Today, the Supreme Court ruled that an ERISA plan that fails to take prompt action to enforce subrogation rights may find itself without any remedy. Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan puts the obligation squarely on plans to move quickly to take legal action to protect their interests in settlement proceeds or damages awards received by plan participants. Under the ruling, once those funds have been spent, equitable relief under ERISA does not extend to recovering them from the participants’ general assets, even when the plan participant was aware of the plan’s claim. As a practical matter, the ruling will require plans to resort to litigation early and often.

The Ruling

ERISA-regulated health plans usually include subrogation clauses.  These clauses require plan participants to reimburse the plan for medical expenses if the participant later recovers money from a third party.  ERISA’s limited set of exclusive remedies, however, often stands in the way of a plan’s recovery.

Under ERISA § 502(a)(3), plan fiduciaries can file civil suits to obtain “appropriate equitable relief” to enforce the terms of the plan.  “Equitable” remedies include “those categories of relief that were typically available in equity” when the courts of law and the courts of equity were divided.  Mertens v. Hewitt Associates, 508 U. S. 248, 256 (1993).   Remedies typically available in equity include injunctions and specific performance, while  compensatory and consequential damages are examples of traditional legal remedies not available under § 502(a)(3).

Petitioner Robert Montanile was a participant in an ERISA-governed health plan administered by the respondent, the Board of Trustees.  By its terms, the plan paid for participants’ medical expenses, but reserved the right to demand reimbursement when a participant recovered money from a third party for medical expenses. Participants were required to notify the plan and obtain its consent before settling claims.  After Montanile was badly injured by a drunk driver in 2008, the plan paid $121,044.22 for his medical care.  Montanile sued the  drunk driver for damages including medical expenses.  He obtained a $500,000 settlement.  After legal fees and expenses, he retained $240,000.

Montanile’s attorney initially held the funds in a client trust account.  The plan administrator sought to recover its expenses for Montanile’s medical care, but Montanile’s lawyer asserted that the plan administrator was not entitled to the money.  He informed the plan’s attorney that he would release the money to Montanile in fourteen days, unless the plan administrator objected.  The plan administrator did not respond, and the lawyer released the money to Montanile.  Montanile took possession of the money and spent an unspecified portion of it.

Six months later, the plan administrator filed a lawsuit, seeking reimbursement of its expenditures.  The district court granted summary judgment to the plan administrator, holding that the plan administrator was entitled to reimbursement even if that reimbursement had to come from Montanile’s general assets.  The Eleventh Circuit affirmed the judgment, reasoning that once an equitable lien attaches, the dissipation of the fund cannot destroy the underlying reimbursement obligation.

The Supreme Court disagreed.  It held that recovery from Montanile’s general assets was not permitted.  Writing for the majority, Justice Thomas explained that enforcement of a lien is generally equitable in nature.  However, in historical courts of equity, the lien could be asserted only against specifically identified funds that were still in the defendant’s possession.  If the defendant dissipated the entire fund on nontraceable items (like food, services or travel), the lien was eliminated and the plaintiff was not entitled to attach the defendant’s general assets instead.  This held true even if the lien initially attached to a separate, identifiable fund.  The plan administrator argued that the “swollen assets doctrine” – under which the fact that wrongfully held assets increased the defendant’s available assets justified recovery from general assets – applied.  The Court would only adopt a more limited rule: “that commingling a specifically identified fund – to which a lien attached – with a different fund of the defendant’s did not destroy the lien.”   The Supreme Court directed the lower courts to determine whether any traceable assets remained.  To the extent that Montanile retained his settlement money in a separate account or spent it on “traceable” items (such as a car), the plan administrator is entitled to recover that money.  The Court faulted the plan administrator’s failure to respond to the notice that the settlement proceeds would be paid out to Montanile in fourteen days, and instead waiting six months to file suit.

In light of Montanile, plan administrators should set up internal processes, including close monitoring of participant disputes with third parties, that enable them to act promptly to enforce subrogation clauses once settlement proceeds or damages are paid to a participant.  To do this, plan administrators will need to closely monitor plan participants’ litigation against third parties, and file any necessary enforcement suits before plan participants have a chance to dissipate funds.  Notably, although the Court emphasized that plan administrators now routinely inform participants of potential subrogation rights as part of paying claims, the fact that Montanile was well aware of the Board of Trustees’ claim did not change the outcome of the case.