Scholtens v. Schneider
Annotate this Case
NOTICE: Under Supreme Court Rule 367 a party has 21 days after
the filing of the opinion to request a rehearing. Also, opinions
are subject to modification, correction or withdrawal at anytime
prior to issuance of the mandate by the Clerk of the Court.
Therefore, because the following slip opinion is being made
available prior to the Court's final action in this matter, it
cannot be considered the final decision of the Court. The
official copy of the following opinion will be published by the
Supreme Court's Reporter of Decisions in the Official Reports
advance sheets following final action by the Court.
Docket No. 79686--Agenda 18--May 1996.
RANDY SCHOLTENS, Appellee, v. JEFFREY SCHNEIDER et al.
(Electrical Insurance Trustees, Appellant).
Opinion filed September 19, 1996.
CHIEF JUSTICE BILANDIC delivered the opinion of the court:
Electrical Insurance Trustees (Trustees) appeal from an
appellate court judgment that affirmed a circuit court order
holding the Trustees liable under the common fund doctrine for
attorney fees and costs expended in recouping the Trustees'
subrogation lien. The Trustees claim that section 514 of the
Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C.
1144 (1982)) preempts application of the common fund doctrine to
self-funded employee welfare benefit plans. We hold that ERISA does
not preempt application of the common fund doctrine.
The plaintiff, Randy Scholtens, an electrician, was a
participant in an employee benefit plan as a member of the Illinois
Brotherhood of Electrical Workers, Local 134. It is undisputed that
the plan is a welfare benefit plan within the meaning of ERISA (29
U.S.C. 1001 et seq. (1982)). The appellant, Trustees, administers
the plan pursuant to a trust agreement between Local 134 and the
Electrical Contractor Association of the City of Chicago. The plan
is a self-funded benefit plan which provides medical and disability
benefits to union electrical workers.
On December 22, 1989, Scholtens was injured in a non-work-
related automobile accident. The accident occurred when a vehicle
in which Scholtens was a passenger was struck by another vehicle.
Scholtens' injuries required hospitalization and surgery. Pursuant
to the plan, the Trustees paid medical bills and disability
benefits totalling $42,921.75 to Scholtens for those injuries.
Scholtens subsequently retained an attorney to pursue a cause
of action for damages arising out of the automobile accident.
Scholtens filed a lawsuit against the two drivers involved in the
accident, Jeffrey Schneider and L.C. O'Banner. Prior to trial,
Scholtens settled his claim against the two defendants for
$100,000.
The Trustees never made an independent effort to seek
reimbursement of the benefits paid to Scholtens from Schneider or
O'Banner, nor did they attempt to intervene in Scholtens' pending
litigation against those defendants. Following Scholtens'
settlement of the lawsuit, however, the Trustees demanded full
reimbursement of all of the benefits paid to Scholtens. The
Trustees premised their demand on the subrogation clause contained
in the benefit plan and a subrogation agreement that Scholtens
signed on January 3, 1990, shortly after the accident.
The subrogation clause, which appears in the booklet
explaining plan benefits to participants, provided:
"In some circumstances, such as an automobile accident,
a third party may ultimately pay medical expenses for you
or an enrolled dependent through an insurance settlement
or otherwise. In that case, you must reimburse benefits
paid by the Plans to the extent they are paid by the
third party."
The subrogation agreement that Scholtens signed after his accident
provided, in part:
"The undersigned hereby agrees, in consideration of money
paid or to be paid by the Electrical Insurance Trustees
to me as an employee under a Plan of benefits maintained
by the Trustees, or to another on my behalf as such
employee, because of loss or damage for which I or my
dependent may have a cause of action against a third
party who caused this loss or damage, the Trustees shall
be subrogated, to the extent of such payment, to any and
all recovery by me or my dependent, and such right shall
be assigned to the Trustees by me as a condition of the
payment of such money by the Trustees."
Faced with the demand for complete reimbursement by the
Trustees, Scholtens' attorney filed a petition to adjudicate the
Trustees' subrogation lien in the court where Scholtens' tort
action was pending. The trial court applied the common fund
doctrine and directed that the amount Scholtens owed to the
Trustees would be reduced in accordance with the attorney fees and
costs incurred in the litigation from $42,921.75 to $28,286.76. The
trial court stated that it did not adjudicate the Trustees' rights
under the terms of either the ERISA plan or the subrogation
agreement, but simply applied the common fund doctrine to the facts
before it.
The appellate court affirmed, rejecting the Trustees' claim
that ERISA preempted the application of the common fund doctrine.
We allowed the Trustees' petition for leave to appeal. 155 Ill. 2d
R. 315. Amicus briefs were filed on behalf of both the appellant
and the appellee.
ANALYSIS
The issue in this appeal is whether section 514 of ERISA (29
U.S.C. 1144 (1982)) preempts application of the common fund
doctrine to self-funded employee benefit plans. The question of
whether a federal statute, such as ERISA, preempts a particular
state law is one of congressional intent. Metropolitan Life
Insurance Co. v. Massachusetts, 471 U.S. 724, 738, 85 L. Ed. 2d 728, 739, 105 S. Ct. 2380, 2388 (1985). Congress' intent to preempt
state law may be explicitly stated in the statute's language or
implicitly contained in its structure and purpose. Shaw v. Delta
Air Lines, Inc., 463 U.S. 85, 95, 77 L. Ed. 2d 490, 500, 103 S. Ct. 2890, 2900 (1983). In analyzing claims of preemption, however, the
Supreme Court has "never assumed lightly that Congress has
derogated state regulation." New York State Conference of Blue
Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. ___,
131 L. Ed. 2d 695, 704, 115 S. Ct. 1671, 1676 (1995). Instead, the
Court instructs that the analysis should begin with the presumption
that Congress did not intend to supplant state law. Travelers, 514
U.S. at ___, 131 L. Ed. 2d at 704, 115 S. Ct. at 1676.
In ascertaining congressional intent, the inquiry necessarily
begins with an analysis of the language of the statute. Travelers,
514 U.S. at ___, 131 L. Ed. 2d at 705, 115 S. Ct. at 1677. The text
of ERISA's preemption provision, section 514(a), is expansive.
Section 514(a) provides, with some exceptions not relevant here,
that:
"the provisions of this subchapter and subchapter III of
this chapter shall supersede any and all State laws
insofar as they may now or hereafter RELATE TO any
employee benefit plan." (Emphasis added.) 29 U.S.C.
1144(a) (1982).
A brief discussion of the manner in which the Supreme Court
has interpreted this provision and the progression of law relating
thereto is helpful in resolving the question presented here.
A
Prior to 1995, the Supreme Court cases analyzing preemption
claims under ERISA relied heavily upon the language of the
preemption provision and dictionary definitions of the phrase
"relate to" as the primary guides to determining whether a
particular state law was preempted. While acknowledging that
ERISA's preemption provisions were not models of legislative
drafting, the Supreme Court found that section 514(a) was
"conspicuous for its breadth." FMC Corp. v. Holliday, 498 U.S. 52,
58, 112 L. Ed. 2d 356, 364, 111 S. Ct. 403, 407 (1990). The Court
rejected an attempt to limit the scope of preemption to state laws
relating to specific subjects covered by ERISA or specifically
designed to affect employee benefit plans. Shaw, 463 U.S. at 98, 77 L. Ed. 2d at 501, 103 S. Ct. at 2900. Instead, the Court stated
that the phrase "relate to" must be given a " `broad common-sense
meaning,' " Metropolitan Life Insurance Co., 471 U.S. at 739, 85 L. Ed. 2d at 740, 105 S. Ct. at 2389, and that a state law "relates
to" an employee benefit plan "in the normal sense of the phrase, if
it has a connection with or reference to such a plan." Shaw, 463 U.S. at 96-97, 77 L. Ed. 2d at 501, 103 S. Ct. at 2900.
For more than one decade, the Court relied upon the text of
section 514(a) and, particularly, this definition of the phrase
"relate to" as the basis for deciding preemption claims. Applying
this analysis, the Court determined that any state law which
singles out plans encompassed by ERISA for special treatment
"relates to" such plans and is preempted, even if consistent with
ERISA's substantive requirements. Mackey v. Lanier Collections
Agency & Service, Inc., 486 U.S. 825, 829, 100 L. Ed. 2d 836, 843-
44, 108 S. Ct. 2182, 2185 (1988) (garnishment statute that
specifically referred to ERISA plans was preempted, but general
garnishment statute did not "relate to" ERISA plans and was not
preempted). The Court also determined that a state law may "relate
to" an employee benefit plan " `even if the law is not specifically
designed to affect such plans, or the effect is only indirect.' "
District of Columbia v. Greater Washington Board of Trade, 506 U.S. 125, 130, 121 L. Ed. 2d 513, 520, 113 S. Ct. 580, 583 (1992),
quoting Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 139, 112 L. Ed. 2d 474, 484, 111 S. Ct. 478, 483. Accordingly, state laws that
required that employee benefits plans be structured in a particular
manner were found to "relate to" such plans and were preempted.
See, e.g., Shaw, 463 U.S. at 96-97, 77 L. Ed. 2d at 501, 103 S. Ct.
at 2900 (state statute that prohibited discrimination against
pregnancy and thereby mandated that employers structure their
benefit plans to cover pregnancy-related disability, "related to"
benefit plans and was preempted); FMC Corp. v. Holliday, 498 U.S. 52, 58, 112 L. Ed. 2d 356, 364, 111 S. Ct. 403, 407-08 (1990)
(state statute that prohibited benefit plans from enforcing
subrogation liens in actions involving motor vehicle accidents
"relate[d] to" benefit plans and was preempted). The Court
cautioned, however, that the scope of the preemption provision was
not unlimited and that "[s]ome state actions may affect employee
benefit plans in too tenuous, remote, or peripheral a manner to
warrant a finding that the law `relates to' the plan." Shaw, 463 U.S. at 100 n.21, 77 L. Ed. 2d at 503 n.21, 103 S. Ct. at 2901
n.21.
In its most recent decision interpreting ERISA's preemption
clause, however, the Supreme Court expressed exasperation with this
strictly textual approach. In New York State Conference of Blue
Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. ___,
131 L. Ed. 2d 695, 115 S. Ct. 1671 (1995), the Court questioned
whether the words of limitation in section 514(a) ("insofar as they
. . . relate") did much limiting, and cautioned that "[i]f `relate
to' were taken to extend to the furthest stretch of its
indeterminacy, then for all practical purposes preemption would
never run its course, for `really, universally, relations stop
nowhere.' " Travelers, 514 U.S. at ___, 131 L. Ed. 2d at 705, 115 S. Ct. at 1677, quoting H. James, Roderick Hudson xli (New York
ed., World's Classics (1980)). The Court stressed that such an
expansive interpretation of the preemption clause would "read
Congress's words of limitation as mere sham, and *** read the
presumption against pre-emption out of the law whenever Congress
speaks to the matter with generality." Travelers, 514 U.S. at ___,
131 L. Ed. 2d at 705, 115 S. Ct. at 1677. Having determined that
"infinite relations cannot be the measure of pre-emption"
(Travelers, 514 U.S. at ___, 131 L. Ed. 2d at 705, 115 S. Ct. at
1677), the Court concluded:
"We simply must go beyond the unhelpful text and the
frustrating difficulty of defining its key term, and look
instead to the objectives of the ERISA statute as a guide
to the scope of the state law that Congress understood
would survive." Travelers, 514 U.S. at ___, 131 L. Ed. 2d
at 705, 115 S. Ct. at 1677.
Travelers therefore announced a fundamental shift in emphasis
away from mere interpretation of the words of ERISA's preemption
provision toward an analysis of Congress' objectives in enacting
ERISA. Accordingly, in considering whether section 514(a) preempts
application of the common fund doctrine to self-funded ERISA
benefit plans, we must consider not only the language of the
preemption provision, but also the structure and purpose of the
statute as a whole.
Congress enacted ERISA for the express purpose of providing
safeguards to protect the interests of participants in employee
benefit plans. 29 U.S.C. 1001(b) (1982). Congress determined that
"the soundness and stability of plans with respect to adequate
funds to pay promised benefits may be endangered" because of a lack
of uniformity in the regulation of such plans. Accordingly,
Congress enacted a comprehensive statute that subjects plans
providing employees with fringe benefits to federal regulation.
Shaw, 463 U.S. at 90, 77 L. Ed. 2d at 497, 103 S. Ct. at 2896. The
statute imposes participation, funding, and vesting requirements on
pension plans (29 U.S.C. 1051 through 1086 (1982)) and sets
uniform standards, including rules concerning reporting, disclosure
and fiduciary responsibility for both pension and welfare benefit
plans (29 U.S.C. 1021 through 1031, 1101 through 1114 (1982)).
ERISA does not require employers to provide any particular benefits
to employees and does not speak on the subject of subrogation. The
statute does not require, bar or regulate the content of
subrogation clauses in welfare benefit plans.
In Travelers, the Court explored the specific question of
congressional intent as it relates to the enactment of ERISA's
preemption clause. Section 514(a) of ERISA (29 U.S.C. 1144(a)
(1982)) reflects Congress' intent to establish regulation of
employee benefit plans as an exclusively federal concern. The Court
noted that the purpose of section 514(a) is to insure that the
administrative practices concerning employee benefit plans are
governed by a uniform body of benefit law, in order to minimize the
administrative and financial burden that employers would face if
required to comply with conflicting directives among states or
between states and the federal government. Congress recognized that
obligating an employer to satisfy the varied and perhaps
conflicting requirements of particular state laws regulating
employee benefits would make administration of a nationwide benefit
plan more difficult and inefficient, which might lead employers
with existing employee benefit plans to reduce benefits and lead
employers without such plans to refrain from adopting them. Fort
Halifax Packing Co. v. Coyne, 482 U.S. 1, 96 L. Ed. 2d 1, 107 S. Ct. 2211 (1987). Thus, the basic purpose of the preemption
provision in ERISA (29 U.S.C. 1144(a) (1982)) is to "avoid a
multiplicity of regulation in order to permit the nationally
uniform administration of employee benefit plans." Travelers, 514
U.S. at ___, 131 L. Ed. 2d at 706, 115 S. Ct. at 1677-78.
B
With these general principles in mind, we consider whether
section 514(a) of ERISA preempts application of the Illinois common
fund doctrine. We first utilize the textual approach. Under this
approach, a law that "relates to" benefit plans, in that it "refers
to or has a connection to" such plans, is preempted.
In determining whether the common fund doctrine "refers to or
has a connection to" ERISA plans, it is necessary to briefly
discuss the nature of that doctrine. In general, each party to
litigation in the United States bears its own attorney fees, absent
a specific fee-shifting statute. Over time, courts have created
several equitable exceptions to this "American Rule." One of the
earliest, and most prevalent, exceptions is the common fund
doctrine. This doctrine has been recognized and applied in the
United States Supreme Court, the lower federal courts, and in the
courts of virtually every state in the Union, including Illinois.
See Baier v. State Farm Insurance Co., 66 Ill. 2d 119 (1977);
Sprague v. Ticonic National Bank, 307 U.S. 161, 164, 83 L. Ed. 1184, 1186, 59 S. Ct. 777, 779 (1939) (fee award from fund
generated in class action is within "the historic equity
jurisdiction of the federal courts"); see generally 42 A.L.R. Fed.
134 (1979); 23 A.L.R.5th 241 (1994); S. Speiser, Attorneys' Fees
(1973).
The common fund doctrine permits a party who creates,
preserves, or increases the value of a fund in which others have an
ownership interest to be reimbursed from that fund for litigation
expenses incurred, including counsel fees. Brundidge v. Glendale
Federal Bank, F.S.B., 168 Ill. 2d 235 (1995). It is now well
established that "a litigant or a lawyer who recovers a common fund
for the benefit of persons other than himself or his client is
entitled to a reasonable attorney's fee from the fund as a whole."
Boeing Co. v. Van Gemert, 444 U.S. 472, 478, 62 L. Ed. 2d 676, 681,
100 S. Ct. 745, 749 (1980). The underlying justification for
reimbursing attorneys from a common fund, as explained by the
United States Supreme Court in three early cases, is that, unless
the costs of litigation are spread to the beneficiaries of the
fund, they will be unjustly enriched by the attorney's efforts. See
Sprague, 307 U.S. at 166-67, 83 L. Ed. at 1187, 59 S. Ct. at 779-
80; Central R.R. & Banking Co. v. Pettus, 113 U.S. 116, 126-27, 28 L. Ed. 915, 919, 5 S. Ct. 387, 392-93 (1885); Trustees of the
Internal Improvement Fund v. Greenough, 105 U.S. 527, 532, 26 L. Ed. 1157, 1160 (1882); see also Ryan v. City of Chicago, 274 Ill.
App. 3d 913 (1995).
The common fund doctrine is a common law rule of general
application. It does not single out or expressly refer to ERISA
plans, nor is it predicated upon their existence. It applies
generally to all funds created, increased or preserved by a party
in which others have an ownership interest. In this respect, the
common fund doctrine is similar to the other laws of general
applicability that the Supreme Court has held affect employee
benefit plans in too tenuous, remote or peripheral a manner to
warrant a finding that the law "relates to" the plan. For example,
in Mackey v. Lanier Collections Agency & Service, Inc., 486 U.S. 825, 100 L. Ed. 2d 836, 108 S. Ct. 2182 (1988), the Supreme Court
held that a general state garnishment statute did not "relate to"
employee benefit plans and fell outside the scope of ERISA's
preemption provision. In reaching this conclusion, the Court found
that Congress did not intend to forbid the use of generally
applicable state-law mechanisms of executing judgments against
ERISA welfare benefit plans. Mackey, 486 U.S. at 831, 100 L. Ed. 2d
at 845, 108 S. Ct. at 2186; cf. Greater Washington Board of Trade,
506 U.S. at 130, 121 L. Ed. 2d at 520, 113 S. Ct. at 583 (striking
down District of Columbia law that "specifically refers to welfare
benefit plans regulated by ERISA and on that basis alone is pre-
empted").
Although the common fund doctrine does not expressly refer to
ERISA plans, our inquiry cannot end here. Travelers instructs
courts to go beyond the unhelpful text of section 514(a) and look
instead to the purposes of ERISA as a guide to determining whether
a particular state law is preempted. Travelers, 514 U.S. ___, 131 L. Ed. 2d 695, 115 S. Ct. 1671. Thus, we must inquire whether
preemption would serve the basic purpose of section 514(a), namely,
"to avoid a multiplicity of regulation in order to permit the
nationally uniform administration of employee benefit plans."
Travelers, 514 U.S. at ___, 131 L. Ed. 2d at 706, 115 S. Ct. at
1677-78.
1
The Trustees and amici argue that the common fund doctrine
frustrates this goal for two reasons. First, they claim that
application of the common fund doctrine frustrates uniform
administration of nationwide benefit plans because it prevents plan
administrators in Illinois from enforcing the subrogation rights
which are part of written plan agreements. They argue that the
common fund doctrine is, in substance, an antisubrogation law
similar to the Pennsylvania statute the Supreme Court held was
preempted by ERISA in FMC Corp. v. Holliday.
We note initially that the Trustees' characterization of the
common fund doctrine as a law unique to Illinois is misguided. As
earlier discussed, the common fund doctrine has been recognized and
applied in the United States Supreme Court, the lower federal
courts, and in courts of virtually every state. Accordingly, the
Trustees' portrayal of the common fund doctrine as a law restricted
to Illinois is not persuasive. Rather, the law, like the general
garnishment statute at issue in Mackey, exists in some form
throughout the nation.
The common fund doctrine has, in fact, been applied in a
number of federal cases involving ERISA plans. See, e.g., Carpenter
v. Modern Drop Forge Co., 919 F. Supp. 1198 (N.D. Ind. 1995); Dugan
v. Nickla, 763 F. Supp. 981 (N.D. Ill. 1991); Serembus v. Mathwig,
817 F. Supp. 1414 (E.D. Wis. 1992); Cutting v. Jerome Foods, Inc.,
820 F. Supp. 1146 (W.D. Wis. 1991). These courts applied the common
fund doctrine as a matter of federal common law and required ERISA
benefit plans to pay for legal services rendered in protecting the
plan's subrogation lien. But see Ryan v. Federal Express Corp., 78 F.3d 123 (3d Cir. 1996) (refusing to require ERISA plan to pay a
proportionate share of attorney fees in recovering subrogation
liens as a matter of federal common law).
We are also unpersuaded by the Trustees' characterization of
the common fund doctrine as an antisubrogation law similar to that
found preempted in FMC Corp. v. Holliday. Although the common fund
doctrine may be invoked in actions involving subrogation liens, it
cannot appropriately be characterized as an "antisubrogation" law.
On the contrary, the common fund doctrine has been applied in many
types of cases covering a large range of civil litigation. S.
Speiser, Attorney Fees 11.13, at 417 (1973). The doctrine is most
frequently applied in class actions brought by, and on behalf of,
creditors, taxpayers, public utility customers, trust
beneficiaries, decedents' estates, labor union members, and
shareholders of corporations. See S. Speiser, Attorney Fees 11.13
through 11.21 (1973) (and cases cited therein); see also Boeing Co.
v. Van Gemert, 444 U.S. 472, 62 L. Ed. 2d 676, 100 S. Ct. 745
(1980) (class action by bondholders against corporation); Mills v.
Electric Auto-Lite Co., 396 U.S. 375, 396-97, 24 L. Ed. 2d 593,
609, 90 S. Ct. 616, 628 (1970) (stockholder's derivative action);
Sprague v. Ticonic National Bank, 307 U.S. 161, 164, 83 L. Ed. 1184, 1185-86, 59 S. Ct. 777, 779 (1939) (action to protect a trust
fund); Brundidge v. Glendale Federal Bank, 168 Ill. 2d 235 (1995).
Moreover, the common fund doctrine bears no resemblance to the
Pennsylvania antisubrogation statute at issue in FMC Corp. v.
Holliday. That statute prohibited plans from requiring
reimbursement of medical expenses from beneficiaries who recovered
from third-party tortfeasors in actions arising out of motor
vehicle accidents. The statute conflicted with a subrogation clause
contained in a self-funded employee welfare benefit plan that
required plan members to reimburse benefits paid to a plan member
if the member recovered from a third-party tortfeasor. The Supreme
Court held that the Pennsylvania statute "relate[d] to" an employee
benefit plan and was thereby preempted. FMC Corp., 498 U.S. at 58,
112 L. Ed. 2d at 364, 111 S. Ct. at 407. The statute required plan
providers in Pennsylvania to calculate benefit levels based on
expected liability conditions that differed from those in states
that had not enacted similar antisubrogation legislation. FMC
Corp., 498 U.S. at 60, 112 L. Ed. 2d at 365, 111 S. Ct. at 408-09.
The Court found that application of different state subrogation
laws to plans would frustrate plan administrators' continuing
obligation to calculate uniform benefit levels nationwide. FMC
Corp., 498 U.S. at 60, 112 L. Ed. 2d at 365-66, 111 S. Ct. at 408-
09.
In contrast to the state statute at issue in FMC Corp. v.
Holliday, the common fund doctrine does not prohibit employers from
structuring their employee benefit plans to require reimbursement
of subrogation liens. Scholtens specifically acknowledges the
Trustees' right to subrogation under both the benefit plan and the
subrogation agreement. He does not seek to modify or avoid his
obligation to reimburse the plan for benefits paid to him and does
not question the right of the trustees to collect under the
subrogation clause. Moreover, nothing in the trial court's decision
relieved Scholtens of his obligation to comply with the terms of
the subrogation agreement. In fact, the trial court specifically
stated that it did not adjudicate the Trustees' rights under the
terms of either the ERISA plan or the subrogation agreement.
The Trustees nevertheless maintain that application of the
common fund doctrine in effect requires plan administrators to
structure plans to cover attorney fees incurred by beneficiaries in
personal injury cases. We disagree. We find that the common fund
doctrine does not dictate or restrict the manner in which ERISA
plans are structured or administered.
An employee benefit plan is in the nature of a contractual
agreement between the employer, the plan and its fiduciaries, and
the participants and beneficiaries. The claim for attorney fees at
issue here did not arise out of that contractual agreement or any
separate subrogation agreement executed between the Trustees and
Scholtens. Rather, the claim for attorney fees arises independently
of both the benefit plan and the subrogation agreement. Here, the
attorney who represented Scholtens in his tort action, and who
negotiated the settlement and obtained the proceeds from which the
plan's subrogation lien will be paid, simply invoked his quasi-
contractual right to payment of fees for services rendered in
recovering the plan's subrogation lien. The quasi-contractual
obligation he seeks to impose upon the Trustees arises
independently of the benefit plan, resting instead upon equitable
considerations of quantum meruit and the prevention of unjust
enrichment. Accordingly, applying the common fund doctrine under
the circumstances of this case does not alter the relationship or
agreements formulated among the principal ERISA entities (e.g., the
employer, the plan fiduciaries, and the participants). It affects
the relations between one of those entities (i.e., the Trustees)
and an outside party. In effect, the attorney who performed legal
services that ultimately led to the recovery of the plan's
subrogation lien instituted a separate and distinct action against
the Trustees for unpaid fees. The action, in substance if not in
form, is wholly independent of and unrelated to the underlying
benefit plan. We conclude, therefore, that the common fund doctrine
does not dictate or restrict the manner in which ERISA plans are
structured or administered.
Supporting this conclusion is this court's decision in Baier
v. State Farm Insurance Co., 66 Ill. 2d 119 (1977). In Baier, the
plaintiff, an attorney, represented a motorist in a claim for
damages arising out of an automobile accident. The attorney
ultimately negotiated a settlement of $12,000 between the injured
motorist and the tortfeasor. The injured motorist used a portion of
the settlement proceeds to reimburse State Farm, pursuant to a
subrogation agreement, for $1,000 in medical benefits State Farm
had paid the motorist following the accident. Following dismissal
of the negligence action, the attorney brought a separate action
against State Farm to recover a fee for the services he performed
in recovering State Farm's subrogation lien. In that case, as here,
there was no allegation that there was a contract of employment,
express or implied, between the attorney and State Farm. Rather,
the claim for fees was based on the equitable concept that an
attorney who performs services in creating a fund should, in equity
and good conscience, be allowed compensation from all those who
seek to benefit from the fund recovered. Baier, 66 Ill. 2d at 124.
In applying the common fund doctrine, the Baier court
specifically rejected State Farm's claim that application of the
doctrine would violate the subrogation agreement between the
insured motorist and State Farm. Baier, 66 Ill. 2d at 126. Like the
Baier court, we find that the quasi-contractual obligation to pay
fees in this case arises wholly independently of, and is unrelated
to, both the subrogation clause in the ERISA plan and the
contractual subrogation agreement that Scholtens signed after the
accident. The common fund doctrine is invoked by someone who is not
a party to the contractual agreement between the plan and its
beneficiaries to recover an unpaid debt, namely, a reasonable fee
in quantum meruit for legal services rendered to the plan and its
Trustees.
The Supreme Court has recognized that such actions are not
preempted by ERISA in Mackey, 486 U.S. at 833, 100 L. Ed. 2d at
846, 108 S. Ct. at 2187. The Mackey Court explained:
"These cases--lawsuits against ERISA plans for run-
of-the-mill state-law claims such as unpaid rent, failure
to pay creditors, or even torts committed by an ERISA
plan--are relatively commonplace. Petitioners and the
United States (appearing here as amicus curiae) concede
that these suits, although obviously affecting and
involving ERISA plans and their trustees, are not pre-
empted by ERISA 514(a)."
In a footnote, the Court cited a number of cases, including one
case involving a suit against an ERISA plan for unpaid attorney
fees. Mackey, 486 U.S. at 833 n.8, 100 L. Ed. 2d at 846 n.8, 108 S. Ct. at 2187 n.8, citing Luxemburg v. Hotel & Restaurant Employees
& Bartenders International Union Pension Fund, 91 Misc. 2d 930, 398 N.Y.S.2d 589 (1977). Luxemburg allowed an attorney to recover
unpaid legal fees from an ERISA plan. Although the suit for unpaid
attorney fees in Luxemburg was based upon an express contract,
while the present action is quasi-contractual in nature, this
factual distinction is not relevant to the preemption question
raised here. The present suit is equivalent to an action to force
an ERISA plan to pay for telephone services or rent. ERISA does not
require the creation of a fully insulated legal world that renders
all state law preempted whenever there is a plan in the picture.
United Wire, Metal & Machine Health & Welfare Fund v. Morristown
Memorial Hospital, 995 F.2d 1179, 1193 (3d Cir. 1993).
2
The Trustees next claim that the common fund doctrine disrupts
the uniform administration of ERISA plans and is thereby preempted
because application of the doctrine will significantly increase
plan costs. The Trustees have offered no proof in support of this
claim, however, and we believe that precisely the opposite result
is likely. The Trustees conceded in oral argument that they do not
generally bring an independent action against third-party
tortfeasors to recover subrogation liens. Instead, they rely upon
the cooperative efforts of injured beneficiaries in suing
tortfeasors as the exclusive means of obtaining reimbursement of
benefits paid to beneficiaries. Holding that the common fund
doctrine is preempted would, in at least some instances, destroy
any incentive plan beneficiaries might have to bring independent
actions against tortfeasors and, thus, ultimately increase plan
costs.
Assume, for instance, that an ERISA plan pays a participant
medical benefits totalling $10,000, and the participant ultimately
obtains a settlement award of $15,000 from a responsible third
party. Under these facts, $10,000 of the settlement proceeds would
be paid to the ERISA plan. Assuming a standard one-third
contingency fee agreement, the injured worker's attorney would be
entitled to the remaining $5,000. At least some plan beneficiaries
would not be willing to file an independent civil suit that would
result in no benefit to them. Requiring ERISA plans to pay attorney
fees under the common fund doctrine, on the other hand, may
encourage beneficiaries to pursue independent actions against
tortfeasors. Because such actions ultimately result in
reimbursement of subrogation liens to ERISA plans, plan costs would
thereby be reduced.
Even if we found, however, that application of the common fund
doctrine would increase plan costs, that finding would not
necessitate a conclusion that the law is preempted under ERISA. The
Supreme Court has held that the fact that a state law imposes
additional costs on ERISA plans, standing alone, is not a
sufficient basis for holding that the law is preempted. Travelers,
514 U.S. at ___, 131 L. Ed. 2d at 705, 115 S. Ct. at 1677; Mackey,
486 U.S. at 831, 100 L. Ed. 2d at 845, 108 S. Ct. at 2186.
In Travelers, a New York statute imposed surcharges on
hospital bills of patients covered by commercial insurance and
health maintenance organizations (HMOs), but not on bills of
patients covered by Blue Cross/Blue Shield. The statute ultimately
resulted in a 24% surcharge on the bills of commercially insured
patients and a 9% surcharge on patients covered by HMOs. Several
commercial insurers who were acting as fiduciaries of ERISA plans
filed suit, arguing that the statute imposing the surcharges was
preempted by ERISA. The Second Circuit Court of Appeals agreed,
concluding that the surcharges "related to" ERISA plans because
they imposed a "significant economic burden" on such plans and
therefore exerted an impermissible impact on ERISA plan structure
and administration. Travelers Insurance Co. v. Cuomo, 14 F.3d 708,
721 (2d Cir. 1994).
The Supreme Court, in a unanimous opinion authored by Justice
Souter, rejected this conclusion and found that the statute
imposing the surcharges was not preempted. In reaching this result,
the Court acknowledged that the surcharges affected ERISA plans by
encouraging insurance buyers, including ERISA plans, to choose
certain insurers (i.e., Blue Cross) over other insurers. Travelers,
514 U.S. at ___, 131 L. Ed. 2d at 707, 115 S. Ct. at 1679. The
Court nevertheless concluded that the statute was not preempted,
because an "indirect economic influence *** does not bind plan
administrators to any particular choice *** [or] preclude uniform
administrative practice or the provision of a uniform interstate
benefit package ***. It simply bears on the costs of benefits and
the relative costs of competing insurance to provide them."
Travelers, 514 U.S. at ___, 131 L. Ed. 2d at 707-08, 115 S. Ct. at
1679. The Court concluded that "laws with only an indirect economic
effect on the relative costs of various health insurance packages
in a given State are a far cry from those `conflicting directives'
from which Congress meant to insulate ERISA plans." Travelers, 514
U.S. at ___, 131 L. Ed. 2d at 709, 115 S. Ct. at 1680.
Likewise, application of the common fund doctrine does not
"bind plan administrators to any particular choice *** [or]
preclude uniform administrative practice or the provision of a
uniform interstate benefit package." Regardless of the common fund
doctrine, a plan may choose to initiate its own action against
responsible tortfeasors to recoup benefits paid to plan
beneficiaries. In such circumstances, the plan must employ legal
counsel, file a lawsuit and expend litigation costs. A plan may
also choose to wait for the injured person to seek compensation
from a responsible third party and then enforce its right to
subrogation under the benefit plan. Where an attorney performs
legal services on the plan's behalf, however, the plan has a legal
obligation to pay that attorney a reasonable fee for those
services. It may not simply accept the fruits of an attorney's
labor without paying a reasonable fee for the legal services
rendered. Had the Trustees hired independent counsel to pursue
their subrogation lien and then, after services were rendered,
inexplicably refused to pay the bill for such services, we would
not hesitate to obligate them to pay. The preemption provision of
ERISA does not compel a different result here simply because we are
dealing with a quasi-contractual obligation to pay for legal
services. "[I]f ERISA is held to invalidate every state action that
may increase the cost of operating employee benefit plans, those
plans will be permitted a charmed existence that never was
contemplated by Congress." United Wire, 995 F.2d at 1194, citing
Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir. 1984).
Our conclusion is also supported by the Supreme Court's
decision in Mackey. The Court there held that ERISA's preemption
provision did not bar application of a general state garnishment
statute to participants' benefits under an ERISA plan, even though
garnishment imposed administrative costs and burdens on benefit
plans. The Court acknowledged that, when a plan was garnished by
creditors under the statute, plan trustees were served with
garnishment summons, became parties to a suit, and ultimately
deposited the funds that they would otherwise hold or pay out to
beneficiaries. Although compliance with the state law admittedly
subjected ERISA plans to substantial administrative burdens and
costs, the Court nevertheless found that the statute did not
"relate to" benefit plans within the meaning of section 514(a).
Mackey, 486 U.S. at 831, 100 L. Ed. 2d at 845, 108 S. Ct. at 2186.
In sum, we have before us a generally applicable common law
doctrine which (1) is not intended to regulate the affairs of ERISA
plans, (2) neither singles out such plans for special treatment nor
predicates rights or obligations on the existence of an ERISA plan,
and (3) does not have either the effect of dictating or restricting
the manner in which ERISA plans structure or conduct their affairs
or the effect of impairing their ability to operate simultaneously
in more than one state. The purpose of ERISA is to protect
employees, not to provide loopholes through which ERISA plans can
avoid paying their debts. We therefore decline to hold that the
common fund doctrine is preempted by section 514(a). Without
explicit direction, we would not ascribe to Congress the intention
to void existing general provisions of state law protecting the
very beneficiaries of the ERISA statute.
3
As a final matter, we reject the Trustees' claim that we are
bound to follow statements made in a decision of the Seventh
Circuit Court of Appeals in Land v. Chicago Truck Drivers, Helpers
& Warehouse Union Health & Welfare Fund, 25 F.3d 509 (7th Cir.
1994), to the effect that the common fund doctrine may not be
applied to ERISA benefit plans. The statements in Land concerning
the common fund doctrine are pure dicta. See Carpenter v. Modern
Drop Forge Co., 919 F. Supp. 1198, 1205 (N.D. Ind. 1995). The
question raised in this appeal--namely, whether the common fund
doctrine "relates to" and is therefore preempted by section 514(a)
of ERISA--was never raised or decided in Land. The plaintiff in
Land did not invoke the common fund doctrine in either the district
or the appeals court. Land, 25 F.3d at 513; Modern Drop Forge Co.,
919 F. Supp. at 1205 n.5. Rather, the only substantive issue the
Land court decided was that ERISA did not unconstitutionally
delegate legislative authority to private welfare benefit plans.
Land, 25 F.3d at 512-13 (court also addressed a procedural matter
and held that the plaintiff's attempt to challenge the plan's
denial of benefits to him pursuant to a section 1983 cause of
action warranted Rule 11 sanctions). Therefore, we are not bound by
the language upon which the Trustees rely.
CONCLUSION
For the reasons stated above, we hold that any effect the
common fund doctrine has upon employee benefit plans is simply too
tenuous, remote or peripheral to warrant a finding that the
doctrine "relates to" such plans. We therefore conclude that the
doctrine is outside the scope of ERISA's preemption provision (29
U.S.C. 1144(a) (1982)). The Trustees are obligated to pay the
reasonable value of the legal services rendered in protecting their
subrogation lien. Accordingly, the appellate court judgment
affirming the trial court's judgment holding the Trustees liable
for the legal expenses incurred in protecting their subrogation
lien is affirmed.
Affirmed.
the filing of the opinion to request a rehearing. Also, opinions
are subject to modification, correction or withdrawal at anytime
prior to issuance of the mandate by the Clerk of the Court.
Therefore, because the following slip opinion is being made
available prior to the Court's final action in this matter, it
cannot be considered the final decision of the Court. The
official copy of the following opinion will be published by the
Supreme Court's Reporter of Decisions in the Official Reports
advance sheets following final action by the Court.
Docket No. 79686--Agenda 18--May 1996.
RANDY SCHOLTENS, Appellee, v. JEFFREY SCHNEIDER et al.
(Electrical Insurance Trustees, Appellant).
Opinion filed September 19, 1996.
CHIEF JUSTICE BILANDIC delivered the opinion of the court:
Electrical Insurance Trustees (Trustees) appeal from an
appellate court judgment that affirmed a circuit court order
holding the Trustees liable under the common fund doctrine for
attorney fees and costs expended in recouping the Trustees'
subrogation lien. The Trustees claim that section 514 of the
Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C.
1144 (1982)) preempts application of the common fund doctrine to
self-funded employee welfare benefit plans. We hold that ERISA does
not preempt application of the common fund doctrine.
The plaintiff, Randy Scholtens, an electrician, was a
participant in an employee benefit plan as a member of the Illinois
Brotherhood of Electrical Workers, Local 134. It is undisputed that
the plan is a welfare benefit plan within the meaning of ERISA (29
U.S.C. 1001 et seq. (1982)). The appellant, Trustees, administers
the plan pursuant to a trust agreement between Local 134 and the
Electrical Contractor Association of the City of Chicago. The plan
is a self-funded benefit plan which provides medical and disability
benefits to union electrical workers.
On December 22, 1989, Scholtens was injured in a non-work-
related automobile accident. The accident occurred when a vehicle
in which Scholtens was a passenger was struck by another vehicle.
Scholtens' injuries required hospitalization and surgery. Pursuant
to the plan, the Trustees paid medical bills and disability
benefits totalling $42,921.75 to Scholtens for those injuries.
Scholtens subsequently retained an attorney to pursue a cause
of action for damages arising out of the automobile accident.
Scholtens filed a lawsuit against the two drivers involved in the
accident, Jeffrey Schneider and L.C. O'Banner. Prior to trial,
Scholtens settled his claim against the two defendants for
$100,000.
The Trustees never made an independent effort to seek
reimbursement of the benefits paid to Scholtens from Schneider or
O'Banner, nor did they attempt to intervene in Scholtens' pending
litigation against those defendants. Following Scholtens'
settlement of the lawsuit, however, the Trustees demanded full
reimbursement of all of the benefits paid to Scholtens. The
Trustees premised their demand on the subrogation clause contained
in the benefit plan and a subrogation agreement that Scholtens
signed on January 3, 1990, shortly after the accident.
The subrogation clause, which appears in the booklet
explaining plan benefits to participants, provided:
"In some circumstances, such as an automobile accident,
a third party may ultimately pay medical expenses for you
or an enrolled dependent through an insurance settlement
or otherwise. In that case, you must reimburse benefits
paid by the Plans to the extent they are paid by the
third party."
The subrogation agreement that Scholtens signed after his accident
provided, in part:
"The undersigned hereby agrees, in consideration of money
paid or to be paid by the Electrical Insurance Trustees
to me as an employee under a Plan of benefits maintained
by the Trustees, or to another on my behalf as such
employee, because of loss or damage for which I or my
dependent may have a cause of action against a third
party who caused this loss or damage, the Trustees shall
be subrogated, to the extent of such payment, to any and
all recovery by me or my dependent, and such right shall
be assigned to the Trustees by me as a condition of the
payment of such money by the Trustees."
Faced with the demand for complete reimbursement by the
Trustees, Scholtens' attorney filed a petition to adjudicate the
Trustees' subrogation lien in the court where Scholtens' tort
action was pending. The trial court applied the common fund
doctrine and directed that the amount Scholtens owed to the
Trustees would be reduced in accordance with the attorney fees and
costs incurred in the litigation from $42,921.75 to $28,286.76. The
trial court stated that it did not adjudicate the Trustees' rights
under the terms of either the ERISA plan or the subrogation
agreement, but simply applied the common fund doctrine to the facts
before it.
The appellate court affirmed, rejecting the Trustees' claim
that ERISA preempted the application of the common fund doctrine.
We allowed the Trustees' petition for leave to appeal. 155 Ill. 2d
R. 315. Amicus briefs were filed on behalf of both the appellant
and the appellee.
ANALYSIS
The issue in this appeal is whether section 514 of ERISA (29
U.S.C. 1144 (1982)) preempts application of the common fund
doctrine to self-funded employee benefit plans. The question of
whether a federal statute, such as ERISA, preempts a particular
state law is one of congressional intent. Metropolitan Life
Insurance Co. v. Massachusetts, 471 U.S. 724, 738, 85 L. Ed. 2d 728, 739, 105 S. Ct. 2380, 2388 (1985). Congress' intent to preempt
state law may be explicitly stated in the statute's language or
implicitly contained in its structure and purpose. Shaw v. Delta
Air Lines, Inc., 463 U.S. 85, 95, 77 L. Ed. 2d 490, 500, 103 S. Ct. 2890, 2900 (1983). In analyzing claims of preemption, however, the
Supreme Court has "never assumed lightly that Congress has
derogated state regulation." New York State Conference of Blue
Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. ___,
131 L. Ed. 2d 695, 704, 115 S. Ct. 1671, 1676 (1995). Instead, the
Court instructs that the analysis should begin with the presumption
that Congress did not intend to supplant state law. Travelers, 514
U.S. at ___, 131 L. Ed. 2d at 704, 115 S. Ct. at 1676.
In ascertaining congressional intent, the inquiry necessarily
begins with an analysis of the language of the statute. Travelers,
514 U.S. at ___, 131 L. Ed. 2d at 705, 115 S. Ct. at 1677. The text
of ERISA's preemption provision, section 514(a), is expansive.
Section 514(a) provides, with some exceptions not relevant here,
that:
"the provisions of this subchapter and subchapter III of
this chapter shall supersede any and all State laws
insofar as they may now or hereafter RELATE TO any
employee benefit plan." (Emphasis added.) 29 U.S.C.
1144(a) (1982).
A brief discussion of the manner in which the Supreme Court
has interpreted this provision and the progression of law relating
thereto is helpful in resolving the question presented here.
A
Prior to 1995, the Supreme Court cases analyzing preemption
claims under ERISA relied heavily upon the language of the
preemption provision and dictionary definitions of the phrase
"relate to" as the primary guides to determining whether a
particular state law was preempted. While acknowledging that
ERISA's preemption provisions were not models of legislative
drafting, the Supreme Court found that section 514(a) was
"conspicuous for its breadth." FMC Corp. v. Holliday, 498 U.S. 52,
58, 112 L. Ed. 2d 356, 364, 111 S. Ct. 403, 407 (1990). The Court
rejected an attempt to limit the scope of preemption to state laws
relating to specific subjects covered by ERISA or specifically
designed to affect employee benefit plans. Shaw, 463 U.S. at 98, 77 L. Ed. 2d at 501, 103 S. Ct. at 2900. Instead, the Court stated
that the phrase "relate to" must be given a " `broad common-sense
meaning,' " Metropolitan Life Insurance Co., 471 U.S. at 739, 85 L. Ed. 2d at 740, 105 S. Ct. at 2389, and that a state law "relates
to" an employee benefit plan "in the normal sense of the phrase, if
it has a connection with or reference to such a plan." Shaw, 463 U.S. at 96-97, 77 L. Ed. 2d at 501, 103 S. Ct. at 2900.
For more than one decade, the Court relied upon the text of
section 514(a) and, particularly, this definition of the phrase
"relate to" as the basis for deciding preemption claims. Applying
this analysis, the Court determined that any state law which
singles out plans encompassed by ERISA for special treatment
"relates to" such plans and is preempted, even if consistent with
ERISA's substantive requirements. Mackey v. Lanier Collections
Agency & Service, Inc., 486 U.S. 825, 829, 100 L. Ed. 2d 836, 843-
44, 108 S. Ct. 2182, 2185 (1988) (garnishment statute that
specifically referred to ERISA plans was preempted, but general
garnishment statute did not "relate to" ERISA plans and was not
preempted). The Court also determined that a state law may "relate
to" an employee benefit plan " `even if the law is not specifically
designed to affect such plans, or the effect is only indirect.' "
District of Columbia v. Greater Washington Board of Trade, 506 U.S. 125, 130, 121 L. Ed. 2d 513, 520, 113 S. Ct. 580, 583 (1992),
quoting Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 139, 112 L. Ed. 2d 474, 484, 111 S. Ct. 478, 483. Accordingly, state laws that
required that employee benefits plans be structured in a particular
manner were found to "relate to" such plans and were preempted.
See, e.g., Shaw, 463 U.S. at 96-97, 77 L. Ed. 2d at 501, 103 S. Ct.
at 2900 (state statute that prohibited discrimination against
pregnancy and thereby mandated that employers structure their
benefit plans to cover pregnancy-related disability, "related to"
benefit plans and was preempted); FMC Corp. v. Holliday, 498 U.S. 52, 58, 112 L. Ed. 2d 356, 364, 111 S. Ct. 403, 407-08 (1990)
(state statute that prohibited benefit plans from enforcing
subrogation liens in actions involving motor vehicle accidents
"relate[d] to" benefit plans and was preempted). The Court
cautioned, however, that the scope of the preemption provision was
not unlimited and that "[s]ome state actions may affect employee
benefit plans in too tenuous, remote, or peripheral a manner to
warrant a finding that the law `relates to' the plan." Shaw, 463 U.S. at 100 n.21, 77 L. Ed. 2d at 503 n.21, 103 S. Ct. at 2901
n.21.
In its most recent decision interpreting ERISA's preemption
clause, however, the Supreme Court expressed exasperation with this
strictly textual approach. In New York State Conference of Blue
Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. ___,
131 L. Ed. 2d 695, 115 S. Ct. 1671 (1995), the Court questioned
whether the words of limitation in section 514(a) ("insofar as they
. . . relate") did much limiting, and cautioned that "[i]f `relate
to' were taken to extend to the furthest stretch of its
indeterminacy, then for all practical purposes preemption would
never run its course, for `really, universally, relations stop
nowhere.' " Travelers, 514 U.S. at ___, 131 L. Ed. 2d at 705, 115 S. Ct. at 1677, quoting H. James, Roderick Hudson xli (New York
ed., World's Classics (1980)). The Court stressed that such an
expansive interpretation of the preemption clause would "read
Congress's words of limitation as mere sham, and *** read the
presumption against pre-emption out of the law whenever Congress
speaks to the matter with generality." Travelers, 514 U.S. at ___,
131 L. Ed. 2d at 705, 115 S. Ct. at 1677. Having determined that
"infinite relations cannot be the measure of pre-emption"
(Travelers, 514 U.S. at ___, 131 L. Ed. 2d at 705, 115 S. Ct. at
1677), the Court concluded:
"We simply must go beyond the unhelpful text and the
frustrating difficulty of defining its key term, and look
instead to the objectives of the ERISA statute as a guide
to the scope of the state law that Congress understood
would survive." Travelers, 514 U.S. at ___, 131 L. Ed. 2d
at 705, 115 S. Ct. at 1677.
Travelers therefore announced a fundamental shift in emphasis
away from mere interpretation of the words of ERISA's preemption
provision toward an analysis of Congress' objectives in enacting
ERISA. Accordingly, in considering whether section 514(a) preempts
application of the common fund doctrine to self-funded ERISA
benefit plans, we must consider not only the language of the
preemption provision, but also the structure and purpose of the
statute as a whole.
Congress enacted ERISA for the express purpose of providing
safeguards to protect the interests of participants in employee
benefit plans. 29 U.S.C. 1001(b) (1982). Congress determined that
"the soundness and stability of plans with respect to adequate
funds to pay promised benefits may be endangered" because of a lack
of uniformity in the regulation of such plans. Accordingly,
Congress enacted a comprehensive statute that subjects plans
providing employees with fringe benefits to federal regulation.
Shaw, 463 U.S. at 90, 77 L. Ed. 2d at 497, 103 S. Ct. at 2896. The
statute imposes participation, funding, and vesting requirements on
pension plans (29 U.S.C. 1051 through 1086 (1982)) and sets
uniform standards, including rules concerning reporting, disclosure
and fiduciary responsibility for both pension and welfare benefit
plans (29 U.S.C. 1021 through 1031, 1101 through 1114 (1982)).
ERISA does not require employers to provide any particular benefits
to employees and does not speak on the subject of subrogation. The
statute does not require, bar or regulate the content of
subrogation clauses in welfare benefit plans.
In Travelers, the Court explored the specific question of
congressional intent as it relates to the enactment of ERISA's
preemption clause. Section 514(a) of ERISA (29 U.S.C. 1144(a)
(1982)) reflects Congress' intent to establish regulation of
employee benefit plans as an exclusively federal concern. The Court
noted that the purpose of section 514(a) is to insure that the
administrative practices concerning employee benefit plans are
governed by a uniform body of benefit law, in order to minimize the
administrative and financial burden that employers would face if
required to comply with conflicting directives among states or
between states and the federal government. Congress recognized that
obligating an employer to satisfy the varied and perhaps
conflicting requirements of particular state laws regulating
employee benefits would make administration of a nationwide benefit
plan more difficult and inefficient, which might lead employers
with existing employee benefit plans to reduce benefits and lead
employers without such plans to refrain from adopting them. Fort
Halifax Packing Co. v. Coyne, 482 U.S. 1, 96 L. Ed. 2d 1, 107 S. Ct. 2211 (1987). Thus, the basic purpose of the preemption
provision in ERISA (29 U.S.C. 1144(a) (1982)) is to "avoid a
multiplicity of regulation in order to permit the nationally
uniform administration of employee benefit plans." Travelers, 514
U.S. at ___, 131 L. Ed. 2d at 706, 115 S. Ct. at 1677-78.
B
With these general principles in mind, we consider whether
section 514(a) of ERISA preempts application of the Illinois common
fund doctrine. We first utilize the textual approach. Under this
approach, a law that "relates to" benefit plans, in that it "refers
to or has a connection to" such plans, is preempted.
In determining whether the common fund doctrine "refers to or
has a connection to" ERISA plans, it is necessary to briefly
discuss the nature of that doctrine. In general, each party to
litigation in the United States bears its own attorney fees, absent
a specific fee-shifting statute. Over time, courts have created
several equitable exceptions to this "American Rule." One of the
earliest, and most prevalent, exceptions is the common fund
doctrine. This doctrine has been recognized and applied in the
United States Supreme Court, the lower federal courts, and in the
courts of virtually every state in the Union, including Illinois.
See Baier v. State Farm Insurance Co., 66 Ill. 2d 119 (1977);
Sprague v. Ticonic National Bank, 307 U.S. 161, 164, 83 L. Ed. 1184, 1186, 59 S. Ct. 777, 779 (1939) (fee award from fund
generated in class action is within "the historic equity
jurisdiction of the federal courts"); see generally 42 A.L.R. Fed.
134 (1979); 23 A.L.R.5th 241 (1994); S. Speiser, Attorneys' Fees
(1973).
The common fund doctrine permits a party who creates,
preserves, or increases the value of a fund in which others have an
ownership interest to be reimbursed from that fund for litigation
expenses incurred, including counsel fees. Brundidge v. Glendale
Federal Bank, F.S.B., 168 Ill. 2d 235 (1995). It is now well
established that "a litigant or a lawyer who recovers a common fund
for the benefit of persons other than himself or his client is
entitled to a reasonable attorney's fee from the fund as a whole."
Boeing Co. v. Van Gemert, 444 U.S. 472, 478, 62 L. Ed. 2d 676, 681,
100 S. Ct. 745, 749 (1980). The underlying justification for
reimbursing attorneys from a common fund, as explained by the
United States Supreme Court in three early cases, is that, unless
the costs of litigation are spread to the beneficiaries of the
fund, they will be unjustly enriched by the attorney's efforts. See
Sprague, 307 U.S. at 166-67, 83 L. Ed. at 1187, 59 S. Ct. at 779-
80; Central R.R. & Banking Co. v. Pettus, 113 U.S. 116, 126-27, 28 L. Ed. 915, 919, 5 S. Ct. 387, 392-93 (1885); Trustees of the
Internal Improvement Fund v. Greenough, 105 U.S. 527, 532, 26 L. Ed. 1157, 1160 (1882); see also Ryan v. City of Chicago, 274 Ill.
App. 3d 913 (1995).
The common fund doctrine is a common law rule of general
application. It does not single out or expressly refer to ERISA
plans, nor is it predicated upon their existence. It applies
generally to all funds created, increased or preserved by a party
in which others have an ownership interest. In this respect, the
common fund doctrine is similar to the other laws of general
applicability that the Supreme Court has held affect employee
benefit plans in too tenuous, remote or peripheral a manner to
warrant a finding that the law "relates to" the plan. For example,
in Mackey v. Lanier Collections Agency & Service, Inc., 486 U.S. 825, 100 L. Ed. 2d 836, 108 S. Ct. 2182 (1988), the Supreme Court
held that a general state garnishment statute did not "relate to"
employee benefit plans and fell outside the scope of ERISA's
preemption provision. In reaching this conclusion, the Court found
that Congress did not intend to forbid the use of generally
applicable state-law mechanisms of executing judgments against
ERISA welfare benefit plans. Mackey, 486 U.S. at 831, 100 L. Ed. 2d
at 845, 108 S. Ct. at 2186; cf. Greater Washington Board of Trade,
506 U.S. at 130, 121 L. Ed. 2d at 520, 113 S. Ct. at 583 (striking
down District of Columbia law that "specifically refers to welfare
benefit plans regulated by ERISA and on that basis alone is pre-
empted").
Although the common fund doctrine does not expressly refer to
ERISA plans, our inquiry cannot end here. Travelers instructs
courts to go beyond the unhelpful text of section 514(a) and look
instead to the purposes of ERISA as a guide to determining whether
a particular state law is preempted. Travelers, 514 U.S. ___, 131 L. Ed. 2d 695, 115 S. Ct. 1671. Thus, we must inquire whether
preemption would serve the basic purpose of section 514(a), namely,
"to avoid a multiplicity of regulation in order to permit the
nationally uniform administration of employee benefit plans."
Travelers, 514 U.S. at ___, 131 L. Ed. 2d at 706, 115 S. Ct. at
1677-78.
1
The Trustees and amici argue that the common fund doctrine
frustrates this goal for two reasons. First, they claim that
application of the common fund doctrine frustrates uniform
administration of nationwide benefit plans because it prevents plan
administrators in Illinois from enforcing the subrogation rights
which are part of written plan agreements. They argue that the
common fund doctrine is, in substance, an antisubrogation law
similar to the Pennsylvania statute the Supreme Court held was
preempted by ERISA in FMC Corp. v. Holliday.
We note initially that the Trustees' characterization of the
common fund doctrine as a law unique to Illinois is misguided. As
earlier discussed, the common fund doctrine has been recognized and
applied in the United States Supreme Court, the lower federal
courts, and in courts of virtually every state. Accordingly, the
Trustees' portrayal of the common fund doctrine as a law restricted
to Illinois is not persuasive. Rather, the law, like the general
garnishment statute at issue in Mackey, exists in some form
throughout the nation.
The common fund doctrine has, in fact, been applied in a
number of federal cases involving ERISA plans. See, e.g., Carpenter
v. Modern Drop Forge Co., 919 F. Supp. 1198 (N.D. Ind. 1995); Dugan
v. Nickla, 763 F. Supp. 981 (N.D. Ill. 1991); Serembus v. Mathwig,
817 F. Supp. 1414 (E.D. Wis. 1992); Cutting v. Jerome Foods, Inc.,
820 F. Supp. 1146 (W.D. Wis. 1991). These courts applied the common
fund doctrine as a matter of federal common law and required ERISA
benefit plans to pay for legal services rendered in protecting the
plan's subrogation lien. But see Ryan v. Federal Express Corp., 78 F.3d 123 (3d Cir. 1996) (refusing to require ERISA plan to pay a
proportionate share of attorney fees in recovering subrogation
liens as a matter of federal common law).
We are also unpersuaded by the Trustees' characterization of
the common fund doctrine as an antisubrogation law similar to that
found preempted in FMC Corp. v. Holliday. Although the common fund
doctrine may be invoked in actions involving subrogation liens, it
cannot appropriately be characterized as an "antisubrogation" law.
On the contrary, the common fund doctrine has been applied in many
types of cases covering a large range of civil litigation. S.
Speiser, Attorney Fees 11.13, at 417 (1973). The doctrine is most
frequently applied in class actions brought by, and on behalf of,
creditors, taxpayers, public utility customers, trust
beneficiaries, decedents' estates, labor union members, and
shareholders of corporations. See S. Speiser, Attorney Fees 11.13
through 11.21 (1973) (and cases cited therein); see also Boeing Co.
v. Van Gemert, 444 U.S. 472, 62 L. Ed. 2d 676, 100 S. Ct. 745
(1980) (class action by bondholders against corporation); Mills v.
Electric Auto-Lite Co., 396 U.S. 375, 396-97, 24 L. Ed. 2d 593,
609, 90 S. Ct. 616, 628 (1970) (stockholder's derivative action);
Sprague v. Ticonic National Bank, 307 U.S. 161, 164, 83 L. Ed. 1184, 1185-86, 59 S. Ct. 777, 779 (1939) (action to protect a trust
fund); Brundidge v. Glendale Federal Bank, 168 Ill. 2d 235 (1995).
Moreover, the common fund doctrine bears no resemblance to the
Pennsylvania antisubrogation statute at issue in FMC Corp. v.
Holliday. That statute prohibited plans from requiring
reimbursement of medical expenses from beneficiaries who recovered
from third-party tortfeasors in actions arising out of motor
vehicle accidents. The statute conflicted with a subrogation clause
contained in a self-funded employee welfare benefit plan that
required plan members to reimburse benefits paid to a plan member
if the member recovered from a third-party tortfeasor. The Supreme
Court held that the Pennsylvania statute "relate[d] to" an employee
benefit plan and was thereby preempted. FMC Corp., 498 U.S. at 58,
112 L. Ed. 2d at 364, 111 S. Ct. at 407. The statute required plan
providers in Pennsylvania to calculate benefit levels based on
expected liability conditions that differed from those in states
that had not enacted similar antisubrogation legislation. FMC
Corp., 498 U.S. at 60, 112 L. Ed. 2d at 365, 111 S. Ct. at 408-09.
The Court found that application of different state subrogation
laws to plans would frustrate plan administrators' continuing
obligation to calculate uniform benefit levels nationwide. FMC
Corp., 498 U.S. at 60, 112 L. Ed. 2d at 365-66, 111 S. Ct. at 408-
09.
In contrast to the state statute at issue in FMC Corp. v.
Holliday, the common fund doctrine does not prohibit employers from
structuring their employee benefit plans to require reimbursement
of subrogation liens. Scholtens specifically acknowledges the
Trustees' right to subrogation under both the benefit plan and the
subrogation agreement. He does not seek to modify or avoid his
obligation to reimburse the plan for benefits paid to him and does
not question the right of the trustees to collect under the
subrogation clause. Moreover, nothing in the trial court's decision
relieved Scholtens of his obligation to comply with the terms of
the subrogation agreement. In fact, the trial court specifically
stated that it did not adjudicate the Trustees' rights under the
terms of either the ERISA plan or the subrogation agreement.
The Trustees nevertheless maintain that application of the
common fund doctrine in effect requires plan administrators to
structure plans to cover attorney fees incurred by beneficiaries in
personal injury cases. We disagree. We find that the common fund
doctrine does not dictate or restrict the manner in which ERISA
plans are structured or administered.
An employee benefit plan is in the nature of a contractual
agreement between the employer, the plan and its fiduciaries, and
the participants and beneficiaries. The claim for attorney fees at
issue here did not arise out of that contractual agreement or any
separate subrogation agreement executed between the Trustees and
Scholtens. Rather, the claim for attorney fees arises independently
of both the benefit plan and the subrogation agreement. Here, the
attorney who represented Scholtens in his tort action, and who
negotiated the settlement and obtained the proceeds from which the
plan's subrogation lien will be paid, simply invoked his quasi-
contractual right to payment of fees for services rendered in
recovering the plan's subrogation lien. The quasi-contractual
obligation he seeks to impose upon the Trustees arises
independently of the benefit plan, resting instead upon equitable
considerations of quantum meruit and the prevention of unjust
enrichment. Accordingly, applying the common fund doctrine under
the circumstances of this case does not alter the relationship or
agreements formulated among the principal ERISA entities (e.g., the
employer, the plan fiduciaries, and the participants). It affects
the relations between one of those entities (i.e., the Trustees)
and an outside party. In effect, the attorney who performed legal
services that ultimately led to the recovery of the plan's
subrogation lien instituted a separate and distinct action against
the Trustees for unpaid fees. The action, in substance if not in
form, is wholly independent of and unrelated to the underlying
benefit plan. We conclude, therefore, that the common fund doctrine
does not dictate or restrict the manner in which ERISA plans are
structured or administered.
Supporting this conclusion is this court's decision in Baier
v. State Farm Insurance Co., 66 Ill. 2d 119 (1977). In Baier, the
plaintiff, an attorney, represented a motorist in a claim for
damages arising out of an automobile accident. The attorney
ultimately negotiated a settlement of $12,000 between the injured
motorist and the tortfeasor. The injured motorist used a portion of
the settlement proceeds to reimburse State Farm, pursuant to a
subrogation agreement, for $1,000 in medical benefits State Farm
had paid the motorist following the accident. Following dismissal
of the negligence action, the attorney brought a separate action
against State Farm to recover a fee for the services he performed
in recovering State Farm's subrogation lien. In that case, as here,
there was no allegation that there was a contract of employment,
express or implied, between the attorney and State Farm. Rather,
the claim for fees was based on the equitable concept that an
attorney who performs services in creating a fund should, in equity
and good conscience, be allowed compensation from all those who
seek to benefit from the fund recovered. Baier, 66 Ill. 2d at 124.
In applying the common fund doctrine, the Baier court
specifically rejected State Farm's claim that application of the
doctrine would violate the subrogation agreement between the
insured motorist and State Farm. Baier, 66 Ill. 2d at 126. Like the
Baier court, we find that the quasi-contractual obligation to pay
fees in this case arises wholly independently of, and is unrelated
to, both the subrogation clause in the ERISA plan and the
contractual subrogation agreement that Scholtens signed after the
accident. The common fund doctrine is invoked by someone who is not
a party to the contractual agreement between the plan and its
beneficiaries to recover an unpaid debt, namely, a reasonable fee
in quantum meruit for legal services rendered to the plan and its
Trustees.
The Supreme Court has recognized that such actions are not
preempted by ERISA in Mackey, 486 U.S. at 833, 100 L. Ed. 2d at
846, 108 S. Ct. at 2187. The Mackey Court explained:
"These cases--lawsuits against ERISA plans for run-
of-the-mill state-law claims such as unpaid rent, failure
to pay creditors, or even torts committed by an ERISA
plan--are relatively commonplace. Petitioners and the
United States (appearing here as amicus curiae) concede
that these suits, although obviously affecting and
involving ERISA plans and their trustees, are not pre-
empted by ERISA 514(a)."
In a footnote, the Court cited a number of cases, including one
case involving a suit against an ERISA plan for unpaid attorney
fees. Mackey, 486 U.S. at 833 n.8, 100 L. Ed. 2d at 846 n.8, 108 S. Ct. at 2187 n.8, citing Luxemburg v. Hotel & Restaurant Employees
& Bartenders International Union Pension Fund, 91 Misc. 2d 930, 398 N.Y.S.2d 589 (1977). Luxemburg allowed an attorney to recover
unpaid legal fees from an ERISA plan. Although the suit for unpaid
attorney fees in Luxemburg was based upon an express contract,
while the present action is quasi-contractual in nature, this
factual distinction is not relevant to the preemption question
raised here. The present suit is equivalent to an action to force
an ERISA plan to pay for telephone services or rent. ERISA does not
require the creation of a fully insulated legal world that renders
all state law preempted whenever there is a plan in the picture.
United Wire, Metal & Machine Health & Welfare Fund v. Morristown
Memorial Hospital, 995 F.2d 1179, 1193 (3d Cir. 1993).
2
The Trustees next claim that the common fund doctrine disrupts
the uniform administration of ERISA plans and is thereby preempted
because application of the doctrine will significantly increase
plan costs. The Trustees have offered no proof in support of this
claim, however, and we believe that precisely the opposite result
is likely. The Trustees conceded in oral argument that they do not
generally bring an independent action against third-party
tortfeasors to recover subrogation liens. Instead, they rely upon
the cooperative efforts of injured beneficiaries in suing
tortfeasors as the exclusive means of obtaining reimbursement of
benefits paid to beneficiaries. Holding that the common fund
doctrine is preempted would, in at least some instances, destroy
any incentive plan beneficiaries might have to bring independent
actions against tortfeasors and, thus, ultimately increase plan
costs.
Assume, for instance, that an ERISA plan pays a participant
medical benefits totalling $10,000, and the participant ultimately
obtains a settlement award of $15,000 from a responsible third
party. Under these facts, $10,000 of the settlement proceeds would
be paid to the ERISA plan. Assuming a standard one-third
contingency fee agreement, the injured worker's attorney would be
entitled to the remaining $5,000. At least some plan beneficiaries
would not be willing to file an independent civil suit that would
result in no benefit to them. Requiring ERISA plans to pay attorney
fees under the common fund doctrine, on the other hand, may
encourage beneficiaries to pursue independent actions against
tortfeasors. Because such actions ultimately result in
reimbursement of subrogation liens to ERISA plans, plan costs would
thereby be reduced.
Even if we found, however, that application of the common fund
doctrine would increase plan costs, that finding would not
necessitate a conclusion that the law is preempted under ERISA. The
Supreme Court has held that the fact that a state law imposes
additional costs on ERISA plans, standing alone, is not a
sufficient basis for holding that the law is preempted. Travelers,
514 U.S. at ___, 131 L. Ed. 2d at 705, 115 S. Ct. at 1677; Mackey,
486 U.S. at 831, 100 L. Ed. 2d at 845, 108 S. Ct. at 2186.
In Travelers, a New York statute imposed surcharges on
hospital bills of patients covered by commercial insurance and
health maintenance organizations (HMOs), but not on bills of
patients covered by Blue Cross/Blue Shield. The statute ultimately
resulted in a 24% surcharge on the bills of commercially insured
patients and a 9% surcharge on patients covered by HMOs. Several
commercial insurers who were acting as fiduciaries of ERISA plans
filed suit, arguing that the statute imposing the surcharges was
preempted by ERISA. The Second Circuit Court of Appeals agreed,
concluding that the surcharges "related to" ERISA plans because
they imposed a "significant economic burden" on such plans and
therefore exerted an impermissible impact on ERISA plan structure
and administration. Travelers Insurance Co. v. Cuomo, 14 F.3d 708,
721 (2d Cir. 1994).
The Supreme Court, in a unanimous opinion authored by Justice
Souter, rejected this conclusion and found that the statute
imposing the surcharges was not preempted. In reaching this result,
the Court acknowledged that the surcharges affected ERISA plans by
encouraging insurance buyers, including ERISA plans, to choose
certain insurers (i.e., Blue Cross) over other insurers. Travelers,
514 U.S. at ___, 131 L. Ed. 2d at 707, 115 S. Ct. at 1679. The
Court nevertheless concluded that the statute was not preempted,
because an "indirect economic influence *** does not bind plan
administrators to any particular choice *** [or] preclude uniform
administrative practice or the provision of a uniform interstate
benefit package ***. It simply bears on the costs of benefits and
the relative costs of competing insurance to provide them."
Travelers, 514 U.S. at ___, 131 L. Ed. 2d at 707-08, 115 S. Ct. at
1679. The Court concluded that "laws with only an indirect economic
effect on the relative costs of various health insurance packages
in a given State are a far cry from those `conflicting directives'
from which Congress meant to insulate ERISA plans." Travelers, 514
U.S. at ___, 131 L. Ed. 2d at 709, 115 S. Ct. at 1680.
Likewise, application of the common fund doctrine does not
"bind plan administrators to any particular choice *** [or]
preclude uniform administrative practice or the provision of a
uniform interstate benefit package." Regardless of the common fund
doctrine, a plan may choose to initiate its own action against
responsible tortfeasors to recoup benefits paid to plan
beneficiaries. In such circumstances, the plan must employ legal
counsel, file a lawsuit and expend litigation costs. A plan may
also choose to wait for the injured person to seek compensation
from a responsible third party and then enforce its right to
subrogation under the benefit plan. Where an attorney performs
legal services on the plan's behalf, however, the plan has a legal
obligation to pay that attorney a reasonable fee for those
services. It may not simply accept the fruits of an attorney's
labor without paying a reasonable fee for the legal services
rendered. Had the Trustees hired independent counsel to pursue
their subrogation lien and then, after services were rendered,
inexplicably refused to pay the bill for such services, we would
not hesitate to obligate them to pay. The preemption provision of
ERISA does not compel a different result here simply because we are
dealing with a quasi-contractual obligation to pay for legal
services. "[I]f ERISA is held to invalidate every state action that
may increase the cost of operating employee benefit plans, those
plans will be permitted a charmed existence that never was
contemplated by Congress." United Wire, 995 F.2d at 1194, citing
Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir. 1984).
Our conclusion is also supported by the Supreme Court's
decision in Mackey. The Court there held that ERISA's preemption
provision did not bar application of a general state garnishment
statute to participants' benefits under an ERISA plan, even though
garnishment imposed administrative costs and burdens on benefit
plans. The Court acknowledged that, when a plan was garnished by
creditors under the statute, plan trustees were served with
garnishment summons, became parties to a suit, and ultimately
deposited the funds that they would otherwise hold or pay out to
beneficiaries. Although compliance with the state law admittedly
subjected ERISA plans to substantial administrative burdens and
costs, the Court nevertheless found that the statute did not
"relate to" benefit plans within the meaning of section 514(a).
Mackey, 486 U.S. at 831, 100 L. Ed. 2d at 845, 108 S. Ct. at 2186.
In sum, we have before us a generally applicable common law
doctrine which (1) is not intended to regulate the affairs of ERISA
plans, (2) neither singles out such plans for special treatment nor
predicates rights or obligations on the existence of an ERISA plan,
and (3) does not have either the effect of dictating or restricting
the manner in which ERISA plans structure or conduct their affairs
or the effect of impairing their ability to operate simultaneously
in more than one state. The purpose of ERISA is to protect
employees, not to provide loopholes through which ERISA plans can
avoid paying their debts. We therefore decline to hold that the
common fund doctrine is preempted by section 514(a). Without
explicit direction, we would not ascribe to Congress the intention
to void existing general provisions of state law protecting the
very beneficiaries of the ERISA statute.
3
As a final matter, we reject the Trustees' claim that we are
bound to follow statements made in a decision of the Seventh
Circuit Court of Appeals in Land v. Chicago Truck Drivers, Helpers
& Warehouse Union Health & Welfare Fund, 25 F.3d 509 (7th Cir.
1994), to the effect that the common fund doctrine may not be
applied to ERISA benefit plans. The statements in Land concerning
the common fund doctrine are pure dicta. See Carpenter v. Modern
Drop Forge Co., 919 F. Supp. 1198, 1205 (N.D. Ind. 1995). The
question raised in this appeal--namely, whether the common fund
doctrine "relates to" and is therefore preempted by section 514(a)
of ERISA--was never raised or decided in Land. The plaintiff in
Land did not invoke the common fund doctrine in either the district
or the appeals court. Land, 25 F.3d at 513; Modern Drop Forge Co.,
919 F. Supp. at 1205 n.5. Rather, the only substantive issue the
Land court decided was that ERISA did not unconstitutionally
delegate legislative authority to private welfare benefit plans.
Land, 25 F.3d at 512-13 (court also addressed a procedural matter
and held that the plaintiff's attempt to challenge the plan's
denial of benefits to him pursuant to a section 1983 cause of
action warranted Rule 11 sanctions). Therefore, we are not bound by
the language upon which the Trustees rely.
CONCLUSION
For the reasons stated above, we hold that any effect the
common fund doctrine has upon employee benefit plans is simply too
tenuous, remote or peripheral to warrant a finding that the
doctrine "relates to" such plans. We therefore conclude that the
doctrine is outside the scope of ERISA's preemption provision (29
U.S.C. 1144(a) (1982)). The Trustees are obligated to pay the
reasonable value of the legal services rendered in protecting their
subrogation lien. Accordingly, the appellate court judgment
affirming the trial court's judgment holding the Trustees liable
for the legal expenses incurred in protecting their subrogation
lien is affirmed.
Affirmed.
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