Amicus Curiae Brief — Patterson v. Shumate

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& v No. 91-513

rs & Z

In the Supreme Court of the United States

OcTOBER TERM, 199]

JOHN R. PATTERSON,

Petitioner,

v.

JoseEPH B. SHUMATE, Jr..

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Fourth Circuit

MOTION FOR LEAVE TO FILE AND

BRIEF OF LINCOLN NATIONAL CORPORATION

AS AMICUS CURIAE SUPPORTING RESPONDENT

BRIAN J. MARTIN

(Counsel of Record)

MICHAEL ROSIELLO

of

BARNES & THORNBURG

1313 Merchants Bank Building

11 South Meridian Sireet

Indianapolis, Indiana 46204

Telephone: (317) 638-1313

Attorneys for

Lincoln National Corporation

QUESTION PRESENTED

Whether the anti-alienation provisions of the Employee

Retirement Security Act of 1974 (ERISA) constitute “‘appli-

cable nonbankruptcy law” within the meaning of Section

541(c)(2) of the Bankruptcy Code (11 U.S.C.) so that a

bankruptcy trustee may not acquire a debtor’s assets in an

ERISA plan that could not be reached by creditors outside of

bankruptcy.

il

In the Supreme Court of the United States

OCTOBER TERM, 1991

No. 91-913

JOHN R. PATTERSON.

Petitioner.

Vv.

JOSEPH B. SHUMATE, JR.,

Respondent.

On Writ of Certiorari

to the United States Court of Appeals

for the Fourth Circuit

MOTION FOR LEAVE TO FILE BRIEF

AS AMICUS CURIAE SUPPORTING RESPONDENT

Lincoln National Corporation moves this Court for an order

granting Lincoln National leave to file its Brief as Amicus

Curiae Supporting Respondent. Respondent (the debtor) has

consented to Lincoln National’s filing, but petitioner (the

trustee in bankruptcy) has not. In support of this motion,

Lincoln National states:

iil

1. This case presents an issue of great importance to

Lincoln National -- i.e., whether the anti-alienation provisions

of the Employee Retirement Security Act of 1974 (ERISA)

constitute “applicable nonbankruptcy law” within the meaning

of Section 541(c)(2) of the Bankruptcy Code (11 U.S.C.) so that

a bankruptcy trustee may not acquire a debtor’s assets in an

ERISA plan that could not be reached by creditors outside of

bankruptcy.

2. Lincoln National Corporation sponsors an ERISA

Savings and retirement program for its employees -- the Lincoln

National Corporation Employee Profit & Savings Plan. The

Lincoln National Plan has more than 8,400 participants. The

Lincoln National Plan is qualified under Section 401 of the

Internal Revenue Code and contains the anti-alienation

provisions mandated by ERISA, the Internal Revenue Code,

and IRS regulations.

3. From time to time, bankruptcy trustees have attempted

to reach assets held by the Lincoln National Plan. Currently,

the Lincoln National Plan is a defendant-appellant in three

adversary proceedings in the United States District Court for

the Northern District of Indiana. In those cases, the bankruptcy

court ordered the Lincoln National Plan to disregard the terms

of its Plan and to turn over ERISA trust funds to the bankruptcy

trustee. The Lincoln National Plan has appealed those orders

to the district court. The Court’s decision in this case very likely

will determine the outcome of those pending cases.

4. Lincoln National’s main interest is to ensure that this

Court follows the plain terms of the Bankruptcy Code so that

the access restrictions in its profit and savings plan are governed

exclusively by federal law -- i.e., ERISA and the Internal

Revenue Code. If petitioner's argument were accepted by this

Court -- so that the Bankruptcy Code would only respect state

iv

spendthrift-trust laws -- then Lincoln National would be obliged

to draft its Plan in accordance with the varied laws of many

different States. And Lincoln National could never be sure that

its Plan S aCCess restrictions would be upheld by the various

States laws. That is important because the Internal Revenue

Service has threatened a loss of tax-qualification status to

ERISA plans that tur over funds to bankruptcy trustees

Lincoln National, of course, has a strong interest in avoiding

such a result so as to protect the i

1a nterests of its thousands

participants. =

| 5. We believe that Lincoln National’s amicus curiae brief

will assist the Court in at least two ways. First, the Court’s

decision in this case will likely affect all ERISA pension and

profit and savings plans. The particular plan at issue in this case

however, does not resemble many ERISA pension plans. In this

case, respondent largely controlled the plan and was its prin-

cipal participant. Accordingly, Lincoln National can aid the

my presenting the Perspective of a different kind of

: “qualified plan -- Lea large pension plan not controlled

y any Participant and with thousands of employee participants

across the nation. In short, Lincoln National can speak from

courts have thought that the Practice under the old Bankru tc

Act is relevant to a proper interpretation of the new sat

Code. Petitioner also makes that argument in his brief. Our

amicus brief will be helpful on that point because Lincoln

National has researched the old practice and has discovered

material that no court has yet addressed.

y Vi

Wherefore, Lincoln National asks this Court to grant it leave TABLE OF CONTENTS

to file its amicus curiae brief supporting respondent.

Page

Respectfully submitted,

Interestof AmicusCuriae .......,,~0~0~2~~C«C«” l

BRIAN NJ. ee) Statement and Summary of Argument .......... 2

ou

MICHAEL ROSIELLO SION O 5 ts CAwie ds bee wc ee ek 4

of NO ck ces ec eccccccnce... Y

Barnes& Thomburg

+3 a ae TABLE OF AUTHORITIES

indianapolis. IN 46204 . Cases

Telephone: (317) 638-131 Burlington Northern R.R. y. Oklahoma Tax Comm'n.

Attomeys for . 481 U.S. 454(1987) ... 0. 5

Lincoln National Corporation Davis v. Michigan Department of Treasury,

489 U.S. 803 (1989)... 4

Gladwell v. Harline, 950 F.2d 669 (10th Cir. 1991) .. 3.8

Guidry v. Sheet Metal Workers National

Pension Fund, 110 S. Ct. 680 Ee 8,9

Ingersoll-Rand Co. y. McClendon,

111S.Ct.478(1990) 2... 7

In re Ahlswede, 516 F.2d 784 (9th Cir.),

cert. denied, 423 U.S. 913 (a 6

In re Denison, 38 F.2d 662 (W.D. Okl. 1930) .. . 6

In re Goff. 706 F.2d 574 (Sth Cir. 1983) .. 2... 4,5

In re Lucas, 924 F.2d §97 (6th Cir.),

cert. denied, 111 S. Ct. 2275 eee 3

Taylor v. Tayrien, 51 F.2d 884 (10th Cir. 1931)... . 6

Velis v. Kardanis, 949 F.2d 78 (3d Cir.1991) . 3,8

Vii

Page

Statutes ,

11 U.S.C. 522(d OME) . 2. eee ee ee tes ,

11 U.S.C. 541(c)(2) ww we ee : | : | : | : | | Bice

Sako. au padre aceasta as .

, OR toe)! i

Other Authorities

6

4A Collier on Bankruptcy § 70.26 (14th ed. 1978).

H.R. Rep. No. 95-595, 95th Cong.. -

Id Sess. 176(1977) . 2... 5-2 eee eee ees

4 L. King, Collier on Bankruptcy § 541 04 ?

Th 8.)

Jn the Supreme Court of the United States

OCTOBER TERM, 199]

No. 91-913

JOHN R. PATTERSON.

Petitioner.

v.

JOSEPH B. SHUMATE. JR.

Respondent.

On Writ of Certiorari

to the United States Court of Appeals

for the Fourth Circuit

BRIEF OF LINCOLN NATIONAL CORPORATION

AS AMICUS CURIAE SUPPORTING RFSPONDENT

INTEREST OF AMICUS CURIAE

Lincoln National Corporation sponsors an ERISA savings

and retirement program for its employees -- the Lincoln

National Corporation Employee Profit & Savings Plan. The

Lincoln National Plan has more than 8,400 participants. The

Lincoln National Plan is qualified under Section 401 of the

Internal Revenue Code and contains the anti-alienation

provisions mandated by ERISA, the Internal Revenue Code,

and {RS regulations. From time to time, bankruptcy trustees

have attempted to reach assets held by the Lincoln National

Plan. Currently, the Lincoln National Plan is a defendant-

appellant in three adversary proceedings in the United States

District Court for the Northern District of Indiana. In those

cases, the bankruptcy court ordered the Lincoln National Plan

to disregard the terms of its Plan and to turn over ERISA trust

funds to the bankruptcy trustee. Lincoln has appealed those

orders to the district court.

Lincoln National’s primary interest in this case is to ensure

that this Court follows the plain terms of the Bankruptcy Code

so that the access restrictions in its pension plan are governed

exclusively by federal law -- ie., ERISA and the Internal

Revenue Code. That result will allow the Lincoln National Plan

to look to one uniform body of law as the Plan drafts rules

governing a participant’s access to trust funds.

STATEMENT AND SUMMARY OF ARGUMENT

|. Petitioner, a bankruptcy trustee, seeks to recover as part

of the bankruptcy estate the debtor's vested interest in a

qualified ERISA pension plan. That plan, as required by

ERISA and the Internal Revenue Code, has “non-alienation

provision{s]” that “‘prevent both voluntary and involuntary

encroachments on vested benefits.” 943 F.2d 362, 364 (4th

Cir. 1991) (citation omitted). Petitioner claims that those anti-

alienation provisions are not valid in bankruptcy. The merit of

petitioner’s claim depends on the proper interpretation of Sec-

tion 541(c)(2) of the Bankruptcy Code. Section 541(c)(2)

provides that “[a] restriction on the transfer of a beneficial

interest of the debtor in trust that is enforceable under applicable

nonbankruptcy law is enforceable in a case under” the

Bankruptcy Code.

: The district court agreed with petitioner that

applicable nonbankruptcy law” in Section Foose rho

only state laws governing so-called spendthrift trusts. 943 F.2d

at 363. The district court then held that the plan in this case did

not qualify as a spendthrift trust under Virginia law; therefore

the court ruled that the plan’s anti-alienation provisions were

invalid in bankruptcy. Accordingly, the district court held that

the debtor’s funds in the ERISA

lan

bankruptcy estate. /bid. ae

2. The court of appeals reversed. The court w "

plain language” of Section 541(c)(2) is “not eee ha

but” also “embrace[s] federal Statutes, including ERISA.”

943 F.2d at 363-64. The Fourth Circuit, therefore, ruled that

the anti-alienation provisions of ERISA qualify as “applicable

nonbankruptcy law.”” Hence, the court of appeals held that the

debtor’s interest in a qualified ERISA i

prac Wotan pension plan was not part

| 3. The Fourth Circuit's decision is correct. The last four

circuits to consider the issue have agreed that the plain meanin

of the phrase “applicable nonbankruptcy law” is broad enou h

to encompass federal statutes such as ERISA. See >

Gladwell v. Harline, 950 F.2d 669 (10th Cir. 1991): Velis v.

Kardanis, 949 F.2d 78 (3d Cir. 1991): In re Lucas 924 F 24

597 (6th Cir.), cert. denied, 111 S.Ct. 2275 (1991) In any event

the legislative history of Section 541(c)(2) plainly supports that

natural reading of the statute. Furthermore, the court of

appeals’ decision has the virtues of: (1) reconciling the

Bankruptcy Code with ERISA, and (2) making the drafting of

ERISA pension plans exclusively a matter of federal law. For

all those reasons, the Fourth Circuit’ isi

affirmed. uit's decision should be

ARGUMENT

|. We agree with the Fourth Circuit that this is a “plain

meaning” case. The meaning of “applicable nonbankruptcy

law” in Section 541(c)(2) is evident. If, outside of bankruptcy

proceedings, a debtor and his creditors could not reach the

debtor’s funds held in trust (i.e., under “nonbankruptcy law”),

then the bankruptcy estate does not include the debtor’s interest

in such trust funds. In adopting the Bankruptcy Code, Congress

did not attempt to micro-manage the area of trust law by setting

forth the types of trust laws that qualify as “nonbankruptcy

law.” Rather, Congress used the sweeping phrase “non-

bankruptcy law,” which is broad enough to include both federal

statutes and state laws that enforce access restrictions in trust

instruments.

This case likely would never have reached this Court but

for the Fifth Circuit's decision in Jn re Goff, 706 F.2d 574 (Sth

Cir. 1983), on which petitioner relies. In that case, the court

held that the phrase “applicable nonbankruptcy law” in Section

§41(c)(2) did not include federal law -- in particular ERISA.

The In re Goff court did not ask whether Section 541(c)(2) has

a facially plain meaning. See 706 F.2d at 581. Instead, after

noting that Section 541(c)(2) is “facially broad” (ibid.), the Jn

re Goff court went directly to the statute’s legislative history.

And the court ruled that the statute’s legislative history showed

that “Congress intended by its reference to ‘applicable non-

bankruptcy law’ to exempt from the estate only those

‘spendthrift trusts’ traditionally beyond the reach of creditors

under state law.” 706 F.2d at 582.

In light of more recent decisions of this Court, it is clear that

the Jn re Goff court’s method of statutory interpretation was

incorrect. As the Court stated in Davis v. Michigan Department

of Treasury, 489 U.S. 803 (1989), “{Ijegislative history is

irrelevant to the interpretation of an unambiguous statute.” /d

at 808 n.3. In other words, “{jJudicial inquiry is complete”

when the court finds “the terms of a statute unambiguous.”

Burlington Northern R.R. v. Oklahoma Tax Comm'n. 48} US

454, 461 (1987) (citation omitted). And, in this case, the phrase

“applicable nonbankruptcy law” in Section 541

u

includes both federal and state laws. nambiguously

2. Inany event, the legislative histo

» th ry of Section 541(c)(2)

Supports the Fourth Circuit’s decision. The House of Repre-

a committee report pertaining to Section 541(c)(2)

The bill also 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. The bankruptcy of the beneficiary

should not be permitted to defeat the legitimate expec-

tations of the settlor of the trust.

H.R. Rep. No. 95-595, 95th Cong., 2d Sess. 176 (1977). This

passage undoubtedly shows that Congress intended that state

awe governing spendthrift trusts would fall within the Category

of applicable nonbankruptcy law.” But there is no indication

in the report that Congress thought that the phrase “applicable

nonbankruptcy” law included only such state laws. The com-

mittee report simply does not attempt to list all the types of

restrictions on tr

trust funds. ansfers of

Indeed, the principle announced in the House committee

report is wholly consistent with the natural meaning of the

statutory language -- i.e., the Bankruptcy Code respects both

federal and state laws upholding restrictions on the transfer of

trust funds. The report's basic principle, on which the Jn re Goff

court relied (706 F.2d at 582), is that Congress wanted to

“continue[] over” the prior bankruptcy law regarding assets

held in trusts. H.R. Rep. No. 95-595, at 176. Petitioner incor-

rectly assumes (Br. 39-42), however, that the old Bankruptcy

Act only incorporated state spendthrift-trust laws.

To be sure, before the passage of ERISA, state law most

commonly governed the question whether trust assets could be

alienated. See, e.g., In re Ahlswede, 516 F.2d 784, 786 (9th

Cir.), cert. denied, 423 U.S. 913 (1975). Under the -

Bankruptcy Act, however, the courts also looked to federa

statutes regarding alienability in cases “where the trust is one

created and controlled by federal law.” 4A Collier on

Bankruptcy § 70.26, at 365-66 (14th ed. 1978). For example,

the courts ruled that federal law prohibited alienation of certain

assets held in trust for Indians and, therefore, those assets did

not become a part of the bankruptcy estate. See Taylor v.

Tayrien, 51 F.2d 884 (10th Cir. 1931); In re Denison, 38 F.2d

662 (W.D. Okl. 1930). Accordingly, if the House report con-

firms that Congress wanted Section 541(c)(2) to continue prior

practice (as petitioner argues), it still follows that the new

Bankruptcy Code incorporates both state and federal statutes

that protect trust assets from the reach of creditors.

3. At bottom, petitioner is advancing an incredible claim

of congressional intent. In 1974, Congress made oe

aspects of trust law a matter of federal law when it passe

ERISA, including its anti-alienation provisions. ERISA

governs pension plans, which are trusts administered for the

benefit of employees. In adopting ERISA, Congress preempted

state law and made federal law the exclusive body of law

governing such trusts. See 29 U.S.C. 1144(a). Four years later,

Congress passed Section 541(c)(2) of the Bankruptcy Code.

When Congress passed the Bankruptcy Code in 1978, it is

incredible to believe that Congress implictly undermined the

ERISA statute that it had so recently enacted.

Moreover, petitioner’s view of congressional intent (if ac-

cepted) would effectively require sponsors of ERISA pension

plans to draft plans to meet the vagaries of each state’s

spendthrift- trust laws. But Congress adopted ERISA precisely

to avoid such state-by-state regulation of pension plans. As this

Court stated in Ingersoll-Rand Co. v. McClendon, 111 S. Ct.

478 (1990), the goal of ERISA was “to ensure that plans and

plan sponsors would be subject to a uniform body of [federal]

law; the goal was to minimize the administrative and financial

burden of complying with conflicting directives among States

or between States and the Federal Government.” Jd. at 484. It

makes no sense, therefore, to believe that Congress used the

broad phrase “nonbankruptcy law” in Section 541(c)(2) to

include state laws pertaining to trusts but to exclude Congress’ s

own highly significant statute -- ERISA.

4. It is important for the Court to keep in mind that this

type of case cannot be resolved simply by noting that it involves

an ERISA plan. The key question is whether the debtor’s funds

held in trust were restricted from alienation under the terms of

the trust instrument on the date the debtor filed his bankruptcy

petition. ! If the funds were so restricted, then Section 54] (c)(2)

asks whether those restrictions are valid under state or federal

laws, including ERISA. By contrast, if the debtor has a present

right to withdrawal the funds, or the present right to receive

‘Under the Bankruptcy Code, “the critical time as of which the

property comprising the estate is to be determined . . . is the date upon

which the petition is filed.” 4 L. King, Collier on Bankruptcy

§ 541.04, at 541-22 (15th ed. 1991).

income, then Section 541(c)(2) and ERISA would not create a

restriction on alienation that does not otherwise exist.

This explains why petitioner is mistaken in asserting

(Br. 25-29) that Section 541(c)(2) cannot encompass ERISA

because that would render meaningless the exemption in Sec-

tion 522(d)(10)(E). Section 522 applies in a case where an

ERISA pension-plan participant has a present right to funds

held in the plan (e.g., the participant is in “pay status”). Such

funds would not be excluded by the terms of the ERISA plan

or by Section 541(c)(2); therefore, Section 522(d)(10)(E) is

needed to provide a limited exemption for reasonable support

of the debtor and his family. See Gladwell v. Harline, 950 F.2d

at 675; Velis v. Kardanis, 949 F.2d at 82.

5. Petitioner argues (Br. 55-58) that the Fourth Circuit's

reading of the pertinent statutes is so unfair that this Court

should create an “equitable exception” to those laws. But

Section 541(c)(2) of the Bankruptcy Code was expressly

designed to keep certain assets of the debtor held in trust from

the reach of creditors. Similarly, as this Court noted in Guidry

v. Sheet Metal Workers National Pension Fund, 110 S. Ct. 680

(1990), the anti-alienation provisions in ERISA were enacted

to protect pension plan assets from creditors. The Court in

Guidry stated that the anti-alienation provisions of ERISA

represent a “considered congressional policy choice” that

necessarily “hinder[s] the collection of a lawful debt.” 110 S.

Ct. at 687. Congress made that policy decision as part of its

effort “to safeguard an income stream 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.” /bid. Congress was willing to accept that

consequence in order to protect a pensioner’s retirement

income, and that policy choice applies equally in all situations

including bankruptcy. Accordingly,

ree to Create exceptions to the anti-alienation provisions; “[i}f

exceptions to this policy are to be made. it i

, itis for C

undertake that task.” Guidry, 110 S. Ct. at 687. -_

the courts are not now

CONCLUSION

The judgment of the court of appeals should be affirmed

Respectfully submitted,

BRIAN J. MARTIN

(Counsel of Record)

MICHAEL ROSIELLO

of

1313 Meche

erchants Bank Buil

1] South Meridian Sweet =e

Indianapolis, IN 46204

Telephone: (317) 638-1313

Attorneys for

April 1992 Lincoln National Corporation