In Montanile v. Bd. of Trustees of the Nat'l Elevator Indus. Health Benefit Plan, the US Supreme Court held, in the context of a health plan reimbursement dispute, that a plan could not enforce an equitable lien (under the remedy provisions of the Employee Retirement Income Security Act of 1974 (ERISA)) against a participant's general assets after the participant had obtained a third-party recovery but spent the settlement on nontraceable items (No. 14-723, (Jan. 20, 2016)).

After a plan participant was severely injured by a drunk driver in an automobile accident, his health plan paid more than $120,000 for his medical care. The plan terms required the participant to reimburse the plan if he obtained a recovery from a third party, and the participant signed an agreement reaffirming this obligation to reimburse the plan (see Standard Document, SPD Language, Subrogation and Reimbursement). The participant secured a substantial settlement and, despite reductions for attorney's fees and repayments, the remaining balance (held in a client trust account) would have satisfied the participant's obligations to the plan (see Practice Note, ERISA Litigation: Attorney's Fees).

The plan sought reimbursement from the participant, whose attorney disputed that the plan was entitled to any recovery. After discussions broke down, the attorney informed the plan that he would distribute the remaining settlement funds to the participant unless the plan objected within 14 days. The plan failed to timely respond and the attorney disbursed the funds to the participant.

Six months after the negotiations ended, the plan sued the participant under ERISA to enforce the reimbursement provision. Specifically, the plan sought:

A district court ruled in the plan's favor and the Eleventh Circuit affirmed, holding that the plan could recover from the participant's general assets after the participant dissipates a specifically identified fund.

Reversing the Eleventh Circuit on an issue that has divided the circuit courts of appeals, the Supreme Court held that an ERISA fiduciary cannot enforce an equitable lien against a participant's general assets when the participant spends settlement funds on nontraceable items (such as food or travel), because such a suit is not one for "appropriate equitable relief" under ERISA Section 502(a)(3) (29 U.S.C. § 1132(a)(3)) (see Practice Note, ERISA Litigation: Causes of Action Under ERISA Section 502).

Section 502(a)(3) allows plan fiduciaries to bring civil actions to obtain "appropriate equitable relief" to enforce plan terms (among other relief). Under prior Supreme Court cases involving health plan reimbursement claims, the term "equitable relief" for Section 502(a)(3) purposes is limited to the types of relief that were typically available in equity, when courts of law and equity were separate. Whether a plaintiff seeks a legal or equitable remedy depends on:

(See Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002); Sereboff v. Mid Atlantic Med. Servs., Inc., 547 U.S. 356 (2006); and US Airways, Inc. v. McCutchen, 133 S.Ct. 1537 (2013); see also Legal Update, Supreme Court Addresses Health Plan Reimbursement Dispute and Significant Employee Benefits Developments since the Enactment of ERISA Timeline).

Relying on its prior cases, the Court determined that the basis for the plan's claim was equitable. Specifically, the plan had an equitable lien by agreement that attached to the participant's settlement fund when he obtained title to it. Also, the nature of the plan's remedy would have been equitable if it had immediately sued to enforce its lien against the fund in the participant's possession.

The unresolved issue, according to the Court, was whether the plan was still seeking an equitable remedy after a participant dissipated all the funds in his possession and the plan later tried to recover from the participant's general assets. Relying on standard equity treatises, the Court concluded that this remedy was not equitable under ERISA. At equity, in the Court's view, a plaintiff usually could not enforce an equitable lien if the defendant possessed, but then dissipated, a separate, identifiable fund to which a lien had attached. Also, the plaintiff could not recover against the defendant's general assets in this situation because those assets were not the specific thing to which the lien attached. As a result, the plan could not recover against the participant's general assets. (The Court rejected several of the plan's arguments, based on the plan's reading of equity practice and ERISA policy rationales, for why its claim should be recognized.)

Because the lower courts wrongly concluded (in light of the Court's decision) that the plan could recover from the participant's general assets, they did not assess whether the participant had either:

The Court therefore remanded the case to the district court to make that determination.

As Justice Ginsburg implies in her dissent, it's difficult to read a case like this (the latest in a long line of Supreme Court subrogation and reimbursement decisions) without wondering what equity treatises and remedies from "the days of the divided bench" have to do with modern health plan administration. But short of a legislative fix involving ERISA's civil enforcement provisions, it appears that plans and participants will continue litigating the meaning of "appropriate equitable relief" under ERISA Section 502(a)(3) (see Practice Note, ERISA Litigation: Causes of Action Under ERISA Section 502).

This plan went to fairly great lengths to enforce its reimbursement provision, including requiring the participant to sign a separate reimbursement agreement, but it wasn't enough to win the day. In dismissing the plan's argument that it is difficult and expensive to stay ahead of reimbursement litigation, Justice Thomas faulted the plan for not timely objecting to the attorney's decision to disburse the settlement funds, and for not filing suit immediately. Thus, one of the takeaways from this decision is that plans, even those with clear reimbursement provisions, must be very vigilant in tracking participants' legal proceedings against third parties in the context of big ticket health plan claims (though settlements in such proceedings may be difficult to monitor).