On January 20, 2016, the United States Supreme Court held that an ERISA plan could not satisfy its reimbursement rights from a participant’s general assets. ERISA plans’ reimbursement rights are now so limited that participants should be expected to seek to avoid reimbursing the plan. And ERISA plan fiduciaries should take prompt actions to enforce a plan’s reimbursement rights, including possibly intervening in a participants’ lawsuit against third parties.

The Montanile Facts and Holdings

In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, the Supreme Court considered the common circumstances that arise when a health plan pays medical expenses after a participant is in an accident. After a drunk driver hit Montanile, he sued the driver and received a $500,000 settlement. The plan had paid about $120,000 for his initial medical care. After subtracting costs and attorneys’ fees, Montanile’s attorneys held about $240,000 from the settlement.

The Board of Trustees (the “Board”) as the plan’s fiduciary sought reimbursement. Montanile’s attorney informed the Board that he would distribute the remainder of the settlement funds to Montanile unless the Board objected within 14 days. The Board did not do so. Montanile’s attorney distributed the funds. Six months later, the Board sued Montanile. By that time, though, Montanile had spent almost all of the settlement funds.

The District Court held that the plan was entitled to reimbursement from Montanile’s general assets. The Court of Appeals for the Eleventh Circuit affirmed, holding that the plan can recover out of a participant’s general assets when the participant dissipates specifically identified funds. The Supreme Court agreed to review the case to resolve the law as to when an ERISA fiduciary can enforce an equitable lien against a defendant’s general assets.

The Supreme Court reversed the Eleventh Circuit and remanded the case for further proceedings. Based on the plan language, the Supreme Court held that “[t]he Board had an equitable lien by agreement that attached to Montanile’s settlement fund when he obtained title to that fund” and that his “commingling a specifically identified fund – to which a lien attached – with a different fund of the defendant’s did not destroy the lien. Instead, that commingling allowed the plaintiff to recover the amount of the lien from the entire pot of money.” On the other hand, the Supreme Court held that “recovery out of Montanile’s general assets – in the absence of commingling – would not have been ‘typically available’ relief” under ERISA.

The Court also said that, “[b]ecause the lower courts erroneously held that the plan could recover out of Montanile’s general assets, they did not determine whether Montanile kept his settlement fund separate from his general assets or dissipated the entire fund on nontraceable assets. . . . A remand is necessary so that the District Court can make that determination.”

What Are the Practical Consequences in Light of Montanile?

In light of Montanile, plan participants, and their lawyers, will have incentives to spend, hide and otherwise avoid reimbursing funds. Two recent cases that reached the federal Circuit Courts of Appeal illustrate some of the problems.

In Central States, Southeast and Southwest Areas Health and Welfare Fund v. Lewis, 745 F.3d 283 (7th Cir. 2014), a plan participant’s lawyer had notice of the plan’s lien but distributed the settlement proceeds from a lawsuit to the participant and himself nonetheless. The Seventh Circuit affirmed an order requiring the participant and his lawyer to restore $180,000 to the lawyer’s client trust fund account, a finding against the participant’s lawyer of civil contempt for not doing so, and an order to submit information to the General Counsel of the State Bar of Georgia for possible disciplinary proceedings against the lawyer. Under the holding in Montanile, it is doubtful this monetary relief would have been appropriate.

In Airtran Airways, Inc. v. Elem, 767 F.3d 1192 (11th Cir. 2014), the plan participant and her lawyer “conspired to hide and disburse settlement funds she received after a car accident.” The Eleventh Circuit affirmed a judgment in favor of the plan for over $100,000 for medical care and awarded attorney’s fees and costs in favor of the plan. Because the funds could not be traced, however, under the holding in Montanile, the monetary relief would not have been appropriate.

The Supreme Court’s Montanile opinion perhaps raises more questions than it answers. In circumstances where a participant should reimburse a plan, when can a fiduciary recover? Recovery is appropriate when the funds at issue can be identified, but identifying money often is not practical. Based on the opinion, a fiduciary can still recover if he can identify a bank account where the funds are held, even if commingled with other funds. Or a fiduciary can still recover if he can trace the funds to other assets: examples might be stocks, a car, or other identifiable asset. But how are funds identified yet commingled but traceable? How does one “trace” liquid assets? Perhaps more important, how can a plan fiduciary avoid having the funds spent on non-traceable assets?

What Should a Plan Fiduciary Do in Light of Montanile?

The result in Montanile will embolden some participants to avoid reimbursing plans. For pension plans and self-funded employee benefit (usually medical) plans, the dollars not reimbursed might be big. What should a plan fiduciary do?

A first step should be to make sure the plan has strong, helpful language. The plan should not only provide for subrogation and reimbursement, but also require participants to notify plan fiduciaries of claims against third parties and otherwise to cooperate. The plan should provide that not cooperating has consequences, such as offsets against future benefits or terminating plan coverage for misconduct, but imposing these consequences might raise other issues.

As the fiduciary in Montanile protested, without being able to recover from general assets, recovery from a participant will be hard and costly. A fiduciary will first have to decide if the amount at issue is worth pursuing. A $500 reimbursement would rarely be worth the effort; a $500,000 reimbursement would almost always be. In between these two, a fiduciary would have to use discretion and make a judgment call.

Once a plan fiduciary has notice of a potential claim worth pursuing, the fiduciary needs to take steps to avoid having the funds dissipated. In Montanile, the participant had signed a reimbursement agreement affirming his obligation under the plan language to reimburse the plan from any recovery. That step was a good one, but apparently did not work. Having the participant’s lawyer sign such an agreement is advisable. If the participant or the lawyer will not sign, or the fiduciary is concerned that the lawyer will not comply with an agreement he or she signs, then intervening in a pending lawsuit or filing a separate lawsuit, before the settlement funds are even received, would need to be considered.