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Case Report: Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan

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United States Supreme Court
Date: January 20, 2016

In what the dissent describes as a “bizarre conclusion,” the Supreme Court holds that a ERISA plan participant who is obligated through ERISA–and the Plan at issue– subrogation provisions to reimburse the Plan for medical expenses if the participant obtains a judgment against a third party DOES NOT have to conform to that obligation IF the plan participant has spent the entire judgment (after attorneys’ fees) on “nontraceable items” for example services or travel or food.

The majority reaches this conclusion by reading into Sec. 502(a)(3) of ERISA [29 U.S.C. Sec. 1132(a)(3)] that any Plan can obtain “appropriate equitable relief” to enforce any terms of the Plan (against, for example, Plan participants) as only authorizing “equitable” relief –as opposed to “legal” relief. The Court strictly divides “equitable” relief from “legal” relief for ERISA purposes. Since the Plan cannot seek “equitable” relief from the Plan participant’s “general assets” –for that is “legal relief”—the Plan cannot recover at all against this Plan’s participant.

Robert Montanile is a participant in an ERISA health benefits plan administered by the Board of Trustees of the National Elevator Industry. As is typical, the plan must pay for certain medical expenses that participants incur and may demand reimbursement when a participant recovers money from a third party for medical expenses. The provisions in the Plan make this perfectly clear. Also, participants must notify the Plan and obtain its consent before settling any third party claims.

Mr. Montanile was severely injured when in December 2008 a drunk driver ran a stop sign and crashed into his vehicle. The Plan paid at least $121,000 for his medical care as a result of this accident. Subsequently, Mr. Montanile sued the at fault driver and brought an action through uninsured motorist benefits from his own auto insurance. After litigation, he obtained a $500,000 settlement. Mr. Montanile paid his attorneys $200,000 and litigation expenses of $60,000 incurred in the case. This left about $240,000 more than sufficient to reimburse the Plan its $121,000 in medical costs. At this point, the funds were in the client trust account maintained by Mr. Montanile’s attorneys.

But the Plan and Mr. Montanile’s attorneys could not agree on the Plan’s reimbursement. There is no discussion of what the debate was over – the negotiations –  one may presume the “made whole rule” or “costs of procurement” or seriousness of the injuries, and other equitable aspects of the case; however, the Plan provisions clearly stated that it was entitled to reimbursement. “The parties attempted but failed to reach an agreement about reimbursement. After discussions broke down, Montanile’s attorney informed the [Plan] that he would distribute the remaining settlement funds to Montanile unless the [Plan] objected within 14 days.” At this point, the Plan would have to bring an action against Mr. Montanile within that time—the Plan failed to do this.

However, six months later, the Plan sued Mr. Montanile in District Court (in Florida) under the relevant provisions of ERISA seeking their promised reimbursement. The Plan asked the District Court to enforce an equitable lien upon any settlement funds or any property in Mr. Montanile’s possession. Because Mr. Montanile had already taken possession of the (remaining) settlement funds, the Plan also sought an order enjoining him from dissipating any such funds.

The District Court granted summary judgment in favor of the Plan, entering judgment against Mr. Montanile for $121,044.22. The court rejected Montanile’s argument that, because he had –by that time—spent almost all of the settlement funds, there was no specific, identifiable fund separate from his general assets against which the Plan’s equitable lien could be enforced. The court thus also held that, even if Montanile had dissipated some or all of the settlement funds, the Plan was entitled to reimbursement from his general assets. The Court of Appeals for the Eleventh Circuit affirmed, reasoning that the Plan can always enforce an equitable lien once the lien attaches and that dissipation of a specific fund to which the lien attached cannot destroy the underlying reimbursement obligation.

But the Supreme Court disagreed. Justice Thomas – writing for an 8-1 majority—held that any ERISA-qualified Plan cannot enforce its reimbursement obligation against a Plan participant’s general assets.  

The Court went through several authorities on equitable remedies, taking the words of the relevant provision of ERISA quite literally: “to obtain other appropriate equitable relief… to enforce … the terms of the plan.” See 29 USC Sec. 1132(a)(3). “We have employed this approach in three earlier cases where, as here, the plan fiduciary sought reimbursement for medical expenses after the plan beneficiary or participant recovered money from a third party. Under these precedents, the basis for [the Plan before the Court’s] claim is equitable.” Great- West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002); Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), and US Airways, Inc. v. McCutchen, 569 U.S. ___ (2013).

The Court in Montanile explained: “Under these principles, the basis for the [Plan’s] claim here is equitable: The [Plan] had an equitable lien by agreement that attached to Montanile’s settlement fund when he obtained title to that fund. And the nature of 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.” But the Plan cannot sue to recover the reimbursement from Montanile’s general assets. The Court also observed that “Equitable remedies ‘are, as a general rule, directed against some specific thing; they give or enforce a right to or over some particular thing.. rather than a right to recover a sum of money generally out of the defendant’s assets.’” (Citing 4 S. Symons, Pomeroy’s Equity Jurisprudence Sec. 1234, p. 694 (5th ed. 1941).)

The Court went on to say (and this is the difficult part): “If, instead of preserving the specific fund subject to the lien, the defendant dissipated the entire fund on non-traceable items, that complete dissipation eliminated the lien. Even though the defendant’s conduct was wrongful, the plaintiff could not attach the defendant’s general assets instead.” The plaintiff had “’merely a personal claim against the wrongdoer’” – a quintessential action at law. (Citing to: Restatement of Restitution Sec. 215(1), at 866).

The Plan’s arguments against this result were considered and rejected in turn. The Court held: “In sum, at equity, a plaintiff ordinarily could not enforce any type of equitable lien if the defendant once possessed a separate, identifiable fund to which the lien attached, but then dissipated it all. The plaintiff could not attach the defendant’s general assets instead because those assets were not part of the specific thing to which the lien attached. This rule applied to equitable liens by agreement as well as other types of equitable liens.”

The Plan stated before the Court that tracking and participating in legal proceedings is hard and costly, and that settlements are often shrouded in secrecy. But the Court responded: “The [Plan] had sufficient notice of Montanile’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 [Plan] could have – but did not – object. Moreover, the [Plan] could have filed suit immediately, rather than waiting half a year.”

The sole dissent was by Justice Ginsburg. The dissent comments that the Court now allows ERISA plan participants to disavow their reimbursement obligations by spending those settlement funds rapidly on nontraceable items. The dissent remarked, “What brings the Court to that bizarre conclusion?”

“As developed in my dissenting opinion in Great – West, the Court erred profoundly in that case by reading the work product of a Congress sitting in 1974 as “ ‘unravel[ling] forty years of fusion of law and equity, solely by employing the benign sounding word ‘equitable’ when authorizing ‘appropriate equitable relief.’ ’ ”  The Court has been persuasively counseled to confess its error. “I would not perpetuate Great – West’s mistake, and would therefore affirm the judgment of the Court of Appeals for the Eleventh Circuit.”

But the majority won the day. Thus, the Plan is devoid of a remedy, and the plan participant avoids the Plan participant’s clear contractual reimbursement obligation by simply dissipating the remaining settlement funds (from the third party) on nontraceable items. The Plan was chastised by the Supreme Court for sitting on its hands—the Plan did not object within the 14 day deadline set by the plan participant’s attorney and after the remaining settlement funds were obtained by the Plan participant, the Plan did nothing for six months.

One might say the dissent got it right—the majority went into the weeds of equitable remedies, when it had an opportunity to clarify its holding in Great – West and similar cases, to state that any remedy sounding in equity –and perhaps law– would be sufficient for any ERISA plan to enforce its reimbursement rights.

However, there are some other opportunities that this majority missed as well, in clarifying the equitable duties and responsibilities as between the plan and the plan participant. To begin with, this case says nothing about equitable defenses to a plan’s demand for reimbursement, such as the “made whole” rule—which has been virtually eliminated as a defense by recent ERISA- qualified plan language. The Supreme Court has not commented on the “made whole” rule directly in any case involving ERISA, and the Court should have by now acknowledged that the rule exists, should have affirmed it, and should have said that it informs any plan reimbursement demand.

Nor does the case deal at all with the “cost of procurement” or “the common fund” doctrines seeking to hold attorney’s fees from any plan reimbursement demand. Or construe any ERISA statutory language that involves these issues.

Instead, we get only a dissertation on equitable remedies, which as the dissent points out, compounds the Supreme Court’s error in focusing on “equitable” to the exclusion of all else.