SCOTUS Revisits ERISA Reimbursement in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan
The Supreme Court heard oral argument on November 9, 2015 in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan (No. 14-723), the latest in a series of cases to examine whether and when a plan may sue a participant or beneficiary under ERISA § 502(a)(3) to recover funds obtained from a third party.
In Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), the Supreme Court determined that the participant or beneficiary must have possession or control over the third-party funds for the plan to seek equitable restitution under § 502(a)(3). In Sereboff v. Mid Atl. Med. Servs., 547 U.S. 356 (2006), the Court explained that a reimbursement provision in an ERISA plan gives rise to an "equitable lien by agreement" which becomes effective once the funds that are the subject of the reimbursement provision come into the participant's possession. Montanile asks whether a plan may seek reimbursement of funds that were once in the participant's possession but have since been dissipated. Robert Montanile was injured in a car accident in 2008 and incurred medical expenses totaling over $121,000. He subsequently recovered $500,000.00 in a tort settlement against the drunk driver who struck him. Over half of the settlement proceeds went to Montanile's personal injury lawyer, and the remainder he spent on daily living expenses. Despite being put on notice of the settlement, the plan did not take legal action to recover the overpaid medical expenses until six months after the funds were distributed, by which time they had been dissipated. The district court ruled in favor of the plan and the Eleventh Circuit affirmed. Bd. of Trs. of the Nat'l Elevator Indus. Health Benefit Plan v. Montanile, 593 Fed. Appx. 903 (11th Cir. 2014), cert. granted 135 S. Ct. 1700 (2015). Peter Stris, attorney for Mr. Montanile, argued that the remedy sought by the plan amounted to legal relief and ran afoul of Great-West and its progeny. Stris told the Court, "You have adopted a historical test. And so unless applying it here is so obviously at odds with the purposes of ERISA, the unbroken line of authorities tell us that the rule is you can only enforce these liens against specific property or its traceable product." Stris pointed out that ERISA did not preempt a state law action for fraud against the participant, assuming the requisite scienter could be established.
The Solicitor General, represented by Ginger Anders, argued in support of the petitioner. Anders argued that a suit for reimbursement under § 502(a)(3) could be brought against a participant or beneficiary only if the funds remained in the beneficiary's possession and control at the time of suit, even if that meant the plan was sometimes without a remedy. Anders argued that, since Great-West, plans have had to be diligent in protecting their rights by seeking an injunction or filing suit, and that the plan in this instance was not diligent. Neal Katyal, attorney for the plan, argued that courts of equity routinely allowed garnishment of general assets where the defendant, through his or her own wrongdoing knowingly frustrated an otherwise equitable claim. He cited as examples a substitutionary monetary judgment, deficiency decree, and the "swollen assets" doctrine.
Katyal criticized the Solicitor General's rule as overly "formalistic," to which Justice Scalia responded, "Mr. Katyal, equity itself is a formalistic distinction. I mean, to . . . argue that . . . we shouldn't make formalistic distinctions in trying to figure out whether particular relief is equitable relief or not, . . . that's incomprehensible to me."
Justices Scalia, Kagan, and Sotomayor expressed concern that the remedies advocated by the plan derived from cleanup doctrine (i.e., ancillary jurisdiction by courts of equity over legal claims) and were not representative of the remedies "typically available in equity," as required by Mertens v. Hewitt Assocs., 508 U.S. 248, 256 (1993) (interpreting "other appropriate equitable relief" within the meaning of § 502(a)(3)).
Justice Kagan remarked, "[I]t seems, Mr. Katyal, that you are relying on remedies that really developed very late in equity's life. In other words, you know, equity was going along, and there were these very formal rules distinguishing it from the legal world. And then as it progressed, . . . people thought we need some cleanup authority, or maybe even people just thought these rules aren't working in the way that we want them to work. So equity got a little bit less equitable as it approached the merger with law. But that, I think, is not really what we've meant when we've said we're looking to things that are typically equitable. You know, not like the last throes of equity as it was becoming a legal system."
On the other hand, Justices Roberts and Alito expressed concern about the policy implications of a rule that would incent plan participants to spend third-party funds as soon as they are received so as to frustrate recovery efforts.
Justice Roberts told Stris, "I'm just wondering if the solution you're advocating is going to make life a lot more complicated and expensive for the funds, which is, of course, contrary to the idea of preserving the assets."
Justice Alito similarly remarked, "This may be where the law leads us. But . . . [w]hat sense does all of this make?"
One of the more interesting developments during the oral argument was the plan's concession that disability and pension plans would not be affected by the rule it is advocating. Katyal explained that Social Security disability benefits are protected from garnishment under § 207 of the Social Security Act (42 U.S.C. § 407(a)). He added that pension plan participants who receive an overpayment often don't know that they are overspending until after the fact; thus, they lack the requisite knowledge.
That concession is significant because several of the circuit court cases involved in the circuit split, for which certiorari was granted, are disability cases. See Thurber v. Aetna Life Ins. Co., 712 F.3d 654 (2d Cir. 2013), cert. denied 134 S. Ct. 2723 (2014) (affirming right of ERISA plan administrator to recover overpaid disability benefits from claimant's general assets); Funk v. CIGNA Group Ins., 648 F.3d 182 (3d Cir. 2011) (same); Cusson v. Liberty Life Assurance Company, 592 F.3d 215 (1st Cir. 2010 (same); Gutta v. Standard Select Trust Ins. Plans, 530 F.3d 614 (7th Cir. 2008) (same); but see Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (9th Cir. 2012), cert. denied 133 S. Ct. 1242 (2013) (deeming ERISA lien unenforceable).
In Cusson and Weitzenkamp, the plans successfully circumvented 42 U.S.C. § 407(a) by characterizing their liens as a lien not over the Social Security disability benefits but rather over the overpaid long-term disability benefits, even though those benefits had been dissipated. See Cusson, 592 F.3d at 232; Weitzenkamp, 661 F.3d at 332; but see Bilyeu, 683 F.3d at 1093-95 (rejecting that argument). It will be interesting to see whether the Court resolves this additional split between the circuits.
Martina Sherman, DeBofsky & Associates