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The Case That Affects ERISA-Based Subrogation Rights (Liens)


Throughout the past couple of months, the Supreme Court of the United States heard and decided a case dealing with an ERISA-based subrogation rights or ERISA-based health plan’s ability to receive reimbursement rights from third-party settlements. While it has been long established that “equitable liens” and rights to reimbursement do exist, the court for the first time addressed the following question:

“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 the defendant’s general assets.”

Montanile v. Bd. of Trs. of Nat’l Elevator Industry Health Benefit Plan577, U.S. ____ , No. 14–723 (Jan. 20, 2016).

It has been well established in prior cases, such as US Airways, Inc. v. McCutchen and Sereboff v. Mid Atlantic Medical Services, Inc. that ERISA-based policies may seek an equitable lien in third-party settlements. However, Montanile is distinguishable from prior cases in that the defendant claimed that he had spent all of his money on non-traceable services, thus dissipating all of the settlement proceeds. All other cases heard by the Supreme Court involved identifiable proceeds that had not yet been dissipated.

How Did the Court Rule?

In an 8-1 decision, the Supreme Court limited an ERISA-based plan’s recovery of settlement proceeds to funds still held by or on behalf of the participant (identifiable proceeds):

We hold that, when a participant dissipates the whole settlement on non-traceable items, the fiduciary cannot bring a suit to attach the participant’s general assets under [ERISA] §502(a)(3) because the suit is not one for “appropriate equitable relief.”

Montanile v. Bd. of Trs. of Nat’l Elevator Industry Health Benefit Plan577 U.S. ____ , No. 14–723 (Jan. 20, 2016).

Under ERISA Section 502(a)(3), an action may be brought by an ERISA-based plan to enjoin any act or practice that will interfere with an ERISA-based plan’s reimbursement right or to obtain “appropriate equitable relief” to redress violations of the act.

In Montanile, the Supreme Court reiterated that fact that ERISA-based plans have rights to reimbursement out of personal injury settlements and may seek “equitable relief” against the settlement proceeds; however, the plan has no right to seek reimbursement from a participant’s general assets, as it would constitute a legal remedy. In other words, an ERISA-based plan will lose their equitable claim or lien if the settlement proceeds are dissipated toward non-identifiable services or objects (ie., food or travel).

Some Points of Emphasis on ERISA-based Subrogation

In this case, Montanile was injured when hit by a drunk driver. Montanile eventually received a $500,000 settlement. His health plan coverage, an ERISA-based coverage plan, paid a little over $100,000 toward his medical bills. After receiving the proceeds, Montanile’s attorney tried to negotiate the lien amount, but conversation broke down. Once this occurred, Montanile’s attorney contacted the plan administrator for the ERISA-based policy and stated that he would disburse the remaining settlement proceeds from the IOLTA account to his client (Montanile) unless the policy objected within 14 days. The plan never objected. Furthermore, the plan never filed for injunctive relief, which could have prevented Montanile from spending the money. Lastly, the ERISA-based health plan did not file suit until 6 months after the money was disbursed to Montanile.

Why are these facts important? The ERISA-based plan had ample opportunities to prevent spending of the settlement proceeds, or to act on their equitable lien right, and failed to do so. Furthermore, the court stated that the lien right was still enforceable on those assets that were traceable; and thus remanded the case to district court in order to determine what, if any, were identifiable.  Montanile v. Bd. of Trs. of Nat’l Elevator Industry Health Benefit Plan577 U.S. ____ , No. 14–723 (Jan. 20, 2016).

What Montanile Means for Personal Injury Lawyers

In a practical sense, not much. In dicta, the court did mention that Mr. Monatile’s conduct was wrongful. Monatile would not have been in the place to wrongfully spend the settlement proceeds if it had not been for his attorney, who improperly disbursed the proceeds in the first place.

Under both the ABA and North Carolina Model Rules of Professional Conduct, a lawyer has a fiduciary duty to protect the interests of a valid third-party claim against wrongful interference by the client. North Carolina Rule of Professional Conduct 1.15-4 Comment [15] states:

“Third parties may have lawful claims against specific funds or other property in a lawyer’s custody, such as a client’s creditor who has a lien on funds recovered in a personal injury action. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client. In such cases, when the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claim is resolved. A lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute.” – NC RPC 1.15-4 Comment [15].

This comment directly involves not disbursing an amount that is in dispute with a valid lien holder. Furthermore, the lawyer MUST refuse (not may refuse) to surrender the property, meaning, the attorney has no choice but to hold the disputed amount in trust until the issue is resolved.

Also, the rule states that the attorney must protect against wrongful interference by the client with valid third-person claims (lien/subrogation rights). Albeit dicta, the Supreme Court stated that the spending of funds on non-traceable services in order to dispose of a lien holder’s interest was wrongful, but ERISA had no other legal recourse pursuant to the current law.

While many personal injury attorneys do not agree with the fiduciary duty to protect the interests of a third party, the concept is well established and reiterated in Montanile that ERISA-based policies have a valid right to reimbursement from third-party settlements and judgments. Therefore, an attorney still has a fiduciary duty to protect those interests’ rights.

When and How Will the Effects of This Case be Felt?

A party that receives a settlement and has a valid ERISA-based lien may utilize this case under two sets of circumstances:

  1. When the party handles their own settlement or disbursement; OR
  2. When the party’s attorney improperly disburses the disputed amount to his or her client

Under the first set of facts, the injured party will be handling their own case or disbursement; therefore, they will be responsible for paying the lien holder. In other words, as long as the party receiving the settlement spends the money on non-traceable/non-identifiable services, then the ERISA-based health plan reimbursement rights will dissipate.

Under the second set of facts, the attorney would have to wrongfully disburse the disputed amount, and the client will have to spend the money on non-traceable/non-identifiable services. The issue with this set of facts is that an attorney could be held liable for the disputed amount and may even receive a bar complaint.

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