78 F.3d 123 (3rd Cir. 1996), 95-5180, Ryan by Capria-Ryan v. Federal Express Corp.

Docket Nº:95-5180.
Citation:78 F.3d 123
Party Name:Theresa Lyn RYAN, An infant by her Guardian Ad Litem, Alberta CAPRIA-RYAN; Gregory L. Ryan, Jr., An infant by his Guardian Ad Litem, Alberta Capria-Ryan; Brigid Ryan, An infant by her Guardian Ad Litem, Alberta Capria-Ryan; Alberta Capria-Ryan, Individually; Gregory L. Ryan, Individually v. FEDERAL EXPRESS CORPORATION, Appellant.
Case Date:March 14, 1996
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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78 F.3d 123 (3rd Cir. 1996)

Theresa Lyn RYAN, An infant by her Guardian Ad Litem,

Alberta CAPRIA-RYAN; Gregory L. Ryan, Jr., An infant by his

Guardian Ad Litem, Alberta Capria-Ryan; Brigid Ryan, An

infant by her Guardian Ad Litem, Alberta Capria-Ryan;

Alberta Capria-Ryan, Individually; Gregory L. Ryan, Individually

v.

FEDERAL EXPRESS CORPORATION, Appellant.

No. 95-5180.

United States Court of Appeals, Third Circuit

March 14, 1996

Submitted Pursuant to Third Circuit LAR 34.1(a) Jan. 25, 1996.

On Appeal from the United States District Court for the District of New Jersey (D.C. No. 94-cv-01467).

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Leonard A. Wolkstein, Gutterman, Wolkstein, Klinger & Yohalem, Westfield, New Jersey, for Appellees.

Elizabeth C. Smith, Federal Express Corporation, Memphis, TN, for Appellant.

Before: COWEN and McKEE, Circuit Judges and POLLAK, District Judge. [*]

OPINION OF THE COURT

COWEN, Circuit Judge.

In this case we must decide the extent of the power of federal courts to develop federal common law in cases involving the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001-1461. Specifically, is such power sufficiently broad to permit the district court to override a subrogation provision in an ERISA-regulated plan on the ground that the plan would be unjustly enriched if it were to be enforced as written. In the instant case the district court granted the motion by Alberta, Gregory, Brigid and Theresa Ryan ("the Ryans") for summary judgment, ruling that appellant Federal Express--despite having paid the plaintiffs over $190,000.00 under the terms of its health plan before plaintiffs settled their malpractice claims--was not entitled to full reimbursement. The district court ruled that the health plan's subrogation provision could not be given effect because Federal Express would receive an "unjust benefit" if it were not required to deduct from its subrogation lien a pro rata share of the attorneys' fees that the plaintiffs had incurred in obtaining their malpractice settlement.

In granting the Ryans' motion for summary judgment, the district court failed to articulate how its effective revision of the terms of the Federal Express Plan served to validate an important statutory policy of ERISA. Such a determination is a necessary antecedent to overriding an express provision of a benefits plan within the purview of ERISA. Because the district court interpreted the authority of federal courts to develop federal common law under ERISA too broadly, we will reverse the February 15, 1995, order of the district court granting the Ryans summary judgment.

I.

Alberta Capria-Ryan and Gregory L. Ryan are employees of Federal Express. Theresa Lyn Ryan is their infant daughter. The Ryans are beneficiaries under the Federal Express Group Health Plan ("the Plan"), which is a self-funded employee welfare benefit plan within the meaning of ERISA. 29 U.S.C. § 1002(1).

Article 11, Section 11.2 of the Plan provides, in relevant part, that "[e]ach Covered Participant shall be deemed conclusively to have agreed to and accepted the terms and conditions of the Plan when he becomes a Covered Participant." App. at 192. The Plan also contains a subrogation/reimbursement clause which requires full reimbursement of all benefits paid by the Plan if the amount of a covered employee's net recovery exceeds the amount of benefits paid by the Plan. Article 8, Section 8.5 of the Plan provides in pertinent part that

if benefits are paid on account of an illness resulting from the intentional actions or from the negligence of a third party, the Plan shall have the right to recover, against any source which makes payments or to be reimbursed by the Covered Participant who receives such benefits, 100% of the amount of covered benefits paid. (Subrogation in connection with the Insured Options shall be governed by the provisions of those Options.) If the 100% reimbursement provided above exceeds the amount recovered by the Covered Participant, less legal and attorney's fees incurred by the Covered Participant in obtaining such recovery (the Covered Participant's "Net Recovery"), the Covered Participant shall reimburse the Plan the entire amount of such Net Recovery.

Id. at 185-86 (emphasis added). Similarly, pages fifty-five and fifty-six of Your Employee Benefits, the summary plan description,

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entitled "SUBROGATION (THIRD-PARTY RESPONSIBILITY)," provide that

[i]f your illness or injury is caused by the actions of a third party, payment of your expenses is the responsibility of that third party. If you receive any payment from the third party, the Company expects 100% reimbursement for any plan benefits paid. However, if the payment you receive from the third party, less your attorneys' fees and other legal expenses, is not enough to reimburse benefit payments at 100%, you must reimburse the plan 100% of what is left after paying your attorneys' fees and other legal expenses.

Id. at 293. The Ryans do not claim that Federal Express made any representations to them about the requirements of the subrogation provision other than those expressly set forth in the Plan.

The Ryans applied for benefits under the Plan after Mrs. Ryan gave birth to Theresa Ryan. Theresa Ryan was born on October 5, 1989, afflicted with cerebral palsy and severe brain damage. On February 27, 1991, the Ryans filed a malpractice action in the New Jersey Superior Court, Law Division, Union County. Before the Ryans recovered any money from the parties named in their malpractice action, they obtained over $190,000.00 under the Plan. The Ryans' malpractice case ultimately settled on January 18, 1994. The Ryans' recovery under the settlement agreement totaled $1,486,357.67. Of that sum, the Ryans' lawyers were awarded $273,635.77 in attorneys' fees, which amounted to 18.4% of the settlement award.

After the settlement was finalized, Federal Express asserted a subrogation lien against the Ryans' recovery for $191,793.65. The Ryans offered to pay only part of the subrogation lien, insisting that they be permitted to subtract a pro rata share of counsel fees they had incurred (18.4% of $273,635.77, or $35,290.03) in pursuing their malpractice claims in state court. Federal Express rejected the Ryans' proposal, asserting that the Plan unambiguously required the Ryans to remit the entire $191,793.65 because their net recovery far exceeded this amount.

On March 18, 1994, the Ryans filed a complaint in state court, in which they sought a judgment directing Federal Express to pay a pro rata share of their attorneys' fees. The Ryans contended that they were entitled under state law to deduct a pro rata share of reasonable attorneys' fees from the subrogation lien and that Federal Express was prohibited from denying them benefits of any kind under the terms of the Plan. On March 30, 1994, Federal Express removed the case to the United States District Court for the District of New Jersey pursuant to 28 U.S.C. § 1441.

Both parties moved for summary judgment and the Ryans' arguments prevailed. The district court refused to enforce the Plan's subrogation clause, finding that the...

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