Amicus Curiae Brief — Patterson v. Shumate

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No. 91-913 APR 6 1997

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OFFICE Mr

In the Supreme Court of the United Stuten

OCTOBER TERM, 1991

JOHN R. PATTERSON, TRUSTEE, PETITIONER

Vv.

JOSEPH B. SHUMATE, JR.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

BRIEF FOR THE

UNITED STATES AS AMICUS CURIAE

SUPPORTING RESPONDENT

KENNETH W. STARR

Solicitor General

JAMES A. BRUTON

Acting Assistant Attorney General

MAUREEN E. MAHONEY

Deputy Solicitor General

CHRISTOPHER J. WRIGHT

Assistant to the Solicitor General

GARY D. GRAY

BRIDGET M. ROWAN

Attorneys

Department of Justice

Washington, D.C. 205380

(202) 514-2217

me ...... ———

QUESTION PRESENTED

Whether the anti-alienation provision of the Employee

Retirement Income Security Act, which shields pension

plans from claims of creditors, is enforceable in a bank-

ruptey proceeding.

(1)

TABLE OF CONTENTS

Page

Interest of the United Stats 1

Statutory and regulatory provisions involve 2

r 3 2

Summary of argument 6

Argument:

The terms of ERISA and the federal Bankruptcy

Code shield respondent’s pension benefits from

A 9

A. ERISA’s anti-alienation rule is an enforceable

restriction on the transfer of pension benefits

and does not make any exception for bankruptcy

ES Ee 10

B. The Bankruptcy Code gives effect to the anti-

alienation provisions of ERISA _..................... 14

C. Excluding respondent’s pension benefits —

his bankruptey estate harmonizes ERISA and

e 25

EEE EE a 28

, § ‚‚‚ͥ 2233333 ————————— 1a

TABLE OF AUTHORITIES

Cases:

Ahead By a Length, Inc., In re, 100 B.R. 157

Rs MD sss cscsncecsstnccenssorensnocsesonase 15

Anderson v. Raine (In re Moore), 907 F.2d 1476

a 5, 11, 15, 26

Burlington Northern R.R. v. Oklahoma Taz

Comm'n, 481 U.S. 484 (1987707

Connecticut Nat’l Bank v. Germain, No. 90-1791

e .... 14, 16, 23

Connolly v. Pension Benefit Guaranty Corp., 475

U.S. 211 (19865 1 12

Creasy v. Coleman Furniture — 763 F. 2d 656

(4th Cir. 1985) 1 3

(111)

Vv

IV . P

1 * Cases—Continued : age

Morton v. Mancari, 417 U.S. 585 (1974) 25

Daniel V. Security Pacific Nat’! Bank, 771 F.2d Motor Carrier Audit & Collection Co. v. Lighting

— — 1985), cert. denied, 475 U.S. : Products, Inc., 118 B.R. 424 (N. D. Ill. 1989) 15

. Pension ranty Corp.,

Danning v. Lederer, 282 F.2d 610 (7th Cir. 1956). 17 “hee oe

Dewsnup v. Timm, 112 S. Ct. 778 (1992) 23 Pension Benefit Guaranty Corp. v. R.A. Gray &

Eagle-Picher Industries, Inc. v. United States, 937 Co., 467 U.S. 717 e 12

F.2d 625 (D.C. Cir. 1991) 15 Regan v. Ross, 691 F.2d 81 (2d Cir. 1982) 9, 18

* 2 . Lewis, 477 F. Supp. 1256 (8. P. N. v. va Rubin v. United States, 449 U.S. 424 (1981) 14

— — Graha Cir.

Forbes v. Lucas, 924 F.2d 597 (6th Cir.), cert. 3 1 9, 16, 24

Gented, 111 8. Ct. $875 (1981) . Se Smith v. Mirman, 749 F.2d 181 (4th Cir. 1984) — 11

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 Tatge v. Cheaver (In re Cheaver), 121 B.R. 665,

outed sean eee erguaeeeaeeraeee = (Bankr. P. D. C. 1990) 20

General Motors Corp. v. Buha, 623 F.2d 455 (6th Taylor v. Tayrien, 51 F.2d 894 (10th Cir.), cert.

Our. 1060) anne evnrneneenrnenrnrnenenentneneren 12 denied, 284 U.S. 672 (1931) 8 s

Gladwell . Harline, 950 F.2d 669 (10th Cir. Tenneco, Inc. v. First Virginia Bank, 698 F.2d 688

1951 e 9, 26 (4th Cir. 1983) »

%., Taylor, 706 F.2d 574 (5th Cir. 1988) ..... * The Stanley Hotel, Inc., In re, 13 B. R. 926 (Bankr.

Guidry v. Sheet Metal Workers Nat’l Pensi ei oe 15

Fund, 493 U.S. 365 (1990) 6, 7, 11, 12, 18, 14, 27 Toibb v. Radloff, 111 S. Ct. 2197 (1991)

a v. Dyke, 943 F.2d 1485 (6th Cir. * Turpin v. Wente, 644 F. 2d 472 (5th Cir. 1981) 18

— —— 8 5 3,28

John Hancock Mutual Life Insurance Co. v. reer

Watson (In re Kincaid), 917 F.2d 1162 (9th Statutes and regulations:

Cir. 19900) — 26 12

Jones v. Harrison, 7 F.2d 461 (8th Cir. 1925). aT — eee

cert. denied, 270 U.S. 652 (1926) 17 ' 1

Judson v. Witlin, 640 F. 2d 661 (5th Cir. 1981) 18 11 U.S.C, 108 d. —

Komet, In re, 104 B.R. 799 (Bankr. W. D. Tex. — — —— 1 —

—— a iodo Banal 25 S.C. 109 (l —..—ijꝗ᷑—

Lichstrahl v. Bankers Trust, 750 F.2d 1488 (11th 11 U.S.C. 110(a) (1976) ———— *

—Tſ— ( 5, 9, 24 Ch. 3:

Mackey v. Lanier Collection Agency & Service, Te ee 15

Inc., 486 U.S. 825 (1988) 13 Ch. 5:

Mason v. Eastman Kodak Co. (In re Parker), uus 4, 6, 19, 24, 25, la

473 F. Supp. 746 (W. D. N. V. 19790 18 11 U.S.C. 522 (b) — 15, 19, 24, 1a

McLean v. Central States, Southeast & Southwest . 15, 19

Areas Pension Fund, 762 F.2d 1204 (4th Cir. 11 U.S.C. 522(b) (2) (A) ... 4, 19, 24, la

55——.———ꝛ——v 11 11 U.S.C. 522 (b) (2) ( 16

Morrison-Knudsen Construction Co. v. Director, 11 U.S.C. 522 ( d)) 4, 8, 19, 20, la

VI

Statutes and regulations—Continued : Page

11 U.S.C. 522 (d) (10) (E) 19, 21, 22, 28, 24, 1a

11 U.S.C. 522 (d) (10) (E) (iii) 7, 18, 21, 2a

11 U.S.C. 523 (a) (5) 15

ee 19

11 U.S.C. 541 (a) (1) 3, 24

S 27

11 U.S.C. 541 (e) (2 passim

. ⁵ le ll eee ae 3, 24

Ch. 9:

ee 15

8 Se ee 3

Aren. 15

11 U.S.C. 1145 (a) . 15

96% L 24

11 U.S.C. 1225 (vo) se 24

=} ee 1 1 24

13 USC. 198606) 24

Employee Retirement Income Security Act of 1974:

re 10

29 U.S.C. 1002 (33) 10

29 U.S.C. 1008(b) (i777 7,10, 21, 3a

29 U.S.C. 1003 (b) (27 10, 3a

. a 10

29 U.S.C. 105 1 (6) a Oe 20, 3a

29 U.S.C. 1056 (d) (1) (8 206 (d) (1) 2, 6, 9, 10,

17, 25, 3a

29 U.S.C. 1056 (d) (3) 13, 4a

e 14

29 U.S.C. 1104 (a) (1) D)) 11

29 U.S.C. 1182 (a) (377 6, 11, 14

29 U.S.C. 1132 (a) (6) 2, 6, 11, 14

r enn 26

Internal Revenue Code (26 U.S.C.) :

nn. 14. 20, 21

Rh A ia 2 «I 2, 10, 17, 2a

VII

Statutes and regulations —Continued: Page

8 403 = 21

. 20

8 409 1 4 20

. 21

8410 (e) (1) (83) ** a ee 21

LE EE NS 21

§ 411(e) (1) (B) 7 1 21

8415 (e) (1) 1 27

Z ad 10

Labor-Management Reporting and Disclosure Ac

of 1959, 29 U.S.C. 401 et seq.:

29 U.S.C. 51 18

e Ee 14

Longshore and Harbor Workers’ Compensation

Act, 38 U.S.C. 9168 25

Retirement Equity Act of 1904, Pub. L. No. 98-

a 17

§ 204(a), 98 Stat. 144 17

28 U.S.C. 158 (d) I 23

28 U.S.C. 1291 1 23

43 U.S.C. 175 (1976) 24

Va. Code Ann. (Michie 1986) :

11 19

r 4

26 C. F. R.:

eee ele 1-2

Section 1.401 (a) -13 (a) z 8, 10, 21, 4a

Section 1.401 (a) -13 (b)))ʒ)) 1-2

Section 1.401 (a) -13 (b) (i) 10, 4a

Section 1.401 (a)-13(b) (2 11

Miscellaneous:

Arnopol, Including Retirement Benefits in a

Debtor’s Bankruptcy Estate: A Proposal for

Harmonizing ERISA and the Bankruptcy Code,

56 Mo. L. Rev. 491 (19917) 20

3 Collier on Bankruptcy (15th ed. 1991) 19

4A Collier on Bankruptcy (14th ed. 1978) 17

130 Cong. Rec. 22,126-22,127 (1984) 17

H.R. Rep. No. 595, 95th Cong., 2d Sess. (1977) 16, 18, 24

VIII

Miscellaneous—Continued : Page

Hearings on S. 235 and 286 Before the Subcomm.

on Improvements in Judicial Machinery of the

Senate Comm. on the Judiciary, 94th Cong., 1st

Sess. (1975) ............... 8 22

Report of the Commission of the Bankruptcy Laws

of the United States, H.R. Doc. No. 187, 93d

Cong., Ist Sess. (1978) .2n22.......-.-cececececececeeesereneeee 18

— . 18

— 18

S. Rep. No. 989, 95th Cong., 2d Sess. (1978) 16, 18, 24

S. 1985, 102d Cong., 2d Sess. (1992) 27

Seiden, Chapter 7 Cases: Do ERISA and the

Bankruptcy Code Conflict as to Whether a

Debtor’s Interest in or Rights Under a Qualified

Plan Can be Used to Pay Claims?, 61 Am.

Bankr. L.J. 301 (1987) : 20

In the Supreme Court of the United States

OCTOBER TERM, 1991

No. 91-913

JOHN R. PATTERSON, TRUSTEE, PETITIONER

V.

JOSEPH B. SHUMATE, JR.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

BRIEF FOR THE

UNITED STATES AS AMICUS CURIAE

SUPPORTING RESPONDENT

INTEREST OF THE UNITED STATES

Petitioner, the trustee of respondent’s bankruptcy

estate, seeks to include respondent’s pension in the estate

and distribute it to respondent’s creditors. As mandated

by ERISA, respondent’s pension plan contains a provision

prohibiting the assignment or alienation of pension bene-

fits. Thus, the issue is whether ERISA’s anti-alienation

requirement is to be given force in determining what is

included in a bankruptcy estate.

The Department of the Treasury and the Department

of Labor have substantial authority for the enforcement

of the terms of ERISA. The Secretary of the Treasury

is charged with interpreting and administering ERISA’s

anti-alienation provision and has promulgated a regu-

lation construing the anti-alienation requirement. 26

(1)

2

C. F. R. 1.401(a)-13. The Treasury, through the Internal

Revenue Service, also is responsible for monitoring the

tax-qualified status of pension plans, which may be

affected by the assignment of plan benefits to bank-

ruptcy trustees. In addition, the Secretary of Labor has

authority to bring civil actions to ensure that fiduciaries

of pension plans that are subject to ERISA comply with

the terms of the Act, including the prohibition on

alienation or assignment of plan benefits. 29 U.S.C.

1132 (a) (5). The interpretation of ERISA's anti-

alienation requirement therefore implicates basic ERISA

policies that affect the agencies’ enforcement of the Act.

STATUTORY AND REGULATORY

PROVISIONS INVOLVED

The pertinent provisions of ERISA, the Bankruptcy

Code, and the Internal Revenue Code, along with the

IRS’s anti-alienation regulation, are reprinted in the

appendix to this brief.

STATEMENT

1. Coleman Furniture Corporation established a Pen-

sion Plan that satisfied all applicable requirements of the

Employee Retirement Income Security Act of 1974

(ERISA) and qualified for favorable tax treatment un-

der the Internal Revenue Code. In particular, the Pension

Plan complied with Section 206(d)(1) of ERISA, 29

U.S.C. 1056 (d) (1), which states that “[e]ach pension

plan shall provide that benefits provided under the plan

may not be assigned or alienated.“ Respondent Joseph

B. Shumate, Jr., was associated with Coleman Furniture

for more than 30 years. J.A. 14. After 1977, Shumate

1 The Internal Revenue Code similarly provides as a general rule

that [a] trust shall not constitute a qualified trust under this sec-

tion unless the plan of which such trust is a part provides that

benefits under the plan may not be assigned or alienated.” 26 U.S.C.

401 (a) (13).

3

controlled 96% of Coleman Furniture's stock and, from

1979 until early 1983, he served as president and chair-

man of the board of directors. J. A. 119-124. As an em-

ployee of Coleman Furniture, Shumate participated in

the Pension Plan and his interest in the Plan has been

valued at $250,000. J.A. 92-94.

Coleman Furniture experienced financial difficulties

and, in November of 1982, the corporation filed a peti-

tion for relief under Chapter 11 of the Bankruptcy Code.

The case soon was converted to a Chapter 7 proceeding

and a trustee, Roy V. Creasy, was appointed. J.A. 13.

Shumate then filed a Chapter 11 petition in his individual

capacity in June of 1984, and his case also was converted

to a Chapter 7 proceeding. Petitioner John R. Patterson

was appointed as the trustee presiding over Shumate’s

personal bankruptcy. J.A. 18.

The trustee for the Coleman Furniture bankruptcy

initiated an action in district court in which he sought

and ultimately obtained approval to terminate the Pen-

sion Plan. See Creasy v. Coleman Furniture Corp., 763

F.2d 656 (4th Cir. 1985). The trustee then proceeded

to terminate and liquidate the Pension Plan, a process that

was completed, for the most part, by the end of 1987.

J.A. 8, 26-27. As a result, approximately 400 partici-

pants in the Pension Plan, except Shumate, received full

termination distributions from Coleman Furniture’s bank-

ruptey estate. Pet. App. 4a.

In April of 1987, petitioner, the trustee in Shumate’s

case, filed an action—referred to as a turnover action—

to recover Shumate’s pension benefits for his personal

bankruptcy estate. J. A. 18-19.“ The turnover proceeding

was subsequently consolidated with a pre-existing action

2 Because the scope of the bankruptcy estate is determined as of

the time a bankruptcy petition is filed, 11 U.S.C. 541 (a) (1), and

the Pension Plan was not terminated until after Shumate filed his

bankruptcy petition, whether Shumate’s pension benefits are in-

cluded in the bankruptcy estate is unaffected by the Plan’s termi-

nation.

4

that Shumate had brought to compel Coleman Furniture’s

trustee to pay his interest in the Pension Plan to him.

J.A. 7-10; Pet. App. 52a-57a. Shumate argued that his

interest in the Pension Plan was excluded from his bank-

ruptey estate pursuant to 11 U.S.C. 541 (e) (2), which

excludes property that is subject to transfer restrictions

that are enforceable under “applicable nonbankruptcy

law.” The applicable nonbankruptey law” on which

Shumate relied was ERISA’s anti-alienation provision.

Alternatively, Shumate maintained that even if his

interest in the Plan was not excluded from the bank-

ruptey estate under Section 541 (e) (2), he was entitled

to an exemption for his pension benefits under 11 U.S.C.

522(b) (2) (A), which provides for the exemption of “any

property that is exempt under Federal law, other than

subsection (d) of this section, or State or local law.”

Shumate again relied on ERISA’s anti-alienation provi-

sion as the basis for his argument that his pension is

“exempt under Federal law” within the meaning of Sec-

tion 522(b) (2) (A).

2. The district court held that Shumate’s interest in

the Pension Plan was included in the bankruptcy estate

under Section 541 and was not exempt under Section 522.

Pet. App. 18a-46a. With respect to whether a pension

is included in a bankruptcy estate, the court rejected

Shumate’s argument that ERISA constitutes “applicable

nonbankruptcy law” under Section 541(c)(2). It in-

stead agreed with those courts that have “interpreted the

phrase ‘nonbankruptcy law’ to mean state law.” Pet.

App. 26a. The court accordingly turned to Virginia law

and held that Shumate’s interest did not qualify for pro-

tection as a spendthrift trust under Va. Code Ann. § 55-

19 (Michie 1986) because Shumate had a controlling in-

terest in Coleman Furniture. Pet. App. 36a-38a.

The district court then proceeded to reject respond-

ent’s alternative argument that his interest in the Plan

was “exempt under Federal law” within the meaning of

Section 522(b)(2)(A). Pet. App. 41a-45a. The court

5

reasoned that “the House and Senate reports contain a

list of property that can be exempted under federal laws,”

that ERISA is “conspicuously absent” from that list, and

that the federal laws mentioned related to interests that

were “peculiarly federal in nature,” while “ERISA regu-

lates private employer pension systems.” Id. at 44a,

quoting Lichstrahl v. Bankers Trust, 750 F.2d 1488,

1491 (11th Cir. 1985). Accordingly, the court ordered

that “Shumate’s interest in the Coleman Furniture Cor-

poration Pension Plan” be paid to the trustee of Shu-

mate’s bankruptcy estate. Pet. App. 54a.

3. The court of appeals reversed. Pet. App. la-17a.

The court found that the terms of the Pension Plan in-

cluded an anti-alienation clause as required by ERISA.

The court therefore held, in accordance with its prior

decision in Anderson v. Raine (In re Moore), 907 F.2d

1476 (4th Cir. 1990), that Shumate’s interest in the

Pension Plan was excluded from his bankruptcy estate

under Section 541(c) (2) of the Bankruptcy Code. Sec-

tion 541(c) (2) honors transfer restrictions that are en-

forceable under “applicable nonbankruptcy law,” and the

court concluded that this language clearly encompasses

ERISA: “‘Applicable nonbankruptcy law’ means pre-

cisely what it says: all laws, state and federal, under

which a transfer restriction is enforceable. Nothing in

the phrase ‘applicable nonbankruptcy law’ . . . suggests

that the phrase refers exclusively to state law, much less

to state spendthrift trust law.” Pet. App. 7a-8a, quoting

907 F.2d at 1477.

The court further found that its “holding is consistent

with the clear intent of ERISA and the Bankruptcy

Code.” Pet. App. 13a. Relying on this Court’s prece-

dents, the court of appeals reasoned that “Congress passed

ERISA to guarantee that ‘if a worker has been promised

a defined pension benefit upon retirement—and if he has

fulfilled whatever conditions are required to obtain a

vested benefit—he actually will receive it.“ Ibid., quot-

ing Nachman Corp. v. Pension Benefit Guaranty Corp.,

446 U.S. 359, 375 (1980). The court of appeals also

6

relied on Guidry v. Sheet Metal Workers Nat’l Pension

Fund, 493 U.S. 365 (1990), where this Court held that

ERISA’s anti-alienation provision precluded a union from

attaching a union official’s pension benefits to recover

money the official had embezzled from the union. Pet.

App. 14a. The court therefore concluded that Shumate’s

pension account also should not be distributed among his

debtors in bankruptcy proceedings, “because § 541 man-

dates that where trusts contain enforceable restrictions

on transfer of a beneficial interest, those restrictions must

be recognized in bankruptcy and there onerate to exclude

the interest from the debtor’s estate.” Jd. at 15a. The

court of appeals accordingly did not reach the question of

whether Shumate’s plan interest was exempt under Sec-

tion 522.

SUMMARY OF ARGUMENT

There is no dispute that ERISA ordinarily forbids

the trustee of a pension plan from conveying a benefi-

ciary’s interest in the plan to any creditor, even if re-

quested to do so by the beneficiary. Petitioner neverthe-

less asks this Court to create an implied exception to this

rule against alienation, and to require involuntary con-

veyance of pension interests to bankruptcy trustees for

the purpose of discharging the claims of creditors. Noth-

ing in the statutory language of ERISA or the Bank-

ruptey Code, however, suggests that Congress intended

that debtors would forfeit the ERISA-mandated protec-

tion of their pension benefits when they declare bank-

ruptcy.

A. The literal language and purposes of ERISA com-

pel the interpretation adopted by the court of appeals in

this case. Section 206 (d) (1) of ERISA provides that

pension benefits “may not be assigned or alienated,” 29

U.S.C. 1056 (d) (1), and trustees who violate this pro-

hibition are subject to suits for damages and equitable

relief under ERISA, 29 U.S.C. 1132 (a) (3) and (5).

The statutory language makes no exception favoring cred-

7

itors in bankruptcy proceedings, and this Court has al-

ready declined to create implied exceptions to ERISA’s

anti-alienation rule. Guidry v. Sheet Metal Workers Nat'l

Pension Fund, 493 U.S. 365, 376 (1990).

The purpose of ERISA’s prohibition on voluntary and

involuntary alienation—conserving plan benefits for the

beneficiary’s retirement—is also fully implicated in the

context of bankruptcy proceedings. If the debtor’s pen-

sion benefits are used to discharge claims of creditors in

bankruptcy, they simply will not be available for retire-

ment, and that is the very result Congress sought to

avoid.

B. The Bankruptey Code also provides, consistent with

ERISA, that a debtor’s beneficial interest in a trust is

excluded from the bankruptcy estate whenever “appli-

cable nonbankruptcy law“ would otherwise prevent the

transfer of that interest. 11 U.S.C. 541 (e) (2). The court

of appeals correctly held in this case that there is simply

no way to read the phrase “applicable nonbankruptcy

law” to exclude ERISA’s restriction against alienation,

or to refer only to “state spendthrift trust law,” as peti-

tioner contends. See Pet. App. 15a-16a.

Petitioner’s reliance on the legislative history and the

language of the exemption section of the Bankruptcy

Code for such a restrictive interpretation is misplaced.

The legislative history in fact demonstrates a congres-

sional intent to recodify the rule adopted under the prior

Bankruptey Act, which enforced restrictions on aliena-

tion that were recognized under either state or federal

law.

Similarly, the fact that one section establishing an

exemption for property otherwise included in the estate,

11 U.S.C. 522(d) (10) (E) (iii), makes reference to qual-

ified ERISA pension plans, is also fully consistent with

our interpretation of the Bankruptcy Code. Certain cate-

gories of tax-qualified pension plans, those established by

governmental entities and churches, are not required to in-

corporate anti-alienation clauses. 29 U.S.C. 1003 (b) (1);

8

26 C.F.R. 1.401(a)-18(a). Such plans accordingly would

not be excluded from the bankruptcy estate under “ap-

plicable nonbankruptcy laws” within the meaning of Sec-

tion 541(c)(2). The exemption set forth in Section

522(d) therefore serves to enlarge the protections af-

forded to such plans, thereby demonstrating that the

section is not partially superfluous.

C. The court of appeals’ interpretation reconciles co-

ordinate federal statutes without undermining the pur-

poses of either law. Adoption of petitioner’s restrictive

reading, in contrast, would defeat ERISA’s command

that claims of creditors must always be subordinated to

the debtor’s need for pension benefits at the time of

retirement. It would also defeat congressional intent

to establish a uniform federal rule governing the aliena-

tion of ERISA plan benefits, since protection of those

benefits would depend upon whether state law happened

to make the anti-alienation provision enforceable. In the

end, petitioner would have this Court conclude that Con-

gress sought to give pension benefits held in an ERISA

qualified trust less protection than pension benefits held

in a state spendthrift trust. There is no reason whatso-

ever to adopt such a strained interpretation of the law.

9

ARGUMENT

THE TERMS OF ERISA AND THE FEDERAL BANK-

RUPTCY CODE SHIELD RESPONDENT’S PENSION

BENEFITS FROM BANKRUPTCY CREDITORS

The dispositive question in this case is whether ER!SA’s

prohibition against the assignment or alienation of pen-

sion benefits, 29 U.S.C. 1056 (d) (1), must be honored

in bankruptey proceedings. The Bankruptcy Code pro-

vides that 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,” 11 U.S.C. 541(c) (2), and the court of

appeals concluded that ERISA is “applicable nonbank-

ruptey law.“ It accordingly held that respondent’s pen-

sion benefits are excluded from his bankruptcy estate.

Accord Velis v. Kardanis, 949 F.2d 78 (3d Cir. 1991);

Forbes v. Lucas, 924 F.2d 597 (6th Cir.), cert. denied,

111 S. Ct. 2275 (1991); Gladwell v. Harline, 950 F.2d

669 (10th Cir. 1991).

Petitioner, the trustee of respondent’s bankruptcy

estate, urges this Court to reject the court of ap-

peals’ straightforward interpretation of ERISA and the

Bankruptcy Code, and to instead read the phrase “appli-

cable nonbankruptcy law“ to refer solely to state spend-

thrift trust law. Br. 49. That interpretation was first

advanced in Goff v. Taylor, 706 F.2d 574 (5th Cir. 1983).

Accord Samore v. Graham, 726 F.2d 1268 (8th Cir.

1984), Daniel v. Security Pacific National Bank, 771 F.2d

1352 (9th Cir. 1985), cert. denied, 475 U.S. 1016 (1986),

and Lichstrahl v. Bankers Trust, 750 F.2d 1488 (11th

Cir. 1985). See also Regan v. Ross, 691 F.2d 81, 85 (2d

Cir. 1982). The United States agrees with the court

below that the Goff interpretation is inconsistent with the

literal language of ERISA as well as the Bankruptcy

Code, and would nullify central terms of ERISA’s scheme

to protect pension plan benefits.

10

A. ERISA’s Anti-Alienation Rule Is An Enforceable Re-

striction On The Transfer Of Pension Benefits And

Does Not Make Any Exception For Bankruptcy

Proceedings

1. The literal terms of ERISA do not permit the

trustee of a pension plan to transfer or assign plan ben-

efits to a bankruptcy trustee. A beneficiary’s interest in

a pension plan is generally subject to transfer restric-

tions by virtue of Section 206(d) (1) of ERISA, 29 U.S.C.

1056 (d) (1), which provides that el ach pension plan

shall provide that benefits provided under the plan may

not be assigned or alienated.” * The coordinate section

of the Internal Revenue Code provides as a general rule

that [a] trust shall not constitute a qualified trust under

this section unless the plan of which such trust is a part

provides that benefits provided under the plan may not

be assigned or alienated.” 26 U.S.C. 401 (a) (13) (ERISA

§ 1021(c)). In addition, the Treasury Department has

promulgated a regulation, 26 C.F.R. 1.401(a)-13(b) (1),

specifying that pension benefits held in trust are not

subject to various kinds of attachment by creditors.*

Section 206 (d) (1) is part of Title I of ERISA, which governs

“protection of employee benefit rights.” A number of types of em-

ployee benefit plans are excepted from coverage under Title I of

ERISA, including “governmental plan [s]“ and “church plan[s].”

29 U.S.C. 1003(b)(1) and (2); see 29 U.S.C. 1002(32) and

1002(33) (defining “governmental plan” and “church plan”). Ac-

cordingly, pension plans sponsored by government agencies and

churches are not required to include anti-alienation clauses.

The regulation states that [a] trust will not be qualified unless

the plan of which the trust is a part provides that benefits provided

under the plan may not be anticipated, assigned (either at law or

in equity), alienated or subject to attachment, garnishment, levy,

execution or other legal or equitable process.” 26 C. F. R. 1.401 (a) -

13(b) (1). In light of the statutory exclusion of governmental plans

and church plans from coverage under Title I of ERISA, the regu-

lation provides that it does not apply to such plans. Id. § 1.401 (a) -

13(a). The regulation also permits alienation to satisfy a federal

tax levy under Section 6331 of the Internal Revenue Code or a judg-

11

ERISA requires plan trustees to adhere to these anti-

alienation provisions. Under 29 U.S.C. 1104(a)(1)(D),

the plan trustee must discharge his duties “in accordance

with the documents and instruments governing the plan,“

and is subject to suit for any violation of the anti-alien-

ation rule. The Secretary of Labor, a plan participant

or beneficiary, or a plan fiduciary may bring a civil

action to enjoin any violation of the anti-alienation re-

quirement, to recover benefits due under a plan, and to

seek reimbursement for the plan from fiduciaries who

violated the requirements of the statute or the terms

of a plan by alienating benefits held in trust. See 29

U.S.C. 1132 (a) (3) and (5).

It has therefore been firmly established outside the

bankruptcy context that general creditors—even those

who have been criminally wronged by the debtor—may

not reach pension benefits properly held in trust by a

pension fund containing an anti-alienation provision man-

dated by ERISA. Guidry v. Sheet Metal Workers Nat'l

Pension Fund, 493 U.S. 365, 376 (1990). See also Smith

v. Mirman, 749 F.2d 181, 183 (4th Cir. 1984) (an em-

ployee’s accrued benefits under a qualified plan may not

be reached by judicial process in aid of a third party

ment in favor of the United States resulting from an unpaid tax

assessment. Id. § 1.401 (a) -13 (b) (2).

5In addition, the IRS has taken the position that the transfer of

a beneficiary’s interest in a pension plan to a bankruptcy trustee

would disqualify the plan from taking advantage of the preferential

tax treatment available under ERISA. See Forbes v. Lucas, 924

F.2d 597, 603 (6th Cir.), cert. denied, 111 S. Ct. 2275 (1991);

Anderson v. Raine (In re Moore), 907 F.2d 1476, 1481 (4th Cir.

1990); McLean v. Central States, Southeast & Southwest Areas

Pension Fund, 762 F.2d 1204, 1206 (4th Cir. 1985). However,

the IRS has refrained from disqualifying plans on that basis in

light of the conflict as to whether pension benefits are excluded

from the bankruptcy estate under 11 U.S.C. 541 (e) (2). The IRS

may continue to exercise its enforcement discretion in that man-

ner in circuits that have rejected the Service’s position on the ques-

tion presented in this case pending resolution of the conflict by

this Court.

12

creditor); Tenneco, Inc. v. First Virginia Bank, 698

F.2d 688, 689-690 (4th Cir. 1983) ; General Motors Corp.

v. Buha, 623 F.2d 455, 463 (6th Cir. 1980) (pension plan

benefits protected against garnishment by tort judgment

creditor). There is no reason to apply a different rule

here, because none of the provisions governing alienation

of ERISA plan benefits includes any exception that would

permit alienation in favor of a bankruptcy trustee. The

literal language of ERISA therefore serves to bar the

trustee of an ERISA plan from making the transfer

sought by the petitioner in this case.

2. The purposes of ERISA’s anti-alienation provisions

apply with full force in the context of bankruptcy.

ERISA’s restriction on alienation protects vested benefits

from both voluntary and involuntary encroachments and

ensures that an employee’s accrued pension benefits will

actually be available for retirement. As this Court has

noted on a number of occasions, Congress passed ERISA

to guarantee that “if a worker has been promised a de-

fined pension benefit upon retirement—and if he has

fulfilled whatever conditions are required to obtain a

vested benefit—he actually will receive it.” Nachman

Corp. v. Pension Benefit Guaranty Corp., 446 U.S. 359,

375 (1980). See also Pension Benefit Guaranty Corp. v.

R.A. Gray & Co., 467 U.S. 717, 720 (1984) ; Connolly v.

Pension Benefit Guaranty Corp., 475 U.S. 211, 214

(1986). This Court has also stated that ERISA’s anti-

alienation rule furthers this purpose: Section 206 (d

reflects a considered congressional policy choice, a decision

to safeguard a stream of income for pensioners (and

their dependents, who may be, and perhaps usually are,

blameless), even if that decision prevents others from

securing relief for the wrongs done them.” Guidry V.

Sheet Metal Workers Nat’l Pension Fund, 493 U.S. 365,

376 (1990).

It simply makes no difference whether the pension plan

trustee alienates pension benefits in favor of a judgment

creditor, a lien holder, or a bankruptcy trustee. The result

is the same—the benefits will not be available to the

13

employee at the time of his retirement. And that is the

result Congress sought to prevent through adoption of a

broad anti-alienation clause.

3. This Court has already refused to create implied

exceptions to ERISA’s anti-alienation rule. Instead, this

Court held in Guidry that “[i]f exceptions to this policy

are to be made, it is for Congress to undertake that task.”

Guidry, 493 U.S. at 376.“ In Guidry, this Court held

that ERISA’s anti-alienation provision shields plan bene-

fits from creditors even where the equities strongly favor

the creditor, and even where another federal statute argu-

ably provides a basis for an exception to ERISA’s anti-

alienation rule. Noting that where Congress intended

to create exceptions to ERISA’s bar against the alienation

of pension benefits it has very explicitly done so within

ERISA itself, this Court declined to create an equitable

exception to ERISA’s rule against alienation. 493 U.S.

at 376; see Mackey v. Lanier Collection Agency & Service,

Inc., 486 U.S. 825, 838 (1988).

The argument rejected by this Court in Guidry has

substantial parallels to petitioner’s argument in this case.

Guidry, a union official and a trustee of the union’s pen-

sion fund, pleaded guilty to embezzling union funds in

violation of the Labor-Management Reporting and Dis-

closure Act of 1959 (LMRDA), 29 U.S.C. 501. The union

therefore sought to impose a constructive trust on Guidry’s

pension account in order to further the remedial purposes

of the LMRDA, which provides a labor organization with

The Court noted, however, that Guidry had not been found to

have breached his fiduciary duty to the union pension plan by em-

bezzling from the union, so that the Court was not deciding whether

a fiduciary could be ordered to transfer funds from his pension

account to other pension accounts as a remedy for such a breach.

493 U.S. at 378-374.

The Court was referring to 29 U.S.C. 1056(d) (3), which pro-

vides an express exception to ERISA’s anti-alienation rule for satis-

faction of qualified domestic relations orders relating to child sup-

port and alimony.

14

a private right of action to recover damages or obtain

other appropriate relief from officials who violate the

Act. 29 U.S.C. 501 (b). This Court rejected that argu-

ment, which had been accepted by the lower court, based

upon a specific directive from Congress: pension benefits

are immune from alienation or assignment. This Court

declined to override this directive in the absence of a

clear statement from Congress. 493 U.S. at 375-376. As

in Guidry, no such clear congressional statement can be

found in this case.

B. The Bankruptcy Code Gives Effect to the Anti-

alienation Provisions of ERISA

1. Section 541(c) (2) of the Bankruptcy Code provides,

consistent with ERISA, that trust funds subject to enforce-

able transfer restrictions are not included in the bank-

ruptey estate. Section 541(c) (2) provides that [a] re-

striction 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.” 11 U.S.C. 541 (e) (2). A pension fund that was

established in compliance with ERISA is a “trust,” see

29 U.S.C. 1103; 26 U.S.C. 401(a), and as shown previ-

ously, ERISA’s restrictions against alienation are “en-

forceable” under 29 U.S.C. 1132 (a) (3) and (5). Section

541(c) (2)’s reference to “applicable nonbankruptcy law“

is unqualified and contains no reference to state law or,

more particularly, to state spendthrift trust law. Follow-

ing this Court’s “first canon” of statutory interpretation,

a straightforward reading of the phrase “applicable non-

bankruptcy law“ necessarily encompasses federal as well

as state law. Connecticut Nat’! Bank v. Germain, No.

90-1791 (Mar. 9, 1992), quoting Rubin v. United States,

449 U.S. 424, 430 (1981).

Reading Section 541(c) (2) to encompass both federal

and state laws is also consistent with the use of the

phrase “applicable nonbankruptcy law” in other sections

15

of the Bankruptcy Code. See Morrison-Knudsen Construc-

tion Co. v. Director, OWCP, 461 U.S. 624, 633 (1983)

(recognizing the principle of statutory construction that

a word is presumed to have the same meaning in all sub-

sections of the same statute). In numerous places, unless

otherwise limited by the text, the term “applicable non-

bankruptcy law” refers to federal as well as state law.“

As the Fourth Circuit noted in Jn re Moore, it would be

“incongruous to give the same phrase in § 541(c)(2) a

narrower construction than the identical phrase in other

parts of the Bankruptcy Code, particularly since the dis-

parate sections of the Bankruptcy Code were enacted to-

gether in a single comprehensive statute.” 907 F.2d at

1478.

Conversely, other portions of the Barkruptcy Code

demonstrate that, when Congress intended to refer ex-

clusively to state law, it did so explicitly. See, e.g., 11

U.S.C. 109 (e) (2) (entity may be a debtor under Chapter

9 if authorized “by State law“); 11 U.S.C. 522 (b) (1)

(election of exemptions controlled by “State law that is

applicable to the debtor”) ; 11 U.S.C. 523 (a) (5) (a debt

for alimony, maintenance, or support determined “in

accordance with state or territorial law” is not discharge-

able); 11 U.S.C. 903 (1) (“State law prescribing a method

of composition of indebtedness” is not binding on non-

consenting creditors) ; see also 11 U.S.C. 362(b) (12); 11

U.S.C. 1145(a). Accordingly, petitioner’s contention that

the phrase “applicable nonbankruptcy law” is limited to

See, .., 11 U.S.C. 1125(d) (“otherwise applicable nonbank-

ruptey law” includes federal securities law), see In re The Stanley

Hotel, Inc., 13 B.R. 926, 931 (Bankr. D. Colo. 1981); 11 U.S.C.

108(a) (“applicable nonbankruptcy law” includes, inter alia, the

Racketeer Influenced and Corrupt Organization Act and the Inter-

state Commerce Act), see Jn re Ahead By a Length, Inc., 100 B. R.

157, 162-163 (Bankr. S. D. N. V. 1989), and Motor Carrier Audit &

Collection Co. v. Lighting Products, Inc., 113 B. R. 424, 425-426

(N. D. TIL 1989); 11 U.S.C. 108(b) (“applicable nonbankruptcy

law” includes the Federal Tort Claims Act), see Eagle-Picher In-

dustries, Inc. v. United States, 987 F.2d 625, 639-640 (D.C. Cir.

1991).

16

state spendthrift trust law is unsupported by the lan-

guage of Section 541(c)(2), which neither states nor

implies any such limitation.“

2. Petitioner, and the courts that have limited “appli-

cable nonbankruptcy law” to state spendthrift trust law,

have purported to rely on the legislative history of Section

541 (e) (2). See Br. 38-42; Goff, 706 F.2d at 581-582;

Graham, 726 F.2d at 1271-1272. As an initial matter,

resort to the legislative history is improper where the

statute is not ambiguous. Connecticut Nat’l Bank v.

Germain, No. 90-1791 (Mar. 9, 1992), slip op. 5. But

even if it were proper to advert to the legislative history,

the limited history pertaining to Section 541 (e) (2) is

more consistent with the statutory interpretation adopted

by the court of appeals in this case.

a. The House Report stated that the term “applicable

nonbankrupey law” in Section 541(c)(2) “preserves

restrictions on transfer of a spendthrift trust to the ex-

tent that the restriction is enforceable under applicable

nonbankruptcy law,” and added that Section 541(c) (2)

„continues over the exclusion from property of the estate

of the debtor’s interest in a spendthrift trust to the extent

the trust is protected from creditors under applicable

State law.” H.R. Rep. No. 595, 95th Cong., Ist Sess. 369,

176 (1977). The Senate Report similarly noted that

Section 541 (e) (2) “preserves restrictions on a transfer

of a spendthrift trust.” S. Rep. No. 989, 95th Cong., 2d

Sess. 83 (1978). Those passages indicate Congress’s in-

tent to protect spendthrift trusts, and other passages in

legislative history pertaining to ERISA reveal that Con-

o Petitioner’s observation (Br. 35) that in Bankruptcy Code

Section 522 (b) (2) (B) the phrase “applicable nonbankruptcy law“

is effectively restricted to state law does not advance his position.

The reference in Section 522 (b) (2) (B) is effectively limited to

state law because the phrase is qualified by a reference to the law

pertaining to tenancies by the entireties and there is no similar

language in Section 541(c)(2) restricting “applicable nonbankruptcy

law” to state law, much less state spendthrift trust law.

17

gress in fact has equated the ERISA anti-alienation re-

quirement with a “spendthrift” clause.’ Moreover, these

passages should not be read to limit the scope of “applica-

ble nonbankruptcy law” merely because they illustrate

congressional intent by pointing to a common example—

spendthrift trusts that are enforceable under state law.

b. The legislative history also shows that Congress

intended Section 541(c) (2) to preserve prior law with

respect to restrictions on alienability and assignment.

Prior law would have protected the pension plan interests

in issue, providing further support for the lower court’s

construction of Section 541 (e) (2).

Prior to the adoption of Section 541(c) (2), interests

protected by an enforceable anti-alienation provision were

excluded from the bankruptcy estate under Section 70a

of the Bankruptcy Act. 11 U.S.C. 110(a) (1976). See

Danning v. Lederer, 232 F.2d 610 (7th Cir. 1956) ; Jones

v. Harrison, 7 F.2d 461 (8th Cir. 1925), cert. denied,

270 U.S. 652 (1926). In addition, restrictions on alien-

ation were respected by Section 70a whether they were

enforceable under state spendthrift trust law or federal

law. 4A Collier on Bankruptcy para. 70.26, at 365-366

(14th ed. 1978). Thus, for example, the “headright” of

an Osage Indian—.e., oil and gas rights held in trust by

the United States—did not become property of the In-

dian’s bankruptcy estate because federal law imposed

restrictions on transfer and seizure of those assets. Taylor

v. Tayrien, 51 F.2d 884 (10th Cir.), cert. denied, 284

U.S. 672 (1931) .™

10 In Section 204(a) of the Retirement Equity Act of 1984, Pub.

L. No. 98-397, 98 Stat. 1426, Congress amended Internal Revenue

Code Section 401(a) (13) to exempt a “qualified domestic relations

order” from ERISA’s restrictions on alienation of benefits. 98

Stat. 1445. In the technical explanation which accompanied the

Act, the Senate Committee on Finance specifically referred to the

anti-alienation provision of Section 401 (a) (13) of the Internal

Revenue Code and to the parallel provision in Section 206(d) (1)

of ERISA as “spendthrift provisions.” 130 Cong. Rec. 22,126-

22,127 (1984).

After enactment of the current Bankruptcy Code, but in cases

decided under the former Act, a few courts also had occasion to

18

The history leading to the adoption of the current

law reveals a congressional intent to leave these rules

undisturbed. The Commission on Bankruptcy Laws, es-

tablished in 1970 to study the former Bankruptcy Act,

proposed a modification of the spendthrift trust rules

that was ultimately rejected in favor of the prior law.

The Commission recommended that restrictions on a

debtor’s beneficial trust interests that were “enforceable

under applicable nonbankruptcy law” should only be en-

forceable in bankruptcy to the extent reasonably neces-

sary for support of the debtor and his dependents. Re-

port of the Commission of the Bankruptcy Laws of the

United States, H.R. Doc. No. 137, 93d Cong., Ist Sess.

Pt. 1, at 197 (1973). Id. Pt. 2, § 4-601(b), at 147-148.

The House version of the bill that was ultimately en-

acted as the new Bankruptcy Code did not adopt this

aspect of the Commission’s recommendation. The law

adopted did not limit the exclusion of protected trust

interests to the amount necessary for support. See H.R.

Rep. No. 595, supra, at 176, 369; S. Rep. No. 989, supra,

at 83. Thus, it is clear that Bankruptcy Code Section

541 (e) (2) was intended to continue in full the protec-

tion of interests in spendthrift trusts that was available

under the prior Bankruptcy Act.

3. Petitioner and the courts that have restricted “ap-

plicable nonbankruptcy law” to state spendthrift trust

law have also relied on the misimpression that reading

Section 541 (e) (2) to mean what it says would render

one of the Bankruptcy Code’s exemption provisions, 11

U.S.C. 522 (d) (10) (E) (iii), partially superfluous. See

Br. 24-33; Goff, 706 F.2d at 582; Heitkamp v. Dyke, 943

F.2d 1435, 1442-1443 & n.20 (5th Cir. 1991); ef. Regan

v. Ross, 691 F.2d 81 (2d Cir. 1982). In fact, there is no

consider, and recognize, interests in pension plans subject to ERISA

as interests that were outside the scope of the bankruptcy estate.

See Turpin v. Wente, 644 F.2d 472 (5th Cir. 1981); Mason v. East-

man Kodak Co. (In re Parker), 473 F. Supp. 746 (W.D.N.Y. 1979).

But see Judson v. Witlin, 640 F.2d 661 (5th Cir. 1981).

19

reason to depart from the language Congress used in or-

der to avoid a conflict between the exclusion and exemp-

tion provisions, because each provision has force when

read together properly.

a. The Bankruptcy Code provides that certain prop-

erty includable in the bankruptcy estate under Section

541 may be exempted from the estate pursuant to a com-

plex set of provisions detailed in Section 522. In some

States, debtors may choose between two different lists

of exemptions: (1) the exemptions referred to as the

“laundry list,” set forth in Section 522(d); or (2) the

exemptions available under Section 522 (b). In the ma-

jority of States, including Virginia, which is respond-

ent’s residence, debtors may not elect the exemptions

set out in the laundry list under Section 522(d), but

are restricted to the exemptions allowed under Section

522(b). See 11 U.S.C. 522(b) (1); Va. Code Ann. § 34-31

(Michie 1986); 3 Collier on Bankruptcy para. 522.02

n.4a (15th ed. 1991).

Even though the laundry list of exemptions under 522(d)

is not applicable to most bankruptcies—including respond-

ent’s—petitioner claims (Br. 26) that the terms of Section

522(d) disclose an intent to make all ERISA benefits

includable in the estate. Section 522 (d) (10) (E) provides

that a debtor who chooses the laundry list of exemptions

(if allowed to do so under state law), may exempt his

right to receive “a payment under a stock bonus, pen-

sion, profitsharing, annuity, or similar plan or contract

7, to the extent reasonably necessary for the support

of the debtor and any dependent of the debtor, unless—

* * (iii) such plan or contract does not qualify under

section 401 (a), 403 (a), 403 (b), 408, or 409 of the In-

ternal Revenue Code of 1986 (26 U.S.C. 401 (a), 403 (a),

403 (b), 408, or 409).“ If interests in qualified pension

plans are excluded from the bankruptey estate under

1 Section 522 (h) (2) (A) provides for the exemption of any

property that is exempt under Federal law, other than subsection

(d) of this section, or State or local law.”

20

Section 541(c) (2), petitioner contends, there would be

no need for a reference to pension plans that qualify for

preferential tax treatment under Section 401 (a) of the

Internal Revenue Code in the Bankruptcy Code’s ex-

emption provision. See Br. 29-31.

It should be noted at the outset that plans that qualify

for preferential tax treatment under Section 408—in-

dividual retirement accounts (IRAs)—are not required to

contain anti-alienation provisions.“ An IRA therefore

would not be protected from alienation under “applicable

nonbankruptcy law,” but the exemption in Section 522(d)

would nevertheless serve to enlarge the protection afforded

to the IRA assets when the debtor declares bankruptcy.

It would be counter-intuitive to read Section 522(d),

which provides increased protection for plans that are not

required to contain an anti-alienation clause, to reduce

the protection afforded to the plans that Congress re-

quired to be protected from assignment or alienation.

Moreover, even the Section’s reference to pension plans

that qualify under Section 401(a) does not render the

section partially superfluous. Not all pension plans that

qualify for favorable tax treatment under Section 401 (a)

contain an anti-alienation provision, and the exemption

of 522(d) would therefore serve to enlarge the protection

afforded those plans as well. See Tatge v. Cheaver (In re

Cheaver), 121 B.R. 665, 665-666 (Bankr. D.D.C. 1990) ;

Seiden, Chapter 7 Cases: Do ERISA and the Bankruptcy

Code Conflict as to Whether a Debtor’s Interest in or

Rights Under a Qualified Plan Can be Used to Pay

Claims?, 61 Am. Bankr. L.J. 301, 317-318 (1987); Ar-

nopol, Including Retirement Benefits in a Debtor’s Bank-

ruptey Estate: A Proposal for Harmonizing ERISA and

the Bankruptcy Code, 56 Mo. L. Rev. 491, 552-553 (1991).

As noted previously (see notes 3, 4, supra), two sig-

18 Pension plans that qualify for preferential tax treatment under

26 U.S.C. 408 (individual retirement accounts) and 409 (which

covered retirement bonds at the time the Bankruptcy Code was en-

acted) are specifically excepted from ERISA’s anti-alienation re-

quirement by 29 U.S.C. 1051(6).

21

nificant categories of pension plans, those established by

governmental entities and churches, may qualify for

preferential tax treatment without complying with

ERISA’s anti-alienation requirement. See 29 U.S.C.

1003 (b) (1) and (2); 26 C. F. R. 1.401 (a)-13 (a).“ In

short, since these pension plans qualify for favorable tax

treatment under Section 401 (a) of the Internal Revenue

Code but are not protected against alienation under “ap-

plicable nonbankruptcy law,” the court of appeals’ inter-

pretation of Section 541 (e) (2) does not partially nullify

Section 522(d) (10) (e) (iii). Rather, under the court of

appeals’ construction of the statute, Section 522 (d) (10

(e) (iii) increases the protections afforded to participants

in governmental plans and church plans.

b. Unlike petitioner, amicus David B. Tatge, Trustee,

recognizes that some types of ERISA pension plans

are not required to include anti-alienation clauses.

He nevertheless contends that the court of appeals’ in-

terpretation is contrary to various shreds of legislative

history bearing on Congress’s intent in enacting Section

522 (d) (10) (E).

Amieus relies primarily on a note explaining the ex-

emption provision in the proposal of the Commission on

the Bankruptcy Laws. Br. 10-11, quoting Note 8 to

14 Because the provisions of Subchapter I of ERISA do not apply

to governmental! plans and church plans, they are treated differently

from plans established by private companies in a number of respects.

For example, in addition to not being subject to the anti-alienation

rule, governmental plans and church plans are not required to com-

ply with ERISA’s reporting and disclosure requirements or the

statute’s vesting and participation requirements. Governmental

plans and church plans are excepted from these requirements whether

they establish a trust fund or purchase annuity contracts, as pro-

vided in 26 U.S.C. 408. See 26 U.S.C. 410(c) (1) (A) and (B), 411

(e) (1) (A) and (B); see also Feinstein v. Lewis, 477 F. Supp.

1256, 1261 (S.D.N.Y. 1979) (“[p]lans established by state and

local governments are generally excluded from coverage under

ERISA because of concerns of federalism“).

22

§ 4-503 of the Commission Report. That note supports

the view that the drafter thought that interests in qual-

ified plans sponsored by private companies would be par-

tially exempted from the bankruptcy estate. Putting

aside the question whether it would be proper to rewrite

Section 541(c) (2) based upon the explanatory note to

a Commission proposal, there is no reason to impute

the drafter’s intention to Congress because Congress in

fact revised the Commission’s proposal in material

ts.“

ae also notes that a witness at a hearing on the

Commission’s proposal stated that the Commission’s bill

allowed a partial exemption for pension benefits, whereas

ERISA precluded any alienation of pension benefits. Br.

12, quoting Hearings on S. 235 and 236 Before the Sub-

comm. on Improvements in Judicial Machinery of the

Senate Comm. on the Judiciary, 94th Cong., Ist Sess.

664, 678 (1975) (statement of John Creedon of the

American Life Insurance Association). Perhaps that tes-

timony prompted Congress to resolve the conflict be-

tween the Commission’s proposal and ERISA by excluding

pension benefits subject to a mandatory anti-alienation

clause altogether. In any event, as enacted, Section

541(c) (2) and Section 522 (d) (10) (E) are fully com-

patible with each other and with ERISA’s anti-alienation

provision. U

c. The court of appeals properly rejected petitioner's

argument even though it may not have appreciated that

Section 541(c) (2) and Section 522(d) (10) (E) are fully

15 The Commission proposed in § 4-601 (b) to exclude interests

of the debtor “in a trust created for his support.” A pension trust,

which might have been created before a participant was employed

by the sponsoring company, would not normally have been created

for the debtor’s support. Therefore, under the Commission’s pro-

posal, pension benefits would have been subject to partial exemption

but not exclusion. However, Congress deleted “created for his sup-

port” from the Commission’s proposal and broadly excluded property

held “in a trust” in Section 541(c) (2), so the law actually adopted

does exclude pension benefits.

|

„

‘

:

23

compatible. The Bankruptcy Code is not a model of

precise draftsmanship, Dewsnup v. Timm, 112 S. Ct.

773, 778 (1992), and the Code’s exemption provision is

particularly complex. In a recent decision, this Court

refused to depart from the clear language of 28 U.S.C.

158 (d), which governs appellate jurisdiction in bank-

ruptey cases, based upon an overlap between Section

158(d) and 28 U.S.C. 1291, which governs appellate

jurisdiction generally. Connecticut Nat’! Bank v. Ger-

main, No. 90-1791 (Mar. 9, 1992).

In reasoning applicable to this case, the Court said

that because giving effect to both §§ 1291 and 158 (d

would not render one or the other wholly superfluous,

we do not have to read § 158(d) as precluding courts of

appeals, by negative implication, from exercising jurisdic-

tion under § 1291 over district courts sitting in bankruptcy.”

Connecticut Nat’l Bank, slip op. 4-5. Under no reading

of the Bankruptcy Code is either Section 541(c) (2) or

Section 522(d)(10)(E) rendered wholly superfluous,

since there is no dispute that Section 522 (d) (10) (E ex-

empts interests in pension plans that do not qualify for

preferential tax treatment in some circumstances. Accord-

ingly, even a partial overlap between Section 541(c) (2)

and Section 522‘d) (10) (E) would not provide an adequate

basis to read “applicable nonbankruptcy law“ to mean

“state spendthrift trust law.” But as we have explained,

Section 541 (e) (2) and Section 522 (d) (10) (E) are never-

theless entirely compatible.“

1% In this connection, we note that the Third Circuit did not

adequately harmonize Section 541 (c) (2) and Section 522(d) (10) (E)

by reading the latter provision as relating only to distributions from

a pension plan that the debtor has an immediate and present right

to receive. See Velis v. Kardanis, 949 F.2d at 81-82. Even assuming

that Section 522 (d) (10) (E) can be read to protect distributions

only, such a reading does not resolve the present issue. In our view,

Section 541(c) (2) excludes from the bankruptcy estate the debtor’s

interest in a plan containing an anti-alienation clause mandated by

ERISA; once the interest in the plan is excluded, distributions

24

4. If this Court agrees that respondent’s pension ben-

efits are excluded from his bankruptcy estate because the

Pension Plan was subject to ERISA’s anti-alienation rule,

there is no need to consider whether those benefits are

exempt under Section 522(b) (2) (A), which provides an

exemption for “property that is exempt under Federal

law, other than subsection (d) of this section.” But it

is instructive that the district court’s conclusion that

interests in pension plans are not “exempt under Fed-

eral law” rested on the fact that ERISA was not men-

tioned in the legislative history of Section 522(b). Pet.

App. 44a; see S. Rep. No. 989, 95th Cong., 2d Sess. 75

(1978), H.R. Rep. No. 595, 95th Cong., Ist Sess. 360

(1977); see also Lichstrahl, 750 F.2d at 1491; Graham,

726 F.2d at 1274.7 If we are correct that interests in

under the plan are excluded as well and constitute part of the

debtor’s “fresh start” because, with a few exceptions not applicable

in this Chapter 7 case, only interests of the debtor in property as

of “the commencement of the case” go into the bankruptcy estate.

11 U.S.C. 541(a)(1). Thus, since respondent’s interest in the Pen-

sion Plan is not included in his estate under Section 541 (e) (2),

there is no need to exempt distributions under the Plan that occurred

after the filing of his bankruptcy petition.

Even in Chapters 12 and 13, where property of the estate includes

property received by the debtor during the pendency of the case,

Section 522(d)(10)(E) would not be necessary to protect distribu-

tions. Debtors in Chapters 12 and 13 are required only to commit

their “disposable income,” ie, amounts in excess of that which is

“reasonably necessary * * * for the maintenance or support of the

debtor or a dependent of the debtor,” 11 U.S.C. 1225(b), 1325(b),

and Section 522(d)(10)(E) by its terms provides an exemption

only “to the extent reasonably necessary for the support of the

debtor and any dependent of the debtor.”

17 As an example of the sort of property that is “exempt under

Federal law” other than Section 522(d), the reports mentioned

homestead land protected by 43 U.S.C. 175 (1976), which provided

that In ſo lands acquired under the provisions of the homestead

laws * * * shall in any event become liable to the satisfaction of

any debt contracted prior to the issuing of the patent therefor.”

The other examples provided in the legislative history of Section

522 include some types of benefits that are protected by strong anti-

plans subject to ERISA’s anti-alienation provision gener-

ally are excluded from the bankruptcy estate, there was

simply no pressing need to list ERISA in the legislative

history of Section 522. On the other hand, if we are

wrong about the meaning of Section 541 (e) (2), Con-

gress’s failure to mention ERISA in the legislative his-

tory of Section 522 still does not provide an adequate

basis to conclude that ERISA is not “Federal law.”

ERISA most definitely is a federal law. In re Komet,

104 B.R. 799, 808 (Bankr. W.D. Tex. 1989).

C. Excluding Respondent’s Pension Benefits From His

Bankruptcy Estate Harmonizes ERISA And The

Bankruptcy Code

As the court of appeals stated, Pet. App. 16a, citing

Morton v. Mancari, 417 U.S. 535 (1974), coordinate

federal statutes should be read in harmony whenever

possible. Indeed, when two federal statutes are capable

of co-existence, it is the affirmative duty of the courts,

absent clear direction to the contrary, to interpret the

statutes So as to give effect to both. Id. at 551. Apply-

ing Bankruptcy Code Section 541(c) (2) according to its

terms (and, thus, to exclude from the bankruptcy estate

a debtor’s interest in a pension plan that contains an

anti-alienation clause mandated by ERISA) avoids a

significant inroad on Congress’s goal, manifest in Section

206(d) (1) of ERISA, of preserving retirement benefits

from the demands of a participant’s creditors. Thus,

the court of appeals’ decision in this case interprets

alienation provisions, such as the provision ibiti -

ation of benefits payable under the — — be

Compensation Act, 33 U.S.C. 916. However, although such benefits

are protected by an anti-alienation provision, they are not held in

trust, and would not be excluded from the bankruptcy estate pursu-

ant to Section 541(c) (2) under our interpretation of that provision

because it applies only to benefits held “in a trust.”

ERISA’s anti-alienation provision and the Bankruptcy

Code in a manner that gives effect to both.“

On the other hand, petitioner’s interpretation of Bank-

ruptey Code Section 541(c)(2) would nullify ERISA’s

anti-alienation provisions in situations where a pension

plan did not meet state law requirements for a spend-

thrift trust. Petitioner’s interpretation thus leads to the

incongruous result that pension benefits subject to

ERISA’s anti-alienation rule are fully protected from

creditors until the filing of a bankruptcy petition in fed-

eral court, at which time their protection becomes de-

pendent on state law. See John Hancock Mutual Life

Insurance Co. v. Watson (In re Kincaid), 917 F.2d

1162, 1169-1170 (9th Cir. 1990) (Fletcher, J. con-

curring). Petitioner's interpretation thus creates an

incentive for creditors to force debtors into involuntary

bankruptcy proceedings in order to reach pension funds

that otherwise would be protected. See In re Moore, 907

F.2d at 1480; Gladwell, 950 F.2d at 675. Furthermore,

because petitioner’s interpretation makes the application

of ERISA’s anti-alienation provision dependent on state

law, it is contrary to ERISA’s broader purpose of ensur-

ing uniform treatment of pension plans throughout the

country. See Fort Halifax Packing Co. v. Coyne, 482

U.S. 1, 9 (1987).

An interpretation of one federal statute that so under-

cuts another is to be avoided, unless that is the clear

intent of Congress. Such intent is not evident here, either

in the Bankruptcy Code or in ERISA. By contrast, the

natural reading of Section 541 /e) (2) endorsed by the

18 Contrary to petitioner’s suggestion, Br. 15, 16, 20, 42-46,

ERISA’s preemption provision affords little guidance with respect

to the proper resolution of the question presented in this case.

Section 514(d) of ERISA, 29 U.S.C. 1144(d), provides that Injoth-

ing in this [Act] shall be construed to alter, amend, invalidate,

impair, or supersede any law of the United States.” But that merely

begs the question: if “applicable nonbankruptcy law” includes

ERISA, then ERISA does not interfere with the Bankruptcy Code.

—ͤ— a

27

court of appeals in this case avoids differential treatment

of participants in pension plans containing the anti-alien-

ation clause mandated by ERISA and gives force to such

clauses.

As a frequent creditor in bankrup roceedings, the

United States is not unmindful of ~~ — Ag

ness of discharging debtors from their obligations while

allowing the debtors to retain substantial assets.“ How-

ever, this Court has already declined, under more com-

pelling circumstances than those presented by the filing

of a petition in bankruptcy, to carve out an equitable

exception to ERISA’s anti-alienation provision. See

Guidry, 493 U.S. at 376. As this Court recognized, the

imposition of safeguards against potential abuse of the

bankruptey forum is a task more properly undertaken

directly by Congress.“

It is possible for a debtor to build up a substantial interest in

a pension plan that is subject to ERISA. However, it is not ible

for a debtor quickly to transfer substantial assets into a —

plan — — of bankruptcy because ERISA restricts the

amounts that may be contributed annually to an individual’s

See, e. g., 26 U.S.C. 41800 (1). *

At present, several bills have been introduced to clarify this

question. E.g., S. 1985, 102d Cong., 2d Sess. § 202 (1992) (adding

a third paragraph to Section 541(c) explicitly excluding from the

estate “any rights of debtor” to various qualified plans).

CONCLUSION

The judgment of the court of appeals should be affirmed.

Respectfully submitted.

KENNETH W. STARR

APRIL 1992

APPENDIX

11 U.S.C. 522 provides in pertinent part:

(b) Notwithstanding section 541 of this title, an

individual debtor may exempt from property of the

estate

(2)(A) any property that is exempt under

Federal law, other than subsection (d) of this

section, or State or local law that is applicable

on the date of the filing of the petition at the

place in which the debtor’s domicile has been

located for the 180 days imediately preceding

the date of the filing of the petition, or for a

longer portion of such 180-day period than in

any other place * * *.

d) The following property may be exempted un-

der subsection (b) (1) of this section:

8 * * * e

(10) The debtor’s right to receive—

(E) a payment under a stock bonus, pen-

sion, profitsharing, annuity, or similar plan

or contract on account of illness, disability,

death, age, or length of service, to the extent

reasonably necessary for the support of the

debtor and any dependent of the debtor,

unless—

(i) such plan or contract was estab-

lished by or under the auspices of an

insider that employed the debtor at the

time the debtor’s rights under such

plan or contract arose;

(la)

2a

(ii) such payment is on account of

age or length of service; and

(iii) such plan or contract does not

qualify under section 401(a), 403 (a),

403(b), 408, or 409 of the Internal

Revenue Code of 1954 (26 U.S.C.

401(a), 403(a), 403(b), 408, or 409).

11 U.S.C. 541 (e) (2) provides:

A restriction on the transfer of a beneficial inter-

est of the debtor in a trust that is enforceable under

applicable nonbankruptcy law is enforceable in a case

under this title.

26 U.S.C. 401 (a) (13) provides in pertinent part:

Assignment and alienation.—

(A) In general.—A trust shall not consti-

tute a qualified trust under this section unless

the plan of which such trust is a part provides

that benefits provided under the plan may not

be assigned or alienated. For purposes of the

preceding sentence, there shall not be taken into

account any voluntary and revocable assignment

of not to exceed 10 percent of any benefit pay-

ment made by any participant who is receiving

benefits under the plan unless the assignment

or alienation is made for purposes of defraying

plan administration costs. For purposes of this

paragraph a loan made to a participant or bene-

ficiary shall not be treated as an assignment or

alienation if such loan is secured by the partici-

pant’s accrued nonforfeitable benefit and is ex-

empt from the tax imposed by section 4975

(relating to tax on prohibited transactions) by

reason of section 4975 (d) (1). This paragraph

shall take effect on January 1, 1976 and shall

not apply to assignments which were irrevocable

on September 2, 1974.

3a

a (B) Special rules for domestic relations

orders.—Subparagraph (A) shall apply to the

creation, assignment, or recognition of a right

to any benefit payable with respect to a partici-

pant pursuant to a domestic relations order,

except that subparagraph (A) shall not apply

if the order is determined to be a qualified do-

mestic relations order.

29 U.S.C. 1003(b) provides in pertinent part:

The provisions of this subchapter shall not apply

to any employee benefit plan if—

(1) such plan is a governmental plan (as de-

fined in section 1002(32) of this title) ;

(2) such plan is a church plan (as defined in

section 1002(33) of this title) with respect to

which no election has been made under section

410 (d) of Title 26 * * *.

29 U.S.C. 1051 provides in pertinent part:

* * * * *

This part shall apply to any employee benefit plan

described in section 1003(a) of this title (and not

ee under section 1003(b) of this title) other

than—

* * * * *

(6) an individual retirement account or an-

nuity described in section 408 of Title 26, or a

retirement bond described in section 409 of

Title 26 (as effective for obligations issued be-

fore January 1, 1984) * *.

29 U.S.C. 1056(d) provides in pertinent part:

(1) Each pension plan shall provide that benefits

provided under the plan may not be assigned or

alienated.

(2) For the purposes of paragraph (1) of this

subsection, there shall not be taken into account any

4a

voluntary and revocable assignment of not to exceed

10 percent of any benefit payment, or of any irre-

vocable assignment or alienation of benefits executed

before September 2, 1974. The preceeding sentence

shall not apply to any assignment or alienation made

for the purposes of defraying plan administration

costs. For purposes of this paragraph a loan made

to a participant or beneficiary shall not be treated

as an assignment or alienation if such loan is secured

by the participant’s accrued nonforfeitable benefit

and is exempt from the tax imposed by section 4975

of Title 26 (relating to tax on prohibited transac-

tions) by reason of section 4975(d) (1) of Title 26.

(3) (A) Paragraph (1) shall apply to the creation,

assignment, or recognition of a right to any benefit

payable with respect to a participant pursuant to a

domestic relations order, except that paragraph (1)

shall not apply if the order is determined to be a

qualified domestic relations order. Each pension plan

shall provide for the payment of benefits in accord-

ance with the applicable requirements of any quali-

fied domestic relations order.

26 C. F. R. 1.401 (a)-13 provides in pertinent part:

(a) Scope of the regulations. This section applies

only to plans to which section 411 applies without

regard to section 411 e) (2). Thus, for example, it

does not apply to a governmental plan, within the

meaning of section 414(d); a church plan, within

the meaning of section 414(e), for which there has

not been made the election under section 410(a) to

have the participation, vesting, funding, ete. re

quirements apply; or a plan which at no time after

September 2, 1974, provided for employer contribu-

tions.

(b) No assignment or alienation—(1) General

rule. Under section 401(a) (13), a trust will not be

qualified unless the plan of which the trust is a

— —

—

—ä—— —— —äↃ— —

5a

part provides that benefits provided under the plan

may not be anticipated, assigned (either at law or

in equity), alienated or subject to attachment, gar-

nishment, levy, execution or other legal or equitable

process.

. „ „. GOVERNMENT lie OFrice, 1992 312324 45393