A recent federal appeals court ruling provides guidance to benefit plans seeking to recover benefit overpayments made to plan participants or beneficiaries. In Zirbel v. Ford Motor Co., __ F.3d.__, 2020 U.S. App. LEXIS 36081 (6th Cir. 2020), the Sixth Circuit Court of Appeals affirmed a lower court ruling requiring a beneficiary to return $243,190 in retirement benefit overpayments made by Ford Motor Company (“Ford”). The case applies the Supreme Court’s holding in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 577 U.S. 136 (2016), as it relates to benefit plans’ rights under ERISA to recover benefit overpayments.
In 2013, Ford paid pension benefits to Donna Jean Zirbel, the ex-spouse of a participant in the Ford Motor Company General Retirement Plan (“Plan”), in a lump sum of $351,690. Zirbel paid taxes on the funds and deposited the rest in her bank account. She later moved some of the money to other accounts and gave some to her children. In 2017, Ford determined that, due to an error in calculating the benefit, Zirbel received an overpayment from the Plan in the amount of $243,190.
Ford requested that Zirbel return the overpaid amount to the Plan as required under its terms. Zirbel appealed the request to return the overpaid amount and, when the Plan denied her appeal, she filed suit asking the federal district court to declare that she was entitled to keep the overpayment. Ford, as the Plan sponsor and administrator, filed a counterclaim seeking an equitable lien for the overpayment amount under ERISA Section 502(a)(3)(B). The district court granted Ford’s motion for summary judgment and required Zirbel to return the $243,190 overpayment to the Plan. Zirbel appealed the decision to the Sixth Circuit Court of Appeals.
The first issue the Sixth Circuit addressed on appeal was whether the Plan’s decision to request repayment in full was arbitrary and capricious. Under the applicable standard of review, if the language of the plan document gives the trustees discretionary authority to interpret the terms of the plan, then a court may not “second-guess” the decision unless it was arbitrary and capricious. Zirbel, 2020 U.S. App. LEXIS 36081 at *4.
The Sixth Circuit held that Ford’s decision to demand repayment from Zirbel was not arbitrary and capricious. The court relied on the language of the Plan, which states that in the event of an overpayment, the amount of the overpayment “shall be returned” to the Plan. The court concluded that it was not arbitrary and capricious for Ford to demand repayment because it has a fiduciary duty to the other participants and beneficiaries to administer the Plan according to its terms.
Second, the Sixth Circuit considered whether the district court’s order for Zirbel to repay $243,190 was an award of equitable relief, rather than legal relief. Under ERISA Section 502(a)(3)(B), a benefit plan is entitled to obtain “appropriate equitable relief” to enforce the terms of the plan, which includes imposing a lien on specific funds or property in the defendant’s possession. However, as the court in Zirbel noted, “[s]ometimes a wrongful possessor will argue that she no longer possesses the ‘particular funds’ to which a lien once attached, preventing recovery in equity.” Zirbel, 2020 U.S. App. LEXIS 36081 at *7.
The Supreme Court previously addressed this situation in Montanile in the context of a group health plan seeking reimbursement of amounts overpaid for medical benefits. In that case, the Supreme Court held that an equitable lien did not attach to a beneficiary’s general assets if the beneficiary’s general assets could not be traced back to the health plan’s original payment. 577 U.S. at 151. Montanile explained that if funds are spent on “traceable items” such as tangible purchases of cars or homes, the equitable lien attaches to the traceable items and remains intact. On the other hand, if the funds are spent on nontraceable items such as food, services or travel, no equitable lien can attach. The Supreme Court also noted in dicta that when funds can be traced to an account that contains other assets, the equitable lienholder obtains a lien on the account containing the commingled funds.
Applying Montanile to the overpayment in Zirbel, the Sixth Circuit held that Ford could recover its overpayment under ERISA Section 502(a)(3)(B) because it retained an equitable lien on the overpaid funds, even if they were commingled with Zirbel’s other assets. The deposit of the overpayment into Zirbel’s main bank account, as well as other accounts to which amounts were subsequently transferred, were all “traceable” under the analysis in Montanile and gave the plan an equitable lien over all such accounts that contained the commingled funds, up to the amount of the overpayment.
Third, the Sixth Circuit rejected Zirbel’s argument that Ford should be equitably estopped from recovering the overpayments. When Zirbel received Ford’s lump sum offer, she knew the amount was incorrect and asked Ford to recalculate her benefits. Zirbel asserted that despite her request to recalculate her benefits, Ford did not change the lump sum payment to Zirbel and therefore Ford should be bound by its confirmation of the lump sum payment.
To bring an equitable estoppel claim in the Sixth Circuit, Zirbel had to show that: (i) Ford made a fraudulent representation to her, (ii) that she did not know the truth behind Ford’s representations, and (iii) that she justifiably relied on Ford’s representations to her detriment. The Sixth Circuit concluded she could not meet any of these requirements because Ford did not know it paid the wrong lump sum amount and, conversely, Zirbel was aware that she received an overpayment. The court also explained that Zirbel’s reliance on Ford’s recalculation of her lump sum benefit payment was not reasonable or justifiable because it was clearly inconsistent with the terms of the Plan. Accordingly, the Sixth Circuit affirmed the lower court ruling requiring Zirbel to return the $243,190 overpayment to the Plan.
The Sixth Circuit’s holding in Zirbel is a key decision in favor of ERISA plans for several reasons. First, the court held that, under the arbitrary and capricious standard of review, the Plan acted properly when it demanded return of the overpayment as required by its terms. Furthermore, the decision clarifies the appropriate application of Montanile in situations where the overpaid funds are commingled with other assets belonging to the beneficiary. The opinion provides ERISA plans with additional legal precedent to pursue repayment where the overpaid amounts have been commingled with other funds in the recipient’s bank accounts by allowing plans to obtain an equitable lien on the accounts holding the commingled funds, up to the amount of the overpayment.