The Supreme Court Narrowly Defines an ERISA Plan’s Right to Subrogation in Montanile v. Board of Trustees of Nat. Elevator Industry Health

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Most ERISA group health plans have subrogation terms – that is, terms allowing the plan to recover benefits paid to injured participants who later recover a tort settlement for their injuries. These subrogation claims are traditionally brought under ERISA Section 502(a)(3). Because this section of ERISA only allows a participant to recover “equitable” relief, the Supreme Court has long struggled to define exactly what relief a plan can obtain from a participant who refuses to reimburse a plan for benefits paid.

Last week, in Montanile v. Board of Trustees of Nat. Elevator Industry Health, No. 14-723, the Supreme Court once again entered into this morass. Earlier cases such as Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006) suggested that the only “equitable” relief available to a plan was the imposition of a lien or equitable trust over “specifically identifiable funds” in the possession of the participant that in “good conscience” were owed to the Plan. In other words, a plan could not just obtain a judgment and seize the participant’s general assets; rather it had to find an bank account, trust fund, or the like in which money actually owed to the plan could be found. The prototypical case would be a trust account in which a settlement payment was deposited, which the plan’s language gave it the right to recover from.

What if the participant spent all of that money before the plan sued? If the participant spent it on a tangible assets – a house, for example –Sereboff allowed the plan to “trace” the amounts it was owed to that asset. But what if the participant, by design or accident, spent the money on something that could not be recovered by the plan – food, services, or a vacation? Montanile examined just this question. It concluded that if the participant spent all of the “entire identifiable fund on nontraceable items,” the Plan was out of luck and could not recover. The equitable lien/constructive trust allowed under ERISA 502(a)(3) “is simply a right” to raise a claim to recover the “specifically identified fund” owed to the plan. Such a claim can only proceed if “the court can lay hold of that specific property.”

Although the Court’s conclusion was (in its mind) compelled by ERISA 502(a)(3)’s language, it will certainly encourage unscrupulous plan participants to go on a spending spree before the plan can take action. And the decision has implications not just for subrogation claims, but claims by plans to recover erroneous payments made to participants. Still, there are decent, if novel, arguments that plans can proceed under another provision of ERISA’s remedial scheme, and there are various ways (some well-established and some less so) that a plan can try to recover sums owed to it notwithstanding Montanile. But that is a story for another day.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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