A fleeting memory of Montanile may have plaintiff attorneys encouraging injured parties to quickly spend their settlement funds thereby avoiding the lien asserted by their health plan. This would be a false narrative that could prove to be costly. No doubt about it, ERISA self-funded plan rights are often unyielding. But overall, they still need to be addressed head on and brought to definite resolution. Fortunately for the injured party, if the health plan fails to take appropriate action then the Plan’s rights are not as ironclad as it may have thought. If all of the pieces of the puzzle are all there, Montanile can be a positive and the injured party can retain more of their settlement funds. Unfortunately, when some of those pieces of the puzzle are missing, handling and ultimately paying the lien is still required.
As you may recall, in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 136 S Ct 651 (2016), the Court found that if a plaintiff fully exhausts the settlement funds so that they are no longer in the possession and control of the plaintiff, then an ERISA plan could not make a claim against the plaintiff since the subject of their claim, the settlement fund, is fully dissipated. However, there are limitations and exceptions to this. To mirror the facts in Montanile that brought the success, two key pieces must be in the puzzle. First, the plaintiff attorney must be cooperative with the Plan and show a good faith effort to resolve the lien claim. Second, if the Plan is unresponsive in return, then the funds can arguably be spent on nontraceable items. Miss these two pieces and you’ll likely have negative result.
There is no doubt that Montanile was a win for injured parties especially following the other ERISA related US Supreme Court decisions of McCutchen, Seraboff, and Knudson that have ultimately served to provide strength to self-funded plans seeking reimbursement against an injured party’s settlement funds. Understandably, it may be tempting in a post-Montanile world for plaintiff attorneys to just ignore the lien, take their fee and disburse the remaining funds to their client – doing so in the name of Montanile. However, that is not usually a recommended course of action. The best way to handle an asserted ERISA lien is to resolve the asserted ERISA lien; reach an agreement with the lien holder thereby fully and completely bringing the matter to a close. This avoids any potential ethical issues for attorneys in states that follow ABA Ethical Rule 1.15 which provides:
(e) When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute. ABA Rule 1.15.
and it ensures that the client is protected from any later action from the Plan including offset of future benefits or the time and expense of defending a reimbursement action brought by the Plan. Attorney due diligence is keyAvoiding the lien holder and hiding from the reimbursement demand is not suggested. In fact, it is not at all what Montanile or his attorney did. A key piece in Montanile is that the plaintiff attorney demonstrated due diligence by informing the ERISA plan of the pursuit of a third-party claim, cooperating with the Plan by signing additional agreements (which isn’t recommended), and giving the Plan fourteen (14) days’ notice with an opportunity to object before disbursing the remaining settlement funds. These actions matter. Without these pieces of plaintiff counsel’s due diligence, the Court would have likely ruled differently.
Notifying the Plan is the first step to showing due diligence. As most plaintiff attorneys know, self-funded plans have expanded their policy language to encompass all defenses as case law evolves. The plan language has been repeatedly modified to ensure the Plan is in a robust posture for reimbursement. Most policy provisions state that a plan participant must notify the Plan that they are pursuing a third-party liability claim. If the Plan does not respond, then that piece of Montanile puzzle is present. On the other hand, if the Plan is never informed, then the plan participant cannot later argue that the Plan did not respond timely and that piece is forever missing.
Most ERISA Plan Administrators and their recovery vendors have responded to the Montanile case by clearly objecting to disbursement of settlement funds during negotiations. Plan Administrators now make faster decisions when negotiating lien claims. As negotiations stall, they are prepared to file legal action, provide the necessary testimony, and actively litigate their claim. Plans are being more proactive rather than waiting around for a windfall. The industry has a very different landscape from a decade ago, whereby Plans did not necessarily expect to see subrogation dollars. Now, the Plan’s outstanding subrogation interests are often represented as a line item on their accounts receivable. Thus, the more aggressive nature of pursuing their claims including asserting a claim directly against the tortfeasor and filing civil actions for reimbursement against injured parties. Plaintiff counsel’s mild cooperation with the Plan from the onset is likely to pacify most Plan Administrators and keep their assertive action and interference at bay.
Note that the Montanile Court made it clear that had the Plan taken more aggressive action, and sooner, that their recovery rights may have been preserved. The crux of the Montanile case is that when negotiations stalled, it was Montanile’s attorney who continued to be active by voicing his intent to distribute the settlement funds to Montanile unless the plan objected within 14 days. The Plan was radio silent. For six months. Ultimately, because of their inactivity, the funds had been dissipated by Montanile by the time the Plan brought its subrogation enforcement claim in the form of a reimbursement action. Although Montanile is a win for injured parties, an important puzzle piece is that plaintiff counsel must show due diligence to ensure that proper steps are taken. If the Plan fails to act, then piece one of Montanile can be relied on for plaintiff’s benefit.
Funds spent on non-traceable items
The second piece of the puzzle is examined more fully in another reimbursement action pursued by The Board of Trustees of the National Elevator Industry Health Benefit Plan. The Plan ensured that they did not fail to act timely this time and immediately took steps to ensure the reimbursement of the Plan when there was a third-party liability settlement. In Board of Trustees of National Elevator v. Goodspeed, 2019 WL 1934475 (E.D. Pa. May 1, 2019), the focus was on what the funds were dissipated on – whether they were traceable or not. Here, unfortunately for the Goodspeeds’ the Court found that their attempt to dissipate funds under a Montanile theory failed and that there was still an identifiable fund of which the Plan’s equitable lien could attach. The pertinent language from Montanile is:
“We hold that, when a participant dissipates the whole settlement on nontraceable items, the fiduciary cannot bring a suit to attach the participant’s general assets under §502(a)(3) because the suit is not one for ‘appropriate equitable relief’.” Justice Thomas in Montanile
In Goodspeed, the injured tort victim netted $304,463.22 after deducting attorney fees and costs. The Plan had notified the Goodspeeds’ attorney that they held a lien on the settlement proceeds prior to the case settling. Nonetheless, the attorney disbursed all $300,000plus to the Goodspeeds’ and did not reimburse the Plan’s asserted equitable lien of $82,088.36. The Goodspeeds’ deposited the check in their joint savings account in October 2017. Between October 2017 and May 2018, the couple spent or withdrew more than $304,463 from the account. Specifically, and traceably, they transferred $200,000 to a certificate of deposit with right of survivorship and purchased a van for $62,000. Presumably, the Goodspeeds’ believed that these actions would defeat the Plan’s reimbursement right because the funds were not only comingled with other general assets but also because the funds were dissipated. Regrettably, this belief was incorrect. The Court specifically found that there is an identifiable fund and allocation of the fund was now ready to be discussed.
The second key piece to Montanile is that the dissipation of funds must be attributed to nontraceable items. It is not enough to fall into the Montanile bucket by just dissipating the funds. The use of the funds must be nontraceable which would include food, travel, remodeling a house, paying off bills, or other disposable items. Traceable items include identifiable things like vehicles and certificates of deposit as specifically outlined in Goodspeed.
Since Montanile, and as expected, other case decisions have been guided by it and attempted to fill in any gaps or otherwise expand its meaning. In Cognetta v Bonavita, 2018 WL 2744708 (E.D. N.Y) the Plan filed a declaratory action to establish a constructive trust for the benefit of the Plan before the settlement funds were even in existence. The Court allowed it. Other Plans could follow this course of action. Plans are also intervening in the underlying case as a means of protecting their equitable lien and avoiding a Montanile defense. But this is a jungle that most plaintiff personal injury attorneys will not want to enter just to avoid paying an equitable lien claim. Unfortunately, another option for a scorned Plan Administrator is to offset future benefits if the injured party is still an active participant with the Plan. And finally, another risk is that the Plan names the tortfeasor in a subrogation action. Then the terms of the release obtained by the tortfeasor would be triggered whereby the tortfeasor would point to the indemnity clause placing the issue right back in the plaintiff attorney’s lap. Arguably, the Montanile dissipation argument would not be viable in that situation.
In the end, it comes with great risk to bury your head in the sand of Montanile and hope that the equitable lien just goes away. The better course of action is to tackle it head on, thereby closing the case knowing that the lien issue is resolved completely and not still lingering.
Jason D. Lazarus is the managing partner and founder of the Special Needs Law Firm; a Florida law firm that provides legal services related to public benefit preservation, liens and Medicare Secondary Payer compliance. He is also a founding Principal and Chief Executive Officer of Synergy Settlement Services, which offers healthcare lien resolution, Medicare secondary payer compliance services, pooled trust services, settlement asset management services and structured settlements.