Yates, Raymond, M.D., etc. v. Hendon, William (Trustee) (03/02/2004)

Questions presented: Whether the working owner of a business (here, the sole shareholder of a corporate employer) is precluded from being a "participant" under Section 3(7) of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 1002(7), in an ERISA plan?

BY TARA ALEXANDER, MEDILL NEWS SERVICE

Like many Americans plagued by out-of-control debt, Raymond B. Yates was successful and capable in his career as a radiologist but suffered when it came to finances.

Yates had his own practice in Knoxville, Tenn., which included three additional employees, but his skills as a doctor did little for Yates as a businessman.

Since borrowing $20,000 from his profit-sharing plan in 1989, Yates had not made one required monthly payment and even extended the loan repayment time an additional five years.

Then, in November of 1996, Yates paid off the entire loan, which had increased to $50,467.46, by using proceeds from a real estate sale.

Despite finally paying off his debt to the profit-sharing plan, Yates financial troubles were only beginning.

Only three weeks later, Yates creditors filed an involuntary bankruptcy petition against him. Theee in bankruptcy, William T. Hendon, filed a complaint in the U.S. Bankruptcy Court for the Eastern District of Tennessee, asserting that the loan repaid to Yates retirement plan should have gone to pay off the debts owed to creditors.

Yates argued that the assets in his retirement plan were protected under the federal Employee Retirement Income Security Act of 1974 (ERISA).

Congress passed ERISA following a 20-year study on how to protect employee benefit plans.

A provision of ERISA, known as the "Spendthrift Clause," protects ERISA plan participants retirement savings from creditors in cases of bankruptcy.

However, Hendon contends that Yates, the sole shareholder of Raymond B. Yates, M.D., P.C., is an employer, not an employee, and therefore his retirement savings are not sheltered by ERISA.

But, Yates claims that he should be covered by ERISA because he is an employee of the corporation he created and a legitimate participant in the plan.

The bankruptcy court disagreed, finding against Yates on Sept. 2, 1999. The U.S. District Court for the Eastern District of Tennessee affirmed.

In a brief opinion on April 19, 2002, a 6th Circuit Court of Appeals panel unanimously affirmed.

The panel considered a 1992 6th Circuit precedent controlling. That case held that "a sole proprietor or sole shareholder of a business must be considered an employer and not an employee of the business for purposes of ERISA."

In so noting, though, Judge David A. Nelson wrote for the panel that it is arguable that the 6th Circuit's 1992 decision "departs from a plain reading of ERISA, conflicts with advisory opinions of the Department of Labor, and is contradicted by the caselaw of eight other circuits." Nonetheless, the panel said it had no authority to overrule that opinion.

"Under circuit precedent by which this panel is bound, in short," Nelson wrote, "it is clear that the spendthrift clause in the Yates profit sharing/pension plan is not enforceable by Dr. Yates under ERISA."

Irrespective of the open invitation for reconsideration by the full 6th Circuit, a petition for en banc review was denied.

In a "friend of the court" role, U.S. Solicitor General Theodore B. Olson encouraged the U.S. Supreme Court to take up the case to resolve the conflict among the circuits.

Olson also asked the Court to review the case because the "court of appeals decision in this case is incorrect."

In his brief, Olson stated that the appeals court disregarded the Supreme Courts 1992 decision in Nationwide Mutual Insurance Co. v. Darden, the text of ERISA, an advisory opinion issued by the Department of Labor and Labor Department regulation.

In addition, Olson said that if 6th Circuit had inquired into the text of ERISA, the panel would have found "provisions that plainly contemplate that working owners may be participants in employee benefit plans."

On June 27, 2003, the final day of the Court's 2002-03 term, the Court accepted review of the case for its 2003-04 term.

Al Holifield, Yates attorney, said that in addition to 100 percent shareholders, the Courts decision could affect whether or not partners and partial shareholders could participate in employee benefits plans.

But Mark Troutman, Hendons attorney, said the Court's ruling will effect a more limited group of employers.

"I think that non-sole shareholders . . . would still be protected [under ERISA] . . . I dont think that it would be a blanket exclusion," said Troutman.

On March 2, 2004, the Court reversed, holding 9-0 for Yates, that working owners of businesses in which they are the sole shareholder and president of a professional corporation may qualify as a "participant" in a pension plan covered by ERISA.

Justice Ruth BaderGinsburg wrote the Court's lead opinion. Justices Antonin Scalia and Clarence Thomas each wrote concurrences.