This article was first published on the California Bankruptcy Blog at http://calbk.blogspot.com/2014/01/insurer-cannot-attach-social-security.html

In Bilyeu v. Morgan Stanley, 683 F.3d 1083 (9th Cir. 2012), the United States Court of Appeals for the Ninth Circuit rules that an insurer cannot impose a lien upon the proceeds of Social Security benefits in the possession of the insured in order to recover overpayment of long-term disability benefits.

Leah Bilyeu filed a claim with First Unum Life Insurance Co. under her long-term disability plan with her employer Morgan Stanley.  Unum approved a claim for 24-months of benefits, subject to a mental-illness limitation.  Bilyeu brought an action against Unum and alleged that her benefits were wrongfully terminated because her disability was caused by an autoimmune condition.  Unum counterclaimed for reimbursement of $36,000 in Social Security benefits Bilyeu received.

By reversing the trial court’s judgment in favor of Unum, the Ninth Circuit split with five other circuit courts. Specifically, the court ruled that Unum could seek only equitable relief and could not sue for breach of contract under the Employee Retirement Income Security Act (ERISA). Moreover, Unum could not obtain reimbursement by imposing an “equitable lien by agreement” against the proceeds of Bilyeu’s Social Security benefits by targeting money in her possession as a fund for recovery.  The court found that this would “circumvent the congressional prohibition on assignment and attachment of Social Security benefits….”

This case may have implications for bankruptcy debtors and trustees.  In particular, it is likely to impact the priority and treatment of insurers’ claims for reimbursement against bankruptcy estates.

About the author:

Reno F.R. Fernandez III is a partner with Macdonald Fernandez LLP, a bankruptcy, turnaround and insolvency litigation firm with offices in San Francisco and Modesto, California.  Mr. Fernandez is also the chair of BASF’s Commercial Law & Bankruptcy Section.