Last week’s US Supreme Court decision in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, No. 14-723 (Jan. 20, 2016) has two morals on two different levels.  First, health plans that attempt to recoup medical expenses paid on their participants’ behalf by enforcing subrogation clauses must be prompt and diligent in enforcing their rights.  Second, the Court still takes very seriously its pronouncement in Mertens v. Hewitt Associates, 508 U.S. 248 (1993), that “the term ‘equitable relief’ in [ERISA] § 502(a)(3) is limited to ‘those categories of relief that were typically available’ during the days of the divided bench (meaning, the period before 1938 when courts of law and equity were separate).”

The participant in Montanile was the victim of an accident caused by a drunk driver.  The plan paid medical expenses of more than $120,000 on his behalf.  As required by the plan’s subrogation provisions, the participant signed an agreement under which he promised to reimburse the plan if he recovered damages from third parties.

A lawsuit against the other driver led to a settlement that, after attorneys’ fees and expenses, left the participant with a net of $240,000, which his lawyers initially held in a client trust account while they negotiated with the plan about its subrogation rights.  The negotiations broke down.  The lawyers notified the plan that they would release the trust account to their client unless the plan objected within 14 days.  Hearing no objection, the lawyers sent a check to the participant, which he began to spend.  When the plan sued him six months later, he asserted that the entire settlement proceeds were gone, expended on living costs, services, travel, and the like.

The plan sued under section 502(a)(3) of ERISA, which authorizes plan fiduciaries (among other parties) to bring actions for “appropriate equitable relief” to enforce the terms of a plan.  Equitable relief includes, according to Mertens and later decisions, only “those categories of relief that were typically available in equity” (Mertens at 256 (emphasis in original)) before the courts of law and equity were merged.  Courts of equity historically were concerned primarily with wrongs that could not be righted through the law courts’ standard remedy of monetary damages.  The Mertens principle, then, is that a lawsuit under section 502(a)(3) cannot amount to a simple claim for compensation for an injury.  Instead, the plaintiff must show that he or she is entitled to a nonmonetary remedy, albeit handing over money may be among the remedy’s subsidiary consequences.

The plan’s claim in Montanile was that the funds the participant had recovered through his lawsuit were subject to an “equitable lien by agreement.”  In layman’s terms, the recovery was, to the extent of the plan’s disbursements for medical care, a piece of property belonging to the plan that the participant was wrongfully retaining.  The plan argued that an equity court would have ordered him to turn it over; hence, an ERISA court could do the same.

Previous Supreme Court decisions have allowed plans to recover under this theory.  Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 248 (1993); U.S. Airways v. McCutchen, 133 S. Ct. 1537 (2013).  The Court had not, however, previously dealt with a situation where the settlement funds recovered by the participant had been spent on consumable goods and services.  Appellate courts were divided on whether an “equitable lien” nonetheless survived in this circumstance and could be enforced against the participant’s general assets.  In Montanile, the Eleventh Circuit held that it survived and could be enforced.

The Supreme Court reversed with only one dissent (Justice Ruth Bader Ginsberg, who believes that Mertens should be overruled).  Justice Clarence Thomas’ opinion looked straightforwardly at how the equity courts dealt with liens by agreement and concluded that –

A plaintiff could ordinarily enforce an equitable lien only against specifically identified funds that remain in the defendant’s possession or against traceable items that the defendant purchased with the funds (e. g., identifiable property like a car).  A defendant’s expenditure of the entire identifiable fund on nontraceable items (like food or travel) destroys an equitable lien.  The plaintiff then may have a personal claim against the defendant’s general assets – but recovering out of those assets is a legal remedy, not an equitable one.

If the participant had truly expended “the entire identifiable fund on nontraceable items” (the Court remanded the case for the lower courts to determine whether he had), there was nothing for the plan’s lien to attach.  As Justice Thomas pointed out, the plan could have forestalled that outcome by objecting when the defendant’s lawyers announced their intention to turn over the funds to their client or by bringing suit more quickly.  As a practical matter, however, prompt action may be a challenge for large multiemployer welfare funds, whose trustees and administrators have a multitude of other matters to contend with.

A lesson that some may draw from this ruling is that health plan participants who recover damages from third parties should spend the money as fast and pleasurably as they can.  The Court downplayed that prospect, expressing confidence that “plans have developed safeguards against participants’ and beneficiaries’ efforts to evade reimbursement obligations.”  The Court likewise rejected the plan’s argument that settlements by participants are difficult and costly to track, noting that the plan’s problem in this case was a lack of diligence rather than of information.

Montanile is not over.  The Court’s decision made clear that an equitable lien persists until the property subject to the lien is dissipated in a way that cannot be traced into any product.  It also noted “a lack of record evidence as to whether Montanile mixed the settlement fund with his general assets.”  The Court remanded the case to the lower courts for a “determin[ation] whether Montanile kept his settlement fund separate from his general assets or dissipated the entire fund on nontraceable assets.”

While subrogation issues long have plagued plans, practitioners and the courts, Montanilelikely will have consequences beyond the subrogation context.  For example, plans often resort to an action under ERISA section 502(a)(3) to recover over payments of pension benefits from plan participants in situations where they are unable to recover the pension over payments through offsets against future payments.  Montanile principles arguably are applicable in that type of litigation – a bad development for plans.

From an even broader perspective, Montanile may impact the growing number of cases that seek monetary recoveries against plan fiduciaries in section 502(a)(3) litigation.  The decision reaffirms the Court’s teaching in Mertens that traditional equity law is the touchstone for interpreting section 502(a)(3).  In the process, the Court’s opinion, albeit in a footnote, throws some cold water on the prime authority used by lower courts as supporting the imposition of individualized monetary remedies against fiduciaries under section 502(a)(3) – the Court’s discussion of section 502(a)(3) remedies in CIGNA Corp. v. Amara, 563 U.S. 421 (2011).  Justice Antonin Scalia’s concurring opinion in Amara was sharply critical of that discussion, characterizing it as “blatant dictum.”  His criticism came full circle in Montanile.  The plan argued in Montanile that Amara’s discussion of section 502(a)(3) remedies supported a “broad interpretation of ‘equitable relief.’”  In rejecting that argument, eight Justices stated that the discussion of section 502(a)(3) in Amara was “not essential to resolving that case.”  That should aid the defense bar in attempting to fend off claims against their fiduciary clients for monetary relief under section 502(a)(3).