27 January 2016
Practice Groups:
Employee Benefits
Commercial Disputes
Health Care
Recent Supreme Court Decision Limits ERISA Plans’
Ability to Recover Benefits Paid to Injured
Employees Who Later Receive Third-Party
Settlements
By Lauren Garraux
It’s a common scenario when dealing with a benefit plan governed by the Employee
Retirement Income Security Act of 1974 (ERISA): an employee participating in the plan is
injured by a third-party, the plan pays covered medical expenses, and the employee agrees
to reimburse the plan for those expenses if s/he later recovers money from the third-party
pursuant to a subrogation clause in the plan documents. If the employee subsequently
receives a settlement from the third-party, it would seem that the plan’s ability to recover
what it has paid would be settled by the terms of the plan documents. In Montanile v. Board
of Trustees of the National Elevator Industry Health Benefit Plan, U.S. No. 14-723 (January
20, 2016), however, the Supreme Court (the “Court”) decided otherwise, holding that when
the employee has already spent the settlement proceeds, the plan cannot recover.
The Facts of Montanile
The underlying facts in Montanile are similar to those described above. In 2008, Robert
Montanile, a participant in an ERISA plan administered by the Board of Trustees (the
“Board”) of the National Elevator Industry Health Benefit Plan (the “Plan”), was severely
injured in a car accident involving a drunk driver. The plan paid more than $120,000 for his
initial medical care and Montanile signed a reimbursement agreement affirming his obligation
— as set forth in the plan — to reimburse the plan from any recovery he obtained “as a result
of any legal action or settlement or otherwise.” Montanile subsequently filed a claim for
uninsured motorist benefits under his car insurance, ultimately receiving a $500,000
settlement, approximately half of which he paid to his attorneys.
The remainder of the settlement was originally held by Montanile’s attorneys in a client trust
account. The Board, on behalf of the plan, sought reimbursement of the remainder of the
settlement funds from Montanile. Montanile’s attorneys refused, arguing that the plan was
not entitled to any recovery, and later notified the Board that the funds would be released to
Montanile unless the Board objected. The Board did not respond and Montanile attorneys
paid the remaining settlement amount from the trust account to Montanile.
The Board filed suit against Montanile under ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3),
seeking repayment of the medical expenses it had paid. In particular, the Board sought an
equitable lien on: (i) settlement proceeds which Montanile had not yet used at the time the
Board filed suit, or (ii) to the extent that those proceeds had already been dissipated, his
general assets. Prior Court cases had established that settlement proceeds paid to a
separate identifiable fund, such as the client trust fund in which Montanile’s settlement
proceeds were originally held, could be subject to an equitable lien. (See Sereboff v. Mid
Recent Supreme Court Decision Limits ERISA Plans’
Ability to Recover Benefits Paid to Injured Employees Who
Later Receive Third-Party Settlements
Atlantic Medical Services, Inc., 547 U.S. 356 (2006) and U.S. Airways, Inc. v. McCutchen,
569 U.S. __ (2013).) The Board argued that because the settlement proceeds had originally
been held in the client trust account by Montanile’s attorneys, an equitable lien should
attached to the amounts later paid from that account. The Court rejected the Board’s
request, holding that where an ERISA plan participant wholly dissipates a third-party
settlement on nontraceable items (such as services or food), the plan fiduciary may not bring
suit under Section 502(a)(3) to attach the participant’s general assets, even if the amounts
were originally held in a separately identifiable fund.
The Court’s Decision
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.” According to
the Court, the Board’s requested remedy, i.e., enforcement of a lien by agreement against
Montanile’s general assets, was equitable in nature. Relying on standard equity treatises,
the Court explained that equitable liens (including liens by agreement, such as the one at
issue) could only attach to and be enforced against a separate, identifiable fund. In other
words, where, as here, Montanile had spent some of the fund, the Board could not simply
attach his general assets; rather, to enforce the lien, the Board was required to identify a
specific fund to which the lien had originally attached and that still was in Montanile’s
possession. The Court thus remanded the case to determine whether Montanile kept his
settlement fund separate from his general assets or dissipated the entire fund on
nontraceable assets.
Implications of The Decision
The Court’s decision in Montanile has potentially far-reaching effects for ERISA plan
fiduciaries and employees who are injured, have their medical expenses paid under the plan,
and later receive settlements from third-parties relating to their injuries. While plans typically
include notice provisions with respect to third-party litigation and settlements, subrogation
clauses requiring an employee to reimburse the plan for medical expenses the plan has paid
and other safeguards to prevent participants from evading their reimbursement obligations,
Montanile suggests that such provisions, by themselves, may be insufficient to preserve the
plan’s right to settlement funds if the plan does not assert that right quickly and the employee
spends those funds. In view of this decision — which encourages employees to spend
settlement proceeds as quickly as possible, or to commingle settlement recoveries with their
general assets — plan sponsors and fiduciaries must be proactive and review and potentially
strengthen their internal tracking of third-party litigation and associated collection efforts.
Author:
Lauren Garraux
lauren.garraux@klgates.com
+1.412.355.6757
Additional Contact:
Michael A. Hart
michael.hart@klgates.com
+1.412.355.6211
2
Recent Supreme Court Decision Limits ERISA Plans’
Ability to Recover Benefits Paid to Injured Employees Who
Later Receive Third-Party Settlements
Anchorage
Austin
Fort Worth
Frankfurt
Orange County
Beijing
Berlin
Harrisburg
Palo Alto
Paris
Boston
Hong Kong
Perth
Brisbane
Houston
Pittsburgh
Brussels
London
Portland
Charleston
Los Angeles
Raleigh
Charlotte
Melbourne
Research Triangle Park
Chicago
Miami
Dallas
Milan
San Francisco
Doha
Newark
Dubai
New York
São Paulo
Seattle
Seoul Shanghai Singapore Sydney Taipei Tokyo Warsaw Washington, D.C. Wilmington
K&L Gates comprises approximately 2,000 lawyers globally who practice in fully integrated offices located on five
continents. The firm represents leading multinational corporations, growth and middle-market companies, capital
markets participants and entrepreneurs in every major industry group as well as public sector entities, educational
institutions, philanthropic organizations and individuals. For more information about K&L Gates or its locations,
practices and registrations, visit www.klgates.com.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in
regard to any particular facts or circumstances without first consulting a lawyer.
© 2016 K&L Gates LLP. All Rights Reserved.
3