Pardon this interruption for this special edition of ERISA Watch! On Wednesday, the U.S. Supreme Court issued its decision in Montanile v. Board of Trustees of Nat. Elevator Indus. Health Benefit Plan, No. 14-723, and it has taken the ERISA community by storm. The Court held that ERISA Section 502(a)(3) does not authorize a health benefit plan to seek recovery from a participant’s general assets in order to enforce the plan’s reimbursement provision. For a benefit plan to enforce an equitable lien by agreement on settlement funds it seeks to recover, it can only be against specifically identified funds in the participant’s possession or against traceable items that the participant purchased with the funds.
In what is clearly a victory for plan participants who find themselves as defendants in a reimbursement action, a special shout out goes to the team at Stris & Maher LLP and Brian S. King, Attorney at Law! Below is our recap of the SCOTUS decision. If you have access to The Daily Journal, my guest column -“ERISA split resolved” – (credits for catchy title goes to the DJ) was featured on the front page in today’s edition. You can access the full piece here: http://bit.ly/1QjvquO (sub. req.) or email me. Yesterday, Law360 published my commentary, and the reactions of several other ERISA attorneys, in this article: https://www.law360.com/articles/748535/attorneys-react-to-high-court-erisa-reimbursement-ruling (sub. req.). Have a great weekend! On Monday, we’ll return to our regularly scheduled programming.
“The saying goes that possession is nine-tenths of the law. When it comes to an ERISA plan’s enforcement of a subrogation provision, Montanile confirms that possession is ten-tenths of the remedy. Montanile has huge implications for ERISA benefit plans seeking to enforce subrogation provisions against plan participants. Time is now of the essence. If a plan participant dissipates the disputed funds on nontraceable items, a plan fiduciary cannot attach an equitable lien by agreement against a participant’s general assets. The takeaway for both plan participants and ERISA plans seeking reimbursement is clear: Hurry!”
ERISA Section 502(a)(3) does not authorize health benefit plan to seek recovery from participant’s general assets. Montanile v. Bd. of Trustees of Nat. Elevator Indus. Health Benefit Plan, No. 14-723, __S. Ct.___, 2016 WL 228344 (U.S. Jan. 20, 2016) (Justice Alito joining in part, Justice Ginsberg dissenting). This case involved an ERISA health benefit plan’s attempt to enforce an equitable lien against a participant’s third-party settlement. The court held that when an ERISA-plan participant wholly dissipates a third-party settlement on nontraceable items (i.e., food, travel), the plan fiduciary may not bring suit under ERISA Section 502(a)(3) to attach the participant’s separate assets. The Supreme Court reversed and remanded the case to the district court to determine, in the first instance, whether Montanile kept his settlement fund separate from his general assets and whether he dissipated the entire fund on nontraceable assets.
By way of background, Montanile was a participant in the Board of Trustees of the National Elevator Industry Health Benefit Plan (“the Plan”) when his automobile was struck by a drunk driver. The Plan paid more than $120,000 in Montanile’s medical expenses, but the written Plan instrument required Montanile to reimburse the Plan out of any third-party recovery related to his injuries. After suing the drunk driver, Montanile obtained a $500,000 settlement, from which he netted about $240,000 after attorneys’ fees and costs. Montanile’s attorney and the Plan attempted to reach an agreement about the Plan’s right to reimbursement but discussions broke down. At that point, Montanile’s attorney put the Plan on notice that he was distributing the client’s share of the settlement to the client unless the Plan objected within 14 days, which it did not.
After six months of negotiations ended, the Plan brought suit against Montanile under ERISA Section 502(a)(3), which in relevant part provides that plan fiduciaries can file civil suits to obtain appropriate equitable relief to enforce the terms of the plan. The Plan requested that the district court enforce an equitable lien upon any settlement funds in the actual or constructive possession of Montanile and to enjoin Montanile from dissipating the funds. At that point Montanile had spent almost all of the settlement funds.
The Supreme Court granted certiorari to resolve a conflict among the Courts of Appeals over whether an ERISA fiduciary can enforce an equitable lien against a defendant’s assets when the participant dissipates the specifically identified fund. In coming to its decision, the Supreme Court went back to the days of the divided bench to ascertain whether the equitable relief the Plan seeks was typically available in premerger equity courts. Under its precedent, the Court found that the basis of the Plan’s claim is equitable but the remedy the Plan seeks – enforcement of an equitable lien by agreement against the participant’s general assets – is not equitable.
Prior to its decision in Montanile, the Supreme Court had decided three major ERISA reimbursement/subrogation cases in over the past decade, the last two of which did not bode well for the subrogation defendant. First, in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), the Court held that enforcement of a constructive trust or an equitable lien required that the money or property could clearly be traced to particular funds or property in the defendant’s possession. In Great-West, because the plan fiduciaries sought legal relief based on a contractual obligation to pay money, instead of restitution obtained from specific funds or identifiable property in the participant’s possession, the fiduciaries could not seek reimbursement under Section 502(a)(3). Next, in Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), the Court held that a plan’s equitable lien by agreement was enforceable because the Plan sought specifically identifiable funds that were within the possession and control of the beneficiaries. The beneficiaries had placed the proceeds of their tort action settlement in a separate investment account. Similarly, in US Airways, Inc. v. McCutchen, 133 S. Ct. 1537 (2013), the Court found that the plan could enforce an equitable lien against specifically identifiable funds within the beneficiaries’ control – that is, a portion of the settlement they had gotten.
The Supreme Court explained that the Plan’s underlying remedy would have been equitable had it immediately sued to enforce the lien against the settlement fund then in Montanile’s possession. The Court found support for its position on this issue by turning to standard equity treatises. Those treatises make clear that a plaintiff can 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 (i.e., a car). The Supreme Court rejected the Plan’s arguments that certain exceptions apply to this rule, including the principles of substitute money decrees, deficiency judgments, and the swollen assets doctrine.
Justice Alito joined the majority except for the discussion concerning the majority’s rejection of the Plan’s argument that enforcing plan documents according to their terms and of protecting plan assets would be best served by allowing plans to enforce equitable liens against a participant’s general assets. Justice Ginsberg dissented, finding that the Court erred in Great-West by reading ERISA as unraveling fourt years of fusion of law and equity. Justice Ginsberg also found that it was a bizarre conclusion to permit a participant to escape reimbursement obligations by spending the settlement funds rapidly on nontraceable items.