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Supreme Court Issues Decisions Addressing Plan's Subrogation Rights (Again) and Employer Stock in 401(k) Plans Post-Dudenhoeffer

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While 2016 may barely be underway, the U.S. Supreme Court has already issued two significant decisions affecting ERISA plans. The first addresses subrogation rights. The second addresses ERISA’s fiduciary "duty of prudence" as applied to 401(k) plans that offer employer securities. The results bring challenges for plan sponsors but encouraging news for plan fiduciaries.

Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan — The Problem of Untraceable Funds

Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 577 U.S. ___ (2016), once again places the issue of a plan’s subrogation rights front and center before the Court. And once again it doesn’t end well for the plan.

The facts in Montanile are not unique. Robert Montanile’s medical plan, the National Elevator Industry Health Benefit Plan (the "Plan"), paid just over $120,000 of medical expenses as a result of Montanile’s injuries caused by a drunk driver. Montanile ultimately obtained a $500,000 settlement from the drunk driver. After payment of attorney’s fees and an advance, about $240,000 remained payable to Montanile. Relying on the Plan’s subrogation clause, the Board of Trustees of the Plan (the "Board") sought reimbursement from the settlement for Montanile’s medical expenses paid by the Plan. Montanile’s attorney refused the request and told the Board that the settlement would be transferred from the attorney’s client trust account to Montanile unless the Board objected. The Board did not timely respond and Montanile received the settlement.

Six months after the transfer of the settlement, the Board sued Montanile in federal district court under ERISA § 502(a)(3). Specifically, the Board sought an equitable lien on any settlement funds in Montanile’s possession and an order enjoining Montanile from dissipating any such funds. Montanile countered that there were no identifiable funds from the settlement against which to enforce the lien as he had already spent almost all of the money.

The 11th Circuit, affirming a similar ruling by the district court, held that even if Montanile had completely dissipated the settlement, the Plan was still entitled to reimbursement from Montanile’s general assets. The Supreme Court, however, reversed the 11th Circuit, holding that when an ERISA-plan participant wholly dissipates a third-party settlement on nontraceable items, the Plan fiduciary — in this case the Board — may not bring suit under ERISA § 502(a)(3) to attach the participant’s separate assets.

ERISA § 502(a)(3) permits fiduciaries to file suit "to obtain ... equitable relief ... to enforce .. the terms of the plan." In prior cases, such as Mertens v. Hewitt Associates, 508 U.S. 248 (1993), Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002) and Serboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), the Court distinguished between remedies based in law versus those based in equity. Claims filed by plan fiduciaries under ERISA § 502(a)(3) may only seek "equitable relief," which is restricted to only those types of relief that were typically available in courts of equity. Enforcement of an equitable claim therefore is limited to "specifically identifiable funds" that the participant, in this case Montanile, has within his possession and control. The Court noted that the Board could have enforced the lien against the settlement had it acted quickly. But when the Board acted it appeared that the identifiable funds were gone. And the law of equity does not permit the Board to enforce a lien in equity against Montanile’s general or other assets. The fact that this is an ERISA plan doesn’t change the result.

The Court remanded the case to the district court to determine whether in fact any of the settlement proceeds remained identifiable and separate from Montanile’s general assets — that is, whether there are any traceable funds left against which the lien may be enforced.

In her dissent, Justice Ginsburg sums up the dilemma plans are placed in as a result of the Court’s decision. Montanile pledged to reimburse the Plan for its expenditures on his behalf from the settlement. Yet, he escapes his reimbursement obligation merely by spending the settlement funds quickly on nontraceable items. Justice Ginsburg argues that the origin of this result is the error the Court made in Great-West Life by "unravel[ling] forty years of fusion of law and equity, solely by employing the benign sounding word ‘equitable’ when authorizing ‘appropriate equitable relief.’" As Justice Ginsburg concluded, the decision in Montanile "clearly puts plans in a difficult position and ultimately can increase the premium costs for all participants. So, what is a plan sponsor to do in response to this decision?"

What indeed is a plan to do. For example, should plans be amended to not require payment up front until the settlement is achieved, and requiring the settlement proceeds to be used to pay the provider and directly offset the plan’s obligations? The problem is that this could take years; the plan would lose any prompt pay discounts; and the participant could face collection actions from the providers, leading to employee morale problems.

Assuming that the plan continues to pay up front, should a plan require assignment of all or part of the cause of action to the plan as a condition of payment, so that a participant cannot give complete release to a third party without the plan’s assent? It may be difficult to get the participant to agree to this up front and a significant administrative burden for the plan to monitor claims and obtain such assignments in appropriate cases. A significant problem we often see is that the plan may not have knowledge of the settlement before the funds are already disbursed, or even that the lawsuit was filed. And even when the plan does have knowledge, there is the expense to the plan of filing a court action to protect its right to a share of the proceeds. If the amount at issue is significant, then perhaps the plan would consider directly intervening in the underlying lawsuit to protect its interests (again, assuming it has knowledge of the suit). At a minimum, plans should seek to put participants’ attorneys on notice of their liens as soon as possible upon becoming aware of a lawsuit that seeks recovery of medical expenses paid by the plan.

In cases in which the settlement funds are dissipated before the plan can attach them, should the plan go after the participant’s attorney who released the funds from his or her trust account contrary to the plan’s lien by filing a grievance with the applicable state bar association alleging various state bar ethics violations?

As responses to this decision are being considered by plans and ERISA fiduciaries, it appears clear that, at a minimum, plans will need to be more vigilant in uncovering when third party claims are being pursued by participants and filing actions or providing notice of their liens as early as possible, in particular where large amounts of plan expenses are involved.

Amgen Inc. v. Harris — Encouraging News That the Supreme Court Meant What it Said in Dudenhoeffer

Amgen Inc., et al. v. Steve Harris, et al., 577 U.S. ___ (2016) addresses the 9th Circuit’s very troubling decision in one of the first circuit court decisions to address the sufficiency of pleadings in a major stock drop case in the wake of Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. ____, 134 S.Ct. 2459 (2014). The per curiam opinion offers encouraging news to plan fiduciaries by making clear that the Court expects circuit courts to apply its strictest requirements for pleading standards in stock drop cases as set forth in the Dudenhoeffer opinion.

In Harris v. Amgen, Inc., the plaintiffs were Amgen stockholders who had holdings in the Amgen Common Stock Fund, which was composed of Amgen stock. After the stock price fell in 2007, stockholders filed a class action alleging that plan fiduciaries breached their fiduciary duties to plaintiffs by retaining the Amgen Common Stock Fund as an investment option while possessing inside information that the price of the stock was inflated and therefore subject to falling upon public revelation of the information. After a district court dismissed the plaintiffs’ complaint, the 9th Circuit reversed, and the Amgen fiduciaries petitioned for certiorari. While the petition was pending, the Supreme Court decided Dudenhoeffer. As a result, the Supreme Court granted the cert petition, but remanded the case for consideration in light of Dudenhoeffer.

On remand, the 9th Circuit affirmed its prior reversal of the dismissal of the complaint, arguing that it "had already assumed" the standards set forth by the Supreme Court in Dudenhoeffer and that dismissal of the complaint was appropriate because it was "quite plausible" that removing the Amgen Common Stock Fund from the available investment options in the plan would not "caus[e] undue harm to plan participants." Harris v. Amgen Inc., 788 F.3d 916, 937-38 (9th Cir. 2015).

To the relief of plan fiduciaries, the Supreme Court clearly called out the misapplication of the rule it announced in Dudenhoeffer, in which the court stated that to "state a claim for breach of fiduciary duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken . . . that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than help it" and further that "[L]ower courts faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases . . . would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund." Slip Op. 2-3 (citing Dudenhoeffer, 134 S.Ct. at 2472) (emphasis in bold added).

The Supreme Court rejected the 9th Circuit’s loose attempt to reformulate this requirement and its conclusion that the allegations in plaintiffs’ complaint should survive a motion to dismiss because it is "quite plausible" that stopping additional investments in the Amgen Common Stock Fund would not "caus[e] undue harm to plan participants." Id. The Supreme Court went on to state that the plaintiffs’ complaint did not meet the exacting pleading requirement set forth in Dudenhoeffer. The court accordingly reversed the 9th Circuit’s decision, remanding and leaving to the district court whether it was appropriate at this juncture for the plaintiffs to be allowed to amend their complaint in an attempt to meet the stated pleading requirements.

(We note that the pleading standard for plaintiffs and the "more harm than good" test under Dudenhoeffer is currently under consideration by the 5th Circuit in Whitley et al v. BP, P.L.C. (Case No: 15-20282), and we expect a decision from the 5th Circuit later this year.)

We will continue to follow the development of the law by the courts in this post-Dudenhoeffer area, but in the meantime, this is a good signal to circuit and district courts that the Supreme Court expects the pleading requirements announced in Dudenhoeffer to be followed.

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