The Supreme Court has handed down its latest in a long line of decisions on enforcing the reimbursement provisions of self-funded ERISA welfare plans. As evidenced by the Court’s lopsided 8-1 decision, the result in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan will not surprise those familiar with the law in this area. But as indicated by Justice Ginsburg’s indignant dissent, plan sponsors may find the decision downright bizarre. After all, it tells participants who double-recover for medical benefits paid by their employer’s health plan that they’re off the hook – if they spend the money fast enough.

The Perennial Reimbursement Issue. Again.

Sponsors and administrators of self-funded ERISA plans are all too familiar with the reimbursement scenario. Typically, a participant in the plan is injured in an accident caused by a third party. The plan pays the participant’s medical expenses, and then the participant recovers again from the third party for the same injuries. The plan invokes its reimbursement provision, the participant refuses to pay, and the administrator sues to enforce the provision. The court then decides whether the reimbursement provision is enforceable.

The facts in Montanile are garden-variety for a reimbursement case. Mr. Montanile was hit by a drunk driver. His employer’s plan paid over $120,000 for his medical care. He sued the drunk driver and recovered $500,000. After paying his legal fees and expenses, he had about $240,000 – more than double what he owed the plan – left in his lawyer’s trust account.

Mr. Montanile resisted the plan’s efforts to recover what he owed under the reimbursement provision, and protracted negotiations followed. When these broke down, Mr. Montanile’s lawyer told the plan’s board of trustees that he would distribute the remaining funds to Mr. Montanile in 14 days, unless the board objected. The Board failed to object in time, and the lawyer released the funds to Mr. Montanile. Six months later, the board of trustees sued Mr. Montanile to enforce the reimbursement provision. Unfortunately for the plan, by that point Mr. Montanile had spent the money. (It was not clear by the end of the case whether he had spent all of the money, and the case was remanded for further consideration of that issue, but that it isn’t relevant to the Court’s holding.)

The Supreme Court’s Roadmap to Recovery for Plans

Most of the Supreme Court’s energy in this area has been spent deciding whether the terms of a particular reimbursement provision are enforceable. We have devoted no fewer than six articles to its ruminations on this topic, which hinge on arcane distinctions between rules of “law” and rules of “equity."

The obstacle to recovery is that the ERISA statute permits a plan to seek only equitablerelief, and such relief tends to be non-monetary – e.g., an injunction. In its early cases, the Court interpreted this statutory provision as a virtual ban on recovery. Its rationale went something like this: because ERISA grants plans only equitable remedies, and because the imposition of a generic obligation to pay a fixed sum of money (such as money that a participant owes a plan under its reimbursement provision) is a legal remedy, an ERISA plan cannot simply seek to recover the amount the participant owes: it can seek only the very same money it paid the participant.

This complicated distinction between legal and equitable relief – and the Court’s eventual roadmap to recovery for aggrieved plans – are discussed at length in our earlier articles. (See, for example, our June 2006 article on the Sereboff decision.) Essentially, a plan may recover if (i) the plan contains the right language, and (ii) the facts are right.

The “right language” is language that creates an “equitable lien by agreement.” Such a lien “follows” the participant’s recovery from the third party “into the participant’s hands” as soon as the proceeds are identified. As discussed in our April 2013 article on theMcCutcheon decision, the “right language” should also extinguish arguments the participant might otherwise raise under general principles of equity, such as the “double recovery rule” and the “common fund doctrine.”

The “facts are right” when the funds at issue:

  • are specifically identifiable;
  • belong in good conscience to the plan; and
  • are in the possession or control of the participant.

What Happened in Montanile

In Montanile, the plan had an enforceable reimbursement provision. And there was no question which funds were at issue, or whether they belonged in good conscience to the plan. The only question was, if Mr. Montanile had spent the money that he owed the plan on non-traceable items (such as food and travel), whether the plan could recover from hisother assets. The answer was a resounding “no."

On the one hand, this is not a surprising conclusion at all. The Court’s previous decisions, while progressively more favorable to plans seeking to recover under their reimbursement provisions, have never dropped the requirement that the funds at issue be a specifically identifiable fund in the possession or control of the participant. Those decisions have always implied (and arguably even stated) that if the participant dissipates the assets that he or she obtains from the third party, the plan is out of luck. Seeking monetary damages from a participant’s general assets is quintessentially legal relief, and therefore unavailable to an ERISA plan, whose only recourse is equitable relief.

Justice Ginsburg’s incredulous dissent no doubt speaks for plan sponsors and administrators everywhere. Did the other eight Justices really mean that a plan participant “can escape [his] reimbursement obligation … by spending the settlement funds rapidly on non-traceable items”? Yes, that is exactly what they meant.

What Does This Mean for Plan Sponsors?

In a meaningful way, Montanile is not news. The case adds nothing to the Court’s earlier guidance on what makes a reimbursement provision enforceable. And since its earliest decisions in this area the Court has recognized the loophole allowing an industrious (or spendthrift) participant to flout a reimbursement provision by spending the plan’s money on non-traceable items. But several federal circuit courts of appeals either overlooked this wrinkle or could not believe the Court meant it, and instead held that ERISA plans may seek reimbursement from a recalcitrant participant’s general assets. The Court agreed to hearMontanile to set them straight.

Given the Court’s clear statement that participants can dissipate their third-party recoveries without fear of liability to their employer’s plan, the board of trustees’ lethargy inMontanile was an invitation to disaster. Our advice in response to Montanile is therefore the same advice we have given our clients since the Court issued the first case in this series back in 2004: follow the money. (See our August 2004 article on the Knudson decision.) That is, the best way to ensure that your plan recovers pursuant to its reimbursement provisions is to actively track the litigation and settlement proceedings between your participant and the third-party tortfeasor. Maintain regular contact with the parties; know where the plan’s money is at all times; and when the time comes, sue the right person (i.e., the party in possession of identifiable funds that in good conscience belong to the plan, which might not be the participant).

Of course, this advice presumes that your plan already includes an airtight reimbursement provision. Yet another Supreme Court decision on this topic is a good occasion for sponsors to review their plan’s terms. If the reimbursement provision doesn’t reflect the Court’s painstaking guidance on what it takes to recover, then it’s time to beef up the plan's subrogation and reimbursement language to stress the equitable nature of its right to recover from participants.

Another, slightly more aggressive method is to add new coverage exclusions that (i) preclude payment for any expenses that are (or might be) subject to its reimbursement rights, or (ii) offset benefits by the amount of any potential third-party recovery. This approach, while logical, has yet to be thoroughly tested in the courts.