Remedies Under ERISA When a Plan Participant Spends the Proceeds in a Subrogation Case

Background

Robert Montanile was a participant in the National Elevator Industry Health Benefit Plan (the Plan), an ERISA-governed plan administered by the Board of Trustees (Board) to the Plan. The Plan pays for certain medical expenses incurred by the participants and/or beneficiaries of the Plan. However, the Plan may demand reimbursement from the participants and/or beneficiaries when such individuals recover money for medical expenses from a third party, such as an insurance settlement or a tort recovery from an accident.

The Plan states: “Amounts that have been recovered by a [participant] from another party are assets of the Plan ' and are not distributable to any person or entity without the Plan's written release of its subrogation interest.” Further, the Plan states that “any amounts” that a participant “recover[s] from another party by award, judgment, settlement or otherwise ' will promptly be applied first to reimburse the Plan ' and without reduction for attorneys' fees, costs, expenses or damages claimed by the covered person.” Id. at 2.

In December 2008, Mr. Montanile was in an automobile accident with a drunk driver. Mr. Montanile underwent surgical procedures as a result of the accident and obtained follow-up medical care, all of which was covered under the Plan in which he was an employee-participant. The Plan paid $122,044.02 in medical expenses on behalf of Mr. Montanile, who subsequently signed a reimbursement agreement reaffirming his obligation to reimburse the Plan for any recovery he might receive from legal action, settlement or otherwise as a result of this accident. Mr. Montanile did sue the driver and obtained a $500,000 settlement. However, Mr. Montanile spent most of his settlement money on legal fees of $263,788.48. The remainder of the $500,000 settlement was held in the trust account of his attorney, who insisted that the Plan was not entitled to recovery. The amount held in trust would have reimbursed the Plan in full.

The parties attempted to reach an agreement, but such discussions broke down. After the failed attempt at an agreement, Mr. Montanile's attorney informed the Board that he would distribute the funds held in trust to Mr. Montanile unless the Board objected within 14 days. The Board did not respond within such timeframe; thus, the remainder of the funds were distributed to Mr. Montanile, who then spent such funds on daily care for himself and his daughter. Six months later, the Board filed an ERISA lawsuit to enforce the health plan's reimbursement provisions, which were found in the summary plan description.

The Eleventh Circuit Holding: A Departure from Sereboff

The U.S. Court of Appeals for the Eleventh Circuit upheld the lower court's opinion that Mr. Montanile must reimburse $122,044.02 to the Board, despite the dissipation of settlement funds. In so ruling, the Eleventh Circuit held that the equitable lien rights found in the health plan's summary plan description were enforceable under ERISA, and the Plan could enforce its lien against the settlement proceeds even though Mr. Montanile had already spent the proceeds on other expenses. It should be noted that in this case, the “plan” only consisted of a summary plan description. No plan document existed. Thus, the summary plan description is referred to as the “Plan” throughout the case.

The Eleventh Circuit's holding is a departure from a previous Supreme Court case on subrogation claims. In 2006, the Supreme Court addressed the subrogation issue in a unanimous decision in Sereboff v. Mid Atlantic Services, Inc., where the Court held that a plan must comply with strict tracing rules requiring that such settlement funds be within the possession and control of the participant at the time the plan imposes an equitable lien on such funds. Sereboff did not address what would happen to the plan's equitable lien claim if the participant spent, or otherwise dissipated, those settlement funds.

Since Sereboff, lower courts have issued conflicting rulings as to whether actual or constructive possession and control of such settlement funds is required for such an equitable lien to attach. To date, the U.S. Courts of Appeal for the First, Second, Third, Sixth and Seventh Circuits, and the Eleventh Circuit have issued opinions allowing ERISA plans to enforce equitable liens against settlement proceeds that have been dissipated by the participant.

The U.S. Courts of Appeal for the Eighth and Ninth Circuits have issued opinions holding that ERISA plans are not entitled to such equitable lien remedies when dissipation has occurred. The U.S. Court of Appeals for the Fifth Circuit, standing alone, specifically looks to plan language. The Supreme Court used Montanile to resolve this split among the lower courts of “whether an ERISA fiduciary can enforce an equitable lien against a defendant's general assets under these circumstances.” Id. at 4.

The Supreme Court's Decision

The Supreme Court reversed the Eleventh Circuit's decision when it issued is opinion in January holding that “when a participant dissipates the whole settlement on nontraceable items, the fiduciary cannot bring a suit to attach the participant's general assets under '502(a)(3) [of ERISA] because the suit is not one for 'appropriate equitable relief.'” Id. at 2. Section 502(a)(3) of ERISA authorizes plan fiduciaries, like the Board, to bring civil suits “to obtain other appropriate equitable relief ' to enforce ' the terms of the plan.” 29 U.S.C. ' 1132(a)(3). Thus, in determining claims under ERISA, it is important to make the distinction between an equitable claim and a legal claim. In Montanile, the Court reasoned, based on its own precedents, that the Board's claim in this case is equitable. As stated above, the Board had an equitable lien by agreement against any settlement fund received by Mr. Montanile.

However, the Court's precedents do not address whether the remedy sought by the Board is equitable or legal in nature. In this case, the remedy sought is the enforcement of the equitable lien against Mr. Montanile's general assets. Had the Board immediately sued to enforce the lien against the settlement once received by Mr. Montanile, the Board's remedy would have been equitable as well. These are not the facts of this case, though. Here, Mr. Montanile received the settlement, and then after a period of time, dissipated the remainder of the settlement fund after paying his legal fees. As such, the Board then sought a remedy to enforce the lien against Mr. Montanile's general assets.

Mr. Montanile's dissipation of the settlement funds on nontraceable items, such as food or other living expenses, destroys the equitable lien. At that point, the Board could have a personal claim against Mr. Montanile's personal assets; however, recovering any monies out of Mr. Montanile's personal assets is a legal remedy. The Board had notice of Mr. Montanile's settlement. The Board could have taken action at that time to preserve the necessary funds from the settlement to satisfy the Plan where such recovery would be deemed an equitable remedy.

Additionally, subsequent to the notice of the settlement, Mr. Montanile's attorney gave the Board a 14-day notice with respect to disbursement of the funds unless the Board objected, and the Board remained silent. Further, the Board could have brought this lawsuit earlier rather than six months later. All of these facts contributed to the determination that any remedy sought by the Board would be a legal remedy and not an equitable one, as required by ERISA. As such, the Board was unable to collect any monies to satisfy a reimbursement for the Plan.

Conclusion

Although this case may not have forged any new ground, it does serve as an important reminder to plan sponsors. In subrogation cases, it is crucial for plan sponsors to “follow the money” and act quickly. Review plan documents and confirm that subrogation language is well written. Further, when the plan sponsor knows that a participant is going to receive a settlement or other monetary recovery, the plan sponsor needs to follow that payout closely and monitor the timing of that situation. Following the settlement, the receipt of the settlement and acting quickly to recover any necessary funds should be top of mind. If not, according to Montanile, recovery may not be possible under ERISA.

Jennifer S. Kiesewetter is the founder of Kiesewetter Law Firm, PLLC in Memphis, TN. She can be reached at [email protected].