It’s like a simple set of facts on a law school exam with an answer that defies logic. And, yet, Supreme Court precedent has brought us to this illogical conclusion. Facts: Participant agrees to reimburse the plan money it has spent on his medical care. Participant sets aside money to reimburse the plan, but then spends all of the money himself before reimbursing the plan. Question: If the money cannot be traced, can the plan recover the amount it is owed from the participant’s other assets? Answer: Last week, the Supreme Court ruled in Montanile v. Bd. of Trustees of the Nat’l Elevator Indus. Health Benefit Plan that a health plan cannot enforce an equitable lien against a participant’s general assets when the participant has already spent the fund to which the lien attached.

Robert Montanile, a participant in an ERISA-health plan, was seriously injured by a drunk driver in an automobile accident and the plan paid more than $120,000 for his medical care. The plan contained a provision that required reimbursement from a participant who recovered money from a third party for medical expenses. Montanile also signed a reimbursement agreement reaffirming this obligation.

Subsequently, Montanile filed a claim against the drunk driver and received a $500,000 settlement. After settling his attorney’s fees and repayments, the participant had enough funds remaining to repay the amount due to the plan. The funds were held in trust, and the plan sought reimbursement. After negotiations between the parties broke down, Montanile’s attorney distributed the funds from the trust to Montanile.

The plan sued Montanile under ERISA seeking repayment of the amount it had expended on his medical care. Montanile claimed that while he still had some of the settlement proceeds, he had spent most of the funds and could not identify a specific fund separate from his general assets against which an equitable lien could be enforced. The district court ruled in favor of the plan and held that the plan could recover from the participant’s general assets despite the dissipation of the specifically identified fund. The Eleventh Circuit affirmed, reasoning that a plan can enforce an equitable lien once it attaches and dissipation of a specific fund to which it attached cannot destroy the underlying reimbursement obligation.

However, the Supreme Court held that an ERISA fiduciary cannot enforce an equitable lien on a participant’s general assets if the participant has spent the settlement funds on nontraceable items. In the Court’s view, enforcement of such a lien would not constitute “appropriate equitable relief” under ERISA. Citing its prior cases, the Court stated that “equitable relief” is limited to the types of relief which were typically available in equity, and, under those principles, the plan must identify a specific fund in the participant’s possession to enforce a lien.

Is this really the answer? We previously posted that the Supreme Court’s decision in this case could provide more insight into best practices for drafting subrogation provisions in medical plans. But, it didn’t provide such insights. Even a subrogation provision supplemented by a separate reimbursement agreement proved insufficient to avoid this unfavorable outcome. Is the answer really a race, encouraging one party to run to the courthouse and the other to spend as much money as possible as quickly as possible? There may be other novel theories of recovery, but, for now, at least one consideration for plans will be whether to closely monitor participant litigation against third parties in order to be ready to litigate quickly.