A agrees to pay money to B, but instead spends the money on something else. Can A recover?

It may sound like the world’s easiest law school exam, but this question arises under ERISA, where nothing is easy. So this is a question only the U.S. Supreme Court can answer.

This week, the Court heard arguments in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, seeking to resolve a 6-2 circuit split regarding whether an ERISA plan may recoup an overpayment it makes to a plan participant if it cannot trace the proceeds to a particular fund within the participant’s possession.

Montanile should prove of great interest to the benefits community, as its factual premise is commonplace. After he was injured in a car accident, Montanile’s health benefit plan paid his medical expenses — to the tune of $121,000.

Like many plans, Montantile’s specified that if he were to recover money in a tort action for his injuries, he would be required to reimburse the plan. Montanile recovered $500,000 against the tortfeasor, but, rather than pay the plan back, he paid his attorney and spent the rest. By the time the plan sued Montanile to enforce the plan’s equitable lien provisions, Montanile was empty handed.

That Montanile owed money to the plan is undisputed. But ERISA limits a plan’s recourse against participants. Under ERISA, a plan cannot sue a participant for damages — it can pursue only “appropriate equitable relief” under Section 502(a)(3). 

It is settled that, under the traditional rules of equity, a party may demand the return of a specific chattel or a specific fund in another’s possession. But the situation is somewhat murkier when a party seeks to be made whole by claiming against an adversary’s general assets. 

A court of equity could award such relief — particularly where the participant had wrongfully dissipated the specific fund that the plan might otherwise have pursued. But the Supreme Court has suggested that some remedies available in courts of equity may not constitute “equitable relief” under ERISA.

What is a plan to do?

The decision in Montanile — which is expected by June 2016 — may provide useful guidance. In the meantime, the Department of Labor, which is supporting the participant’s argument that the plan cannot recover under ERISA, has made a few suggestions that plan sponsors and fiduciaries should heed:

  • Subrogate. A plan’s terms should give the plan a right of subrogation when the participant pursues tort remedies that could result in double recoveries. Although plans may well hesitate to bear the costs to litigate their participants’ tort suits, they should at least preserve the option for an appropriate case. At a minimum, they should require participants to alert them to potential tort claims and to any litigation or settlement negotiations.
  • Investigate. When it appears that a claim for benefits arises from a tort, the plan should proactively investigate to determine if there is a possible responsible third party against whom a plan participant may take or has taken action.
  • Monitor. Any such cases should be tracked, so that if a plan participant obtains a recovery from a responsible third party, a lien can be secured.
  • Expedite. Because of the possibility that a participate can avoid repayment by depleting his funds, a plan should be prepared to move quickly to litigation, and to obtain temporary restraining orders as a matter of course when participants resist reimbursement. (If the plan in Montanile had acted with greater dispatch, it would not have needed to litigate a claim all the way to the Supreme Court.)

The argument in Montanile did not indicate how the case is likely to be resolved. The Justices did appear concerned about preserving some avenue through which plans can recover excess payments from undeserving participants. 

For example, several Justices suggested that a plan could trace a portion of a tort judgment to the personal-injury attorney and could file a claim to recover those funds. Depending on the outcome of this case, this option may prove attractive and straightforward, depending on how Montanile is resolved.

It is also not clear whether the Court’s ultimate resolution will be limited to the health-benefits context (where an overpayment usually results from what is effectively an advance) or if overpayments in the retirement benefits context (which often result from a fiduciary’s miscalculations) will also be implicated. In either case, the benefits community should pay close watch to Montanile and should be prepared quickly to adapt procedures according to the Court’s forthcoming guidance.

Nancy Ross is a partner in Mayer Brown’s Chicago office and a member of the ERISA Litigation practice. Brian Netter is a partner in the firm’s Washington, D.C. office and a member of the Supreme Court & Appellate practice. Abigail Bartine is a Litigation & Dispute Resolution associate in the firm’s Chicago office.

The information in this legal alert is for educational purposes only and should not be taken as specific legal advice. 

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