There is a lot about ERISA litigation that is hard to understand, but perhaps the most opaque issue is subrogation, which is the law governing when and how plans can recover benefits from participants. It seems that the Supreme Court is constantly changing the rules (while denying that it’s changing the rules), based on its interpretation of old treatises written about procedure in courts that don’t exist anymore.
Many benefit plans contain some form of reimbursement provision. Most commonly, these subrogation disputes arise where a participant is injured in an accident, receives medical care paid for by his health plan, and then sues the person who caused the accident and wins or settles. In that situation, the plan will demand that the participant to pay back some or all of the money that the plan had paid for health care arising from the accident.
The starting point for looking at subrogation claims is, of course, the language of ERISA. 29 U.S.C. § 1132 specifies who can sue whom for what, and section 1132(a)(3) states, in pertinent part, that a civil action may be brought by a fiduciary “to obtain other appropriate equitable relief …(ii) to enforce … the terms of the plan[.]” The Supreme Court held in Mertens v. Hewitt Associates, 508 U.S. 248 (1993), that “appropriate equitable relief” meant “those categories of relief that were typically available in a court of equity,” before courts of equity and courts of law were merged. Because that merger occurred (at the federal level at least) in 1938, it is highly doubtful that any currently practicing lawyers also practiced in the pre-merger days.
Mertens did not involve subrogation. The first case to address how ERISA’s limitation on equitable remedies applied to a subrogation claim was Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002). The plan paid $400,000 for Knudson’s medical expenses after an accident; when she settled a lawsuit against the driver, most of the money went into a “special needs trust” to pay for her medical care, and only $13,000 was set aside to reimburse the plan. The plan sued to enforce the reimbursement provision, but the Supreme Court held that the plan’s claim against Knudson was a legal claim, not an equitable claim (and thus not available under 1132(a)(3)), because the money in the special needs trust was never paid to Knudson. In particular, though the plan’s claim was for “restitution,” which is universally considered an equitable claim, there were different flavors of restitution recognized “in the days of the divided bench.” Truly “equitable” restitution was only available “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.” Because Knudson never had the money in question, the plan’s restitution claim was for “legal restitution,” not “equitable restitution,” and therefore the plan did not seek “appropriate equitable relief” under ERISA.
Four years later came Sereboff v. Mid Atl. Med. Servs., Inc., 547 U.S. 356 (2006). Sereboff seemed remarkably similar to Knudson: the only apparent difference was that there was no special needs trust, and the settlement proceeds were paid directly to Sereboff, and were being preserved “in an investment account” until the litigation was resolved. But that difference, held the Court, was critical: “That impediment to characterizing the relief in Knudson as equitable is not present here. … Mid Atlantic sought ‘specifically identifiable’ funds that were ‘within the possession and control of the Sereboffs’—that portion of the tort settlement due Mid Atlantic under the terms of the ERISA plan, set aside and ‘preserved [in the Sereboffs’] investment accounts.’” The Court found that this claim was equitable under “law from the days of the divided bench” because it sought to enforce an “equitable lien by agreement.”
Sereboff set up a nomenclature for future subrogation cases. Mid-Atlantic was seeking judgment against “a particular fund distinct from the Sereboff’s general assets” that the plan specifically identified, namely, “all recoveries from a third party (whether by lawsuit, settlement, or otherwise).” The Court did not suggest that the “particular fund” needed to be physically segregated from a participant’s other assets for the equitable lien to attach. The plan specified “a particular share of that fund to which Mid Atlantic was entitled – ‘that portion of the total recovery which is due Mid Atlantic for benefits paid.’” Mid-Atlantic could assert an equitable claim “to follow a portion of the recovery into the Sereboff’s hands as soon as the settlement fund was identified, and impose on that portion a constructive trust or equitable lien [quotation marks and brackets omitted].”
The next big subrogation case was US Airways, Inc. v. McCutchen, 133 S. Ct. 1537 (2013). Though it primarily concerned defenses the participant could assert to a valid equitable subrogation claim, there are some factors about possession of funds that are interesting in hindsight. The Plan paid $66,686 in medical expenses for McCutchen’s accident. In subsequent lawsuits, McCutchen recovered a total of $110,000, from which his attorneys deducted $44,000 in fees, leaving $66,000. The attorneys placed $41,500 in escrow pending resolution of the plan’s subrogation dispute, and paid the balance to McCutchen. The plan sought $68,686, which was more than the combined amount placed in escrow and paid to McCutchen. Both the district court and the Third Circuit held that the plan was entitled to subrogation, but differed on the amount. The district court awarded the plan the full $66,686 – more than McCutchen received – and the Third Circuit held that the district court should consider what amount the plan should contribute toward McCutchen’s legal fees.
The Supreme Court began by seeming to gloss over the fact that McCutchen did not technically possess the money his lawyers held in trust, stating that, in Sereboff, “we allowed a health-plan administrator to bring a suit just like this one under § 502(a)(3).” And the Court went on to state that the plan in Sereboff was seeking specifically identifiable funds “within the Sereboff’s control [emphasis added]” though the Sereboffs had actual possession of their money. This certainly suggested that possession of funds was a fluid concept, but is leaves open the question where to draw the line between money held in an attorney trust account and money held in a special needs trust. Ultimately, the Court rejected some equitable defenses that McCutchen wanted to assert to reduce the amount of money payable to the plan, but upheld others. Though it raised some questions, to the extent those questions were around the edges, McCutchen seemed to be evidence of stability and maturity in the law of ERISA subrogation.
Then along came Montanile. In Montanile v. Bd. of Trustees of Nat. Elevator Indus. Health Benefit Plan, 136 S. Ct. 651 (2016), the Supreme Court threw what seemed to be another curve-ball, fundamentally changing what many practitioners thought was the subrogation landscape, while asserting that nothing had changed.
The basic facts in Montanile are all too familiar. Montanile was injured in an accident, resulting in $120,000 in medical bills for which the plan paid. He sued the driver who caused the accident and recovered $500,000, from which his lawyers deducted $260,000 in fees; the lawyers held “most of” the rest in trust while it negotiated the Board’s subrogation claim. Here’s where things get somewhat strange. Montanile’s lawyers and the Board could not reach agreement, and Montanile’s lawyers told the Board that they would distribute the money they were holding to Montanile unless the Board objected. The Board did not object, the lawyers did what they said they would do. The Board and the lawyers negotiated for another six months, during which time Montanile spent “almost all” of the money. After the Board sued, the district court held that, even though Montanile had spent the money, the Board was entitled to restitution from Montanile’s general assets. The Eleventh Circuit affirmed, explaining (as the Supreme Court described it): “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. The court therefore held that the plan can recover out of a participant’s general assets when the participant dissipates the specifically identified fund.”
This would seem to be completely consistent with Sereboff and McCutchen, which apparently held that what is important is that the participant has possession or control of the money at some point; as soon as that happens, the equitable lien attaches. The plan is not then obligated to confine its recovery to the specific money that the participant received.
It was not to be so easy. The Supreme Court held that “the basis for the Board’s claim is equitable. But our cases do not resolve whether the remedy the Board now seeks – enforcement of an equitable lien by agreement against the defendant’s general assets – is equitable in nature.”
The Court explained further:
The Board had an equitable lien by agreement that attached to Montanile’s settlement fund when he obtained title to that fund. And the nature of the Board’s underlying remedy would have been equitable had it immediately sued to enforce the lien against the settlement fund then in Montanile’s possession. That does not resolve this case, however. Our 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.
In order to answer the question, the Court turned, as it had in all of these cases, to “standard equity treatises.”
[T]hose 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 defendant’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 is a legal remedy, not an equitable one.
The Board argued that the Court had rejected precisely this kind of tracing requirement in Sereboff. But the Court disagreed, explaining that Sereboff held that the plan, when enforcing an equitable lien by agreement, is not required to trace the plan’s money in the participant’s possession – in other words, it does not have to sue to recover the exact money that it previously paid to the participant (or the items he bought with that money). The Court explained:
The Board misreads Sereboff, which left untouched the rule that all types of equitable liens must be enforced against a specifically identified fund in the defendant’s possession. See 1 Dobbs § 4.3(3), at 601, 603. The question we faced in Sereboff was whether plaintiffs seeking an equitable lien by agreement must “identify an asset they originally possessed, which was improperly acquired and converted into property the defendant held.” 547 U.S., at 365, 126 S.Ct. 1869. We observed that such a requirement, although characteristic of restitutionary relief, does not “appl[y] to equitable liens by agreement or assignment.” Ibid. (discussing Barnes v. Alexander, 232 U.S. 117, 34 S.Ct. 276, 58 L.Ed. 530 (1914)). That is because the basic premise of an equitable lien by agreement is that, rather than physically taking the plaintiff’s property, the defendant constructively possesses a fund to which the plaintiff is entitled. But the plaintiff must still identify a specific fund in the defendant’s possession to enforce the lien. See id., at 123, 34 S.Ct. 276 (“Having a lien upon the fund, as soon as it was identified they could follow it into the hands of the appellant”).
The Court also rejected arguments that various other doctrines of “historical equity practice,” including something called the “swollen assets doctrine,” provided relief to the Board.
Putting Knudson, Sereboff and Montanile together, there are at least three elements to a successful claim for reimbursement by an ERISA plan: (i) the plan must contain language giving the plan rights to a specifically identifiable fund; (ii) that specific fund must come into the participant’s possession or control at some point in time; (iii) the fund, or identifiable items purchased with the fund, must remain in the participant’s possession or control when the plan sues.
To be sure, a big lesson of Montanile is that a plan seeking to exercise subrogation rights must proceed diligently. This was always true, but now there is more reason for a plan not to sit on its rights.