It’s a common scenario when dealing with a benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA): an employee participating in the plan is injured by a third-party, the plan pays covered medical expenses, and the employee agrees to reimburse the plan for those expenses if s/he later recovers money from the third-party pursuant to a subrogation clause in the plan documents. If the employee subsequently receives a settlement from the third-party, it would seem that the plan’s ability to recover what it has paid would be settled by the terms of the plan documents. In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, U.S. No. 14-723 (January 20, 2016), however, the Supreme Court (the “Court”) decided otherwise, holding that when the employee has already spent the settlement proceeds, the plan cannot recover.
The Facts of Montanile
The underlying facts in Montanile are similar to those described above. In 2008, Robert Montanile, a participant in an ERISA plan administered by the Board of Trustees (the “Board”) of the National Elevator Industry Health Benefit Plan (the “Plan”), was severely injured in a car accident involving a drunk driver. The plan paid more than $120,000 for his initial medical care and Montanile signed a reimbursement agreement affirming his obligation — as set forth in the plan — to reimburse the plan from any recovery he obtained “as a result of any legal action or settlement or otherwise.” Montanile subsequently filed a claim for uninsured motorist benefits under his car insurance, ultimately receiving a $500,000 settlement, approximately half of which he paid to his attorneys.
The remainder of the settlement was originally held by Montanile’s attorneys in a client trust account. The Board, on behalf of the plan, sought reimbursement of the remainder of the settlement funds from Montanile. Montanile’s attorneys refused, arguing that the plan was not entitled to any recovery, and later notified the Board that the funds would be released to Montanile unless the Board objected. The Board did not respond and Montanile attorneys paid the remaining settlement amount from the trust account to Montanile.
The Board filed suit against Montanile under ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3), seeking repayment of the medical expenses it had paid. In particular, the Board sought an equitable lien on: (i) settlement proceeds which Montanile had not yet used at the time the Board filed suit, or (ii) to the extent that those proceeds had already been dissipated, his general assets. Prior Court cases had established that settlement proceeds paid to a separate identifiable fund, such as the client trust fund in which Montanile’s settlement proceeds were originally held, could be subject to an equitable lien. (See Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006) and U.S. Airways, Inc. v. McCutchen, 569 U.S. __ (2013).) The Board argued that because the settlement proceeds had originally been held in the client trust account by Montanile’s attorneys, an equitable lien should attached to the amounts later paid from that account. The Court rejected the Board’s request, holding that where an ERISA plan participant wholly dissipates a third-party settlement on nontraceable items (such as services or food), the plan fiduciary may not bring suit under Section 502(a)(3) to attach the participant’s general assets, even if the amounts were originally held in a separately identifiable fund.
The Court’s Decision
Section 502(a)(3) of ERISA authorizes plan fiduciaries (like the Board) to bring civil suits “to obtain other appropriate equitable relief… to enforce… the terms of the plan.” According to the Court, the Board’s requested remedy, i.e., enforcement of a lien by agreement against Montanile’s general assets, was equitable in nature. Relying on standard equity treatises, the Court explained that equitable liens (including liens by agreement, such as the one at issue) could only attach to and be enforced against a separate, identifiable fund. In other words, where, as here, Montanile had spent some of the fund, the Board could not simply attach his general assets; rather, to enforce the lien, the Board was required to identify a specific fund to which the lien had originally attached and that still was in Montanile’s possession. The Court thus remanded the case to determine whether Montanile kept his settlement fund separate from his general assets or dissipated the entire fund on nontraceable assets.
Implications of The Decision
The Court’s decision in Montanile has potentially far-reaching effects for ERISA plan fiduciaries and employees who are injured, have their medical expenses paid under the plan, and later receive settlements from third-parties relating to their injuries. While plans typically include notice provisions with respect to third-party litigation and settlements, subrogation clauses requiring an employee to reimburse the plan for medical expenses the plan has paid and other safeguards to prevent participants from evading their reimbursement obligations, Montanile suggests that such provisions, by themselves, may be insufficient to preserve the plan’s right to settlement funds if the plan does not assert that right quickly and the employee spends those funds. In view of this decision — which encourages employees to spend settlement proceeds as quickly as possible, or to commingle settlement recoveries with their general assets — plan sponsors and fiduciaries must be proactive and review and potentially strengthen their internal tracking of third-party litigation and associated collection efforts.