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ERISA participants may ignore reimbursement if they spend fast

The Supreme Court recently handed down its latest in a long line of decisions on enforcing the reimbursement provisions of self-funded ERISA welfare plans. As evidenced by the Court’s lopsided 8-1 decision, the result in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan will not surprise anyone familiar with the law in this area. But as indicated by Justice Ruth Bader Ginsburg’s indignant dissent, plan sponsors may find the decision downright bizarre. After all, it tells participants who double-recover for medical benefits paid by their employer’s health plan that they’re off the hook — if they spend the money fast enough.

The Perennial Reimbursement Issue. Again.

Sponsors and administrators of self-funded ERISA plans are all too familiar with the reimbursement scenario. Typically, a participant in the plan is injured in an accident caused by a third party. The plan pays the participant’s medical expenses, and then the participant recovers again from the third party for the same injuries. The plan invokes its reimbursement provision, the participant refuses to pay, and the administrator sues to enforce the provision. The court then decides whether the reimbursement provision is enforceable.

The facts in Montanile are garden-variety for a reimbursement case. Montanile was hit by a drunk driver. His employer’s plan paid over $120,000 for his medical care. He sued the drunk driver and recovered $500,000. After paying his legal fees and expenses, he had about $240,000 — more than double what he owed the plan — left in his lawyer’s trust account.

Montanile resisted the plan’s efforts to recover what he owed under the reimbursement provision. When protracted negotiations broke down, Montanile’s lawyer told the plan’s trustees that he would distribute the remaining funds to Montanile, unless the trustees objected. The trustees failed to object in time, and the lawyer released the funds to Montanile. Six months later, the trustees sued to enforce the reimbursement provision. By that point Montanile had spent the money.

The Supreme Court’s Roadmap to Recovery for Plans

The Supreme Court’s has spent most of its energy in this area deciding whether the terms of a particular reimbursement provision are enforceable. I have devoted numerous articles to its ruminations on this topic, which hinge on arcane distinctions between rules of law and rules of equity.

The obstacle to recovery is that ERISA permits a plan to seek only equitable relief, and such relief tends to be non-monetary — e.g., an injunction. In its early cases, the Court interpreted this statutory requirement as a virtual ban on recovery. Its rationale went something like this: ERISA grants plans only equitable remedies, and the imposition of a generic obligation to pay a fixed sum of money (such as money that a participant owes a plan under its reimbursement provision) is a legal remedy, so an ERISA plan cannot seek to recover the amount the participant owes: it may seek only the very same money it paid the participant.

But essentially, a plan may recover if (i) the plan includes the right language, and (ii) the facts are right.

The “right language” creates an equitable lien by agreement. Such a lien follows the participant’s recovery from the third party into the participant’s hands, as soon as the proceeds are identified.  The “right language” should also extinguish arguments the participant might otherwise raise under general principles of equity, such as the double-recovery rule and the common-fund doctrine.

The “facts are right” when the funds:

  • are specifically identifiable;
  • belong in good conscience to the plan; and
  • are in the possession or control of the defendant.

What Happened in Montanile

In Montanile, the plan had an enforceable reimbursement provision. And there was no question which funds were at issue, or whether they belonged to the plan. The only question was, if Montanile had spent the money that he owed the plan on non-traceable items (such as food and travel), whether the plan could recover from his other assets. The answer was a resounding “no.”

On the one hand, this is not a surprising conclusion. The Court’s previous decisions, while progressively more favorable to plans seeking to recover under their reimbursement provisions, have never dropped the requirement that the funds at issue be a specifically identifiable fund in the possession or control of the defendant. Those decisions have always indicated that if the participant dissipates the assets that recovered from the third party, the plan is out of luck. Seeking monetary damages from the participant’s general assets is quintessentially legal relief, and therefore unavailable to an ERISA plan, whose only recourse is equitable relief.

Justice Ginsburg’s incredulous dissent no doubt speaks for plan sponsors and administrators everywhere. Did the other eight Justices really mean that a plan participant “can escape [his] reimbursement obligation … by spending the settlement funds rapidly on non-traceable items”? Yes, that is exactly what they meant.

What Does This Mean for Plan Sponsors?

In a meaningful way, Montanile is not news. The case adds nothing to the Court’s earlier guidance on what makes a reimbursement provision enforceable. And since its earliest decisions in this area the Court has recognized the loophole allowing a spendthrift participant to flout a reimbursement provision. But several federal circuit courts of appeals either overlooked this wrinkle or could not believe the Court meant it, and instead held that ERISA plans may seek reimbursement from a participant’s general assets. The Court agreed to hear Montanile to set them straight.

Given the Court’s clear statement that participants can dissipate their third-party recoveries without fear of liability to the plan, the trustees’ lethargy in Montanile was an invitation to disaster. Our advice in response to Montanile is therefore the same advice we have given our clients since the Court issued the first case in this series back in 2004: follow the money. That is, the best way to ensure that your plan recovers pursuant to its reimbursement provisions is to actively track the litigation and settlement proceedings between your participant and the third-party tortfeasor. Maintain regular contact with the parties; know where the plan’s money is at all times; and when the time comes, sue the right person (i.e., the party in possession of the funds, which might not be the participant).

Of course, this advice presumes that the plan already includes an airtight reimbursement provision. Yet another Supreme Court decision on this topic is a good occasion for sponsors to review their plan’s terms. If the reimbursement provision doesn’t reflect the Court’s painstaking guidance on what it takes to recover, then it’s time to beef up the plan’s subrogation and reimbursement language to stress the equitable nature of its right to recover from participants.

Another, slightly more aggressive method is to add new coverage exclusions that (i) preclude payment for any expenses that are (or might be) subject to its reimbursement rights, or (ii) offset benefits by the amount of any potential third-party recovery. This approach, while logical, has yet to be thoroughly tested in the courts.

Attorney Larry Jenab

Larry Jenab is a partner with Spencer Fane and helps employers comply with a broad range of legal requirements, allowing them to offer tax-favored benefits to their employees while shielding their directors and officers from personal liability under ERISA. He can be contacted at ljenab@spencerfane.com.

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