Private retirement plans established under the provisions of ERISA now hold a large part of the population’s personal assets. Untold numbers of participants in these plans have found and will find themselves seeking the protection of the bankruptcy courts. Prior to the 1992 U.S. Supreme Court case of Pattersen v. Shumate, the law was in a state of disarray and the courts were split over whether or not the anti-alienation provisions of ERISA protected these assets from bankruptcy. Shumate seemed to lay to rest some of the confusion surrounding the interplay between the bankruptcy laws and ERISA, holding that participants could exclude their interests in “ERISA qualified plans” from the bankruptcy estate in a bankruptcy proceeding.
However, with bankruptcies on the rise and ERISA plans becoming many times the only source of assets, creditors and bankruptcy trustees have become more determined in pursuing these assets. One such pursuit ended in a very unhappy result for participants in the recent case of Rhiel v. Adams in which the Sixth Circuit Court of Appeals reached a surprising conclusion in the 403(b) arena, throwing the state of the law in disarray once again at least with respect to 403(b) plans.
In the Adams case, the court held that a husband and wife’s interests in 403(b) plans were included in the bankruptcy estate and not exempt under section 542(c)(2) of the Bankruptcy Code. Section 541(a) of the Bankruptcy Code provides that the bankruptcy estate is comprised of all legal and equitable interests of the debtor(s) while section 542(c)(2) then provides an exclusion from the estate as follows:
A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title. 11 U.S.C. § 542(c)(2).
The lower federal district court had held that the 403(b) plans were ‘ERISA-qualified’ as contemplated by the Supreme Court in Pattersen v. Shumate. As such, they were not the property of the bankruptcy estate, and were not subject to administration by the bankruptcy Trustee. However, on appeal, the Sixth Circuit reversed the lower court and remanded the case for further proceedings based upon the fact that the husband and wife had not shown that the section 542(c)(2) “in a trust” language had been satisfied. According to the Sixth Circuit, the interest of the debtor had to have been held “in a trust” in order for section 542(c)(2) to apply, meaning that the 403(b) annuities did not satisfy this trust requirement and that the annuities were not exempt from the bankruptcy estate.
The court in reaching its conclusion seems to almost ignore the U.S. Supreme Court case of Pattersen v. Shumate. The U.S. Supreme Court in Shumate had held that the § 541(c)(2) language–“applicable nonbankruptcy law”–included ERISA and that the anti-alienation provision contained in the ERISA qualified plan at issue in the Shumate case (a pension plan) satisfied the literal terms of § 541(c)(2). The court in Shumate held further that the sections of ERISA and the Internal Revenue Code requiring a plan to provide that benefits may not be assigned or alienated clearly imposed a “restriction on the transfer” of a debtor’s “beneficial interest” within § 541(c)(2)’s meaning, and that the terms of the plan provision in question complied with those requirements.
Although the Shumate case did not involve a 403(b) plan, but rather a pension plan, there is language in the Shumate case (which the dissent in the Adams case emphasizes) which could have been used to support a result that the 403(b) interests should not have been included in the estate as follows:
The natural reading of the provision [e.g. § 541(c)(2)] entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law.
As the dissent states, the Sixth Circuit could have reached a different result by relying on this language in Shumate–“any interest in a plan or trust”–as well as on the reasoning espoused by the Supreme Court in Shumate, i.e. that of (1) ensuring that the treatment of pension benefits not “vary based on the beneficiary’s bankruptcy status”; (2) giving “full and appropriate effect to ERISA’s goal of protecting pension benefits” and (3) ensuring that the “important policy underlying ERISA: uniform national treatment of pension benefits” be preserved.
In my opinion, the following arguments of Sixth Circuit Judge Jennie D. Latta’s dissent are highly persuasive:
(1) Judge Latta notes the Sixth Circuit’s own language in which it stated that it would not “rely on the literal language of the statute where such reliance would lead to absurd results or an interpretation which is inconsistent with the intent of Congress.” As Judge Latta aptly states, “[t]he majority’s reading is inconsistent with the clear intent of Congress that ERISA-qualified pension plans not be subject to creditor claims.”
(2) “Outside of bankruptcy, no creditor of the Adams would be able to reach the debtors’ beneficial interests in their pension plans to satisfy claims, and this is true not because these interests are exempt from execution pursuant to state law, but because they are exempt from execution pursuant to federal law. See Guidry v. Sheet Metal Workers Nat. Pension Fund, 493 U.S. 365, 110 S. Ct. 680 (1990)(permitting no equitable exception to ERISA’s anti-alienation provision). The filing of a bankruptcy case should not change this result.”
(3) “The narrow reading of § 541(c)(2) advanced by the majority of the Panel nullifies the anti-alienation provision of ERISA for non-trust, qualified pension plans. The majority advances no policy argument in favor of this reading. Were we called upon simply to construe § 541(c)(2), without the benefit of the Supreme Court’s opinions in Guidry and Shumate, then a narrow, “plain-meaning” reading would be appropriate, but I believe that we must go beyond § 541(c)(2) and include within our discussion the plain meaning of ERISA’s anti-alienation requirement. When this is done, it is clear that ERISA-qualified pension plans, whether held in trust or not held in trust, are excluded from the bankruptcy estate.”