The U.S. Supreme Court has narrowed, ever so slightly, the ever-changing definition of “appropriate equitable relief” under ERISA Section 502(a)(3). In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan,[1] the high court addressed whether a plan fiduciary can recover medical payments made on behalf of a participant when the plan fiduciary has not identified third-party settlement funds still in the participant’s possession at the time the plan fiduciary asserts its reimbursement claim. Yesterday, the Supreme Court held in an 8-1 ruling that when a plan participant has spent — on nontraceable items such as fees for services or travel — all the settlement proceeds that could have been used to reimburse the plan, the plan fiduciary may not reach the participant’s other assets as a broader means of recovery.

The facts of Montanile were mostly undisputed by the parties.[2] Plaintiff, Board of Trustees of the National Elevator Industry Health Benefit Plan (the “Plan”), was an employee welfare benefit plan, which reserved for itself in its summary plan description (“SPD”) “a right to first reimbursement out of any recovery.” Montanile, a plan participant, was injured in a car accident, and the Plan paid out more than $120,000 in medical expenses on his behalf.[3]

Meanwhile, Montanile retained counsel to pursue personal injury damages and ultimately settled for $500,000. When the Plan attempted to enforce its right to reimbursement and subsequent negotiations broke down, Montanile’s attorney notified the Plan that he would distribute the settlement funds to Montanile unless the Plan objected within 14 days. After the Plan failed to respond by the deadline, the funds were distributed to Montanile.  The Plan then waited six months before suing under Section 502(a)(3)(B) of ERISA to enforce an equitable lien on the settlement funds, during which time Montanile spent most of the money.[4]

The district court in Montanile was facing a situation where restitution could theoretically expose Montanile’s general assets to a judgment: the third party settlement funds earmarked to reimburse medical expenses paid by the Plan had either been spent or comingled by Montanile by the time the Plan filed suit. Acknowledging the lack of Eleventh Circuit authority on point, the district court found that the Plan had a right to reimbursement on the grounds that “a beneficiary’s dissipation of assets is immaterial when a fiduciary asserts an equitable lien by agreement.”[5] The Eleventh Circuit easily affirmed the decision in Montanile[6] relying on its recent holding in AirTran Airways, Inc. v. Elem, 767 F.3d 1192 (11th Cir. 2014).[7]

In the Supreme Court, the issue became whether spending settlement funds could destroy the enforcement of a lien. Justice Thomas, writing for the majority, explained that — where a defendant has already spent proceeds that are subject to reimbursement — a restitution claim may only be asserted where funds or property in the defendant’s possession are clearly traceable back to the proceeds that were subject to reimbursement[8] and, where such traceable funds or property exist, the plan can create and enforce an equitable lien over such funds or property.[9] Rejecting the Plan’s arguments that ERISA’s general objectives, concepts of fairness and the fact that the equitable lien was by agreement – by virtue of being set forth the in SPD – justified a recoupment, Justice Thomas clarified that enforcing an equitable lien over a participant’s general assets is not “typically available” relief under the principles of equity. The majority remanded the case back to the district court to determine “how much dissipation there was” and whether Montanile mixed the settlement funds with his general assets. So, there is still some possibility of recovery by the Plan.

From a public policy and legal theory perspective, the broad question put to the Court in Montanile — what is “appropriate equitable relief”? — was unlikely to spawn a new “tracing” rule for all types of reimbursement claims. Instead, the Montanile decision demonstrates that all but one of the justices — Justice Ginsburg, who dissented in the case — are unwilling to turn ERISA Section 502(a)(3) into a damages free-for-all. At the end of the decision, Justice Thomas explained that the Plan should have acted more expeditiously to secure the settlement proceeds before they were dissipated. That statement is the complete scope of Montanile: equitable tracing rules for plan reimbursement remain in place and plans need to act promptly if they want to be repaid.

What Does the Montanile Decision Mean to Plan Fiduciaries?

A narrow decision of this nature has two practical impacts for plan fiduciaries.

  • First, SPDs should include language that puts participants on notice of the plan’s reimbursement rights in the case of a tort recovery and the obligation of participants to guard and not spend any medical expense funds received in a tort recovery that may be subject to the plan’s claim for reimbursement.
  • Second, plan fiduciaries must anticipate the need to enforce and monitor the plan’s subrogation rights when plan assets are paid related to personal injury scenarios and should establish administrative procedures to carry out such enforcement and monitoring.

As an example of the importance of the second point, in AirTran, the plan only learned of the defendants’ full recovery — $425,000 instead of $25,000 — by accident when the defendants put a copy of the wrong check in the mail! It is incumbent upon plans to communicate with all parties in a tort suit, calendar important deadlines, and consult with outside counsel when third-party settlement funds are on the horizon.