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Clearing Claims: McCutchen Makes a Mess of Your Settlement

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By William Peacock, Esq. on August 28, 2013 7:01 AM

Meet Mr. McCutchen. In order to obtain a $110,000 settlement, he agreed to a 40 percent contingency fee. His recovery was then $66,000. US Airways, however, had an ERISA lien of $66,866 in medical expenses.

For the privilege of acting as US Airways' collection agent, he would've ended up $866 in the hole, had it not been for a contract that was silent on attorneys fees -- and you can bet that after U.S. Airways v. McCutchen, such contracts will no longer be so silent.

Circuit Split Resolved

Last month, we wrote about the circuit split that existed in regards to ERISA liens. Most circuits held that the language of the contract governed when enforcing these liens, even when that language ran contrary to such defenses as the "make whole" doctrine, where the injured party is made whole before others (such as the lien-holder), or the "common fund" rule, where the lien is reduced proportionally to account for attorney's fees (US Airways' lien would be docked 40 percent).

Other circuits, namely the Ninth and the Third (which decided U.S. Airways v. McCutchen initially), held that equitable liens enforced by section 502(a)(3) were subject to equitable defenses (such as "make whole" and "common fund").

The Supreme Court, in April, mostly sided with the majority of the circuits here and held that the plain language of the contract controls. However, where the contract is silent on a matter, such as recovery costs, the common fund rule is the default, and the lien should be reduced proportionally to account for attorney's fees.

Application to Practice

For you and your client, you'll need to closely examine the language of the ERISA plan before coming to a settlement. If there is no language assigning costs of recovery, reduce the ERISA lien proportionally to account for your contingency gee.

If there is language that governs, account for it before negotiating a settlement. Otherwise, your client could end up with a negative recovery.

For more on this landmark Supreme Court decision, see our practice guide: What US Airways v. McCutchen Means for Your Personal Injury Cases.

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