The recent Supreme Court decision in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 577 U.S. __, 2016 (decided Jan. 20, 2016) is a cautionary tale to plan fiduciaries that value their rights of subrogation and recovery. Act fast to protect and enforce those rights, says the Court, because “equitable relief” under ERISA § 502(a)(3) can run out just as fast as participants can spend it.
The National Elevator Industry Health Benefit Plan (the “Plan”) paid $120,000 to cover medical expenses for participant Robert Montanile resulting from injuries incurred in an automobile accident. The Plan contained a subrogation clause requiring a participant to reimburse the Plan for medical expenses if the participant later recovers money for the injuries from a third party. Montanile further signed a reimbursement agreement, affirming his obligation to reimburse the Plan.
Montanile later obtained a $500,000 settlement from the culpable driver and uninsured motorist benefits. The Plan’s administrator (the “Board”) sought reimbursement from the settlement funds, but Montanile’s attorney refused to disburse the settlement directly to the Plan. Later, Montanile’s attorney notified the Board that the settlement would be disbursed to Montanile, unless the Board objected. The Board did not respond, let alone object. Six months later, the Board brought suit against Montanile for reimbursement. In the intervening half-year, Montanile spent the settlement funds on untraceable items.* The Board instead sought recovery from Montanile’s general assets under ERISA § 502(a)(3).
ERISA § 502(a)(3) provides that a participant, beneficiary or fiduciary may bring civil suit “to obtain other appropriate equitable relief (i) to redress [ERISA or plan] violations or (ii) to enforce any provisions of [ERISA] or the terms of the plan.” The decision in Montanileturns on the meaning of “appropriate equitable relief.” Supreme Court precedent establishes that what is “equitable” depends on both (i) the basis for the claim and (ii) the nature of the remedy sought.
The Plan terms created an “equitable lien by agreement.” Enforcing such a lien is a claim based in equity. Seeking recovery from “specifically identifiable” funds in the defendant’s actual or constructive possession is an equitable remedy; however, seeking reimbursement from the participant’s general assets is not.
As a result, the Supreme Court held that although the Board’s claim satisfied the first prong, the remedy it sought failed the second. To drive home the moral of this story, the Court noted that “the nature of the Board’s underlying remedy would have been equitable had it immediately sued to enforce the lien against the settlement funds then in Montanile’s possession.” (emphasis added).
The Supreme Court sent a clear message to plan fiduciaries seeking to protect their rights of recovery: You snooze, you lose. Keep a close eye on the funds to which your plan is entitled, and act fast to preserve your equitable claim and right to equitable recovery.
* The Supreme Court cites food, travel and services as examples, although perhaps we shouldn’t rule out a coffee can buried in the backyard. The case was remanded to the Eleventh Circuit to determine whether, as a factual matter, Montanile actually spent the settlement funds on untraceable items.