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Northwest OH Legal Blog

Tuesday, May 10, 2016

Did the Supreme Court Issue a License to Steal--or Subrogation as Usual?

            On January 20, 2016, the United States Supreme Court finally issued their written opinion in the long-awaited decision regarding an ERISA subrogation case, Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 2016 WL 228344 (January 20, 2016).  The highest court was asked to decide whether a plan beneficiary is obligated to reimburse his or her health insurance plan for medical expenses that the plan paid out, when that same beneficiary settles a third-party case BUT spends all of the settlement money.  Apparently the Supreme Court decided the beneficiary was not obligated to pay the plan back if the money was not “traceable.”

            The Montanile case is not unique in its facts as subrogation cases go.  Mr. Montanile was seriously injured by an intoxicated driver, sued him for $500,000 and was awarded recovery for the entire amount. The health plan for Mr. Montanile’s union, the National Elevator Industry, had already paid out $120,000 on behalf of Mr. Montanile to cover his medical expenses associated with the accident.  Communications between the plan’s board of trustees and Mr. Montanile’s lawyer were disjointed and his attorneys advised the trustees that the entire settlement fund would go to Mr. Montanile unless the trustees objected promptly.  The plan’s board of trustees waited 6 months to file an ERISA Section 502(a)(3) action, demanding that the plan be “made whole” for the expenses paid on behalf of Mr. Montanile, that related to the accident for which he received the $500,000 settlement.   But Mr. Montanile argued that, during the 6-month lag between his receipt of the settlement and the action filed by the plan’s board of trustees, that he spent all of the money so there were no funds that could be identified to seize.

            The plan’s trustees argued that the Supreme Court’s decision in Sereboff v. Mid Atlantic Medical Services, LLC, 547 U.S. 356 (2006) eliminated any need for the plan to trace the recoverable assets.  But the Court did not agree, holding that Sereboff does not contain any exceptions to the general asset-tracing requirement for equitable liens by agreement.  Instead, the Court went back to a case decided in 2002, Great West Life and Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002),  where it held that the settlement funds must be identifiable and within the possession of the defendants (the plan).  It then sent this case back to the U.S. District Court to determine whether any assets from the settlement could in fact, be traced.

            Montanile will have the unfortunate effect of increasing litigation between members that incur accidents and their self-funded health insurance plans as well as ERISA-covered disability plans.  Plan members will now have an incentive to quickly disburse and spend funds on non-traceable expenditures, such as groceries, utilities, phone bills, gambling debts and other disposable items that are not “traceable” instead of cars, boats, stocks, bonds and other savings alternatives. 

            So what does the Montanile case mean to Boards of Trustees and plan administrators?  For one thing, plan administrators will hesitate to patiently negotiate with a member’s attorney to settle a plan’s reimbursement issues.  Instead a law suit will need to be filed at the first notion that a claim cannot be resolved quickly after the settlement or recovery is awarded, to avoid the confusing decision reached by the Supreme Court.  Additionally, changes may need to be made to plan documents, summary plan descriptions (SPDs), claims’ notices and subrogation forms to clarify and assert a plan’s right to settlement assets.  For Boards of Trustees and plan administrators, these changes will require quick decisions and an extreme drift from the normal status quo in subrogation transactions within employee benefit plans. 


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