The Supreme Court held yesterday in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, in which we represented the Plan, that an ERISA beneficiary can defeat his health plan’s reimbursement claim by spending the tort settlement or other insurance recovery that he had promised to turn over to the plan. Montanile overturns cases from the First, Second, Third, Sixth, and Eleventh Circuits, which had all held that a plan could recover from the beneficiary’s general assets even when the beneficiary claimed dissipation. 

So what is an ERISA plan to do now? We offer five tips below. 

  1. Sue Faster. In many cases, dissipation occurs when the beneficiary’s counsel declares a stalemate in lien-settlement talks and threatens to disburse the beneficiary’s settlement unless the plan sues in a very short period of time—often as short as 10 or 14 days.  Once disbursement occurs, the beneficiary can then spend the funds, dissipating the plan’s lien.

Before Montanile, the possibility of recovery from the beneficiary’s general assets reduced the risks from attorneys’ sue-or-disburse ultimatums. After Montanile, plans will want to bring suit before disbursement in order to prevent dissipation by the beneficiary. As a result, plans should decide whether to authorize suit beforesettlement talks break down; that discussion shouldn’t start only when a beneficiary’s attorney declares a stalemate.

  1. Seek Preliminary Relief. In cases where a plan brings suit, the plan should seek assurances from the beneficiary’s counsel that the disputed fund will be held in the attorney’s trust account or other segregated account until the suit is resolved. If the beneficiary’s attorney is not willing to set the funds aside, the plan should seek a temporary restraining order or preliminary injunction to prevent disbursement and dissipation. With Montanile highlighting the risk of dissipation, courts may be willing to routinely grant interim relief—even though a preliminary injunction is generally considered an extraordinary remedy.
  2. Name The Beneficiary’s Counsel As A Defendant. Before disbursing settlement funds to an ERISA beneficiary, the beneficiary’s counsel typically takes a percentage off the top for her fees. Those funds, in turn, can typically be traced to the attorney’s operating account. In many circuits, an ERISA plan can recover funds that should have been paid to it from the attorney, even though the attorney did not agree to the plan’s lien. See AirTran Airways, Inc. v. Elem, 767 F.3d 1192 (11th Cir. 2014); Longaberger Co. v. Kolt, 586 F.3d 459 (6th Cir. 2009); Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot, & Wansbrough, 354 F.3d 348 (5th Cir. 2003).  But see Treasurer, Trs. of Drury Indus., Inc. Health Care Plan & Trust v. Goding, 692 F.2d 888 (8th Cir. 2012) (holding that reimbursement is not available from the attorney).

Suing counsel comes with risks. It makes litigation more personal and may sour relationships between opposing attorneys. But a plan might be able to secure cooperation from a beneficiary’s counsel in segregating funds when the beneficiary’s counsel realizes that refusing to do so will make her a defendant in the plan’s reimbursement suit.

  1. Try to Trace. Under Montanile, a plan can “trace” the beneficiary’s tort settlement to whatever the beneficiary purchased with the settlement. If the beneficiary purchases consumable goods—like food or child care—the fund is truly dissipated and the plan has nothing left to recover. But if the beneficiary purchases tangible assets, like a car or stocks, the plan can recover those assets instead. Tracing, however, increases discovery costs to the plan and may not be the best solution when the beneficiary is obviously insolvent.
  2. Remind Beneficiaries’ Counsel of Their Ethical Obligations.Finally, plans may be able to prevent dissipation by reminding beneficiaries’ counsel of their ethical obligations. Under Model Rule of Professional Conduct 1.15(e), when a lawyer receives “property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved.” Under this rule, a beneficiary’s attorney may have a duty to not distribute funds to the beneficiary until the plan’s reimbursement suit is resolved. But interpretation of Rule 1.15(e) varies widely from State to State. Plans should check with local counsel before invoking it to protect their liens.