantic's action properly sought “equitable relief” under § 502(a)(3).

(a) A fiduciary may bring a civil action under § 502(a)(3)(B) “to obtain ··· appropriate equitable relief ··· to enforce ··· the terms of the plan.” The only question here is whether the relief requested was “equitable.” …Mid Atlantic sought identifiable funds within the Sereboffs' possession and control-that part of the tort settlement due Mid Atlantic under the ERISA plan and set aside in the investment account.

(b) This Court's case law from the days of the divided bench confirms that Mid Atlantic's claim is equitable. In Barnes v. Alexander, 232 U.S. 117, 34 S.Ct. 276, 58 L.Ed. 530, attorney Barnes promised two other attorneys “one-third of the contingent fee” he expected in a case, id., at 119, 34 S.Ct. 276. Based on “the familiar rul[e] of equity 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 found that Barnes' undertaking “create[d] a lien” upon the portion of the recovery due him from the client, ibid., which the other attorneys could “follow ··· into [Barnes'] hands” “as soon as [the fund] was identified,” id., at 123, 34 S.Ct. 276. The “Acts of Third Parties” provision in the Sereboffs' plan, like Barnes' promise, specifically identified a particular fund distinct from the Sereboffs' general assets, and a particular share of that fund to which Mid Atlantic was entitled. Thus, Mid Atlantic could rely on a “familiar rul[e] of equity” to collect for the medical bills it had paid by following a portion of the recovery “into the [Sereboffs'] hands” “as soon as [the settlement fund] was identified,” and imposing on that portion a constructive trust or equitable lien. Ibid.

(c) The Sereboffs' contention that the lower courts erred in allowing enforcement of the “Acts of Third Parties” provision, without imposing limitations that would apply to an equitable subrogation action, is rejected. Mid Atlantic's claim is not considered equitable because it is a subrogation claim. Rather, it is considered equitable because it is indistinguishable from an action to enforce an equitable lien established by agreement, of the sort epitomized by Barnes.