On January 20, 2016, the United States Supreme Court issued an opinion in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan. In a nearly unanimous decision, the Court held that a plan administrator may not bring a subrogation claim against a participant whose third-party settlement is dispersed into nontraceable items.

Subrogation Generally

When participants in a health plan are injured by a third party, most employer-sponsored plans pay for benefit claims even though the third party may be held responsible later. Traditionally, plans have subrogation language that requires the participant to reimburse the plan if the participant recovers money as a result of the accident or injury. In the event that the participant fails to reimburse the plan, plans can generally file an equitable action to recover the money under Section 502(a)(3) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). See our Client Alert from 2013 discussing the importance of a plan’s subrogation language.

Montanile’s Case

Richard Montanile was a participant in the National Elevator Industry Health Benefit Plan (the Plan), which is governed by ERISA and administered by a Board of Trustees (the Trustees). In December of 2008, a drunk driver ran a stop sign and crashed into Montanile’s car. The accident severely injured Montanile, and the Plan paid more than $120,000 for his care. The terms of the Plan directed that “any amounts” that Montanile recovered from a third-party settlement would be paid to the Plan as reimbursement for Montanile’s medical expenses.

Montanile filed a negligence claim against the drunk driver and made a claim for uninsured motorist’s insurance under his car insurance. He obtained a settlement of $500,000, from which he first paid his attorney $260,000. The Trustees sought reimbursement for Montanile’s care from his attorney, who held the remaining $240,000 in trust for Montanile. Montanile’s attorney rejected the request and told the Trustees that if they did not object within 14 days, the attorney would disperse the remaining proceeds to Montanile. The Trustees failed to reply to the attorney within that time frame and the attorney gave Montanile the $240,000.

Six months later, the Trustees filed a claim against Montanile in federal district court under ERISA Section 502(a)(3), seeking the $120,000 that they paid for his care through a lien on his settlement assets. Montanile replied that he had already spent most of the proceeds and that the Trustees’ lien was not enforceable because there was no specific, identifiable fund that was separate from his general assets. The district court ruled in favor of the Trustees and held that if Montanile spent all of his settlement proceeds, the Trustees could maintain a lien against Montanile’s general assets. On appeal, the Eleventh Circuit Court of Appeals affirmed the district court.

The Supreme Court took the case to resolve whether an ERISA fiduciary (like the Trustees) can enforce an equitable lien against a participant’s general assets under circumstances like Montanile’s. In an 8-1 decision, the Court held that ERISA Section 502(a)(3) was only an equitable remedy and that maintaining a lien against Montanile’s general assets was not an equitable remedy.

The Court reasoned that the Trustees had an equitable lien by agreement that attached to Montanile’s settlement when Montanile obtained it and that the Trustees should have immediately filed to enforce the lien at that time. By waiting until after Montanile spent the settlement proceeds on nontraceable items (like food and travel), the Plan lost its right to the lien. The Court reversed and remanded the case to the district court to determine whether any amount of Montanile’s settlement remained identifiable and separate from his general assets.

Next Steps

Employers should review their plans’ subrogation provisions and pay careful attention to participants’ cases against third parties. Most employer-sponsored plans retain third parties to pursue subrogation cases on their behalf. Employers should contact these vendors to ensure that they are taking proper and timely steps to recover amounts owed to the plan. Pursuing subrogation recoveries is a fiduciary act, and employers should ensure that they, and their vendors, are meeting their fiduciary duties under ERISA.

Additional Information

If you have any questions regarding Montanile, please contact your Kutak Rock attorney or a member of the Kutak Rock employee benefits practice group listed in the right-hand column.