Westaff (USA), Inc. v. Arce: Court Follows Knudson and Finds No Remedy for Plan Where Complaint Did Not Seek Restitution

Thomas H. Lawrence¹

The United States Court of Appeals for the Ninth Circuit decided Westaff (USA), Inc. v. Arce, Nos. 00-17178 and 01-15751, 2002 U.S. App. LEXIS 16469 (9th Cir. Aug. 15, 2002), on August 15, 2002. The Court held that seeking declaratory relief and specific performance did not constitute equitable relief under Great-West Life & Annuity Ins. Co. v. Knudson , 122 S. Ct. 708 (2002).

On November 19, 1997, Betty Arce was injured in an automobile accident. The Western Staff Services Employee Health Plan (the "Plan") paid in excess of $30,000 on behalf of Arce because of these injuries. Arce recovered another $15,000 from the third party liability carrier for the party who caused her injuries.

The Plan and reimbursement agreement required priority reimbursement, to the extent of benefits paid, from other party recoveries. Despite these provisions, Arce refused to turn over the $15,000 to the Plan. The $15,000, however, was placed in an escrow controlled by the parties.

Westaff initiated an action in federal court seeking a determination of the Plan's rights under ERISA. The action was filed before the Supreme Court decided Knudson and Westaff's attorneys only sought declaratory relief and specific performance. Westaff could not have realized the importance of specifically seeking restitution in the form of a constructive trust. This was the form of "equitable relief" that the majority in Knudson recognized was typically available in equity, even if the party sought a monetary payment, so long as the funds were "identifiable" and the party seeking the funds was entitled to the funds. See Great-West Life & Annuity Ins. Co. v. Randall Brown ,192 F. Supp. 2d 1376 (M.D. Ga. 2002); Bauer v. Gylten , No. A3-00-161, 2002 U.S. Dist. LEXIS 7246 (D.N.D. Apr. 22, 2002); IBEW-NECA Southwestern Health & Benefits Fund v. Douthitt , 2002 U.S. Dist. LEXIS 11430 (N.D. Tex. June 25, 2002); In Re Carpenter , No. 00-2348, 2002 U.S. App. LEXIS 10615 (4th Cir. June 3, 2002).

The district court dismissed Westaff's action and Westaff appealed. On August 15, 2002, the Ninth Circuit affirmed the district court's decision. The Court reasoned "Westaff is seeking to enforce a contractual obligation for the payment of money, a classic action at law and not an equitable claim." The Court found it immaterial that "the money at issue, a legitimate personal injury settlement to which the beneficiary [was] entitled, [had] been placed in an escrow account and [was] specifically identifiable." The result in Westaff is much like Hotel & Restaurant & Bar Employees Fringe Benefit Funds v. Mui Trong , No. 01-873, 2002 U.S. Dist. LEXIS 1697 (D. Minn. Jan. 31, 2002). There, the Court held in favor of the plan participant because the plan did not seek the type of equitable relief, restitution, that the Supreme Court held was typically available in equity.

The Westaff decision is significant only because it is the first post- Knudson decision to be decided by the Ninth Circuit. The case should be remembered a few years from now as an aberration, so long as plans continue to emphasize to the Ninth Circuit, and other courts, the niche carved by the Supreme Court in Knudson .

[1]Thomas H. Lawrence is a partner in the Memphis, Tennessee law firm of Lawrence & Russell, LLP, and represents employers, health plans, and insurers in healthcare and property and casualty subrogation and other employee benefits and employment matters and related litigation in state and federal courts throughout the United States. He was one of the attorneys who represented Great-West Life in Knudson, and has been counsel of record in many of the otherpost-Knudson decisions that have clarified the scope of relief available under ERISA. He can be reached at toml@lawrencerussell.com