The Sixth Circuit seems to have been in the limelight lately for its controversial bankruptcy decisions involving retirement plans. As you may recall, at the end of last year, the Sixth Circuit issued a surprising decision involving 403(b) plans and bankruptcy which was the focus of a previous discussion here at Benefitsblog–“403(b) Plans Take a Turn for the Worst in the Sixth Circuit.” The Sixth Circuit was at the helm again in another controversial bankruptcy case involving a retirement plan which has been reversed by the U.S. Supreme Court. The case is Yates v. Hendon, No. 02-458. You can access the case here.
The question presented in Yates was whether a working owner of a business is an ERISA plan “participant” and thus has the right to enforce the plan’s anti-alienation provisions against a bankruptcy trustee. The Sixth Circuit had said no to this question in this 2002 decision. The Supreme Court issued an opinion today that said yes (in a 9-0 decision) so long as the plan covers one or more employees other than the business owner and his or her spouse.
Under the facts of the case, a debtor in bankruptcy–a physician–was the sole owner of a professional corporation which maintained a profit sharing/pension plan. The plan had four participants, one of which was the physician. The debtor-physician borrowed $20,000 from the plan at 11 percent interest in 1989, was supposed to make monthly payments, but failed to. In June of 1992, the term of the loan was extended for five years. Still no monthly installments were paid. In mid-November of 1996, however, at a time when the physician was apparently insolvent, the physician used proceeds of a house sale to make payments to the plan in amounts totaling $50,467.46. This figure represented repayment of the loan in full, with accrued interest.
On December 2, 1996 – three weeks after the repayment – an involuntary bankruptcy petition was filed against the physician under Chapter 7, Title 11, of the United States Code. Eight months later the trustee in bankruptcy commenced an adversary proceeding against the plan and its trustee, asking the court to (a) set the repayment aside as a preferential transfer and (b) order that the money be paid over to the bankruptcy trustee. According to the Court, it was undisputed that the $50,467.46 transfer made to the plan in November, 1996, qualified as a preference under 11 U.S.C. ? 547. The Bankruptcy Court, in holding that the Bankruptcy Trustee could recover this money, held that the profit sharing plan’s spendthrift provision did not prevent the recovery since the debtor was sole shareholder of the business, and “must be considered an employer and not an employee of the business for purposes of ERISA.” The Sixth Circuit had affirmed.
The U.S. Supreme Court, in reversing the Sixth Circuit, based its decision upon a thorough analysis of the provisions of ERISA, after which it concluded that “Congress intended working owners to qualify as plan participants” but noted that plans covering only sole shareholders and their spouses fall outside the Title I domain. (The Yates case involved a sole shareholder and a plan which covered 4 employees, including the shareholder and his spouse.) Justice Ginsburg wrote the opinion. Justice Scalia and Thomas wrote concurring opinions which you can access here and here. Justice Scalia states that the Court has used a “sledgehammer to kill a knat” and would have deferred to the guidance provided by the Department of Labor without conducting an extensive statutory analysis. Justice Thomas would have remanded and directed the Court of Appeals to address whether the common-law understanding of the term “employee,” as used in ERISA, would have included the business owner.