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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Respondents Brief
- **Published:** January 1, 2004
- **Citation:** 541 U.S. 1

## Text

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 .................
PIE 6.66 S60 tenn siuseceencdes as
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
DU 6440504 dekeeneeseueheeencess

D. The Yates Decision Is Not In Conflict With
The Decisions Of “Nine Other Circuit
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Page

12

15

17
20

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ul

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
a f PPPTTTTITTT TTT TTT Tee 18

»
Cited Authorities

Page
Statutes:
Oe Cees OPED ccc ccenvsccenccesnacens l
TPR IEEE cennketaesensskeeesssaduenwe 5
EEE Snenddeedcnuweuedesusanecuues 3,5
Se EE 4 pobundeneusesedeetnuesdedans 3
PEED Ocenesceucussceceuaensns 10
ee 10
26 U.S.C. § 416(1)iNBMi) o.oo eee cece 10
a Ns bed descenedeusenesoendues 6
Pe OEE 6enéuckcnncdcecetseoundiks 7
ee 1,7
Se EE nee snencdshnesecasunnes 1,9, 10
Pee PE cccccusseccutessncendases l
SEY xavconcsecenedevaléssucse 1,7
SEU, icccncaveseecsusuenenaues 8,14
SP conaedcpnncavenscuseeedenn 13
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te ED cedvesedenecsuesonesabe 10

vi

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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0605%3A07. Public record. Not legal advice.