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

FILED

SEP 15 2003

OFFICE OF THE CLERK

No. 02-458

IN THE

Supreme Court of the United States

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

RAYMOND B. YATES, Trustee,

Petitioners,

V.

WILLIAM T. HENDON, Trustee,

Respondent.

On Wait oF CERTIORARI TO THE

Unitep STaTes CourRT OF APPEALS

FOR THE SiIxTH CIRCUIT

BRIEF FOR RESPONDENT

Joun A. WALKER, JR. C. MARK TROUTMAN

Counsel of Record TROUTMAN & TROUTMAN, P.C.

Wacker & Wacker, 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) 637-5252 (423) 566-6001

Attorneys for Respondent

183039 g

COUNSEL PRESS

(800) 274-3321 + (800) 359-6859

i

QUESTION PRESENTED FOR REVIEW

The issue before the Court in this case is whether the

sole shareholder of a corporation, a Debtor in bankruptcy,

should be classified as an “employer” or an “employee” as

those terms are defined in the Employee Retirement Income

Security Act of 1974 (“ERISA”).

il

TABLE OF CONTENTS

Que stion Presented for Review ................

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Statutory Provisions Involved .................

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Summary Of Argument ..........cccccccececes

SS Gerd cewsive esse eh icutiedulaoetes

A. Yates Is An “Employer” And May Not Be A

“Participant” Under ERISA. .............

B. When The Policies Behind The Enactment Of

ERISA Are Considered, The Individual

Debtor Must Be Classified As An Employer.

reece eeecege ee eee@ece@etce cee ee eee 8 oe 6a 6 a4 Se eo

C. The Holding Of The Sixth Circuit In Yates

Does Not Conflict With This Court’s Opinion

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D. The Yates Decision Is Not In Conflict With

The Decisions Of “Nine Other Circuit

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15

17

20

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Cited Authorities

Page

Cases:

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

re 17

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987)

PURGREREEWOSCECEROSedescenccccccecccsces 12

Fugarino v. Hartford Life and Accident Ins. Co., 969

Pee DOO GE COED co cccccccccccccecs 15, 16, 17

Gilbert v. Alta Health & Life Ins. Co., 276 F.3d 1292

EE eee eee sued anbeseeseence 18

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

2002), reh 'g denied, 2002 U.S. App. LEXIS 12550

(6" Cir. June 20, 2002) ................0005e 4,17

In re Baker, 114 F.3d 636 (7 Cir. 1997) .. 0.2... 18

Kwathcher v. Massachusetts Service Emp. Pension

Fund, 879 F.2d 957 (1" Cir. 1989)... 2.0.0... 8, 9, 16

Laventure v. Prudential Ins. Co. of America, 237

fof a se |) ee 18

Leckey v. Stefano, 263 F.3d 267 (3° Cir. 2001) .... 18

Madonia v. Blue Cross & Blue Shield of Virginia, \1

og 9 ree 18

iv

Cited Authorities

Page

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

SRE nico ccccnecnceeesseuessnensessas 8,9, 15, 16

NLRB vy. Bell Aerospace Co., 416 U.S. 267 (1974) . .. 8

Patterson v. Shumate, 504 U.S. 753 (1992) ....... 5

Simpa v. Mass. Cass. Ins. Co., 256 F.3d 1006 (10"

errr er ree 18

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

(ie: 3 rrr rrr ere 18

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

PGR, BRED co ccveccssccceccoccsvcevesens 18

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

PGs GD bk cencecccececccuseuvacennss passim

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

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Cited Authorities

Page

Statutes:

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PEED Ocenesceucussceceuaensns 10

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26 U.S.C. § 416(1)iNBMi) o.oo eee cece 10

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Cited Authorities

Page

Other Authorities:

29 C.F.R. § 2510-3.3(CM1) 2.0... cece eeeeess 11, 17, 18

H.R. Rep. No. 533, 93* Cong., 2° Sess., reprinted in

1974 U.S. Code Cong. & Admin. News at 4639

l

STATUTORY PROVISIONS INVOLVED

This issue before the Court in this case relates to the

Employee Retirement Income Security Act of 1974,

29 U.S.C. § 1002 (2003), (hereinafter “ERISA”). Specifically,

this case relates to the definition of an “employer,” of an

“employee,” and of a “participant” as contained in 29 U.S.C.

§§ 1002(5), (6), and (7).

STATEMENT OF THE CASE

This appeal emanates from an involuntary bankruptcy

case filed against Raymond B. Yates under Chapter 7 of the

United States Bankruptcy Code (11 U.S.C. § 101, et seq.)

The facts of this appeal are largely undisputed.

The undisputed facts show that the individual debtor in

bankruptcy, Raymond B. Yates, was the sole shareholder of

Raymond B. Yates, M.D., P.C. (Joint Appendix, hereinafter

“JA,” la-3a)'. By agreement dated July 20, 1989, Raymond

B. Yates, M.D., P.C., adopted a Profit Sharing Plan named

the “Raymond B. Yates, M.D., P.C., Profit Sharing Plan.”’

(/bid.). At times material hereto, the Debtor and three other

participants participated in the Plan. (JA 269a).

On December 13, 1989, the Debtor received a loan from

the Plan. (JA 267a-269a). Also on that date, the Debtor

executed a promissory note payable to Plan evidencing the

1. The individual debtor, Raymond B. Yates, will be referred

to hereafter as “the Debtor” when referred to in his individual capacity

as the debtor in bankruptcy.

2. The Raymond B. Yates, M.D., P.C. Profit Sharing Plan will

be referred to hereinafter as “the Plan.”

2

loan. (JA 259a). The note specified the amount of the loan

and the interest rate accruing upon the unpaid balance but

provided for no periodic payments. (/d.). Although the initial

term of the loan was for a period of five years, the note was

purportedly extended for another period of five years.

(JA 269a).

The loan in and of itself violated the terms of the adopted

plan in several ways. First, the Plan terms prohibited any

loans to “Shareholder-employees” or “Owner-employees.”

(JA 207a). Secondly, the Plan required all loans to be repaid

by payroll deductions made at least quarterly. (JA 67a). ©

Thirdly, the Plan prohibited loan repayment periods of longer

than five years unless the loan was for the purchase of a

principal residence. (/d). And finally, there are no facts in

the record indicating that the procedures outlined in the Plan

(at pages JA 68a-69a) were followed.

This loan was not repaid until November 1996, in the

total amount of $50,467.46, upon the sale of certain real

property owned by the Debtor. (JA26a-28a). Other than

another lump sum payment from an inheritance, no other

payments on this loan had been made by the Debtor contrary

to the terms of the adopted plan. (/d.) The repayment of the

$50,467.46 at issue herein came at a time when the debtor

was involved in extensive litigation with one of his creditors,

wherein the creditor was seeking to recover on its loans to

the Debtor. (JA 25a). In fact, on December 2, 1996, and within

weeks of the repayment of the loan by the Debtor to the

pension plan, an involuntary bankruptcy petition under Title

11 of the United States Code was filed by the litigating

creditor against the Debtor. (JA 31a).

3

On August 5, 1998, the Respondent, William T. Hendon,

Chapter 7 Trustee in the bankruptcy case, filed an adversary

proceeding against the Plan and the Plan’s Trustee. (JA 1a-3a).

The Bankruptcy Trustee alleged that the repayment by the debtor

of the sum of $50,467.46 to the Plan was an avoidable transfer

and sought recovery from the Plan pursuant to 11 U.S.C.

§§ 547 and 550. (/d.).

On October 3, 1998, the Plan and the trustee of the Plan

filed their answer to the Respondent’s Complaint. (JA 4a).

In their Answer, these Petitioners admitted that in November of

1996, and within 90 days of the filing of the Involuntary Petition

against the Debtor, the Debtor repaid the sum of $50,467.46 to

the Plan in repayment of loans the Debtor had received from

the Plan. (/d.). The Petitioner Plan alleged that the Plan assets

were exempt by law and that a return of the funds would be

violation of the disbursement provisions of the Plan. (JA 6a).

On March 31, 1999, each party filed a Motion for Summary

Judgment with supporting documents and memorandum.

(Petitioners’ Petition for Writ of Certiorari, hereinafter “Petition”

at page 36a). On September 2, 1999, the Bankruptcy Court filed

its Memorandum on Cross Motions for Summary Judgment

granting the Respondent’s Motion for Summary Judgment and

denying the Petitioner’s Motion for Summary Judgment. (/d. ).

Specifically, the Bankruptcy Court ruled that the Respondent

had established all of the elements required by 11 U.S.C. § 547

concerning the avoidability of a preferential transfer. (Petition

41a-42a). The Bankruptcy Court further held that individual

Debtor’s interest in the Plan was not in a qualified ERISA plan

and that the provisions of ERISA did not bar the Trustee from

recovering the preferential transfer made by the Debtor to the

Plan. (Petition 43a-44a).

4

On June 26, 2000, the District Court affirmed the

decision of the Bankruptcy Court that the Debtor’s interest

in the Plan was not protected by the provisions of ERISA.

(Petition 9a). In addition, the District Court affirmed the

Bankruptcy Court as to the remaining issues before it

affirming the Bankruptcy Court’s granting of summary

judgment in favor of the Respondent. (/d.).

On April 19, 2002, the United States Court of Appeals

for the Sixth Circuit affirmed the decision of the lower courts.

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

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

20, 2002), cert. granted, 2003 U.S. LEXIS 5033 (U.S. June

27, 2003)).

On June 27, 2003, this Court granted the Petitioners’

Petition for Writ of Certiorari.

SUMMARY OF ARGUMENT

The Respondent respectfully submits that the lower

courts correctly ruled that the individual Debtor may not be

a “participant” as defined by ERISA. Consequently, the

individual Debtor’s interest in the Plan is not protected by

ERISA’s anti-alienation provisions. Thus, there is no bar

under ERISA to the Respondent’s claim to avoid and recover

the preferential transfer.

This case presents to this Court the issue of interpreting

the terms “employer” and “employee” as defined by ERISA

and as applied to the facts of this case. When these definitions

are examined in light of the policies behind the enactment

of ERISA, it is apparent that sole shareholders of corporations

are characterized as employers under ERISA, and thus

excluded from the protective provisions thereof.

+--——

5

The Respondent also submits that if the construction of

ERISA espoused by the Petitioner is accepted, the policies

behind the enactment of ERISA will be placed in conflict.

Such conflict is avoided by the holdings of the lower courts

and by classifying the Debtor in this case as the “employer”

as defined by ERISA.

Finally, the Respondent submits that the decisions of the

lower courts do not conflict with the decision of this Court

in Darden and nine other circuit courts of appeals. And when

the approaches of circuit courts are considered, the approach

employed by the Sixth Circuit ultimately is the only approach

that fosters all of the policies and goals of ERISA.

ARGUMENT

Throughout these proceedings and as their defense to

this preference action, Petitioners have asserted that the

individual Debtor’s interest in this pension plan is excluded

from the bankruptcy estate. Petitioners assert that the

Debtor’s interest is in an ERISA qualified plan. In their Brief

before this Court, Petitioners again mischaracterize this case

by asserting that the Respondent, the Bankruptcy Trustee,

“in this case is attempting to alienate” the Debtor’s interest

in the Plan. (Petitioners’ Brief at page 6). Such is incorrect.

The Respondent is seeking to recover a preference from the

Plan and its Trustee under the preference provisions of the

Bankruptcy Code, 11 U.S.C. § 547. The individual Debtor is

not named as such in these proceedings and this action is not

an attempt by a creditor to alienate the Debtor’s interest in

the Plan. Decisions of this Court in Patterson v. Shumate,

504 U.S. 753 (1992) and in other cases construing whether

such interests are excluded from a bankruptcy estate under

Section 541 of the Bankruptcy Code simply have no

6 : 7

application to the case sub judice. However, the Respondent Based upon these findings, Congress declared the policy

respectfully submits that even if the status of the Debtor’s interest of ERISA to be to

is considered, the lower courts correctly held that the Debtor

cannot be a participant under the terms of ERISA. protect interstate commerce and the interests of

| participants in employee benefit plans and their

A. Yates Is An “Employer” And May Not Be A beneficiaries, by requiring the disclosure and

“Participant” Under ERISA. : reporting to participants and beneficiaries of

financial and other information with respect

thereto, by establishing standards of conduct,

responsibility, and obligation for fiduciaries of

employee benefit plans and by providing for

appropriate remedies, sanctions, and ready access

to the Federal Courts.

In enacting ERISA, Congress found:

— —

that the continued well-being and security of millions

of employees and their beneficiaries are directly

affected by these plans;

29 U.S.C. § 1001(b).

that owing to the lack of employee information and

adequate safeguards concerning their operation, it . Notwithstanding these findings, ERISA provides only

is desirable in the interests of employees and their a limited definition of an employer and employee. 11 U.S.C.

beneficiaries, and to provide for the general welfare § 1002, provides, in pertinent part as follows:

and the free flow of commerce, that disclosure be

made and safeguards be provided with respect to (5) The term “employer” means any person

the establishment, operation, and administration of acting directly as an employer, or indirectly

such plans; in the interest of an employer, in relation to

an employee benefit plan; and includes a

group or association of employers acting for

an employer in such capacity.

and that it is therefore desirable in the interest of

employees and their beneficiaries, for the protection (6) The term “employee” means any individual

of the revenue of the United States, and to provide employed by an employer.

for the free flow of commerce, that minimum

character of such plans and their financial soundness. a “beneficiary.” Subsection (7) of Section 1002 provides:

“The term ‘participant’ means any employee, or former

|

standards be provided assuring the equitable ERISA also distinguishes between a “participant” and

\

employee of an employer, . . . . who is or may become eligible

29 U.S.C. § 1001(a).

8

to receive a benefit of any type from an employee benefit

plan which covers employees of such employer... .”

(Emphasis added). “Beneficiary” is defined in Subsection

(8) as “a person designated by a participant, or by the terms

of an employee benefit plan, who is or may become entitled

to a benefit hereunder.” Therefore, Congress limited the

definition of a participant to an employee of an employer

but did not so limit the definition of a beneficiary.

At issue in this case is the status of the Debtor as

employee or employer, as sole shareholder of the corporation.

As stated by the court in Watson v. Proctor, (In re Watson),

161 F.3d 593, 598 (9" 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 (1992).

The legislative history of ERISA provides little insight

into the definitions of “employer” and “employee” but may

contain some indications that are pertinent to this case.

Concerning the definition of “employee” the legislative

history indicates that Congress intended the definition to

include persons who have the “status of an employee under

a collective bargaining agreement.” H.R. Rep. No. 533, 93°

Cong., 2° Sess., reprinted in 1974 U.S. Code Cong. &

Admin. News at 4639, 4648. Under conventional labor-law

principals, management would be excluded under the

definition of “employee.” Kwathcher v. Massachusetts

Service Emp. Pension Fund, 879 F.2d 957, 960 (1* Cir. 1989);

citing NLRB vy. Bell Aerospace Co., 416 U.S. 267, 275 (1974).

fl eae A — ly ia i

ee

9

This Court in the Darden case addressed the ERISA’s

definition of an “employee.” In Darden, this Court was called

upon to determine whether an independent contractor was

an “employee” under ERISA. In that case, this Court adopted

a two step approach in construing ERISA’s definition of

“employee.” First, the Court looked to other provisions of

ERISA for guidance in defining the term. /d. at 323. Because

the Court found no assistance in other provisions in ERISA

to distinguish between an independent contractor and an

employee, the Court adopted a common law test. Jd.

The Petitioner and the United States (as amicus curiae)

both focus on ERISA’s definition of “employee” and virtually

ignore ERISA’s definition of “employer.” While the initial

portions of the definition of an “employer” appear to be as

circular as the definition of an “emptoyee,” additional

language is included within that definition that is pertinent

to this case. Within the definition of “employer,” Congress

included other persons acting “indirectly in the interest of

an employer.” 29 U.S.C. § 1002(5). This additional language

expands ERISA’s concept of an “employer” beyond common

law or corporate law notions. Kwathcher, at 960.

Applying the facts of this case to the foregoing supports

the lower courts’ classification of the individual Debtor as

“employer” and excluding him from the definition of

“participant.” The individual Debtor herein was the sole

shareholder of the corporation. (JA 15a). The corporation at

issue was not a Sub-Chapter S corporation. (JA 35a-36a).

Upon the establishment of the plan, the individual Debtor

was expressly designated as the Trustee of the plan. (JA 36a).

Further, the “Plan Administrator” was designated as

“The Employer, ATTN: RAYMOND B. YATES.” (/d.). A loan

was made to himself which was clearly prohibited in the first

10

place and non conforming in its terms even if initially authorized.

(JA 207a and 67a-69a). The individual Debtor made investment

decisions and directed the use of the plan’s assets, which

directions and decisions ultimately lead to losses of in excess

of $248,000. (JA315a, Affidavit of Dale Horst, a copy of which

is attached hereto as an Appendix). Clearly, the individual Debtor

controlled the operations of the plan and was acting directly in

the capacity as an “employer, or indirectly in the interest of an

employer, in relation to an employee benefit plan,” within

ERISA’s definition of “employer.” (11 U.S.C. § 1002(5)). There

is simply no proof in the record as to the individual Debtor’s

status as employee other than an unspecified reference to

“wages” (JA 9a). Under the facts of this case, the only logical

conclusion is that the Debtor was acting as employer.

Contrary to the arguments made on behalf of the Petitioner

and amicus curiae, other provisions of ERISA and the Internal

Revenue Code do not provide guidance as to distinguishing

between an “employer” and an “employee.” For example,

29 U.S.C. § 1301(b)(1) by its plain language does not reference

sole shareholders of corporations. Likewise, the Internal

Revenue Code provides no assistance. By including certain

shareholders within the definitions of an employee under

the provisions of the Internal Revenue Code (26 U.S.C.

§§ 401(c)(1), 414(q)(1 (a) and 416(1)(i)(B)(i)), Congress clearly

intended to offer favorable tax treatment to such shareholders

who contribute to employee benefit plans. However, by

excluding such shareholders from the ERISA definitions of an

“employee” and thus “participant,” Congress intended to further

the stated purposes of ERISA of guarding against an employer’s

exploitation, abuse or looting of funds collected for employee

benefits plans. The differing definitions between ERISA and

the Internal Revenue Code reveal that Congress may have simply

intended to exclude sole shareholders from favorable protective

ee

1]

provision of ERISA such as the anti-alienation provisions

while at the same time offering favorable tax treatment if

they contributed to an employee benefit plan.

If other parts of the statutory or regulatory scheme of

ERISA are to be considered, no clearer guidance as to the

Debtor’s status can be found than from the regulations

contained in 29 C.F.R. § 2510-3.3(c)(1). That provision

provides in pertinent part:

(c) Employees. For purposes of this section:

(1) An individual and his or her spouse shall

not be deemed to be employees with respect

to a trade or business, whether incorporated

or unincorporated, which is wholly owned by

the individual or by the individual and his or

her spouse, .. .

Clearly, under this plain language, the Debtor herein, as sole

shareholder, could not be considered an employee. Without

regard to whether this provision is to be employed beyond

the initial examination as to whether the plan itself is an

ERISA qualified plan, this language is clear and provides

guidance in the classification of the Debtor as employer.

Accordingly, under the facts of this case, the individual

Debtor is properly classified as an “employer” instead of an

“employee.” The individual Debtor may thus not be a

“participant” under an ERISA plan. The lower court’s

decision in that regard is correct and should be affirmed.

12

B. When The Policies Behind The Enactment Of

ERISA Are Considered, The Individual Debtor Must

Be Classified As An Employer.

The arguments of the parties to these proceedings

illustrate potentially competing polices behind the enactment

of ERISA; namely, Congress’ desire to prohibit employer

abuse and its desire to provide for a “single set of regulation.”

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 11 (1987).

While treating a sole shareholder as an “employee” and

thereby entitling the shareholder to the protections of ERISA

for a “participant” may lead to uniformity of regulations

relative to employee benefit plans, such treatment could

inhibit the other purpose of prohibiting employer abuse.

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

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

13

Department of Labor to exclude self-employed sole

shareholders from its definition of “employees” for

purposes of ERISA.

Watson, at 598.

Examples of such possibilities for abuse are actually

present in the case at hand. Clearly, the Debtor’s actions in

total disregard of the limitations contained in the plan

regarding loans evidence the kinds of potential self dealing

abuses discussed above. The individual Debtor’s control over

the funds is evidenced by his directed use of the funds

resulting in losses of over $248,000. The Debtor should not

be permitted to act in disregard his fiduciary obligations under

ERISA and the clear limitations contained in his purported

plan, treat the funds as his own for years without the

requirement of making loan payments in violation of the plan,

and then after the commencement of a bankruptcy case assert

that he was subject to the restrictions of an ERISA qualified

plan which he had previously patently ignored.

In short, actual abuse is present in the case at hand.

Competing with the Congressional policy of prohibiting such

abuse is the argument that by excluding shareholder owners

from the definition of “participant,” inconsistent state law

remedies, albeit unspecified, may be available to such

shareholders which would frustrate the desire for uniform

regulations. On the other hand, if shareholder owners are

classified as “participants”, not only do benefits inure to them

contrary to 29 U.S.C. § 1103(c), but they would enjoy the

protective shields of the anti-alienation provision as to their

interests while having complete control over the plan funds.

Such employers could act in complete disregard of ERISA

and plan restrictions (as the Debtor did here), and other

14

injured employees would have no remedies against them in

instances like the present case where the employer files

bankruptcy and has no other assets available for creditors.

In instances like the present case, liability for breach of

fiduciary obligations would be meaningless yet the only

viable assets remaining for creditors would be excluded from

their reach even if the assets were wrongly converted or

misappropriated.

While the possibility of different regulations should be

subordinate to the policy of protecting the assets of benefit

plans, it is nevertheless possible to avoid these conflicts

through the definition of “beneficiary.” On the contrary,

adopting the argument espoused on behalf of the Petitioner

results in the policy of preventing abuse being subordinated

to a policy of having uniform regulations.

This term “beneficiary” is plainly defined as “a person

designated by a participant, or by the terms of an employee

benefit plan, who is or may become entitle to a benefit

thereunder.” 29 U.S.C. § 1002(8). Since ERISA’s civil

enforcement provisions in § 502(a)(1)(B) are available for a

“participant” and a “beneficiary,” uniformity of regulations

can achieved by including an “employer” within the broad

definition of “beneficiary.” However, such may be for another

case as the definition of “beneficiary” is not at issue herein.

Therefore, considering the policies behind the enactment

of ERISA, under the facts of this case the individual Debtor

as sole shareholder should be classified as an “employer.”

If a bright line rule is to be established as to sole shareholders,

classifying them as employers is the only result that can

further all of the policies and goals of ERISA.

15

C. The Holding Of The Sixth Circuit In Yates Does Not

Conflict With This Court’s Opinion In Darden.

| Petitioners also argue that the Sixth Circuit’s decision

in this case and in the Fugarino case are inconsistent with

this Court’s decision in Nationwide Mutual Ins. Co. v.

Darden, 503 U.S. 318 (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.

As stated above, this case presents the issue as to whether

the Debtor is an employer or employee under ERISA.

Common law criteria of control make no sense if applied in

this instance.

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 (9" 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 an employer or

employee. The bankrupt was the sole shareholder 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

16

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 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 the individual Debtor is the

sole owner of his professional corporation, he is nevertheless

an employee under ERISA. As found by one court, ERISA

contemplates that the “employer” and the “employee” are two

separate persons and that the “twain shall never meet.”

Kwatcher, at 959. Accordingly, neither Fugarino nor Yates

conflicts with this Court’s decision in Darden.

17

D. The Yates Decision Is Not In Conflict With The

Decisions Of “Nine Other Circuit Courts.”

As a further basis in support of their argument that this

Court should overrule the lower courts, 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 (6" Cir. 2000); Fugarino v. Hartford Life and Accident

Ins. Co., 969 F.2d 178 (6" Cir. 1992); and Hendon v. Yates

(In re Yates), 287 F.3d 521 (6" Cir. 2002), reh'g denied, 2002

U.S. App. LEXIS 12550 (6" 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.

3. 29 C.F.R. § 2510-3.3(c)(1) provides:

(c) Employees. For purposes of this section:

(1) An individual and his or her spouse shall not

be deemed to be employees with respect to a

trade or business, whether incorporated or

unincorporated, which is wholly owned by the

individual or by the individual and his or her

spouse, ...

18

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 (3¢ Cir. 1999); and Gilbert v. Alta

Health & Life Ins. Co., 276 F.3d 1292 (11" 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 (11" Cir. 1999); and Laventure

v. Prudential Ins. Co. of America, 237 F.3d 1042 (9" 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 (3 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 (10" Cir. 2001)

and /n re Baker, 114 F.3d 636, 639 (7" 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.

19

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

593, 597 (9" 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 the

Sixth Circuit.

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 (4" Cir. 1999), and Vega v. Nat. Life

Ins. Services, Inc., 188 F.3d 287 (5" 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.

20

CONCLUSION

In conclusion, the Respondent submits that for the reasons

cited herein, the decisions of the lower courts should be affirmed.

However, the Respondent wishes to add that even if the decisions

are reversed and that the interest of the Debtor is deemed to be

that of a “participant” in an ERISA qualified plan, the inquiry

in this case does not end. While not an issue presently before

this Court, the issue would then become whether the bankruptcy

trustee could nevertheless avoid the transfer and recover the

proceeds of the transfer from the Plan since under 29 U.S.C.

§ 1144(d), ERISA does not supercede other federal laws like

the Bankruptcy Code. Affirmation of the decision of the lower

courts would pretermit this other issue.

Respectfully submitted,

Joun A. WALKER, JR.

Counsel of Record

WALKER & WALKER, 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

la

APPENDIX — AFFIDAVIT OF DALE HORST

DATED NOVEMBER 23, 1999

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE EASTERN DISTRICT OF TENNESSEE,

NORTHERN DIVISION, AT KNOXVILLE

Case No. 96-34511

Chapter 7

Adversary Pro. No. 98-3088

IN RE:

RAYMOND B. YATES,

Debtor.

WILLIAM T. HENDON, TRUSTEE,

Plaintiff/Appellee,

vs.

RAYMOND B. YATES, M.D., P.C. PROFIT SHARING

PLAN and RAYMOND B. YATES, TRUSTEE,

Defendants/Appellants.

AFFIDAVIT OF DALE HORST

I, Dale Horst, hereby swear and affirm the following:

1. 1am the President of ERISA Services, Inc.

2. ERISA Services, Inc. has been engaged by the

Raymond B. Yates, M.D., P.C. Profit Sharing Plan (“Plan’’)

to be the third party administrator of such Plan.

2a

Appendix

3. As part of our contractual arrangement, ERISA

Services, Inc. provides accounting and compliance

administration for the Raymond B. Yates, M.D., P.C. Profit

Sharing Plan.

4. As of June 30, 1996, the total amount of assets in the

Plan were $373,376.44.

5. Dr. Yates total account balance as of June 30, 1996

was $366,852.55.

6. Loraine Yates, Dr. Yates daughter’s, account balance

as of June 30, 1996 was $3,009.33.

7. Marshall West, an employee of Raymond B. Yates,

M.D., P.C. who is not related to Dr. Yates’, account balance

as of June 30, 1996, was $411.74.

8. Marilyn Bacon, an employee of Raymond B. Yates,

M.D., P.C. who is not related to Dr. Yates’, account balance

as of June 30, 1996 was $3,102,82.

9. On June 30, 1997, ERISA Services, Inc., based on

the Pltan’s accounting procedures, wrote off $248,041.56

which included the original investment plus accrued interest

from Dr. Yates’ individual account because of an investment

in Spectrum Consulting, Public Storage Properties &

Professional Management, Inc. Dr. Yates directed that

$210,000 be invested in Spectrum Consulting. Spectrum

Consulting dissolved and is no longer a viable corporation.

Public Storage’s loss was $19,062. Professional Management,

Inc.’s loss was $25,000. Dr. Yates’ Plan lost its total

investment in these businesses.

3a

Appendix

10. As of June 30, 1998, the total amount of Dr. Yates’

individual account balance is $127,553.27.

FURTHER AFFIANT SAITH NOT.

s/ Dale Horst

Dale Horst, President

ERISA Services, Inc.