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RAYMOND B. YATES, M. D., P. C. PROFIT SHARING PLAN et al. v. HENDON, TRUSTEE, 541 U.S. 1

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RAYMOND B. YATES, M. D., P. C. PROFIT SHARING PLAN et al. v. HENDON, TRUSTEE

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

No. 02-458. Argued January 13, 2004--Decided March 2, 2004

Enacted "to protect ... the interests of participants in employee benefit plans and their beneficiaries," 29 U. S. C. §1001(b), the Employee Retirement Income Security Act of 1974 (ERISA) comprises four titles. Relevant here, Title I, 29 U. S. C. §1001 et seq., mandates minimum participation, vesting, and funding schedules for covered pension plans, and establishes fiduciary conduct standards for plan administrators. Title II, codified in 26 U. S. C., amended various Internal Revenue Code (IRC) provisions pertaining to qualification of pension plans for special tax treatment, in order, inter alia, to conform to Title I's standards. Title III, 29 U. S. C. §1201 et seq., contains provisions designed to coordinate enforcement efforts of different federal departments. Title IV, 29 U. S. C. §1301 et seq., created the Pension Benefit Guaranty Corporation and an insurance program to protect employees against the loss of "nonforfeitable" benefits upon termination of pension plans lacking sufficient funds to pay benefits in full. This case concerns Title I's definition and coverage provisions, though those provisions, indicating who may participate in an ERISA-sheltered plan, inform each of ERISA's four titles. Title I defines "employee benefit plan" as "an employee welfare benefit plan or an employee pension benefit plan or ... both," §1002(3); "participant" to encompass "any employee ... eligible to receive a benefit ... from an employee benefit plan," §1002(7); "employee" as "any individual employed by an employer," §1002(6); and "employer" to include "any person acting ... as an employer, or ... in the interest of an employer," §1002(5).

Yates was sole shareholder and president of a professional corporation that maintained a profit sharing plan (Plan). From the Plan's inception, at least one person other than Yates or his wife was a Plan participant. The Plan qualified for favorable tax treatment under IRC §401. As required by the IRC, 26 U. S. C. §401(a)(13), and ERISA, 29 U. S. C. §1056(d), the Plan contained an anti-alienation provision. Entitled "Spendthrift Clause," the provision stated, in relevant part: "Except for ... loans to Participants as [expressly provided for in the Plan], no benefit or interest available hereunder will be subject to assignment or alienation." In December 1989, Yates borrowed $20,000 from another of his corporation's pension plans (which later merged into the Plan), but failed to make any of the required monthly payments. In November 1996, however, Yates paid off the loan in full with the proceeds of the sale of his house. Three weeks later, Yates's creditors filed an involuntary petition against him under Chapter 7 of the Bankruptcy Code. Respondent Hendon, the Bankruptcy Trustee, filed a complaint against petitioners (the Plan and Yates, as Plan trustee), asking the Bankruptcy Court to avoid the loan repayment. Granting Hendon summary judgment, the Bankruptcy Court first determined that the repayment qualified as a preferential transfer under 11 U. S. C. §547(b). That finding was not challenged on appeal. The Bankruptcy Court then held that the Plan and Yates, as Plan trustee, could not rely on the Plan's anti-alienation provision to prevent Hendon from recovering the loan repayment for the bankruptcy estate. That holding was dictated by Sixth Circuit precedent, under which a self-employed owner of a pension plan's corporate sponsor could not "participate" as an "employee" under ERISA and therefore could not use ERISA's provisions to enforce the restriction on transfer of his beneficial interest in the plan. The District Court and the Sixth Circuit affirmed on the same ground. The Sixth Circuit's determination that Yates was not a "participant" in the Plan for ERISA purposes obviated the question whether, had Yates qualified as such a participant, his loan repayment would have been shielded from the Bankruptcy Trustee's reach.


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