In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, the US Supreme Court held that when an ERISA plan participant completely dissipates a settlement from a third party on items that are not “traceable,” plan fiduciaries cannot sue under ERISA section 502(a)(3) to be reimbursed from the participant's general assets.

When Robert Montanile recovered a $500,000 settlement, which included damages for medical expenses paid by his health plan, the plan’s fiduciaries sought reimbursement of the medical expenses, per the terms of the plan. Montanile refused, and his lawyer informed the plan’s fiduciaries, the Board of Trustees of the National Elevator Industry Health Benefit Plan (the Board) that he would release the settlement fund to Montanile unless the Board objected within 14 days. The Board did not respond until six months later, when it filed an Employee Retirement Income Security Act (ERISA) section 502(a)(3) suit for reimbursement, asserting that it possessed an “equitable lien by agreement” against the settlement proceeds.

Montanile contended that he spent all the money at issue, and reimbursing the Board from his general assets was both unfair and not “equitable” under section 502(a)(3) because he had spent the recovery and therefore the money was no longer “traceable.” In response, the Board contended that Montanile agreed to reimburse it in exchange for prompt payments of benefits due and that allowing beneficiaries to avoid reimbursement could affect the affordability of plans for all beneficiaries. In the underlying decisions, the US District Court for the Southern District of Florida and the US Court of Appeals for the Eleventh Circuit agreed with the Board and held that where a plan beneficiary willfully refuses to abide by the terms of a plan, the beneficiary’s “dereliction . . . could not destroy the lien that attached” before dissipation.

The US Supreme Court accepted the case to consider whether a lawsuit by an ERISA fiduciary against a participant to recover monies awarded to a participant in a tort action seeks “equitable relief” under section 502(a)(3) if the fiduciary has not identified a particular fund that is in the participant's possession and control at the time it asserts its claim. This issue had divided lower circuit courts of appeals, with six circuits siding with insurers and two (the Eighth and the Ninth) siding with the beneficiaries in similar cases.

Reversing the Eleventh Circuit’s decision, the Supreme Court held that the Board could not recover the medical expenses from Montanile’s general assets because it would not amount to equitable relief under law. The Court considered its decisions in Great WestSereboff, and McCutchen and explained that because the Board sought to enforce an equitable lien by agreement, the basis for its claim was equitable, but that did not resolve whether the remedy sought also was equitable. Turning to that issue, the Court explained that for a recovery based on an equitable lien by agreement to constitute equitable relief, the lien must attach to “a separate, identifiable fund.” Otherwise, the claim is for legal damages. Spending the settlement funds destroys the equitable lien. The Court explained, “[W]hen a participant dissipates the whole settlement on nontraceable items, the fiduciary cannot bring a suit to attach the participant's general assets under [ERISA] because the suit is not one for appropriate equitable relief.”

The Court rejected the fiduciary’s attempt to invoke “ancillary legal remedies” sometimes used by courts of equity to recoup money and also rejected the Board’s policy arguments about the effect of its ruling on the ability of plans to recoup costs. Instead, the Court suggested that ERISA plans obligate participants to advise them of legal processes against third parties and to give the plan a right of subrogation. In addition, the Court indicated that the decision would have been different had the Board objected when Montanile’s lawyer announced that he intended to release the funds or filed suit immediately, rather than waiting six months.

Ultimately, the Court remanded the case for the lower court to determine whether Montanile actually had dissipated all of the money on nontraceable purchases, such as food, or had retained the settlement fund.

Although Montanile gives participants an incentive to quickly spend any recoveries they receive, it does not change a plan’s right to recover under reimbursement provisions. Rather, the decision emphasizes the importance of monitoring participant litigation implicating a plan’s right to reimbursement and following up quickly with participants about settlement and litigation developments. In addition, the decision does not affect a plan’s ability to use self-help to recoup overpayments, such as offsetting future benefit payments in welfare plans. And, importantly, the decision makes clear that a participant cannot destroy an equitable lien and a plan’s corresponding right to reimbursement by commingling any recovery with the participant’s general assets. As a result, the effect of this decision may be somewhat limited.