The Supreme Court has once again waded into the Serbonian Bog of what is meant by the term “appropriate equitable relief” contained in 29 U.S.C. Section 1132(a)(3) (ERISA Section 502(a)(3)), which authorizes a civil action to be brought “by a participant, beneficiary or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.”

In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 2016 WL 228344 (Jan. 20, 2016), the Supreme Court once again addressed a typical personal-injury scenario where a health benefit plan seeks reimbursement of expenses after a member of the plan recovers damages from a third party.

What makes this case different from prior rulings is that the settlement funds were disbursed before the benefit plan sued to assert its reimbursement claim, which resulted in a holding that “when a participant dissipates the whole settlement on non-traceable items, the fiduciary cannot bring a suit to attach the participant’s general assets under Section 502(a)(3) because the suit is not one for ‘appropriate equitable relief.'”

The court determined that its conclusion was compelled by a trio of earlier rulings that addressed the meaning of the phrase “appropriate equitable relief” contained in the Employee Retirement Income Security Act statute and held that such relief was limited to the type of relief typically available in courts of equity prior to the 1938 merger of courts of law and equity. See Mertens v. Hewitt Associates, 508 U.S. 248, 256, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993); Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204, 217, 122 S.Ct. 708, 151 L.Ed.2d 635 (2002); Sereboff v. Mid Atlantic Medical Services Inc., 547 U.S. 356, 363, 126 S.Ct. 1869, 164 L.Ed.2d 612 (2006). The latter two cases specifically addressed health benefit plan reimbursement claims, noting the distinction between equitable and legal restitution.

In Great-West, the court explained that “restitution in equity typically involved enforcement of a constructive trust or an equitable lien, where money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession.” (Internal quotations omitted.)

Sereboff built on Great-West and held that reimbursement claims by health-care benefit plans are analogous to enforcement of attorney lien claims, and the right to reimbursement attaches to settlement funds prior to distribution.

The Supreme Court found that while the basis of the National Elevator plan’s claim was equitable, and an equitable remedy would have been available had the plan sued to enforce its lien prior to distribution of the funds, because the funds had been disbursed, the court held the lien was not enforceable against Montanile’s general assets. The court found that once “the defendant dissipated the entire fund on non-traceable items, that complete dissipation eliminated the lien.”

The Supreme Court traced the history of equity jurisprudence in the context of restitution claims. While the court acknowledged that courts of equity sometimes awarded monetary relief as a substitute where equitable relief could not be provided, such relief was always characterized as legal in nature.

The court thus rejected all of the respondent’s arguments asserting a right to enforce its lien on Montanile’s general assets, including its claim that it could enforce its lien under the “swollen assets doctrine,” which ostensibly allows an equitable recovery from an individual whose assets had swollen due to receipt of the funds claimed to be subject to restitution. The court cited rulings from equity courts and legal commentators, the majority of whom have rejected the theory as falling within the scope of “equitable” relief.

The National Elevator plan also asserted that it was entitled to relief consistent with ERISA’s objectives of “enforcing plan documents according to their terms and of protecting plan assets.” However, the court was unpersuaded by general notions of statutory intent, especially since the record revealed the plan had failed to aggressively to protect its rights. The court remanded, however, for a determination as to whether any of the settlement funds paid to Montanile could be traced to tangible assets rather than spent on items such as food or rent.

A dissenting opinion filed by Justice Ruth Bader Ginsburg criticized the majority’s strained reading of the meaning of “equitable relief” and suggested the court should confess error in its earlier holdings based on an influential law review article by a leading scholar who was critical of the court’s analysis of equitable remedies.

The impact of this ruling is difficult to predict. Certainly, benefit plans seeking to protect their rights will no doubt be more aggressive in pursuing judicial intervention.

On the other hand, Montanile will afford injured tort claimants greater leverage in negotiating liens, particularly in situations where liability insurance is limited and the claimant’s recovery falls far short of make whole relief.

Otherwise, overly aggressive demands for full reimbursement will backfire on the benefit plans because putative plaintiffs will forgo seeking recompense for personal injuries if the recovery ends up entirely or mostly in the hands of the health benefit provider.

The Montanile decision also affects an area outside of tort litigation. In long-term disability insurance claims, it is typical that group policies integrate disability insurance payments with Social Security disability insurance awards, reducing benefits by the Social Security payments.

Such provisions also permit benefit plans to recoup overpayments resulting from payment of full benefits when a subsequent award of Social Security disability benefits covers the same benefit period. So long as the insurance payments continue, the insurer can recoup the overpayment by imposing a setoff against future benefits according to Northcutt v. GM Hourly-Rate Employee Pension Plan, 467 F.3d 1031, 1035-38 (7th Cir. 2006).

However, the 9th U.S. Circuit Court of Appeals held in Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (9th Cir. 2012), cert. denied 133 S.Ct. 1242 (2013), that disability insurers lack valid claims for equitable reimbursement if the Social Security payment is dissipated and the long-term disability benefits have ceased.

Therefore, when a long-term disability claimant challenges a denial of benefits, the insurer cannot recover on a counterclaim seeking reimbursement of a claimed overpayment of benefits unless it is made conditional upon the insured’s recovery of ongoing benefits. The Bilyeu holding thus anticipated the result in Montanile in recognizing that benefit plans are barred from asserting reimbursement claims under ERISA against an insured’s general assets.

– Our firm authored an amicus brief in support of Montanile.

This article was initially published in the Chicago Daily Law Bulletin.

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