Last week, the United States Supreme Court held that an ERISA healthcare benefit plan with reimbursement rights can only obtain “appropriate equitable relief” when enforcing its lien against a third-party settlement, thus limiting the plan’s recovery to settlement funds still held by or on behalf of the participant:

We hold that, when a participant dissipates the whole settlement on nontraceable items, the fiduciary cannot bring a suit to attach the participant’s general assets under [ERISA] §502(a)(3) because the suit is not one for “appropriate equitable relief.”

Montanile v. Bd. of Trs. of Nat'l Elevator Industry Health Benefit Plan577 U. S. ____ , No. 14–723 (Jan. 20, 2016).

Under ERISA Section 502(a)(3), a civil action may be brought by a plan participant, beneficiary or fiduciary to enjoin any act or practice that violates any provision of Title I of ERISA or the terms of the plan, or to obtain other “appropriate equitable relief” to redress such violations or to enforce any provisions of Title I or the terms of the plan.

Montanile is yet another Supreme Court case that interprets the meaning of “appropriate equitable relief,” following Mertens v. Hewitt Associates, 508 U.S. 248 (1993); Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002);Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006); CIGNA Corp. v. Amara, 563 U. S. 421 (2011); and US Airways, Inc. v. McCutchen, 569 U. S. ___, 133 S. Ct. 1537 (2013). Montanile continues the Court’s narrow interpretation of “appropriate equitable relief,” limiting such relief to “those categories of relief that weretypically available in equity” before 1938 when the Federal Rules of Civil Procedure were adopted when courts of law and equity were separate and “legal remedies” and “equitable remedies” were strictly defined.

In Montanile, the Supreme Court makes clear that even if an ERISA healthcare plan has a right to reimbursement and a lien against a participant’s personal injury settlement, the plan has no claim against the participant’s general assets (which would be a legal remedy) but only an equitable claim against the settlement “fund,” which disappears if the settlement proceeds are dissipated by the participant.

Plan Sues Montanile for Reimbursement of Medical Expenses Paid by Plan

Robert Montanile was injured in a car accident and his ERISA group healthcare plan paid his medical expenses, totaling $121,044. Under the plan’s terms, acceptance of benefits constituted an agreement that any amounts recovered from another party will be applied to reimburse the plan in full for benefits advanced by it. Under Supreme Court precedents, this would create an equitable lien in favor of the plan if Montanile received a judgment or settlement for medical expenses paid by the plan.

Montanile obtained a $500,000 settlement for his injuries. After payments to his attorneys, $240,000 remained of the settlement, most of which those attorneys held in a client trust account. The plan sought reimbursement of the medical expenses it had paid. After discussions failed to resolve the matter, one of Montanile’s attorneys informed the plan that he would distribute the remaining settlement funds to Montanile unless the plan objected within 14 days. The plan did not respond within that time, and so the attorney gave Montanile the remainder of the funds. Because ERISA generally preempts state claims related to ERISA benefit plans, the plan’s only recourse was a suit for “appropriate equitable relief” under Section 502(a)(3). Six months after the reimbursement negotiations with Montanile broke down, the plan filed suit against him, seeking to enforce its equitable lien and to enjoin him from dissipating any such funds. Montanile argued that because he had already spent al­most all of the settlement, no identifiable fund existed against which to enforce the lien.

The lower courts, including the Eleventh Circuit, rejected Montanile’s argu­ment and held that even if he had completely spent the settlement proceeds, the plan was entitled to re­cover out of Montanile’s gen­eral assets. Along with the Eleventh Circuit, the First, Third, Sixth and Seventh Circuits had held that “appropriate equitable relief” permitted enforcement of a plan’s lien against a participant’s general assets. The Eighth and Ninth Circuits had disagreed and had held that “appropriate equitable relief” only permits the plan to recover from specifically identified funds in the beneficiary’s possession or assets “traceable” to those funds.

Supreme Court Refuses to Allow Reimbursement When Settlement Fund Is Dissipated

By an 8-1 vote (with Justice Alito agreeing with the result but not all the Court’s reasoning), the Supreme Court reversed the Eleventh Circuit and held that the plan’s right to “appropriate equitable relief” did not permit a judgment against Montanile’s general assets, but only against funds related to the settlement. Writing for the majority, Justice Thomas said that, under Sereboff, whether the remedy a plaintiff seeks is legal or equitable depends on the basis for the plaintiff’s claim and the nature of the underlying remedies sought, which are determined by looking at “standard treatises on equity,” which establish the “basic contours” of what equitable relief was typically available before the merger of law and equity courts.

As discussed in those treatises, a plaintiff ordinarily could not enforce an equitable lien if the defendant dissipated the separate, identifiable fund to which the lien had attached. The plaintiff could not attach the defendant’s general assets because that is a legal remedy, and not “appropriate equitable relief” under Section 502(a)(3).

The Court rejected the plan’s argument that CIGNA adopted a broader interpretation of Section 502(a)(3) and insisted that the Court’s narrow interpretation of “appropriate equitable relief” was unchanged. The Court stated:

CIGNA reaffirmed that “traditionally speaking, relief that sought a lien or a constructive trust was legal relief, not equitable relief, unless the funds in question were ‘particular funds or property in the defendant’s possession.’ * * * In any event, the Court’s discussion of §502(a)(3) in CIGNA was not essential to resolving that case, and — as our later analysis in US Airways, Inc. v.McCutchen * * * reinforces—our interpretation of “equitable relief” in Mertens,Great-West, and Sereboff v. Mid Atlantic Medical Services, Inc., * * * remains unchanged. [Citations omitted.]

The Court also said the lien could be enforced to the extent Montanile had purchased “traceable assets” with the settlement or commingled the settlement proceeds with a different fund. The lien would survive in these circumstances and commingling would allow the plan to recover the amount of the lien from the entire commingled fund. This appears to mean that if Montanile had deposited the settlement proceeds in his bank account or used the funds to buy “traceable assets,” the plan could enforce its lien against what was left in the bank account or against assets purchased with the settlement funds.

The plan asserted that tracking assets and participating in legal proceedings is hard and costly, and that settlements are often shrouded in secrecy. The Court concluded that the facts of the case undercut that argument:

The [plan] had sufficient notice of Montanile’s settlement to have taken various steps to preserve [the settlement] funds. Most notably, when negotiations broke down and Montanile’s lawyer expressed his intent to disburse the remaining settlement funds to Montanile unless the plan objected within 14 days, the [plan] could have − but did not − object. Moreover, the [plan] could have filed suit immediately, rather than waiting half a year.

The Court remanded the case to the lower courts to determine whether or the entire settlement fund was dissipated.

The Dissent: A “Bizarre Conclusion”

In her lone dissent, Justice Ginsburg argued that the majority’s narrow definition of “appropriate equitable relief” in Section 502(a)(3) is an error, resulting in the “bizarre conclusion” that Montanile could avoid his duty to reimburse the plan by rapidly spending his settlement proceeds on nontraceable assets. She would not perpetuate the mistake in Great-West, i.e.,

reading the work product of a Congress sitting in 1974 [the year ERISA was enacted] as “unravel[ling] forty years of fusion of law and equity, solely by employing the benign sounding word ‘equitable’ when authorizing ‘appropriate equitable relief.’” [Citation omitted.]

What Montanile Means for ERISA Pension and Welfare Plans

Benefits may be improperly paid by healthcare, disability or pension plans due to fraud or unintentional errors by the participant. Retirement or disability benefits may be improperly paid due to mistake by a plan administrator or service provider. In all these circumstances, as well as in reimbursement situations such as Montanile, the plan fiduciary has a duty to seek to recover plan assets improperly paid. Montanilewill complicate the fiduciary’s efforts to recover these amounts. (An insured ERISA plan may also be subject to a state insurance law impacting the plan’s right to recover from a participant.)

In light of Montanile, ERISA benefit plans that want to recover plan assets paid in error or seek reimbursement should:

  • have language in both the plan document and summary plan description that creates a lien by agreement under Supreme Court precedents;
  • promptly assert and pursue claims to recover overpayments or obtain reimbursement, including written notice to the attorney holding the settlement funds, filing suit or obtaining other security for the plan; and
  • be prepared to pursue “tracing” or commingling of assets spent by participants.

Montanile is likely to generate more litigation because plans that delay filing suit run the risk that settlement proceeds or plan assets will be dissipated and recoveries may be limited. Expect, as well, more litigation over “commingling” and tracing of assets. Although it is not clear that the limited remedies available for reimbursement under Montanile will be applied in cases where plans seek recovery of pension or disability benefits paid because of error or fraud, such a defense may be raised against the plan.

ERISA fiduciaries can take some comfort in that Montanile reaffirms a plan’s right an equitable lien against certain assets held by the participant or his attorney and may limit relief against the fiduciary when the fiduciary is the defendant. The Supreme Court’s re-emphasis on historical equity principles in applying Section 502(a)(3) means that ERISA litigators must look to “standard treatises on equity” to determine what “appropriate equitable relief” means in any case.

What Montanile Means for Participants and Plaintiffs Personal Injury Lawyers

Under the ABA Model Rules of Professional Conduct (Model Rules) and ethical rules in many states, a lawyer must promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by such client or third person, must promptly render a full accounting regarding such property. See Model Rule 1.15; Arizona Rules of Professional Conduct 1.15(d) and Ethics Opinion 11-3 (2011); State Bar of California Standing Committee on Professional Responsibility and Conduct, Formal Opinion No. 2008-175; Virginia Legal Ethics Opinion 1865; Board of Professional Responsibility of the Supreme Court of Tennessee Formal Ethics Opinion 2010-F-154. Comment 4 to Model Rule 1.15 states in part:

A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client. In such cases, when the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved.

By reaffirming that a plan can assert a lien against a participant’s recovery from a third party, Montanile reiterates that ERISA plans can have claims as to settlement or judgment proceeds held by a lawyer representing the participant in a personal injury claim against such a party. Montanile does not relieve these lawyers of their duties when holding funds subject to valid liens. Counsel for an ERISA plan should carefully check applicable state law as to the process by which the plan’s lien rights can be asserted against funds held in a plaintiff lawyer’s trust account.