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 controversial decision involving 403(b) plans and bankruptcy which was the focus of a previous discussion at Benefitsblog (and also here at ERISAblog)–“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.