Trial lawyers are happy. On January 20, 2016, the U.S. Supreme Court issued their written opinion in the long-anticipated ERISA subrogation case of Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 2016 WL 228344 (Jan. 20, 2016). The U.S. Supreme Court was asked to decide whether a Plan beneficiary is obligated to reimburse his or her health insurance Plan for medical expenses it paid, when the beneficiary settles a third-party tort case, but spends all the money. And, decide it they did.
The facts are rather typical of ERISA reimbursement cases. Montanile was seriously injured by a drunk driver, whom he later sued and recovered $500,000. The health Plan for the National Elevator Industry paid $120,000 in medical expenses on behalf of Montanile. Negotiations regarding the Plan’s reimbursement broke down and Montanile’s lawyers advised the Plan that the settlement fund would be transferred to Montanile unless the Plan’s Board objected. The Board did not respond at that time, but filed a § 502(a)(3) action six months later.
Montanile argued that he had already spent most of the funds on daily living expenses and that no identifiable fund existed against which to enforce the lien. The District Court rejected the argument and the Eleventh Circuit affirmed, holding that even if the funds were dissipated, the Plan was entitled to reimbursement from Montanile’s general assets. Montanile appealed.
The question decided by the U.S. Supreme Court was whether an ERISA Plan is still seeking an “equitable remedy when the defendant has dissipated all of a separate settlement fund, and the Plan then seeks to recover out of the defendant’s general assets.”
According to the 8-1 majority opinion authored by Justice Thomas, “when an ERISA-Plan participant wholly dissipates a third-party settlement on nontraceable items, the plan fiduciary may not bring suit under § 502(a)(3) to attach the participant’s separate assets.” If a defendant dissipates the entire fund on nontraceable items, the equitable lien by agreement is eliminated, because there is no fund to which it can attach.
The Plan argued that the Court’s prior decision in Sereboff v. Mid Atlantic Medical Services, LLC, 547 U.S. 356 (2006) eliminated the requirement that Plans trace the settlement funds. However, the Court disagreed, holding instead that Sereboff does not contain an exception to the general asset-tracing requirement for equitable liens by agreement. The Court essentially reaffirmed its decision in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002) where it held that the settlement funds must be identifiable and within the possession of the defendants. The Court then remanded the case to the District Court to determine whether any funds remained traceable.
This decision will certainly constrain overpayment claims by ERISA-covered disability Plans. That part is significant. However, the Court’s holding was narrow and it will have limited effect on health Plan reimbursement because the holdings of Sereboff and U.S. Airways v. McCutchen, 133 S. Ct. 1537 (2013) remain in place.
Of course, the decision will also have the unfortunate effect of increasing the amount of litigation. Plan members now have an incentive to quickly disburse and dissipate settlement funds to nontraceable items. Nontraceable items include groceries, utility, internet, cable and phone bills, gambling, medical expenses, and other disposable items. Nontraceable items would not include cars, boats, stocks, bonds, or other similar items that can be traced back to the original settlement funds. As a result, instead of patiently negotiating with the member or her attorney, suit will need to be promptly filed if a claim cannot be quickly settled after settlement or recovery to avoid the dilemma in Montanile.
For Plans and administrators, this decision means a big change in business as usual. Plan administrators will need to make quick litigation decisions. Expedited litigation will mean that Plans and their lawyers must have corporate disclosure statements ready, along with all of the applicable Plan documents like the Master Plan and Summary Plan Descriptions. The Plan administrator will need to be prepared to travel and to provide testimony when called upon. More importantly, Plans and administrators will need to have skilled national ERISA-litigation attorneys on stand-by. As practitioners, we will have to dust off our Temporary Restraining Order motions and prepare for immediate litigation because the widespread exploitation of this decision by plaintiffs’ attorneys is about to begin — if it hasn’t already. Don’t just sit and watch the gathering storm. Batten down the hatches and be prepared.
In the end, the news is not all bad. The ability of a Plan beneficiary to spend his or her settlement dollars and avoid repayment of a Plan’s subrogation interests will be most pronounced in the smaller, policy-limits tort settlements. To counter this new “loophole” for Plan members and protect your right to recover your Plan dollars, we have very specific recommendations and suggestions moving forward. On January 26th MWL presented a 30-minute webinar in which Attorney Ryan Woody discussed the Court’s decision, provided recommendations on addressing the implications from the decision, and, more importantly, addressed questions. If you missed this webinar, you can view the recorded version the webinar by clicking HERE.
If you should have any questions regarding this article or health insurance subrogation in general, feel free to contact Ryan Woody at firstname.lastname@example.org.