On January 20, 2016, the United States Supreme Court issued a significant decision that makes it more difficult for employee benefit plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) to obtain reimbursements of payments made to plan participants who have subsequently received third-party settlements. The decision is Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, __ U.S.__, 136 S. Ct. 651, 84 USLW 4046 (Montanile). In Montanile, the issue presented to the Supreme Court for its review was whether an ERISA plan has authority under the statute to place a lien on a plan participant’s general assets once that person has obtained funds from the settlement of a legal action with a third party and then dissipated the settlement funds.
The Supreme Court held in an 8-1 decision that an ERISA plan fiduciary may not seek reimbursement out of the third-party settlement a plan participant has received in circumstances where the participant has spent the settlement funds. Writing the opinion for the majority (Justice Ruth Bader Ginsburg issued a dissenting opinion), Justice Clarence Thomas found that ERISA provision Section 502(a)(3), which authorizes a fiduciary to bring a suit for equitable relief to enforce the terms of the plan, precludes such a suit for reimbursement where the plan fiduciary is seeking to attach the participant’s separate assets that are not traceable to the settlement funds.
As will be discussed below, Montanile involved an employee health benefit plan. Justice Thomas did not address whether the court’s ruling applies more broadly to other types of ERISA plans, such as pension or disability plans, that may seek to recoup benefits that could have been paid to participants over many years or even decades. Given the length of time during which such pension or disability payments may have occurred, it is even more likely that the payment recipients will have spent the payments they had received.
Overview of Montanile Decision
This case arose from the medical expenses Robert Montanile incurred as a result of injuries he suffered when a drunk driver ran through a stop sign and crashed into his vehicle. Montanile was a participant in the National Elevator Industry Health Plan. The plan paid in excess of $120,000 for medical care Montanile required as a result of his injuries from the car accident. However, the plan’s provisions enable it to demand reimbursement when a participant recovers money from a third party for medical expenses. Indeed, Montanile did file a negligence claim against the drunk driver and obtained a $500,000 settlement. He netted $240,000 after paying attorney’s fees and repaying an advance from his attorneys.
The plan’s Board of Trustees sought reimbursement of the medical expenses the plan paid to Montanile, but his attorney argued that the plan was not entitled to any recovery. The parties entered into negotiations over reimbursement but never reached an agreement. Thereafter, Montanile’s attorney informed the board that he would distribute the remaining settlement funds unless the board objected within 14 days. After the board did not object within that timeframe, Montanile’s attorney paid him the remainder of the funds from the settlement.
Six months later, the plan filed suit against Montanile in the United States District Court for the Southern District of Florida under ERISA Section 502(a)(3) seeking reimbursement of the amount it expended on his medical care. The plan sought to enforce an equitable lien against any settlement funds, as well as any funds that were in Montanile’s actual or constructive possession. Montanile argued that he had spent almost all of the settlement funds and that there were no specific, identifiable funds separate from his general assets against which the equitable lien could be enforced. The district court rejected that argument and held that even if Montanile had dissipated some or all of the settlement funds, the board was entitled to reimbursement from Montanile’s general assets. The United States Court of Appeals for the Eleventh Circuit affirmed the district court’s decision. The court of appeals held that the equitable lien was enforceable, notwithstanding dissipation of the specific fund to which the lien attached. The court of appeals determined that a plan can recover out of a participant’s general assets when the participant dissipates the specifically identified fund.
Courts of appeals in only two circuits have adopted the position that ERISA plans cannot seek reimbursement of general assets under Section 502(a)(3) from participants unless they can trace their claims to specific funds in the participant’s possession. The Eleventh Circuit’s decision followed the majority position taken by courts of appeals in other circuits permitting an ERISA plan to enforce an equitable lien against a defendant’s general assets without having to satisfy a tracing requirement.
The Supreme Court’s decision in Montanile upholds the minority position. One point Justice Thomas made in his opinion was that a plan can only seek equitable relief under Section 502(a)(3), whereas ERISA contains other civil action provisions, such as Section 502(a)(1)(B), that more broadly allow plan participants and beneficiaries to enforce their rights under the plan that does not limit them to equitable relief. He further explained that equitable remedies enforce a right against a particular thing, rather than a right to recover money generally out of a defendant’s general assets. In addition, Justice Thomas found that an equitable lien could ordinarily be enforced against specifically identifiable funds that remain in the defendant’s possession or against traceable items that the defendant purchased with the funds, such as a car. However, he indicated that expenditure of the entire identifiable fund on non traceable items (like food or travel) destroys an equitable lien. Justice Thomas then concluded that the board could not enforce its equitable lien against Montanile’s general assets.
The decision in Montanile puts responsibility on health benefit plan fiduciaries to have in place processes to ensure that they seek reimbursement for medical expenses that they have paid to plan participants and beneficiaries promptly after those individuals have recovered those medical expenses from third parties in legal proceedings. It is especially important that these processes include a system for investigating and tracking expensive claims.
By commencing reimbursement actions promptly, the likelihood that third-party settlement funds will be wholly dissipated will be diminished. Nevertheless, as some settlements (especially settlement amounts) are reached in secrecy with nondisclosure agreements, it may be difficult for plans to gain sufficient information to trigger a prompt reimbursement effort. Furthermore, if lower courts interpret Montanile to apply to other types of ERISA plans, it may not be practicable for plans to quickly seek reimbursement before dissipation of pension or disability disbursements that were perhaps paid years earlier.
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