PA Proposes New Rule Safekeeping of Property to Help Subrogors

A proposal to amend one of the comments to  Rule 1.15 regarding safeguarding property of third parties was published May 14, 2016, at 46 Pa.B. 2407. Under the current language, the comment states that a lawyer must hold third-party funds intact when “the third party claim is not frivolous under applicable law.” The revised comment would eliminate that language and require that a lawyer keep the funds whenever “a letter of protection has been issued by an attorney or a lien on the funds exists under applicable law.” The revised comment requires a greater degree of diligence in maintaining third-party funds until their ownership is determined.

Health Plans must take more active role protecting subrogation (Montanile v. National Elevator)

The U.S. Supreme court today in the case of  Montanile v. National Elevator  ruled that ERISA health Benefit Plans are limited under the laws of Equity to recover only those specific traceable funds available from a settlement .   In the case of Montanile, the Defendant settled his personal injury case for $500,000 arising from an automobile accident and the Plan asserted a claim of $121,044.  After settlement the Plan and the Plaintiffs attorney were unable to agree upon a settlement of the Medical claims and the Plaintiffs attorney advised the Plan it was going to distribute the balance of the settlement proceeds ( Approx. $240,000) to the  member in 14 days if the plan did not object, hearing no objection the attorney distributed.   Approximately 6 months later the plan filed suit against the member pursuant to ERISA Sec. 502(a)(3).  However by this time much of the funds had been dissipated on non-traceable items and expenses.

The Supreme Court has held that the Plan, notwithstanding having a separate reimbursement agreement signed by the member, is only entitled to recover from traceable assets under Equity and does not have a general lien claim against the member’s general assets.  This presents a huge issue for Subrogation recoveries.  The requirement that the plan be able to trace the proceeds allows participants to dissipate assets without fear of liability. The Court has reverted to its opinion in  Great-West Life & Annuity Ins. Co. v. Knudson, 534 U. S. 204, 217 (2002). which required the strict tracing of assets.   The court goes on to cite its more recent decisions in  Sereboff v. Mid Atlantic Medical Services, Inc., 547 U. S. 356, 363 (2006) and US Airways, Inc. v. McCutchen, 569 U. S. ___ (2013) as more recent examples of their opinion that ERISA plans only have Equitable rights as defined by ERISA and not Legal rights.

The Court goes on to acknowledge that the Plan could have immediately sued to enforce its equitable claim, but to the extent it did not the Plan has lost its equitable claim to attach non-settlement general assets.