>Raymond Yates, a doctor, was the sole shareholder of a corporation and had paid $50,467 into a profit sharing plan to repay the plan for a loan three weeks before having an involuntary bankruptcy petition filed against him under Chapter 7. Yates sought to shield this payment from the bankruptcy proceedings based on Section 541(c)(2) of ERISA.
>Section 541(c)(2) provides “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.” The appeals court found the plan’s “spendthrift clause” – which is required by ERISA and bars “assignment or alienation, either voluntarily or involuntarily” of plan funds except for loans to participants -qualifies as an “applicable nonbankruptcy law” under Section 541(c)(2).
>Howe ver, the appeals court decidedthe bankruptcy trustee could reach themoney in the plan, because “as an ’employer,’ a sole shareholder cannotqualify as a ‘participant or beneficiary’ in an ERISA pension plan …the sole shareholder ‘is not an ERISA entity, in other words, and ‘does not have standing under the ERISA enforcement mechanisms.'” To arrive at its decision, the appellate court relied on its decision in Fugarino v. Hartford Life & Accident Ins. Co.
The high court agreed to hear the case, Yates v. Hendon , after asking the US Solicitor General to file an amicus brief expressing the view of the federal government. The brief, filed by Theodore Olson on May 29, found there is a conflict among the federal appeals courts “on whether a working owner (such as a sole shareholder, sole proprietor, or partner who renders services to a business) may be a participant in an ERISA plan that also covers other employees,” Olson said.