A new U.S. Supreme Court decision is a reminder that Employee Retirement Income Security Act (ERISA) plans must act promptly if they want to assert a lien to secure a participant’s obligation to reimburse medical expenses or to recover overpayment of retirement benefits. In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, the Supreme Court addressed whether an ERISA plan can assert a lien against a participant’s general assets to secure recovery of medical reimbursements made on behalf of a participant after the participant received a third-party settlement but spent the settlement proceeds before the plan asked a court to impose the lien.
Robert Montanile participated in a group health plan administered by the Board of Trustees of the National Elevator Industry Health Benefit Plan (Board). A drunk driver injured Mr. Montanile, and the plan paid more than $100,000 for related medical treatment. The plan document included subrogation provisions allowing it to recover medical expenses for injuries caused by third parties, and the plan also provided that any settlement amount a participant recovered from a third party would be deemed assets of the plan. Mr. Montanile also signed a reimbursement agreement reaffirming his obligation to reimburse the plan from any settlement he received.
Mr. Montanile ultimately obtained a $500,000 legal settlement from the drunk driver. For 18 months thereafter, Mr. Montanile’s attorneys held the settlement funds in trust while the Board and the attorneys sparred over whether and how much Mr. Montanile should pay to the Board as reimbursement. When negotiations finally broke down, Mr. Montanile’s attorneys informed the Board that the settlement funds would be released from trust and paid to Mr. Montanile in 14 days unless the Board and Mr. Montanile could reach agreement. The Board did not respond, the settlement funds were disbursed to Mr. Montanile, and not until six months later did the Board ask a court to impose a lien on Mr. Montanile’s assets to secure his promise to repay the plan. By that time, Mr. Montanile had spent all but a small amount of the settlement proceeds.
The parties to the Montanile decision offered competing interpretations of Supreme Court precedent concerning whether a lien could be imposed on Mr. Montanile’s general assets when the specific settlement proceeds had been spent and could not be traced to any particular asset. The Supreme Court’s focus was whether the lien would have been “typically available” from a court of equity rather than a court of law. The Board relied primarily on Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), and argued that the plan was entitled to an “equitable lien by agreement” because Mr. Montanile had control of the settlement proceeds, the settlement proceeds belonged to the plan, Mr. Montanile spent the proceeds, and the plan should, therefore, be entitled to a lien on Mr. Montanile’s general assets. Mr. Montanile’s attorneys relied primarily on Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002), and argued that the plan was not entitled to a lien because Mr. Montanile no longer possessed the settlement proceeds at the time the plan asked for the lien, and a court of equity would not grant a lien when the employee no longer possesses the settlement proceeds and the proceeds cannot be traced to identifiable assets (which might be subject to the lien).
Both the District Court and the U.S. Court of Appeals for the Eleventh Circuit sided with the Board by trying to distinguish the Supreme Court’s decision in Great-West on the basis that the beneficiary in that case—unlike Mr. Montanile—never actually possessed the settlement proceeds because they were placed directly in a special needs trust. The Supreme Court found that the lower courts erred by relying on the “cleanup” doctrine, under which courts of equity found ancillary jurisdiction over legal claims—specifically, if a court of equity was unable to enforce an equitable lien because the asset had been spent or sold (such that the claimant would be forced to seek a deficiency judgment or damages in a court of law), the court of equity could proceed to provide legal relief which otherwise was only available in a court of law.
For ERISA health benefit plans that seek equitable liens to secure a participant’s obligation to repay the plan from third-party settlement proceeds, the Montanile decision will require plan fiduciaries to seek the lien before the proceeds are paid to the participant, or at a time when the participant still holds the settlement proceeds or specific assets which the participant purchased using the settlement proceeds (e.g., a car purchased with the proceeds). Although the Montanile case dealt with a health plan, the same analysis will apply to ERISA retirement plans that seek liens to recover overpayments to plan participants or beneficiaries.