JURIST Guest Columnist John W. Klinker of Loyola University Chicago School of Law discusses how the decision in Montanile potentially creates a precedent that could affect the funding of welfare benefit plans… A common term in welfare benefit plans establishes an agreement whereby the plan will pay covered medical expenses of an employee when the employee is injured by a third party. Typically, as part of this arrangement, employees agree to reimburse the plan should they later recover from the injurious third party. Such an agreement is done by way of a subrogation clause. Consider what happens when an employee receives money from such a third party, but instead of reimbursing his plan he spends it on non-traceable items, such as services or consumable goods. These were the facts before the Supreme Court in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan [PDF].

The National Elevator Industry Health Benefit Plan, the Respondent [PDF], administered a welfare benefit plan. Under the plan, a beneficiary could receive advanced benefits when injured by a third party, thus providing them with adequate financial support while pursing said third party in a legal action. By accepting advanced benefits, a beneficiary agreed to use any amounts recovered through the legal action to promptly reimburse the plan, even before recovered funds were used for attorneys’ fees or costs, or the expenses or damages of the beneficiary.

In December 2008 Robert Montanile, the Petitioner [PDF], was the victim of a car accident. A drunk driver ran through a stop sign and collided with Montanile’s car causing him severe injuries. As a result of his injuries Montanile underwent spinal fusion surgery and several other forms of treatment. At the time of his injury, Montanile was a beneficiary of the Respondent’s welfare benefit plan. As such, the plan paid for Montanile’s medical expenses, which totaled $121,044.02. Before receiving the advancement, Montanile signed an agreement affirming his obligation to reimburse the plan for any recovery he received by way of “legal action or settlement or otherwise.”

Montanile filed suit against the driver and ultimately received a $500,000 settlement from which he paid his attorneys’ fees and costs, reducing his overall recovery to nearly $240,000. The Board of Trustees of the Respondent then pursued reimbursement from Montanile’s remaining funds pursuant to the subrogation clause of the plan. They received resistance from Montanile’s attorneys who claimed the plan was not entitled to reimbursement. The two sides attempted to reach a resolution regarding reimbursement, but the negotiations failed. Montanile’s attorneys then informed the Board that the remaining funds would be disbursed to Montanile unless the Board objected within fourteen days. The Board failed to object and the funds were disbursed. Six months later the Board filed suit.

The Board sought reimbursement of the plan’s advancement to Montanile by way of an equitable lien on the settlement funds or any other property in Montanile’s possession. Montanile, having taken possession of the settlement funds several months earlier and spending nearly all of them, argued that the funds were no longer separate and distinct from his general assets and, therefore, an equitable lien could not be placed on them. This argument failed at the district court, which granted summary judgment for the Board, and the Eleventh Circuit, which affirmed the trial court’s decision. The issue before the Supreme Court was “whether an ERISA fiduciary can enforce an equitable lien against a defendant’s general assets under these circumstances.”

ERISA, specifically § 502(a)(3) therein, allows fiduciaries to pursue equitable relief through a civil suit when necessary to enforce a welfare benefit plan’s terms. This provision became the crux of the discussion in Montanile where the court had to determine whether pursuing reimbursement from Montanile’s general assets, on top of the settlement funds, constituted a permissible equitable remedy or overstepped into the realm of a remedy at law.

In determining whether the resolution sought by the Board constituted equitable relief, the court undertook an extensive investigation of how to characterize the claim before them and the nature of the remedies requested. The court has previously ruled—in Great-West Life & Annuity Insurance Co. v. Knudson, Sereboff v. Mid Atlantic Medical Services, Inc., and US Airways, Inc. v. McCutchen [PDF]—on plan fiduciaries seeking reimbursement of advancements to beneficiaries for medical expenses that the beneficiaries later recovered from third parties. Under the precedent set forth in those three cases the Board’s claim would be considered equitable, but it was not conclusive as to whether the remedy sought by the Board is equitable.

Equitable remedies typically provide a party with rights to or over a particular item whereas legal remedies give a party the right to recover money from the defendant’s assets. Therefore, for an equitable lien to exist it must be placed on a specifically identifiable fund, as that fund would constitute a particular item over which a right could be held. By spending the entirety of the specifically identifiable fund on non traceable items, a beneficiary eliminates the item upon which an equitable lien could be placed. The court stated that such conduct by a defendant is improper but despite that impropriety, a plaintiff could not pursue reimbursement from the beneficiary’s general assets.

Therefore, the court ultimately ruled in favor of Montanile and held that the lower court could not properly allow the plan to seek recovery from Montanile’s general assets. Instead, the court remanded the case to the trial level for a determination of whether Montanile had kept his settlement funds and the rest of his assets segregated, as well as whether he owned any traceable assets directly stemming from the funds.

The precedent set by this decision may be quite narrow, but it has the potential to greatly affect the funding of welfare benefits plans. In situations such as the one in Montanile, benefit plans are set up to provide assistance to their beneficiaries during their time of need following injuries. In return, those beneficiaries expressly agree, by way of a subrogation clause, to repay their plans if they are made whole by the third party who caused their injury. Welfare benefit plans expect beneficiaries to reimburse them as part of their constant efforts to remain adequately funded such that they can provide necessary support for all beneficiaries under the plan. However, as Justice Ginsburg raised in her dissent[PDF] to Montanile, beneficiaries now “can escape that reimbursement obligation . . . by spending the settlement funds rapidly on nontraceable items.”

John Klinker is a student at the Loyola University Chicago School of Law where he serves as the Managing Editor of the Loyola University Chicago Law Journal. He earned a BA in Political Science and a BSW from Loyola University Chicago.

Suggested citation:John KlinkerWhen Equitable Remedies Give Way to Remedies at Law (or How to Avoid a Benefits Plan’s Subrogation Clause, JURIST – Student Commentary, Feb. 24, 2016, http://jurist.org/dateline/2016/02/john-klinker-equitable-remedies.php.