# Amicus Curiae Brief — Patterson v. Shumate

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0223%3A17

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1992
- **Citation:** 504 U.S. 753

## Text

X14

& 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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0223%3A17. Public record. Not legal advice.