Gavel on book The (not-so-secret)secret about filing a §502(a)(3)(B) action is that it frequentlyresults in high legal fees and costs attributable to all parties,including the benefit plan.

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Thousands of third-party recovery claims are handled by each daybenefit plans and their representatives. In terms of private,self-funded ERISA plans, the mere threat of a §502(a)(3)(B)action against a plan participant is usually sufficient to fostersettlement discussion. The (not-so-secret) secret about filing a§502(a)(3)(B) action is that it frequently results in high legalfees and costs attributable to all parties, including the benefitplan. A large portion of any recovery vendor's caseload includesfiles worth less than $10,000.00.

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More often than not, a benefit plan has the law on its side, butit's too expensive to achieve a recovery via a §502(a)(3)(B) actionif a plan participant refuses to reimburse the plan. How does aplan address this problem? Many plans opt to utilize a strategyallowing them to offset (i.e. deny) future medical bills until suchtime as the plan has recouped sufficient funds to satisfy theamount of benefits paid as a result of a third party's negligence.The threat of denying medical bills is often strongly persuasive toplan participants, especially those expecting future medicaltreatment. However, just how enforceable is such a provision giventhe recent rulings by the United States Supreme Court?

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Related: Are class-action waivers in the future of ERISAplans?

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Anyone remotely associated with third-party liability recoverieswill recall the painful and still very real fallout from theMontanile case. As a brief refresher, the Montanile case dealt witha scenario where a plan participant spent funds that wererightfully due to a benefit plan under the terms of the plandocument. The plan asserted a §502(a)(3)(B) claim against the planparticipant claiming reimbursement. The problem? The money wasalready gone.

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

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Turning our attention back to the utilization of an offsetprovision when a plan participant fails to reimburse the Plan inthird-party liability cases, how might the Montanile Court haveviewed this? If the Courts treat health benefits as “propertyrights,” then it can be argued that offset is effectively a legalremedy as defined under Montanile. First, are health benefits a“property right”?

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The Courts have already provided guidance on the issue. Forexample, a federal court in New York stated that a collectivebargaining 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 provisionis a cleverly disguised self-help legal remedy for ERISA plans? Ifso, can the plan actually use it in this context?

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

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

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

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Even if offset is considered an equitable remedy, Montanileprecludes 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 thisissue. It may very well be discovered that the use of an offsetprovision is simply in violation of Montanile whichever way youcharacterize it.

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Before you start removing offset language from your plandocument, remember that Montanile is still young and there is muchthat the Court left unanswered. Contrary to what many personalinjury attorneys might argue, Montanile doesn't justify disbursingand spending funds to avoid the plan. If funds are spent ontraceable assets, the plan can still attach an interest againstthose items. Certain jurisdictions allow the plan to hold attorneysliable if funds are disbursed in a negligent or intentional manner.Having offset in the plan language is still a useful tool in yourarsenal of negotiation tactics.

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

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Furthermore, ERISA provides plans with certain very importantduties, especially pertinent to this discussion is the duty toprudently manage plan assets. This duty can be applied to both thepayment of medical benefits, as well as the recoupment of benefitsthat should be reimbursed by third parties. Does a lack of aneffective recovery solution, then, necessarily create a breach of aplan's fiduciary duty under ERSIA? Plan's must consider the risksof every decision they make and ensure to have quality, qualifiedadvisers at every turn – else they could be in the cross heirs oftheir very own beneficiaries!

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Harry A Horton IV, JD([email protected]) is a senior claims recovery specialist withThe PhiaGroup specializing in health-care cost containment strategiesfor self-insured benefit plans. He is primarily engaged inrecovering funds for ERISA-qualified benefit plans to control thecosts of health care and plan member premiums.

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