The Supreme Court of the United States has held that when a participant in a plan covered by the Employee Retirement Income Security Act of 1974 (ERISA) wholly dissipates a third-party settlement on non traceable items, the plan fiduciary may not bring suit to attach the participant’s separate assets. This case is likely to prompt plans to act more quickly in the future when third-party reimbursements are involved.
The case: Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan
Employee benefit plans regulated by ERISA often contain subrogation clauses requiring a plan participant to reimburse the plan for medical expenses if the participant later recovers money from a third party for injuries. Here, Montanile was seriously injured by a drunk driver, and his ERISA plan paid more than $120,000 for his medical expenses. Montanile later sued the drunk driver, obtaining a $500,000 settlement. Pursuant to the plan’s subrogation clause, the plan administrator (the Board of Trustees of the National Elevator Industry Health Benefit Plan), sought reimbursement from the settlement. Montanile’s attorney refused that request and subsequently informed the Board that the fund would be transferred from a client trust account to Montanile unless the Board objected. The Board did not respond, and Montanile received the settlement.
Six months later, the Board sued Montanile in Federal District Court under ERISA, which authorizes plan fiduciaries to file suit to obtain appropriate equitable relief to enforce the terms of the plan. The Board sought an equitable lien on any settlement funds or property in Montanile’s possession and an order enjoining Montanile from dissipating any such funds. Montanile argued that because he had already spent almost all of the settlement, no identifiable fund existed against which to enforce the lien. The District Court rejected Montanile’s argument, and the Eleventh Circuit affirmed, holding that even if Mon-tanile had completely dissipated the fund, the plan was entitled to reimbursement from Montanile’s general assets.
The Supreme Court said that plan fiduciaries are limited by ERISA to filing suits to obtain equitable relief. Whether the relief requested is legal or equitable depends on the basis for the claim and the nature of the underlying remedies sought.
The Court’s precedents establish that the basis for the Board’s claim—the enforcement of a lien created by an agreement to convey a particular fund to another party—is equitable. The Court’s precedents also establish that the nature of the Board’s underlying remedy—enforcement of a lien against specifically identifiable funds that were within Montanile’s possession and control, would also have been equitable had the Board immediately sued to enforce the lien against the fund. But the question here was whether a plan is still seeking an equitable remedy when the defendant has dissipated all of a separate settlement fund, and the plan then seeks to recover out of the defendant’s general assets.
The Court held that a plan is not seeking equitable relief under those circumstances.
The Supreme Court remanded the case for 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 non traceable assets, such as services or consumable items like food.
Plans that cover medical expenses know how much medical care that participants and beneficiaries require and have the incentive to investigate and track expensive claims. Plan provisions—like the ones here—obligate participants and beneficiaries to notify the plan of legal process against third parties and to give the plan a right of subrogation.
The Board protested that tracking and participating in legal proceedings is hard and costly and that settlements are often shrouded in secrecy. The facts of this case undercut that argument. The board had sufficient notice of Mantanile’s settlement to have taken various steps to preserve those funds. Most notably, when negotiations broke down and Montanile’s lawyer expressed his intent to disburse the remaining settlement funds to Montanile unless the plan objected within 14 days, the Board could have—but did not—object. Moreover, the Board could have filed suit immediately, rather than waiting half a year.