Over the years, the U.S. Supreme Court from time to time has explored the scope of equitable relief available under the Employee Retirement Income Security Act of 1974 (“ERISA”) in circumstances where an employee benefit plan or insurance company seeks to enforce a subrogation right to recover amounts received by a plan participant from a third party.1 Last week, on January 20, 2016, the Court decided the latest such case, Montanile vs. Board of Trustees of the National Elevator Industry Health Benefit Plan.
Montanile, an 8-1 decision, in some ways seems to go against a recent trend in the Court’s decisions to enforce a plan's terms as written.2 Rather, the Court placed an equitable gloss over a plan's right to reimbursement, and ultimately held that, depending on the extent to which the participant in Montanile had already dissipated amounts received from a third party, the participant was not required to reimburse the union’s health plan.
In Montanile, a health benefit plan (the "Plan") paid a Plan participant over US$120,000 in medical expenses that had been incurred by the participant when he sustained injuries in a car accident. The participant thereafter sued the other driver in the accident and settled the case for US$500,000 (US$200,000 of which was paid in attorney's fees). As is often the case, the settlement was paid over to the participant's attorney, for eventual distribution (net of attorney's fees) to the participant.
Like many plans, the Plan contained a standard subrogation clause requiring a participant to reimburse the Plan if the participant were later to recover money from a third party for the participant's injuries. In addition, at the time the Plan initially paid for his covered medical expenses, the participant signed an express reimbursement agreement reaffirming his obligation to repay the Plan from any third-party recovery.
The Plan sought to recover part of the participant's settlement pursuant to its subrogation right, but the participant disputed the Plan’s right to recovery. The parties attempted but failed to reach an agreement about reimbursement. After discussions broke down, the participant's attorney informed the applicable Plan fiduciary that the attorney would distribute the participant's portion of the settlement funds to the participant, unless the fiduciary objected within 14 days. After the 14 days passed without an objection from the Plan fiduciary, the attorney distributed the applicable funds to the participant.
Approximately six months later, the Plan brought an action for equitable relief under Section 502(a)(3) of ERISA3 to enforce the Plan's subrogation clause. The participant argued that he had spent almost all of the settlement money, and that, therefore, there was no specific, identifiable fund to which the Plan’s equitable lien could attach. The District Court for the Southern District of Florida and the Court of Appeals for the Eleventh Circuit held for the Plan, reasoning that a plan can always enforce an equitable lien once the lien attaches, regardless of whether the specific fund subject to the lien has been spent on non-traceable items.
The Supreme Court's Decision in Montanile
The Supreme Court reversed the Eleventh Circuit, holding that when a plan attempts to enforce an equitable lien, and the specific asset subject to such lien has been dissipated, the lien is extinguished and the plan fiduciary cannot then recover from the participant’s general assets. The Court reasoned that, under ERISA, the Plan needed to be seeking an "equitable" remedy, and that, indeed, an equitable lien by agreement attached to the participant’s settlement fund when the participant obtained title to that fund. However, the remedy sought, which would have been equitable in nature had the Plan sued to enforce the lien while the participant still held the settlement proceeds, was no longer equitable in nature (but, rather, would be in the nature of a legal remedy) after such proceeds had been spent by the participant on non-traceable items. Thus, the Plan was held to be left without a recovery to the extent that the participant had spent the applicable funds.
In Montanile, because the lower courts had held that the Plan could recover from the participant's general assets, they did not determine whether the participant kept his settlement proceeds separate from his general assets or spent the entire fund on non-traceable assets. Thus, the Court sent the case back to the district court for a determination of the extent of dissipation by the participant, with the implication being that, to the extent of dissipation, the Plan would be left without a remedy.
Before concluding, the Court noted that the Plan fiduciary protested that tracking and participating in legal proceedings is hard and costly, and that settlements are often shrouded in secrecy. The Court responded:
The facts of this case undercut that argument. The [Plan fiduciary] had sufficient notice of [the participant's] settlement to have taken various steps to preserve those funds. Most notably, when negotiations broke down and [the participant's] lawyer expressed his intent to disburse the remaining settlement funds to [the participant] unless the [P]lan objected within 14 days, the [Plan fiduciary] could have—but did not—object. Moreover, the [Plan fiduciary] could have filed suit immediately, rather than waiting half a year.4
Possible Impact of Montanile
A cynical person might suggest that the lesson from Montanile is for plan participants to spend any third-party recovery as fast as they can. However, as a practical matter, it is unclear how much Montanile will directly impact the manner in which plan participants behave after obtaining third-party settlements. Plan participants would not ordinarily be expected to be ERISA experts, and even their attorneys may not be well-versed in many of ERISA's subtleties. Thus, it is not at all obvious that participants will be moved to rush to dissipate their third-party recoveries in order to avoid subrogation claims by a plan. Further, it is not clear how a court would view the equities of a given case if a participant were intentionally to dissipate recovery amounts for the purpose of avoiding having to reimburse a plan.
In addition, plan sponsors (and, possibly, insurers under ERISA plans) may wish to pay mind to Montanilein connection with their dealings with participants who have obtained, or who are likely to obtain, third-party recoveries that are potentially subject to a subrogation right. Plan sponsors may wish to implement administrative procedures to identify as early as possible health plan claims that have resulted from a third-party action and monitor plan participants’ recoveries from such third-parties on a regular basis. Where a third-party recovery has been obtained by a participant, and where it is advised to pursue subrogation rights, it can be important for the Plan (and its sponsor and other fiduciaries) to pursue any such rights promptly and, at a minimum, to object to any dissipation of the recovery amounts by the plan participant.