orders, approved by a state court, allocated none of the settlement between the insured and a tortfeasor to medical expenses. Id. at *2, *3. U.S. Healthcare argued that it should be able to recover the benefits it advanced under an unjust enrichment theory regardless of the language of the plan. Id. at *7. The Southern District of New York rejected U.S. Healthcare's analysis, because "according to the terms of the contract, USH should reasonably expect to be reimbursed, and the O'Briens should reasonably expect to reimburse USH, 'only when' the O'Briens receive money for 'hospital, medical or surgical services.'" Id.
These courts' analyses are consistent with the language of § 1132(a)(3) which allows fiduciaries to seek equitable relief in order to enforce the terms of ERISA plans. The statute itself indicates that the extent of the equitable relief available to the Plan turns on the language of the Plan. § 1132(a)(3)(B)(ii) (certain parties may seek equitable relief "to enforce . . . the terms of the plan.").
b. Construction of the Return of Over Payment clause
In the case at hand, the Return of Over Payment clause in the Plan permits Lincoln National to seek reimbursement "from any amount of money received by the insured individual from the third party, or its insurer." (emphasis added). The Return of Over Payment clause continues, "The repayment will be to the extent of the benefits paid by Lincoln National, but will not exceed the amount of the payment received by the individual from the third party, or its insurer." The clause purports to be binding on the insured individual "whether . . . the medical or dental charges . . . are itemized in the third party payment." The language in the reimbursement provision in the Plan appears to favor the Plan to an even greater extent than plan language in McIntosh, Singleton, and Dugan. The terms of the Plan do not in any way imply that Lincoln National would be able to recover only from settlement funds allocated to medical expenses.
Language in the Plan limiting the Plan's right of recovery to medical or dental charges resulting from the negligent or intentional act of a third party suggests that the funds received by the Chitkins by way of their settlement with Wolf on a strict liability theory are not subject to the Return of Over Payment clause. Although the Plan does not expressly rule out the possibility that strict liability settlements are subject to the reimbursement provision, this Court will construe all doubts about this point in favor of the insured parties. See Saltarelli v. Bob Baker Group Medical Trust, 35 F.3d 382, 387 (9th Cir. 1994).
c. The strict liability characterization of the Wolf settlement
Lincoln National contends that this Court should ignore the strict liability characterization of the Wolf settlement for two reasons. First, Lincoln National argues that the Wolf Settlement cannot properly be characterized as the settlement of a strict liability cause of action. Second, Lincoln National contends that it cannot be bound by the terms of the Chitkins' settlement with Wolf because Lincoln National was not a party to those proceedings.
Lincoln National argues that the strict liability provided for in Kriegler v. Eichler Homes, Inc., 269 Cal. App. 2d 224, 227, 74 Cal. Rptr. 749 (1969), applies only to mass produced items. Since the duck ponds were not mass produced, Lincoln National argues, Wolf could not be strictly liable for Danielle's injuries that resulted from falling in the pond.
Lincoln National's analysis is flawed. California courts did not stop at mass produced items. In Del Mar Beach Club Owners Assoc., Inc. v. Imperial Contracting Co., 123 Cal. App. 3d 898, 176 Cal. Rptr. 886 (1981), a California Court of Appeal held that the defendants, who "designed, developed, and constructed" the improvements on real property, could be held strictly liable for defects such as: "the cracking, chipping and peeling of the tennis court surfaces; the rusting and corroding of exterior railings and guardrails; the sinking of the pavement on the east side of the pool; the death of several trees; the subsiding of the grading and paving on the eastern portion of the realty; the leaking of water within the garage and miscellaneous stairwells; and the rusting and corroding of numerous door and window sills throughout the units." Id. at 912-13.
The Del Mar Beach Club court relied on Stuart v. Crestview Mut. Water Co., 34 Cal. App. 3d 802, 811, 110 Cal. Rptr. 543 (1973). Del Mar Beach Club, 123 Cal. App. 3d at 913. The Stuart case involved a single defective water distribution system. Neither the Stuart nor the Del Mar Beach Club court appears to have considered whether the defective items were "mass produced."
If a developer can be held strictly liable for game-threatening defects in tennis courts, a developer certainly can be strictly liable for life-threatening defects in duck ponds. The number of duck ponds produced by Wolf is irrelevant. Instead, the only relevant factors appear to be that Wolf had responsibility for producing the ponds and that a reasonable home buyer would not hire its own architect or engineer to evaluate the design of the ponds before purchasing a house in the development. See Del Mar Beach Club, 123 Cal. App. 3d at 911-12.
Lincoln National's argument that it should not be bound by the Wolf settlement because Lincoln National was not a party to the proceedings between the Chitkins and Wolf also fails to persuade this Court that it should ignore the strict liability characterization of the Wolf settlement. The Chitkins argue persuasively that Lincoln National could have asserted some control over litigation between the Chitkins and the tortfeasors by intervening in the litigation. Since Lincoln National did not attempt to intervene, the Chitkins argue, Lincoln National should not be heard to question the terms of the settlement.
California law offered Lincoln National at least a chance to intervene. California Code of Civil Procedure § 387(a) provides, in pertinent part, that "upon timely application, any person, who has an interest in the matter in litigation, or in the success of either of the parties, or an interest against both, may intervene in the action or proceeding." Courts interpreting section 387(a) have found that it vests discretion in the trial court to determine whether to permit intervention. E.g., California Physicians' Serv. v. Superior Ct., 102 Cal. App. 3d 91, 95, 162 Cal. Rptr. 266 (1980). Before deciding to allow a third party to intervene, courts must find that 1) "the intervener's interest in the litigation must be direct and immediate rather than consequential," 2) "the issues must not be enlarged by the intervention," and 3) "the reasons for intervention must outweigh the rights of the original parties to litigate in their own way." California Physicians', 102 Cal. App. 3d at 95; People ex rel. Rominger v. County of Trinity, 147 Cal. App. 3d 655, 660-61, 195 Cal. Rptr. 186; Fireman's Fund Ins. Co. v. Gerlach, 56 Cal. App. 3d 299, 128 Cal. Rptr. 396 (1976).
In the case at hand, Lincoln National probably could have met the burden on it to show that it satisfied all three factors. Lincoln National's interest in the litigation obviously was substantial. Characterization of the Chitkin's cause of action against Wolf and the allocation of damages in all but one of the Chitkins' settlements with various tortfeasors have affected Lincoln National's reimbursement right under the plan. In addition, it appears that the same issues probably would have arisen in the underlying litigation had Lincoln National intervened; the issues simply might have been resolved differently. For example, the parties probably would have had to allocate amounts between general and specific damages. The allocation just might have been different with Lincoln National present. Finally, Lincoln National's interests in the settlements probably would have outweighed the interests of the Chitkins and the various tortfeasors in controlling the course of the litigation. The Chitkins had an obvious--though not necessarily cognizable--interest in keeping Lincoln National out of its settlement with Wolf: A settlement premised on strict liability would freeze out Lincoln National's reimbursement right. Wolf might have had a legitimate interest in characterizing the settlement as one for strict liability--a settlement agreement acknowledging negligent conduct might have harmed its ability to obtain insurance at reasonable rates in the future. Nevertheless, Lincoln National's interest in protecting its legitimate reimbursement rights almost certainly would have trumped the Chitkins' and Wolf's interests in pursuing litigation as they saw fit. In short, Lincoln National cannot say that any efforts it might have made to intervene in the state court proceedings would have been in vain. Unlike the insurance company in Provident Life & Accident Ins. Co. v. Linthicum, 930 F.2d 14, 15 (8th Cir. 1991), Lincoln National did not even attempt to intervene in the state court proceedings between the Chitkins and Wolf. Consequently, this Court will not permit Lincoln National to challenge, after the fact, the terms of the settlement, including the strict liability characterization.
d. Application of the Return of Over Payment clause to the facts at hand
The Fourth Circuit articulated a test for unjust enrichment in Provident Life & Accident Ins. Co. v. Waller, 906 F.2d 985 (4th Cir. 1990). Waller involved an ERISA plan, an insurance company, an insured, and a reimbursement provision similar to that in the case at hand. Id. at 986. The court explained that "three elements encompass the equitable remedy of unjust enrichment and quasi-contract:"
the plaintiff must show that (1) he had a reasonable expectation of payment, (2) the defendant should reasonably have expected to pay, or (3) society's reasonable expectations of person and property would be defeated by nonpayment.
Id. at 993-94 (citing C. Kaufman, Corbin on Contracts § 19A, at 50 (Supp. 1989)).
In Waller, as in the case at hand, the insurance company did not demand a written reimbursement agreement from the insured before advancing payments for medical care. Id. at 986. Nevertheless, the Fourth Circuit held in Provident's favor, noting that "the facts of the instant case fit the archetypal unjust enrichment scenario." Id. at 993. The Fourth Circuit found that Provident reasonably expected to be reimbursed; that Waller was aware of the "Acts of Third Parties" provision in the ERISA plan when she requested and accepted benefits; and society's interests in efficient ERISA plan administration would be served by allowing Provident to obtain equitable relief. Id. at 994.
The Chitkins' twelfth affirmative defense is valid in part and invalid in part under the Waller court's unjust enrichment analysis. On its face, the reimbursement provision appears to make any funds recovered through settlement subject to Lincoln National's reimbursement right, as long as those settlement funds were not obtained by way of a strict liability settlement. As a result, Lincoln National had a reasonable expectation of repayment from any settlement (with the exception of a strict liability settlement) regardless of any allocation within the settlement. In addition, the Chitkins had at least constructive notice that any amount they might recover would be subject to Lincoln National's reimbursement right. Finally, society would reasonably expect an insurance company to enforce the terms of an ERISA plan. If this Court were to construe the Plan in the manner suggested by the Chitkins, insured individuals could defeat their plan's interests by entering into collusive settlements. Collusive settlements would increase uncertainty, and uncertainty surrounding ERISA plans' rights to repayment ultimately would increase plans' costs, defeating society's reasonable interest in efficient ERISA plans.
The tortfeasors settled with the Chitkins for $ 3,256,967.20. The parties to the settlements allocated eight percent of each of the settlements (except the Ed and Judy Way settlement) to John and Nancy Chitkin's future wrongful death claims.
Of the $ 2,996,409.82 remaining, $ 1,794,000 (92% of $ 1,950,000) came from the Wolf strict liability settlement which is not subject to Lincoln National's reimbursement right. That leaves $ 1,046,409.82 from which Lincoln National may seek recovery. The Chitkins' attorney received $ 744,102.45 in attorneys fees on a contingent fee basis for obtaining a $ 2,996,409.82 recovery for the Chitkins. In other words, he received 24.8% of Danielle Chitkin's total recovery.
Using the 24.8% figure, this Court finds that under the terms of the Return of Over Payment provision, Lincoln National must deduct 24.8% from its $ 701,048.66 reimbursement request to account for its pro rata share of attorneys fees. In other words, Lincoln National is entitled to $ 701,048.66 minus $ 173,860.08 (24.8% of $ 701,048.66) for a total of $ 527,188.60.
E. Attorney Fees and Costs
Lincoln National asks this Court to exercise its discretion under 29 U.S.C. § 1132(g)(1) to award it attorneys fees and costs. The Ninth Circuit articulated factors for district courts to consider when ruling on requests for attorney fees and costs in Hummell v. S.E. Rykoff & Co., 634 F.2d 446, 452 (9th Cir. 1980). The Ninth Circuit wrote:
District courts should have guidelines to apply in the exercise of their discretion under § 1132(g). They should consider these factors among others: (1) the degree of the opposing parties' culpability or bad faith; (2) the ability of the opposing parties to satisfy an award of fees; (3) whether an award of fees against the opposing parties would deter others from acting under similar circumstances; (4) whether the parties requesting fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA; and (5) the relative merits of the parties' positions.
Id. at 453. Accord Losada v. Golden Gate Disposal Co., 950 F.2d 1395, 1401 (9th Cir. 1991); Smith v. CMTA-IAM Pension Trust, 746 F.2d 587, 590 (9th Cir. 1984). The Ninth Circuit also has stated, however, that "no one of the Hummell factors . . . is necessarily decisive, and some may not be pertinent in a given case." Carpenters So. Cal. Admin. Corp. v. Russell, 726 F.2d 1410, 1416 (9th Cir. 1984).
In considering a motion for attorneys fees, the district court "should apply its discretion consistent with the purposes of ERISA, those purposes being to protect employee rights and to secure effective access to federal courts." Smith, 746 F.2d at 589.
In the case at hand, the Hummell factors do not favor Lincoln National. First, Lincoln National argues that the Chitkins have recovered more than $ 3,200,000 through settlement but refuse to reimburse Lincoln National under the Plan. The Chitkins' refusal to pay, Lincoln National argues, demonstrates their bad faith. This Court, however, does not consider the Chitkins' refusal to forego their defense bad faith conduct. Due process guarantees the Chitkins the right to defend against Lincoln National's law suit, the right to point out the murky language of the Plan, and to challenge Lincoln National's conduct in enforcing the Plan.
As for the second factor, this Court will assume without deciding that the Chitkins could satisfy an award of attorneys fees.
The third factor requires this Court to determine whether an award of fees against the opposing parties would deter others from acting under similar circumstances. In the case at hand, this Court would not want to deter individuals in the Chitkins' position from mounting vigorous defenses. The Chitkins challenged a poorly worded term of a plan and an insurance company's right to recover based on that term. Their efforts might lead to more precision in the drafting of ERISA plans in the future. The Chitkins also raised novel defenses under ERISA and have helped flesh out the law of affirmative defenses under the statute.
The fourth factor favors Lincoln National. Lincoln National sought to enforce a term in an ERISA plan. By demonstrating the validity of the reimbursement provision, Lincoln National demonstrated that ERISA plans may use such cost-saving provisions. Lincoln National clearly took steps toward clarifying significant legal questions about ERISA.
Finally, this Court must consider the relative merit of the parties' positions. Lincoln National convinced two Ninth Circuit judges that it could bring an action for reimbursement. One Ninth Circuit judge and one district judge did not agree. In other words, Lincoln National is far from a clear winner in this case.
Although Lincoln National took steps toward clarifying the law of ERISA, Lincoln National has not shown that the Chitkins did not also make a contribution to the law or that the Chitkins acted in bad faith in opposing Lincoln National's request for reimbursement. This is an exceptionally close case that has required extensive briefing of a number of complicated issues. The Hummell factors do not tip in Lincoln National's favor. Both sides should bear their own attorneys fees and costs.
For the reasons given above, Lincoln National's motion for summary judgment is GRANTED. Lincoln National is entitled to restitution in the amount of $ 527,188.60. Lincoln National is not entitled to attorneys fees or costs under 29 U.S.C. § 1132(g)(1).
IT IS SO ORDERED:
John S. Rhoades, Sr.
United States District Judge
On November 24, 1993 the Ninth Circuit issued the following order as a Memorandum:
[EDITOR'S NOTE: THIS DOCUMENT IS REPORTED AT: 1993 U.S. App. LEXIS 31024.]