Spending money quickly on lavish trips and fine dining could prevent collection on a debt owed to your ERISA plan. At least this may be the case if you are a plan participant who recently recovered money from a third party for injuries that already resulted in a payment of expenses by your plan.
ERISA Section 502(a)(3) allows plan fiduciaries to file suit “to obtain … appropriate equitable relief … to enforce … the terms of the plan.” In 1993, the Supreme Court interpreted this provision to mean that plan fiduciaries may only seek relief “typically available in equity.” Courts have since had to decide what qualifies as “equitable relief” under ERISA Section 502(a)(3). In an 8–1 decision on January 20, 2016, the Supreme Court decided that a plan could only seek reimbursement for expenses it paid through an equitable lien against specifically identifiable funds remaining in a plan participant’s possession or against traceable items that were purchased with such funds. See Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, __ U.S. ___ (2016). If the funds that a plan participant recovered from a third party were spent on non-traceable items (i.e. consumable goods and services), then any lien on such funds is eliminated and a plan fiduciary may not bring a lawsuit seeking reimbursement from a participant’s other assets. Id.
Plans regulated by ERISA often contain subrogation clauses requiring a participant to reimburse the plan for expenses paid if the participant later recovers money from a third party for their injuries. Section 502(a)(3) of ERISA authorizes plan fiduciaries to file suit to obtain appropriate equitable relief to enforce the terms of a plan. Whether relief is “equitable” depends on the basis for the claim and the nature of the underlying relief sought. See Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006).
In Montanile, the plan participant was injured by a drunk driver resulting in $120,000 being paid by the participant’s ERISA plan to cover medical expenses. The plan participant subsequently sued the drunk driver and recovered a $500,000 settlement. The plan participant’s attorney refused to reimburse the plan from the recovered funds, however he did provide notice that the funds were going to be distributed to the plan participant if there was no objection from the plan within 14 days. After the plan failed to object, the settlement funds were distributed to the plan participant by his attorney. Six months later, the plan sued the plan participant for reimbursement. After being informed that the plan participant had already dissipated most of the settlement funds on non-traceable items, the plan then sought to be reimbursed from the participant’s general assets. The District Court granted summary judgment in favor of the plan and the Court of Appeals affirmed.
The Supreme Court disagreed with the lower courts, determining that while the basis for the plan’s claim was equitable, the relief sought (attachment of the participant’s general assets) was not. The decision of the Court of Appeals was reversed, and the mater was remanded back to the District Court to determine the location and amount of any remaining settlement funds in the participant’s possession. The Supreme Court relied on legal precedent to determine that the plan could not sue for reimbursement under section 503(a)(3) of ERISA, because the participant’s general assets were not part of the specific funds from which the parties agreed the participant would reimburse the plan. Once the settlement funds were spent on non-traceable items by the participant, the plan could not seek reimbursement from the participant’s other assets, unless those assets could be traced back to the settlement funds.
While this decision appears to bestow an unexpected benefit to plan participants, we can expect that plan fiduciaries will now engage in a swift pursuit of reimbursement upon learning that a participant has recovered money from a third party. We can also expect litigation to increase as plan fiduciaries forfeit informal negotiations in favor of disbursement objections and orders enjoining the dissipation of funds. While the Supreme Court’s decision in Montanile clarifies the rules related to seeking equitable relief to recover a reimbursement or subrogation right, it may lead to a new round of litigation to determine when a fund is properly comingled with the third-party recovery to allow enforcement of the lien.