Opposition Brief — Raymond B. Yates, MD, PC Profit Sharing Plan v. Hendon

OCT 21 2002

No. 02-458

IN THE

Supreme Court of the Unii.u States

RAYMOND B. YATES, M.D., P.C., Profit Sharing Plan;

RAYMOND B. YATES, Trustee,

Petitioners,

v.

WILLIAM T. HENDON, Trustee,

Respondent.

On PETITION FOR A Writ oF CERTIORARI TO THE

Unitep States Court OF APPEALS FOR THE SIXTH CIRCUIT

BRIEF IN OPPOSITION

JOHN A. WALKER, JR. C. MARK TROUTMAN

Counsel of Record TROUTMAN & TROUTMAN, P.C.

WALKER & Waker, P.C. 240 West Central Avenue

910 First American Center Suite 10

P.O. Box 2774 P.O. Box 1757

Knoxville, TN 37901 LaFollette, TN 37766

(865) 523-0700 (423) 566-6001

Attorneys for Respondent

176916 cr

COUNSEL PRESS

(R00) 274-3321 © (SOO) 359-6859

QUESTION PRESENTED

The question presented for review is whether the

bankruptcy court correctly held that the Respondent, the

Trustee in the bankruptcy case, may avoid and recover a

preferential transfer under Sections 547 and 550 of the

Bankruptcy Code (11 U.S.C. §§ 547 and 550) from the

Defendants/Petitioners. The Defendants/Petitioners, the

pension plan and its trustee, are the recipients of the transfer.

The debtor, in his individual capacity as a bankruptcy debtor,

is not a party to these proceedings.

il

TABLE OF CONTENTS

Page

Question Presented .......................... i

Table of Contents ......:ss.0sseceesn une il

Table of Cited Authorities ..................... ili

Statement of the Case ........................ l

MreGnetOR ... 555s a snessssnneee l

A. The holding of the Sixth Circuit Court of

Appeals Yates does not conflict with the

decision of this Court in Nationwide Mutual

Ins. Co. v. Darden, 503 U.S. 318, 112 S. Ct.

1344, 117 L. Ed. 581 (SUGE scaceeeeee 2

B. The holding of the Sixth Circuit Court of

Appeals Yates is not in conflict with the

decisions of “nine other circuit courts” and

does not lead to conflicting results. ....... 4

C. The holding of the Sixth Circuit Court of

Appeals in Yates does not conflict with

BREBA, 2... 00500005555 7

D. The result of Yates can be affirmed on other

POUNER. 66 0 0v ec ncune enn 9

Conclusion ......5++.505005se000nenneenee 10

ten PS

IE it lg ag

il

TABLE OF CITEDAUTHORITIES

Page

Cases:

Agrawal v. Paul Revere Life Insurance Co., 205 F.3d ;

297 (6th Cir. 2000) ..... 6... cece eres

Fugarino v. Hartford Life and Accident Ins. Co., 7

969 F.2d 178 (6th Cir. 1992) .. 2.2... e eee eees :

Gilbert v. Alta Health & Life Ins. Co., 276 F.3d we ,

(11th Cir. 2001) 2.02... cece

i 6

In re Baker, 114 F.3d 636 (7th Cir. 1997) ........

Laventure v. Prudential Ins. Co. of America, 237 F.3d ,

1042 (9th Cir. 1998) ... 0.2... cece

| Southwest

e v. Central State Southeast and !

va Health and Welfare and Pension —

(In re Ottawa Carthage, Inc.), 55 B.R. 3

(D.C.N.D. Ill. 1985) .... 6.66 cee eee eee ees

Leckey v. Stefano, 263 F.3d 267 (3d Cir. 2001) ....

Madonia v. Blue Cross & Blue Shield of Virginia,

11 F.3d 444 (4th Cir. 1999) .... 2... eee eens

rden, 503 U.S. 318,

tionwide Mutual Ins. Co. v. Da ‘

nT Ct. 1344, 117 L. Ed. 581 (1992) ...... 2,3,4,7

iv

Cited Authorities

Page

Pulaski Highway Express, Inc. v. Central State

Southeast and Southwest Areas Health and

Welfare and Pension Funds, (In re Pulaski

Highway Express, Inc.), 41 B.R. 305 (M.D. Tenn.

SED bececoeesovessecteseundsasessesenes 9

Simpa v. Mass. Cass. Ins. Co., 256 F.3d 1006

DDG SD 9648 560eeenecedsnnenseooees 5

Slamen v. Paul Revere Life Ins. Co., 166 F.3d 1102

SID DEED eeccndnvecoucéocsédanccese: 5

Vega v. Nat. Life Ins. Services, Inc., 188 F.3d 287

Soe aD SUED cdecceccoccasessonéseennsses 6

Watson v. Proctor, (In re Watson), 161 F.3d 593

ees GES oceeceocaseadeséunsedsudas 3, 6, 7,8

Wolk v. Unum Life ins. of America, 186 F.3d 352

ee en ee eee 5

Statutes:

Se WO NED scncccecentssvccdccbiasenwads |

BD Ce UE She dddcdctccdescesnasecenanet i, 1

Se ee ee SUED 4644.00060000e00enenceunss 9

SO C.Fae GSO ODED ccccccccccvcescseces 4,6,7

Vv

Cited Authorities

Page

Other Authority:

Norton Bankruptcy Law and Practice, Second Ed.,

Postion B9G12 ...ccccccccccescccccccessess 9

l

STATEMENT OF THE CASE

Introduction

Respondent, William T. Hendon, Trustee, respectfully

submits that the Petition for Writ of Certiorari file by the

Petitioners do not present compelling reasons justifying

review by this Court.

Respondent filed this action seeking to avoid and recover

a preferential transfer under Sections 547 and 550 of the

Bankruptcy Code (11 U.S.C. §§ 547 and 550) from the

Defendants/Petitioners. (Appendix page 23). The bankruptcy

debtor was not sued in his individual capacity and the

Respondent has not sought in this adversary proceeding to

recover from the debtor his interest in the pension plan. The

Respondent has simply filed a preference action directly

against the pension plan for debt re-payments it received

within 90 days of the debtor filing for bankruptcy relief.

The only defense raised by the Petitioners on appeal has

related to the claim that the funds were excluded from the

debtor’s bankruptcy estate, alleging that such funds were in

an ERISA-qualified plan. Again, the Respondent is not

directly pursuing in this adversary matter a claim againsi the

debtor. Affirming the rulings of the lower courts, the United

States Court of Appeals for the Sixth Circuit held that the

plan was not an ERISA-qualified plan as to the debtor.

Hendon v. Yates (In re Yates), 287 F.3d 521 (6th Cir. 2002),

reh'g denied, 2002 U.S. App. LEXIS 12550 (6th Cir. June

20, 2002).

In support of their Petition for Writ of Certiorari, the

Appellants assert that the Sixth Circuit’s decision in Yates,

2

and its decision in Fugarino v. Hartford Life and Accident

Ins. Co., 969 F.2d 178 (6th Cir. 1992), conflict “with the

decisions of nine other circuit courts” and this Court's

decision in Nationwide Mutual Ins. Co. v. Darden, 503 U.S.

_ 318, 112 S. Ct. 1344, 117 L. Ed. 581 (1992), asserting the

same arguments that they made below. Respondent will

address each of these assertions separately.

A. The holding of the Sixth Circuit Court of Appeals

Yates does not conflict with the decision of this Court

in Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318,

112 S. Ct. 1344, 117 L. Ed. 581 (1992).

Petitioners argue that the Panel's decision in this case

and in the Fugarino case are inconsistent with the United

States Supreme Court’s decision in Nationwide Mutual Ins.

Co. v. Darden, 503 U.S. 318, 112 S. Ct. 1344, 117 L. Ed.

581 (1992).

In Darden, the sole issue was whether the claimant was

an “employee” or an “independent contractor” as defined

under ERISA. In making this determination, the Supreme

Court noted that the term “employee” was not specifically

defined in ERISA and that courts should look to traditional

common law criteria of agency, such as control, in ) making

this determination. /d., at 323.

Unlike the issue before the Court in Darden, the issue

here relates to Dr. Yates’ status as employer or employee.

The record before the Court indicates that Dr. Yates is the

sole shareholder of Raymond B. Yates, M.D., P.C., a

Tennessee professional corporation, albeit inactive at the

commencement of the bankruptcy case. (Joint Appendix at

page 47). This fact alone indicates that Dr. Yates, as sole

3

shareholder of the entity, exercised control over its operations

and employees. No other facts are contained in this record

relating to Dr. Yates’ status as an employee.

This employer/employee conflict and the application of

Darden in resolving the definition, was addressed by the court

in Watson v. Proctor, (In re Watson), 161 F.3d 593 (9th Cir.

1998), a case cited by the Petitioners. In that case, the court

was reviewing the bankrupt’s claim to exempt his interest in

his pension plan and the bankrupt’s status as »n employer or

employee. The bankrupt was the sole sharehulder of his

medical corporation. In discussing the applicability of

Darden, the court stated:

In Darden, the Supreme Court addressed a

different issue. Whereas here, the issue is one of

a “dual status” employer-employee, in Darden,

the issue involved the distinction between

“employees” and “independent contractors.”. . .

In deciding whether Darden could properly be

considered Nationwide’s “employee” for purposes

of ERISA, the Court held that the term “employee”

as it appears in ERISA, 29 U.S.C. § 1002(6),

incorporates “traditional agency law criteria for

identifying master-servant relationships.

The traditional agency criteria can be applied

logically only in situations involving relationships

between two different persons, i.e., those who

employ persons and those who are so employed.

Accordingly, Darden instructs that we apply the

traditional agency definition of “employee” when

confronted with the question of whether a specific

individual is, in relation to another, an employee

4

or an independent contractor for purposes of

ERISA. The issue we confront here is different. It

is whether a self-employed owner is also his own

“employee” for purposes of qualifying his Plan

under ERISA. Traditional agency law criteria

provide no answer. Thus, we cannot logically

apply Darden in this case.

Id., at 597. (citations and emphasis omitted).

Likewise, Darden, cannot be logically applied to the

Petitioners’ assertion that although Dr. Yates is the sole owner

of his professional corporation, he is nevertheless an

employee under ERISA. Accordingly, neither Fugarino nor

Yates conflicts with this Court’s decision in Darden.

B. The holding of the Sixth Circuit Court of Appeals

Yates is not in conflict with the decisions of “nine other

circuit courts” and does not lead to conflicting results.

As a further basis in support of their argument that this

Court should grant the Wnt, Petitioners assert that the Sixth

Circuit’s decision conflicts with the decisions of “nine other

circuit courts.” However, a careful examination of these cases

reveals that such is not the case.

As indicated above, the precise issue herein relates to

the status of the bankrupt as employer or employee under

ERISA. In construing the language of ERISA and the

regulations, particularly 29 C.F.R. § 2510-3.3(c)(1), the Sixth

Circuit has held that sole owners or shareholders of employers

may not be participants under an ERISA qualified plan.

Agrawal v. Paul Revere Life Insurance Co., 205 F.3d 297

(6th Cir. 2000); Fugarino v. Hartford Life and Accident Ins.

5

Co., 969 F.2d 178 (6th Cir. 1992); and Hendon v. Yates (In re

Yates), 287 F.3d 521 (6th Cir. 2002), reh 'g denied, 2002 U.S.

App. LEXIS 12550 (6th Cir. June 20, 2002). Many of the

decisions of the other circuits cited by the Petitioners as being

in direct conflict with these decisions are readily

distinguished on their facts.

For instance, some of the cases from the other circuits

cited by the Petitioners deal with the issue of whether a

particular claimant is a “beneficiary” under a group health

benefit plan under ERISA. See, e.g., Wolk v. Unum Life ins.

of America, 186 F.3d 352 (3d Cir. 1999); and Gilbert v. Alta

Health & Life Ins. Co., 276 F.3d 1292 (11th Cir. 2001).

In each of these cases, the courts held that the claimants were

entitled to benefits under the group health plan and were thus

beneficiaries of the plan as defined by ERISA. Wolk, at 358.

ERISA’s definition of beneficiary is not as issue herein.

In other instances, the courts were focusing on combined

plans or groups of plans. See, e.g., Slamen v. Paul Revere

Life Ins. Co., 166 F.3d 1102 (11th Cir. 1999); and Laventure

v. Prudential Ins. Co. of America, 237 F.3d 1042 (9th Cir.

1998). In those cases, the courts held that a plan not qualifying

as an ERISA plan was not converted into a qualifying ERISA

plan by either later offering it to other employees or

combining it with other qualified plans. Slamen, at 1106;

and Laventure, at 1047.

Other cases deal with the question of whether minority

shareholders are “employers” or whether other family

members of an owner are “employers.” See, e.g., Leckey v.

Stefano, 263 F.3d 267, 272 (3d Cir. 2001), (holding that a

step daughter of an owner was not an “employer’’). In Simpa

v. Mass. Cass. Ins. Co., 256 F.3d 1006, 1011 (10th Cir. 2001)

6

and Jn re Baker, 114 F.3d 636, 639 (7th Cir. 1997), these

courts held that owners of less than one hundred percent of

the stock in the employer were not excluded from ERISA’s

definition of participant. In fact, the court in Baker expressly

distinguished instances where the corporation was owned by

a single individual, as is case sub judice. Id.

Finally, in Watson v. Proctor, (In re Watson), 161 F.3d

593, 597 (9th Cir. 1998), the court held that the sole

shareholder of the corporation/employer was not an

“employee” for purposes of ERISA. Although this case is

cited by the Petitioners as being in conflict with the decisions

of this circuit, Watson actually supports the decisions of this

Court.

Respondent does concede that some decisions of other

circuits appear to conflict with the decisions of the Sixth

Circuit. See, e.g., Madonia v. Blue Cross & Blue Shield of

Virginia, 11 F.3d 444 (4th Cir. 1999), and Vega v. Nat. Life

Ins. Services, Inc., 188 F.3d 287 (Sth Cir. 1999). In these

cases, the courts limit the provisions of 29 C.F.R. § 2510-

3.3(c)(1) to initial determinations of whether a plan meets

the definition of an “employee benefit plan” but apply these

definitions no further, an approach espoused by the Petitioner.

However, in cases such as this case where the person holds a

dual status, such an approach may produce the conflicting

result of the same person being an employer in one instance

yet an employee in another. The decisions of the Sixth Circuit

yield no such result. According, Yates should not be reversed

and further proceedings herein are not necessary.

J

C. The holding of the Sixth Circuit Court of Appeals in

Yates does not conflict with ERISA.

Petitioners also assert that Yates conflicts with a plain

reading of ERISA. However, as stated by the court in Watson

v. Proctor, (In re Watson), 161 F.3d 593, 598 (9th Cir. 1998),

“the plain language of ERISA is ambiguous with respect to

the classification of a ‘dual status’ employer/employee.”

Further, this Court has expressly stated that ERISA’s

definition of “employee” is “completely circular and explains

nothing.” Nationwide Mutual Ins. Co. v. Darden, 503 U.S.

318, 323, 112 S. Ct. 1344, 1348, 117 L. Ed. 581 (1992).

Therefore, ERISA’s provisions in this regard can hardly be

described in terms of “plain language.”

What is plain is that 29 C.F.R. § 2510-3.3(c)(1) clearly

provides that sole owners of corporate employers are not

employees. As set forth above, courts have differed as to the

scope of this provision. The approach applied in the Sixth

Circuit leads to the appropriate result in these dual status

type cases and results in the most consistent application of

ERISA.

Further, Respondent submits that ii is important to keep

the purposes of ERISA in mind. Again as stated by the Court

in Watson:

ERISA Title I was adopted by Congress in

1974, in part, to remedy abuses by employers who

manage pension plans assets held in trust for

workers in traditional employer-employee

relationships. Congress recognized that workers,

i.e., traditional “employees” are vulnerable to

abuse by employers because employers typically

8

maintain exclusive control over the pension funds

of their employees. In contrast, a self-employed

individual such as Watson, has complete control

over the amount, investment and form of the fund

because he voluntarily creates and manages it for

his own retirement. Congress had no reason to

extend ERISA coverage to self-employed owners

such as Watson. Self interests provides adequate

protection. Therefore, it was reasonable for the

Department of Labor to exclude self-employed

sole shareholders from its definition of

“employees” for purposes of ERISA.

Id., at 598.

Examples of such possibilities for abuse are present in

the case at hand. The plan here limits the availability of loans

and provides that any loans must be for a period of less than

5 years. (Appendix at page 148). The plan further requires

repayments by payroll deductions made at lease quarterly.

(Id.). Contrary to such plan requirements, the loan to the

debtor was outstanding from 1989 until November of 1996.

(Appendix at page 448). During that time, no payments were

made. (Appendix at page 54 and at page 448-449). Shortly

before the commencement of this bankruptcy case, in excess

of $50,467.00 is repaid to the pension plan. Clearly, the

debtor’s actions in total disregard of the limitations contained

in the plan evidence the kinds of potential abuses discussed

above. The debtor should not be permitted to withdraw funds

from his “plan,” treat them as his own for years without the

requirement of making payments in violation of the plan,

and then after repayment and the commencement of a

bankruptcy case assert that he was subject to the restrictions

of an ERISA qualified plan.

9

D. The result of Yates can be affirmed on other grounds.

Finally, the avoidance and recovery of the preferential

transfers can be affirmed on other grounds.

Again, it is important to consider the nature of this case.

This is not a case by a bankruptcy trustee seeking to recover

from an individual debtor an interest that debtor owned in a

pension plan. This is an action by the trustee against a third

party, (the Plan) seeking to recover preferential transfers made

in repayment of an antecedent debt on the eve of bankruptcy.

Consequently, the Respondent submits that this case can be -

resolved without an examination as to whether the debtor

interest in the Plan is excluded from the bankruptcy estate

for whatever reason.

ERISA, particularly 29 U.S.C. § 1144(d) provides

“{N]othing in this title shall be construed to alter, amend,

modify, invalidate, impair or supersede any law of the United

States ...” The plain language of this provision indicates

that ERISA was not intended to supersede other federal law.

Lower courts and commentators considering this provision

have found that the clear language of ERISA does not usurp

the avoidance powers of a trustee set forth in Section 547 of

the Bankruptcy Code. See, e.g., Pulaski Highway Express,

Inc. v. Central State Southeast and Southwest Areas Health

and Welfare and Pension Funds, (In re Pulaski Highway

Express, Inc.), 41 B.R. 305 (M.D. Tenn. 1984); Lavergne v.

Central State Southeast and Southwest Areas Health and

Welfare and Pension Funds (In re Ottawa Carthage, Inc.),

55 B.R. 371 (D.C.N.D. Ill. 1985); and Norton Bankruptcy

Law and Practice, Second Ed., Section 156.12, Pages 156-

40 through 156-47.

10

Therefore, even if the debtor’s interest in this plan did

qualify for the protections of ERISA, the Respondent could

nevertheless recover on his claim against the pension plan.

Accordingly, the decisions of the lower courts can be affirmed

on other grounds and the Writ for Certiorari should not issue.

CONCLUSION

For the reasons cited herein, the Respondent respectfully

requests the Court to deny the Petition for a Writ of Certiorari.

Respectfully submitted,

JoHN A. WALKER, JR.

Counsel of Record

WALKER & Wacker, P.C.

910 First American Center

P.O. Box 2774

Knoxville, TN 37901

(865) 523-0700

C. MarK TROUTMAN

TROUTMAN & TROUTMAN, P.C.

240 West Central Avenue

Suite 10

P.O. Box 1757

LaFollette, TN 37766

(423) 566-6001

Attorneys for Respondent