This article has been published in “The Advocate”, a monthly publication of the Arizona Association for Justice/Arizona Trial Lawyers Association, March-April 2016 issue, @2016 by Steven J. Bruzonsky, Esq.
ERISA Liens: The Montanile Case and How
To “Beat” an Air Tight Written ERISA Lien
Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, No. 14-723 (January 20, 2016) is the latest U.S. Supreme Court case involving an ERISA healthplan lien with potentially large ramifications for plaintiff attorneys and their clients with cases involving employer ERISA healthplan (and disability) lien claims.
Montanile sustain serious injuries in an accident. Montanile sued the drunk driver and recovered a $500,000 injury settlement. Attorney’s fees were $200,000 and costs were more than $63,000. His employer’s ERISA plan sought full reimbursement of $121,044.02 medical benefits paid, under the ERISA plan’s essentially an air tightly written subrogation/reimbursement provision. The plan refused any lien reduction. Then Montanile’s attorney gave written notice to the plan that remaining settlement funds would be released to Montanile if the plan failed to respond within 14 days to Montanile’s attorney, and then the funds were disbursed to Montanile once the plan failed to respond within the 14 days. Six months later the plan filed suit in federal district court to enforce its “equitable” lien.
The district court granted summary judgment in favor of the plan. On appeal to the Eleventh Circuit, the court held that the funds were “specifically identifiable” and that the “equitable” lien could attach even in the case of “dissipation” against Montanile’s general assets. The U.S. Supreme Court reversed (8-1), stating that “We hold that, when a participant dissipates the whole settlement on nontraceable items, the fiduciary cannot bring a suit to attach the participant’s general assets under §502(a)(3) because the suit is not one for “appropriate equitable relief.” “The case was remanded to the district court to determine whether or not Montanile had dissipated the entire settlement funds on “nontraceable” assets.
In Montanile, the Court discusses their prior decisions in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002) (by the time suit was brought, settlement funds were already distributed by the attorney, and a Special Needs Trust had been set up under California law as part of the settlement; and the Court held a suit for money judgment is not a form of equitable relief under §502(a)(3) of ERISA and thus there was no federal court equitable jurisdiction under §502(a)(3) of ERISA); Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006) (per agreement of the parties, the full ERISA healthplan lien of $74,869.37 was maintained in an investment account; and the Court held that there was federal court equitable jurisdiction under §502(a)(3) of ERISA) to enforce the “equitable lien by agreement” set forth in the plan documents; and U.S. Airways v. McCutchen, 569 U.S. ___, 133 S. Ct. 1537 (2013) (McCutchen’s attorney held $41,500 in the attorney’s trust account, and the Court held that there was federal court equitable jurisdiction under §502(a)(3) of ERISA to enforce the “equitable lien by agreement” set forth in the plan documents). The Court states that these “prior cases do not address whether a plan is still seeking an equitable remedy when the defendant, who once possessed the settlement fund, has dissipated it all, and the plan then seeks to recover out of the defendant’s general assets.”
The Court in Montanile explains the history of equitable relief: “In sum, at equity, a plaintiff ordinarily could not enforce any type of equitable lien if the defendant once possessed a separate, identifiable fund to which the lien attached, but then dissipated it all. The plaintiff could not attach the defendant’s general assets instead because those assets were not part of the specific thing to which the lien attached. This rule applied to equitable liens by agreement as well as other types of equitable liens.” The Court explains that standard equitable “treatises make clear that a plaintiff could ordinarily enforce an equitable lien only against specifically identified funds that remain in the defendant’s possession or against traceable items that the defendant purchased with the funds (e.g., identifiable property like a car). A defemdant’s expenditure of the entire identifiable fund on nontraceable items (like food or travel) destroys an equitable lien. The plaintiff then may have a personal claim against the defendant’s general assets - - but recovering out of those assets ia a legal remedy, not an equitable one.”
What are the potential ramifications and consequences of Montanile?
1. Absent plaintiffs and their attorneys’ promise to hold sufficient funds in trust to cover the full lien, you may expect more litigation filed in federal court with early injunctions/restraining orders to prevent plaintiffs and their attorney’s from dissipating the settlement funds.
2. Generally ERISA plan subrogation/reimbursement provisions contractually provide that the plan may reduce/offset future benefits payments in the event of nonpayment/nonreimbursement of the full lien amount from settlement proceeds. Some plans provide that the plan may terminate benefits as well. So even if a plaintiff and his/her attorney could timely dissipate settlement funds, if plaintiff has need for the plan to continue paying future medical and/or disability benefits, nonpayment of the lien from settlement proceeds could be inadvisable and hazardous to the injured plaintiff in this regard.
3. Arizona ER 1.15(f) allows a lawyer to serve written notice upon a third party that the lawyer will distribute the property to the client “unless the third party initiates legal action and provides the lawyer with written notice of such action within 90 calender days.” So long as the injured party’s attorney complies with ER 1.15(f), this presumably gets the attorney off the hook for an ER 1.15 violation, if the attorney disburses settlement funds and does not retain sufficient funds in trust to protect the claimed ERISA lien. However, if the client has continuing future health and/or disability benefits from the ERISA plan, then by sending this ninety day notice letter, all the attorney is doing is inviting the Plan to file litigation and obtain an injunction/restraining order requiring the attorney to hold sufficient funds in trust to cover the full amount of the ERISA lien claim. On the other hand, lets say that the client no longer is employed by the ERISA plan’s employer and will be receiving no continuing or future medical or disability benefits from the plan – then if the settlement proceeds are disbursed and dissipated by the client, and if the plan files in federal court, then the case should be dismissed as there are no specifically identifiable and traceable settlement funds and no federal court equitable jurisdiction.
4. How can a plaintiff “dissipate” all of the settlement funds so that they are not specifically identifiable and traceable? The Court in Montanile states that if the settlement funds have all been spent on nontraceable items like food or travel that this destroys the equitable lien, but that if the funds were used to purchase identifiable property, such as a car, then the equitable lien is enforceable. I personally would be hesitant to assume that an annuity as part of an injury settlement, or purchased after disbursement of settlement funds, in not traceable for ERISA lien purposes. Lets say we get more creative and settlement funds are used to pay down a mortgage on a home – is this any different than using settlement funds to buy a car, and thus traceable? Let’s take this a stop further and settlement funds are comingled into an existing savings or checking account? The bottom line is that we do not have clear guidance on what constitutes the dissipation of settlement funds other than purchase of food (and other consumable items), travel, or other similar consumable purchases.