In January 2016, the Supreme Court resolved a circuit split over whether a plan can enforce an equitable lien against a beneficiary's general assets under ERISA § 502(a)(3). Montanile v. Board of Trustees of National Elevator Industry Health Benefit Plan, 136 S.Ct. 651 (2016). After Montanile, it is clear that plans may enforce an equitable lien only against the fund that caused there to be an overpayment, and it may not trace the fund into the beneficiary's general assets.
Montanile Facts and Lower Court Decisions
Robert Montanile was injured when a drunk driver ran a stop sign. The employee benefit plan in which Montanile participated paid more than $120,000 in medical benefits related to the accident. However, the terms of the health plan established that the plan had a right to reimbursement whenever a plan participant recovered money from a third party who was responsible for the injury and that the plan was entitled to "any amounts" that the participant "recover[ed] from any party by award, judgment, settlement, or otherwise."
Montanile filed a negligence action against the drunk driver and made a claim for uninsured motorist benefits under his own insurance policy. He obtained a $500,000 settlement, from which Montanile's attorneys received $260,000 for fees and costs. The health plan asserted that it had a right to $120,000 from the remaining $240,000 of the settlement.
Montanile's attorneys retained the disputed amount in their trust fund while they attempted to negotiate a settlement of the health plan's claim. After settlement discussions broke down, Montanile's attorneys informed the health plan that they would distribute the remaining settlement funds to Montanile unless the plan objected within 14 days. The plan did not respond within this timeframe, and the attorneys distributed the remainder of the settlement fund to Montanile.
Six months after the negotiations failed, the health plan sued Montanile under ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3), seeking repayment of the $120,000 expended on his medical care. The plan asked the court to enforce an equitable lien upon any settlement funds or property in Montanile's actual or constructive possession. The plan also requested an order enjoining Montanile from dissipating the settlement funds. Montanile stipulated that he still possessed some of the funds.
Following Eleventh Circuit precedent, the district court granted summary judgment to the health plan, rejecting Montanile's argument that there was no specific, identifiable fund separate from his general assets against which the plan's equitable lien could be enforced. The court held that the plan was entitled to reimbursement from Montanile's general assets, regardless of whether Montanile had dissipated some or all of the settlement funds. The Eleventh Circuit affirmed the district court, reasoning that a plan can always enforce an equitable lien once the lien attaches and that dissipation of the specific fund to which the lien attached cannot destroy the underlying reimbursement obligation.
Supreme Court Precedent
Montanile is the fifth in a series of decisions by the Supreme Court interpreting the words "appropriate equitable relief" under § 502(a)(3). In Mertens v. Hewitt Associates, 508 U.S. 248 (1993), the Court explained that the term "equitable relief" is limited to "those categories of relief that were typically available in equity" during the days of the divided bench. In Great-West & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), the Court clarified that a plan could not impose personal liability under § 502(a)(3) on a participant for a contractual obligation to pay money but may be able to impose a constructive trust or equitable lien on a particular fund or property in the participant's possession.
Next, in Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), the Supreme Court held the plan was entitled to recover because both the basis for the claim and the remedy sought were equitable. In that case, the beneficiaries of the plan retained their settlement fund in a separate account. The plan created an equitable lien by agreement against a specific fund that was in the beneficiaries' possession. The cause of action was equitable, because the plan sought to enforce a contract to convey a specific object, even though the parties entered into the contract before the beneficiaries acquired title to the settlement fund. Additionally, the underlying remedies were equitable because the plan sought specifically identifiable funds that were within the possession and control of the beneficiaries—not recovery from the beneficiaries' general assets.
Finally, in US Airways, Inc. v. McCutchen, 133 S.Ct. 1537 (2013), the Court reaffirmed its analysis in Sereboff, again concluding that a plan sought to enforce an equitable claim by seeking equitable remedies. As in Sereboff, the basis for the claim was equitable because the plan's terms created an equitable lien by agreement on a third-party settlement. And, as in Sereboff, the nature of the recovery requested was equitable because it claimed specifically identifiable funds within the beneficiary's control—that is, a portion of the settlement fund.
The Montanile Decision
In Montanile, the Court observed that the basis for the plan's action was equitable because the plan had an equitable lien by agreement that attached to Montanile's settlement fund when he obtained title to that fund. The Court also noted that the nature of the plan's underlying remedy would have been equitable had it immediately sued to enforce the lien against the settlement fund in Montanile's possession. However, the issue before the Court was whether a plan is still seeking an equitable remedy when the defendant, who once possessed the settlement fund, has dissipated it, and the plan then seeks to recover from the defendant's general assets. To resolve this issue, the Court turned to basic principles of equity.
The Court concluded that the plan was seeking legal, not equitable, relief by attempting to collect from Montanile's assets. In arriving at this conclusion, the Court considered standard equity treatises, noting that equitable remedies are, as a general rule, directed against some specific thing. Accordingly, equitable liens are ordinarily enforceable only against a specifically identified fund. The lien is eliminated when the defendant dissipates the fund on nontraceable items. The Court noted that ordinarily, under these circumstances, the plaintiff would retain only a personal claim against the wrongdoer—a quintessential action at law. The Court did not expressly determine that such an action at law would be preempted by ERISA.
In support of its position, the plan argued three points, all of which the Supreme Court rejected. First, the Court rejected a contention that, in Sereboff, it distinguished equitable liens by agreement from other types of equitable liens, which require a plaintiff to trace a specific fund into the defendant's hands. Rather, the Court emphasized that all types of equitable liens must be enforced against a specifically identified fund in the defendant's possession.
Next, the plan argued that historical equity practice supported enforcement of an equitable lien against Montanile's general assets. The plan's argument was based on the methods by which equity courts might have awarded relief from a defendant's general assets when a defendant wrongfully dissipated a fund to thwart enforcement of an equitable lien. The Supreme Court acknowledged that equity courts could award money decrees as part of their ancillary jurisdiction to award complete relief. However, when equity courts did so, the rights of the parties were strictly legal, and legal remedies, even legal remedies that a court of equity could sometimes award, are not "equitable relief," as required by § 502(a)(3).
Finally, the plan argued that ERISA's objectives would be served by enforcing the terms of the plan. The Court reiterated previous decisions stating that vague notions of a statute's "basic purpose" are inadequate to overcome the words of its text regarding a specific issue. Nonetheless, the Court determined that its interpretation of § 502(a)(3) promotes ERISA's purposes by allocating liability for plan-related misdeeds in reasonable proportion to respective actors' power to control and prevent the misdeeds. The Court observed that the plan had adequate notice of the existence and distribution of the fund, yet it failed to act promptly to enforce its lien.
Still, the plan may be able to enforce some of its rights, since Montanile admitted that he still retained some of the funds. The Supreme Court remanded the case to resolve an issue of fact on how much dissipation there was and whether Montanile mixed the settlement fund with his general assets.
Justice Ginsburg dissented. She argued that in Montanile the Court perpetuated its profound error in Knudson, which effectively unraveled 40 years of fusion of law and equity. Justice Ginsburg characterized the outcome of Montanile as bizarre in that it allowed a defendant to escape his reimbursement obligations by spending settlement funds rapidly on nontraceable items.
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