As indicated in both the Knudson and Sereboff cases, §502(a)(3)(B) provides only for equitable relief; an ERISA plan cannot seek legal relief. The actions of the Plan were deemed to seek a legal remedy as ERISA provided only a lien against settlement proceeds. The Plan was attempting to hold the plan participant personally liable for its unpaid interest from the plan participant's general assets. Notable to the Court's rationale was a reference to the deprivation of “property rights” as a form of legal remedy.

Turning our attention back to the utilization of an offset provision when a plan participant fails to reimburse the Plan in third-party liability cases, how might the Montanile Court have viewed this? If the Courts treat health benefits as “property rights,” then it can be argued that offset is effectively a legal remedy as defined under Montanile. First, are health benefits a “property right”?

The Courts have already provided guidance on the issue. For example, a federal court in New York stated that a collective bargaining agreement provided a plan beneficiary with a “constitutionally protected property right in the health benefit.” Given that to be the case, is it possible that an offset provision is a cleverly disguised self-help legal remedy for ERISA plans? If so, can the plan actually use it in this context?

In 2004, the 10th Circuit Court of Appeals heard the Millsap case–more than a decade before the Montanile case. In Millsap, the Court addressed considered whether an award of backpay was available under the definition of “appropriate equitable relief” pursuant to §502(a)(3). The district court ruled that the award of backpay was considered “equitable restitution,” thus permitting its use. The Court methodically dissected this argument and ultimately ruled that an award for backpay was in fact a legal remedy, thus precluding the Court from enforcing its award.

Judge Lucero strongly dissented stating that the Knudson court only precluded the plan from “imposing personal liability on the defendant for a contractual obligation to pay money–relief that was not typically available in equity.” His argument makes a lot of sense; sure, backpay has not yet been decided as an equitable remedy in these types of scenarios, but why can't it be? Isn't that why we have Courts to clarify the law? He rightfully points out that the very authority the majority court relied to reach its opinion indicates that backpay is an equitable remedy. For our purposes, we must determine whether this distinction will ultimately matter based on a strict interpretation of Montanile.

The effect of an award of backpay is our parallel to the utilization of an offset provision. If the majority court in Millsap is correct that such a provision is a legal remedy, virtually all case law will prevent the plan from using offset. But what if Judge Lucero is right? What if it is an equitable remedy? Well, it turns out Montanile might throw cold water on this revelation. The Montanile Court very clearly stated “In sum, at equity, a plaintiff ordinarily could not enforce any type of equitable lien if the defendant once possessed a separate, identifiable fund to which the lien attached, but then dissipated it all.”

Even if offset is considered an equitable remedy, Montanile precludes the plan from seeking any remedy other than filing a §502(a)(3) claim in federal court against the settlement proceeds. It may not matter how the court eventually comes down on this issue. It may very well be discovered that the use of an offset provision is simply in violation of Montanile whichever way you characterize it.

Before you start removing offset language from your plan document, remember that Montanile is still young and there is much that the Court left unanswered. Contrary to what many personal injury attorneys might argue, Montanile doesn't justify disbursing and spending funds to avoid the plan. If funds are spent on traceable assets, the plan can still attach an interest against those items. Certain jurisdictions allow the plan to hold attorneys liable if funds are disbursed in a negligent or intentional manner. Having offset in the plan language is still a useful tool in your arsenal of negotiation tactics.

Hopefully plan administrators, third-party administrators, stop-loss carriers, and brokers alike can realize the importance of proactivity and due diligence in recovery efforts. It is crucial to consult with representatives who understand the nuances of third-party recovery cases and have the capacity to pursue and recover funds through negotiation and coordinated litigation efforts. Health plans that seek to maximize their recoveries must understand that the law with respect to third party recovery is ever evolving and it is no longer enough to sit back and hope the plan participants comply with their obligations.

Furthermore, ERISA provides plans with certain very important duties, especially pertinent to this discussion is the duty to prudently manage plan assets. This duty can be applied to both the payment of medical benefits, as well as the recoupment of benefits that should be reimbursed by third parties. Does a lack of an effective recovery solution, then, necessarily create a breach of a plan's fiduciary duty under ERSIA? Plan's must consider the risks of every decision they make and ensure to have quality, qualified advisers at every turn – else they could be in the cross heirs of their very own beneficiaries!

Harry A Horton IV, JD ([email protected]) is a senior claims recovery specialist with The Phia Group specializing in health-care cost containment strategies for self-insured benefit plans. He is primarily engaged in recovering funds for ERISA-qualified benefit plans to control the costs of health care and plan member premiums.