Supreme Court Ponders Scope of ERISA Plan Recovery Rights

U.S. Supreme Court Justices questioned parties in a case that could further clarify when an ERISA plan fiduciary can recover settlement funds that a plan participant or beneficiary once acquired in a personal injury action but no longer possesses. This case involving the scope of equitable relief under ERISA has significant implications for plans that try to recover benefit expenses — typically in the five- to six-figure range — from such settlements.

The legal question presented in Montanile v. National Elevator Industry Health Benefit Plan, No. 14-723 (U.S., March 30, 2015) is:

Whether a beneficiary of a benefit plan governed by [ERISA] can defeat enforcement of the plan’s valid equitable lien by agreement — after the lien attaches — by dissipating the fund subject to the lien.

In Nov. 9 oral arguments, counsel for the health plan argued that if a participant or beneficiary intentionally dissipates the proceeds of an award the plan is entitled to, the plan still should be able to fully recover its expenses from the individual’s personal funds.

In contrast, the counsel for the participant said the plan’s remedy is limited to funds directly traceable to the award, even if traceable funds are partly or totally dissipated — for practical purposes, leaving the plan with little or no remedy.

The plan’s counsel emphasized that a ruling was needed to prevent plans — even those with air-tight recovery provisions, that also follow participant legal developments and apply timely liens to the appropriate funds, and have signed attestations from participants — from losing remedies because a participant knowingly dissipates funds.

But sympathy from several justices for the injured plan participant — who used up settlement fund monies to pay for living expenses, as the health plan failed to act quickly to recover its expenses — may result in an outcome favorable to the plan participant, experts tell the Guide.


Robert Montanile was covered by the Elevator Industry health plan and was involved in a car accident. He received $500,000 in a personal injury settlement, and after paying legal and other expenses, $200,000 remained in his possession. The plan spent $121,000 on caring for his injuries and tried to enforce lien in that amount. But by the time it did that, Montanile had spent the $200,000.

A federal district court held that plan language required Montanile to repay the initial $120,000, and that was appropriate because Montanile at one time had the $500,000 settlement in his possession. Montanile appealed. The 11th U.S. Circuit Court of Appeals held that the plan had a right to reimbursement because its lien attached before Montanile spent or disbursed the funds. In March 2015, the Supreme Court granted certiorari.

Montanile’s Arguments

Montanile’s attorney Peter Stris said Supreme Court precedent establishes that ERISA liens are enforceable only against specific funds traceable to the settlement and that are in the defendant’s possession.

Stris said if a participant commingles the settlement with his personal funds and starts spending it down, but gets only partway through it, then the plan would be able to access whatever is left in the destination fund (without distinction between settlement and personal funds) down to zero.

Stris said it is a plan’s duty to ensure recovery before dissipation. It needs to recognize when large, costly claims occur, identify tort recoveries, monitor them and get on board in the litigation before the settlement occurs. The Elevator Industry plan’s failure to keep up with the Montanile’s tort litigation resulted in the loss of its remedy, Stris contended.

Testifying in support of Montanile, Ginger Anders, assistant to the U.S. Solicitor General, agreed:

[T]he only reason this issue comes up in this case is that the plan wasn’t diligent, that the plan waited for months when it knew that it had a reimbursement claim, and that that was being disputed. It didn’t seek an injunction. It didn’t file suit.

Some of the Justices seemed to agree that plans really need to track participant litigation and join lawsuits in their early stages even if that clashes with ERISA’s goal of streamlining health and retirement plan administration.

But Chief Justice John Roberts noted that plans may have a difficult time even knowing there’s been a settlement, and they may be facing an opponent determined to dissipate, commingle and hide funds.

Roberts said he suspected the solution suggested by Stris would “make life more complicated and expensive for the funds, which is, of course, contrary to the idea of preserving the assets.”

Retirement and Pension Context

Stris contended that the limitation on equitable relief (and consequentially, on ERISA liens) is especially valid in the pension and disability benefit context. So, for example, if a plan is overpaying a pensioner for years, but he or she lives off that money, the plan should not be able to recover. Anders agreed:

[T]he plan may be making overpayments to beneficiaries over a long period of time. And the beneficiary may spend the money without knowing that she’s going to be responsible for reimbursing it later … or that it’s not her money to spend in a sense. And so in that situation, I think a policymaker could be concerned … about a plan being able to go back months or years later and … get reimbursement from the beneficiary.

Anders and Stris said if tort settlement funds belonging to the plan are intermingled in a single account with personal assets, and the defendant draws from that account, the plan can access what remains in those personal assets, because first dollars spent could be assumed to be personal. But if the defendant spends the account below the plan’s lien amount or spends until he or she has no funds, then the plan has no possible remedy.

The Health Plan’s Arguments

Attorney for the Elevator Industry Plan Neal Katyal said Montanile knowingly frustrated the plan, and took actions that blocked an otherwise valid equitable claim. Montanile signed an attestation saying he was obligated to reimburse the plan. The plan document provided that a tort settlement proceeds (up to the plan’s medical outlays) are the plan’s property.

Justice Stephen Breyer said the onus is on plans to identify the problem claim, follow the funds, and contact the participant’s lawyer at the correct time. If that doesn’t work, the plan can try to repossess the funds under state law if needed.

In reply to the plan’s testimony, but in contrast to what he said earlier to Montanile’s attorney, Roberts said it may not be too difficult for a plan to follow participant cases closely, inform the participant that it is aware of the processing and stay apprised of the tort case as it advances, in order to enforce the lien.

Katyal replied that plans don’t notice when settlements occur. Auto accidents, for example, are settled without any public record and without any lawsuit being filed. And monitoring of this kind costs plans a lot, he added.

Katyal summed up the ERISA plan’s stance:

  • Courts need to enforce plans’ written terms and reasonable decisions.
  • The plan was trying to achieve an equitable remedy and no more than that. It does want to close a loophole that allows participants to escape having to deliver equitable relief.
  • ERISA plans can recover without satisfying Knudson’s tracing rules (see sidebar), and still fit in a proper definition of equitable relief.

Struggling with Scope of Equitable Relief

A circuit court split has allowed plan participants and beneficiaries in certain jurisdictions to avoid repaying plans by spending funds faster than plans could track them.

Under the Supreme Court ruling in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), a plan’s claim for payment fails if the defendant is not in possession of the disputed funds. Knudson remains the law of the land, all parties at the argument agreed. For more information on the evolution of health plan recoveries and equitable relief, go to Section 631 of the Coordination of Benefits Handbook.

Four years later, the Supreme Court recognized a broader definition of funds being in a defendant’s possession, thereby preserving more plan fiduciaries’ claims for equitable relief. For example, more courts now hold that if an equitable lien can be established (for example, by a signed subrogation agreement), then direct tracing to an actual fund might not be required. For more on the Sereboff ruling, see Section 632 of the Handbook.

Attorney Pay Remains Safe

Justice Sonia Sotomayor asked Katyal if he thought plans might should be able to go the participant, attorney or law firm for the fees paid to get the participant’s tort settlement. Katyal noted that was not what the plan thought, because the lawyer is not a party to the underlying ERISA agreement between plan and participant.

Tracking Remains Important

The arguments revealed that tracking participant tort litigation and tracing settlement funds remains important for plans, Michelle Capezza, an attorney with Epstein Becker & Green in New York, told the Guide.

Plans should think about procedures they use to track participants’ tort litigation and could result in a fund from which they could be reimbursed. The outcome in this case could influence how plan documents are drafted, she notes. Documents should clearly state subrogation and recovery rights and provisions that are materially consistent in all aspects should appear in summary plan descriptions, she said.

Attorney Roy Harmon of Greenville, S.C., said there is a likelihood that Montanile will prevail, because the facts are sympathetic. “That does matter regardless of what the courts say,” he said, adding: “Even if the plan did have a claim on the plan member, most of them do not have the kind of money to pay the judgment. So when the big money gets spent on groceries and rent, there is nothing to go after.”

Harmon added: “Sereboff did not abrogate Knudson‘s holding that the remedy must be directed at the asset and not the person (which would be a claim for damages, also known as legal relief). The plan member spent the money, so there is no asset left.”