The Court reversed the Eleventh Circuit Court’s holding to the contrary, thereby resolving a 6-2 circuit split over the issue of equitable recovery involving dissipated funds. This decision is the latest in the Court’s continuing struggle to define appropriate equitable relief under Section 502(a)(3), and may suggest a shift in the Court’s focus from the plans’ interests to those of the participants.

Here, the ERISA Plan paid $121,044 in health benefits to its covered participant Montanile after he was injured in an automobile accident caused by a third-party tortfeasor. Montanile thereafter received a $500,000 settlement from the tortfeasor, from which he paid his attorneys over $260,000 in fees and expenses. The Plan’s Board of Trustees then sought reimbursement from Montanile for paid benefits based on the Plan’s right of recovery provisions. After settlement attempts failed, Montanile’s attorney distributed the remaining funds to Montanile, which he then used to pay additional legal bills and living expenses, leaving less than the amount sought by the Plan. The Board sued Montanile under ERISA, 29 U.S.C. 1132(a)(3), to enforce the plan terms, claiming that the Plan was entitled to equitable restitution in the form of a constructive trust or equitable lien as to the disputed funds in the actual or constructive possession of Montanile.

The Court looked to standard treatises on equity to assess whether the Board sought appropriate equitable relief under Section 502(a)(3). It found that the basis for the Board’s claim was equitable because it sought an equitable lien by agreement that attached to Montanile’s settlement fund when he obtained title to that fund. It also determined that the nature of the Board’s underlying remedy would have been equitable had it sued immediately to enforce the lien against the fund in Montanile’s possession. However, the Court recognized that a defendant’s expenditure of an entire identifiable fund on nontraceable items (e.g. food or travel) destroys any equitable lien attached to that fund, even though the defendant’s conduct is wrongful, leaving the plaintiff, here the Board, with only a legal remedy against the defendant’s general assets—not a permissible equitable remedy under ERISA.

The Court rejected the Board’s argument that an exception should apply for equitable liens by agreement or based on historical equity practices where equity courts awarded legal relief. As to the latter, the Court left open a possible opportunity under the “swollen assets doctrine” where a defendant commingles the attached funds with his general assets, thus enabling the plaintiff to recover the full lien from the entire pot of money. It also rejected the Board’s policy arguments based on ERISA’s objectives and the lack of effective remedies to prevent dissipation, criticizing the Board in delaying filing suit once settlement negotiations broke down.

Accordingly, the Court reversed the Eleventh Circuit Court and remanded to the District Court for a determination of whether Montanile kept his settlement fund separate from his general assets or dissipated the entire fund on nontraceable assets.

Impact to Plans and Fiduciaries: With this decision, plans have one less avenue for pursuing recoveries—not only for subrogation liens on third-party tortfeasor recoveries, but also as to any recovery sought for overpayment of plan benefits, including life, health, disability and retirement overpayments. Some avenues for recovery do remain, including (a) as the Court noted, immediately suing the participant under § 1132(a)(3) to enjoin dissipation of funds through a temporary restraining order, (b) intervening in the participant’s tort suit to protect the lien, (c) suing the third-party tortfeasor directly, where permitted by the plan terms and state law, (d) tracing settlement funds to any assets purchased with those funds. Still open is the extent to which recovery under state law is available, given the routine argument that such claims are preempted by ERISA. Thus, plans should refocus their recovery pursuits to more immediately engage in ongoing third-party settlements or recovery efforts before funds are dissipated.

Jackson Walker provides ERISA and insured benefits counseling and litigation services by skilled attorneys who have counseled and successfully defended employee benefit plans, insurers, third-party administrators and employers in disputes involving group and individual health, disability, life and retirement benefits.

Jackson Walker’s ERISA and insured benefits team includes the following attorneys:

Jim Griffin – 214.953.5827 – jgriffin@jw.com
Chuck Campbell – 512.236.2263 – ccampbell@jw.com
Scott McElhaney – 214.953.6147 – smcelhaney@jw.com
Paula Denney – 713.752.4332 – pdenney@jw.com