Most health plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), include a subrogation clause which requires a participant to reimburse the plan if the participant later recovers money from a third party for injuries (which were treated by medical benefits provided by the health plan).  In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit PlanNo. 14-723, 2016 WL 228344 (January 20, 2016), the United States Supreme Court ruled, that when a participant expends the whole recovery on nontraceable expenditures, the health plan may not seek the reimbursement (subrogation) from the participant’s general assets.

Robert Montanile (the “Participant”) was a participant in the National Elevator Industry Health Benefit Plan (the “Health Plan”) which was an ERISA health plan administered by a Board of Trustees (the “Administrator”).  In 2008, the Participant was severely injured in an automobile accident with a drunk driver and the Health Plan incurred roughly $121,000 in medical claims with respect to the accident.  The Participant signed a reimbursement agreement re-affirming his obligation to reimburse the Health Plan for any recovery he obtained with respect to the accident.

The Participant filed a lawsuit against the drunk driver (and his insurance company) and obtained a $500,000 settlement.  The Participant paid his attorney $200,000, repaid approximately $60,000 of certain advances, and approximately $240,000 of the settlement remained.  The Administrator sought reimbursement of the approximately $121,000 previously paid by the Health Plan from the Participant’s attorney on behalf of the Health Plan.

The parties could not reach an agreement to turn over a portion of the settlement to the Health Plan.  After settlement negotiations broke down, the Participant’s attorney notified the Administrator that he would distribute the remaining settlement proceeds to the Participant unless the Administrator objected within 14 days.  The Administrator did not respond within this time and the Participant’s attorney distributed the remaining settlement funds to the Participant.

Six months later, the Administrator sued the Participant pursuant to Section 502(a)(3) of ERISA seeking reimbursement of the roughly $121,000 of benefits provided through the Health Plan.  The Participant argued that, because all of the settlement proceeds had been expended, there were no funds available from which the Administrator could collect the reimbursement.

The lower courts (the U.S. District Court and the U.S. Circuit Court) ruled that once a reimbursement right arises (i.e. the equitable lien attaches), the expenditure or dissipation of the specific funds to which the lien attaches cannot destroy the underlying reimbursement obligation (i.e., the Health Plan was entitled to seek reimbursement from the Participant’s general assets).

The U.S. Supreme Court ruled that the Administrator’s rights under ERISA Section 502(a)(3) were limited to “equitable remedies”.  Under this approach, the Supreme Court reasoned that the Administrator was limited to an “equitable lien” on the settlement funds and, that if the settlement funds were expended on non-traceable items (such as food or travel), the right to reimbursement (or the equitable lien) disappeared as the identified fund was expended (or dissipated).

In other words, the Health Plan could only look to the settlement funds as the source of payment for the participant’s reimbursement/subrogation liability.  Once the settlement funds are expended on non-traceable expenditures (i.e., expenditures that do not result in an asset which can be used to satisfy the reimbursement liability), the Health Plan’s reimbursement right is eliminated.

In the Montanile case, the Administrator failed to timely object to the distribution of the settlement funds to the Participant.  In addition, the Administrator waited six months following such distribution before beginning a lawsuit to enforce the reimbursement obligation.  These actions permitted the Participant to expend a substantial portion of the settlement funds (the case has been remanded to the lower courts to determine whether, in fact, all of the funds have been expended).  The expenditure of a substantial portion of the settlement funds on non-traceable expenditures resulted in the Health Plan losing all or substantially all of its right to reimbursement.

The Montanile case provides a relatively straight forward lesson to health plan fiduciaries (i.e. administrators) seeking reimbursement or subrogation.  First, the reimbursement obligation is limited to the assets/funds that the participant directly or indirectly receives from the third party.  Second, any delay by the fiduciary in seeking such reimbursement may adversely impact the Health Plan’s ability to obtain such reimbursement (or subrogation).