A Supreme Court ruling this week could have negative implications for medical benefit plans, pensions and profit sharing plans.
In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, the Board was attempting to get plan participant Robert Montanile to repay $121,000 in medical expenses it paid out after he was in a car accident. As part of the company’s policy, he was legally obligated to repay the money if he received a third-party settlement in the case. Montanile sued the drunk driver who hit him and recovered a $500,000 settlement. Instead of repaying the plan, he paid his attorney fees and spent the rest of the settlement money on what the court called non-traceable items, such as food and childcare.
Even though it acknowledged that the health benefit plan should have been repaid first as part of the plan participant’s legal obligation, the Supreme Court ruled that under ERISA’s equitable relief clause, the Board did not have a right to go after Montanile’s general assets to get the money it was owed.
“The same provision of ERISA that the court interpreted, 502a3, which limits plan recoveries to equitable relief, [also] applies to … retirement or pension plans,” says Doug Haloftis, a partner at Barnes & Thornburg in Dallas, Texas. “So while Montanile dealt with the dissipation of a third-party recovery by a plan participant, if a pension plan, for example, overpaid a pension benefit recipient for many months … and the pension benefit recipient spent those funds, it appears there wouldn’t be a way for the plan to recover it.”
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This is the third time the Supreme Court has looked at this issue in the past 15 years. Each case dealt with variations of this right of subrogation of third-party recoveries and how they are collected from plan participants.
Haloftis said that in each case, the court interpreted the meaning of “equitable” very narrowly.
In its decision, the justices said that “the Board’s arguments in favor of the enforcement of an equitable lien against Montanile’s general assets are unsuccessful. Sereboff does not contain an exception to the general asset-tracing requirement for equitable liens by agreement. Nor does historical equity practice support the enforcement of an equitable lien against general assets. And the Board’s claim that ERISA’s objectives are best served by allowing plans to enforce such liens is a ‘vague notion of [the] statute’s basic purpose … [and] inadequate to overcome the words of its text regarding the specific issue under consideration.”
The Supreme Court remanded the case back to District Court to determine whether Montanile kept his settlement funds separate from his general assets and whether he dissipated the entire fund on non-traceable assets.
“This is now going to be a race for the participant to try to dissipate these assets, and the plans are going to have to develop a whole new line of business of monitoring and investigating these pieces of litigation and whether they are going to intervene on a routine matter or file injunctive actions or their own declaratory actions as soon as they have a participant who might have some third-party claim,” says Erin Sweeney, counsel at Miller & Chevalier in Washington, D.C. “It puts plans in a place where they are now going to have to dedicate resources that the plans would prefer to pay benefits with.”
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She adds that even if the plan participant knowingly didn’t tell the plan it reached a settlement and spent the assets, “as long as what they bought with the dollars is non-traceable assets – food, clothing, travel – as long as the plan participant bought it with non-traceable dollars, the plan can’t get those dollars.”
Sweeney thought it was interesting that the court distinguished between traceable and non-traceable assets. A traceable asset, for example, is something like a car or a boat, an asset which the plan would have rights to. But if the plan participant spends the money on non-traceable items, “the Supreme Court says the plan can’t go after the plan participant, even though they made an agreement with the plan to pay the plan back first.”
Scott J. Stitt, counsel with Tucker Ellis LLP in Columbus, Ohio, says that he thought the court’s decision was odd because the arguments in the case reaffirmed that the plan participant owed the plan money.
“The court was very unsympathetic to the plan’s argument that there was something nefarious going on,” he says.
The end result of the Montanile case will be that “if plans want reimbursement, they will have to be much more aggressive about asserting their rights and about trying to intervene in these cases,” Stitt says. “If the Board wanted to fully protect its $121,000 claim, it could have filed suit before the person got the settlement [but] they don’t want to typically do that.”
He added that the decision “gives great incentive for participants to ignore the reimbursement obligation, but I’m not sure they will be ultimately happy with that because it is going to encourage plans to be more aggressive in filing suit and intervening in personal injury cases to make sure plans don’t lose out and end up like the Montanile scenario.”
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Nancy Ross, a partner at Mayer Brown in Chicago, says that the court espousing on what is an equitable remedy and what is a legal remedy has opened the door for people in different types of disputes to cite this case. The decision could be used by both plaintiffs and defendants in litigation.
“When a fiduciary breaches or violates ERISA, one of the remedies is to restore the losses to the plan. When the plan participant violates ERISA, violating plan terms for subrogation, the court isn’t reading equitable relief to include losses to the plan. They are giving it a much narrower reading. Frankly, it is because of the way Congress wrote the statute,” Ross says.
Congress is going to have to act if this is going to change, she adds.
“It would seem that any common law effort by a plan to recover payment from the plan participant would be preempted by ERISA. They might try to go after the plan participant’s attorney. The law would support the conclusion that that would not be preemptive,” she says. “They could sue the attorney for common law damages to the plan because the lawsuit against third parties that aren’t traditional ERISA entities are not preemptive.”
Paula Aven Gladych is a freelance writer based in Denver.
