It’s a common fact pattern. A plan participant is injured and received benefits for treatment of his injuries. The participant then sues a third party for damages based on his injuries. The plan then seeks to recover a portion of the judgment or settlement in reimbursement. So common is this fact pattern that the ability of the plan fiduciaries to recover on these facts has been the subject of four Supreme Court decisions.
In the latest decision, Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, No. 14-723 (January 20, 2016), the Court ruled 8-1 that no right of reimbursement exists if the participant already spent all the money received in the personal injury case.
Montanile involved the typical fact pattern, with a twist not present in the prior cases. Here, the participant claimed to have spent some (if not all) of his personal injury settlement. He challenged the claim brought by the health plan’s board of trustees under ERISA § 502(a)(3) for “appropriate equitable relief.” Essentially, he argued that the trustees’ claim wasn’t equitable because he spent the settlement money and no longer held it in an identifiable fund.
To reach what dissenting Justice Ruth Bader Ginsberg characterized as a “bizarre conclusion” that the trustees had no claim, the Court consulted the Magic 8 Ball of ERISA remedies jurisprudence: “standard treatises on equity.” Op. at 5. According to these treatises and the Court’s prior decisions, to be an equitable remedy for which a plan fiduciary can sue, the remedy must be one that a court of equity would have typically awarded in the days of the divided bench. The Court stressed that the claim and the remedy must be equitable in nature. While the trustees’ claim for enforcement of an equitable lien by agreement was a typical equity claim, the remedy was not. The Court reasoned that in a court of equity, “a plaintiff ordinarily could not enforce any type of equitable lien if the defendant once possessed a separate, identifiable fund to which the lien attached, but then dissipated it all.” Id. at 9.
All was not lost in this case, however, because the participant’s lawyer admitted at oral argument that a fact question existed as to whether the participant still had any of the settlement money in his possession. The Court sent the case back to the lower courts to resolve this question and, if undissipated assets still existed, presumably to allow the trustees to recover them.
The practical consequences of the decision will be significant, because it will force plans to race to take action to recover funds faster than the participant can spend the money, which is not the norm now and may not be possible in practice. The decision may also have consequences for other types of common reimbursement claims (such as for pension and disability benefit overpayments). In the face of a Supreme Court decision that encourages participants to dissipate assets potentially subject to reimbursement obligations, plan sponsors may need to consider taking steps to avoid payment of benefits until potential overpayments are resolved, and fiduciaries should review and enhance their collection efforts.