ERISA Section 502(a)(3) empowers plan fiduciaries to file suit “to obtain … appropriate equitable relief … to enforce … the terms of the plan.” In 1993, the Supreme Court of the United States interpreted this ERISA provision to mean that plan fiduciaries may only seek relief “typically available in equity.” Continuing its clarification of what precisely qualifies as “equitable relief” under ERISA Section 502(a)(3), in an 8-1 decision on January 20, 2016, the Supreme Court ruled in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan that an ERISA plan cannot enforce an equitable lien against a participant’s general assets when the full amount of the settlement is spent on non-traceable items.

Montanile involved a participant who received a large third-party settlement after he was seriously injured in a car accident. Pursuant to the terms of the National Elevator Industry Health Benefit Plan (Plan), Montanile received approximately $121,044.02 in Plan benefits to pay for his medical expenses prior to his settlement.

After filing a private suit against the drunk driver responsible for the accident, Montanile received a $500,000 settlement. The Plan contained a subrogation clause, entitling the Plan to reimbursement from the third-party settlement for Montanile’s medical expenses, and Montanile had signed a reimbursement agreement acknowledging his obligation to reimburse the Plan from any recovery he obtained from a third party. The settlement was sufficient, after paying attorney fees and amounts advanced by the lawyers, to reimburse the Plan for the full $121,044.02. Montanile’s lawyers held the remaining settlement amount in a client trust account while the Plan administrator and the lawyers negotiated the reimbursement terms. After negotiations broke down, however, the lawyers distributed the remaining settlement amount to Montanile. The Plan administrator did not timely object to the distribution and did not file a claim under ERISA Section 502(a)(3) until half a year later, after Montanile had received the settlement funds and spent some or all of it on living expenses. 

Montanile makes clear that enforcement of an equitable lien against general assets is not a request for “appropriate equitable relief” permitted under ERISA Section 502(a)(3). A plan cannot recover under ERISA Section 502(a)(3) to the extent a settlement is spent on non-traceable items. However, the Supreme Court’s decision appears to leave open the opportunity for recovery when a settlement is spent on specifically traceable items or when the settlement is comingled with general assets, such as a personal bank account.

The Sereboff Test

To be considered equitable in nature, a claim must pass the two-part test prescribed in Sereboff v. Mid Atlantic Medical Services, Inc.:

  • The basis for the plaintiff’s claim must be equitable.
  • The nature of the underlying remedies sought must be equitable.
  • The Supreme Court held that the Plan’s claim for reimbursement of Montanile’s medical expenses was equitable in nature under the Sereboff test because the Plan had obtained equitable lien by agreement that attached to Montanile’s settlement amount once the settlement amount was paid to him. However, because the Plan waited until Montanile had spent all or some of the settlement fund, Montanile argued that the Plan was now seeking a legal remedy, not an equitable remedy, by attempting to recover from Montanile’s general assets.

    Nature of Equitable Remedies

    The Supreme Court found that an equitable lien by agreement will pass the first part of the Sereboff test. Traceability can defeat the second portion of the test, however. The basic premise of an equitable lien by agreement is that the defendant constructively possesses a fund to which the plaintiff is entitled, rather than the defendant physically possessing the plaintiff’s property.

    Citing Sereboff, the Supreme Court acknowledged that an equitable lien by agreement on a third-party settlement is a claim based in equity. Specifically, an equitable lien by agreement gives rise to a claim in equity, because a contract to convey a specific object before it is acquired will make the contractor a trustee as soon as he or she gets a title to the thing. Here, the Supreme Court found that the lien attached when Montanile obtained title to the settlement fund.

    According to the treatises cited by the Supreme Court, an equitable lien is a right of a special nature over a specific thing. In this case, by entering into a reimbursement agreement with Montanile, the Plan had asserted an equitable lien over Montanile’s ultimate settlement amount. The Supreme Court noted that if the Plan administrator had immediately sued to enforce the lien against the settlement fund, the nature of the remedy would have been equitable. Once Montanile’s lawyers distributed the settlement to Montanile and Montanile spent the money on living expenses and other non-traceable items, the lien was eliminated.

    Traceability when Assets Comingled

    Although the Supreme Court held that an individual’s expenditure of the entire identifiable fund on non-traceable items (like food or travel) destroys an equitable lien, the Court left the door open for equitable recovery of dissipated settlement funds if comingled with another pot of money. The Supreme Court found a genuine issue of material fact as to how much of the settlement fund had been spent on non-traceable items. The Court also noted a lack of evidence about whether Montanile kept his settlement fund separate from his general assets. As a result, the Supreme Court remanded the case back to the district court for a determination on those issues.

    Impact of the Opinion

    This decision should encourage plan fiduciaries to take action on reimbursement and subrogation rights more quickly after learning of a third-party recovery, in order to preserve their right to assert an equitable remedy against an identifiable, traceable fund. The Supreme Court rejected the Plan’s argument that tracking and investigating participants’ third-party legal proceedings is too difficult and costly. Plan administrators and fiduciaries should review and update subrogation and reimbursement provisions in plan documents and summary plan descriptions to preserve all remedies available to recover from plan participants who obtain settlements or awards from third parties.

    While the Supreme Court’s decision in Montanile clarifies the rules related to when a plan fiduciary may seek equitable relief to recover a reimbursement or subrogation right, it will likely lead to a new round of litigation to determine when a fund is properly comingled with the third-party recovery to allow enforcement of the lien, or what types of assets will be deemed traceable assets, such as a car or a home, to satisfy the Sereboff test for tracing.