How and when the assets in qualified plans and individual retirement accounts (IRA) and their benefits are exempt from claims of creditors is a much litigated issue. Two recent cases are on point: a U. S. Supreme Court case, Yates v. Herndon,1 and a federal appeals case, Hoult v. Hoult,2 which acknowledges a conflict among the circuits that may well lead the Supreme Court to grant certiorari. The cases indicate that searches by creditors to reach retirement benefits are still proceeding apace.

In Yates, the Supreme Court determined that, for purposes of the Employee Retirement Income Security Act of 1974 (ERISA),3 the term “employee” includes an owner as long as the ERISA plan also covered other employees who were not owners. Raymond B. Yates was the sole shareholder of Raymond B. Yates, M.D., P.C and a participant in the Raymond B. Yates, M.D., P.C. Profit Sharing Plan. He also was the plan's trustee and administrator. The plan's other participants were clearly non-owner employees. The plan, as required by 29 U.S. Code Section 1056(d)(1),4 contained an anti-alienation provision that, in relevant part stated, “[N]o benefit or interest available hereunder will be subject to assignment or alienation, either voluntarily or involuntarily.”

In 1989, Yates borrowed $20,000 from the plan. The loan was to bear interest at 11 percent and required monthly payments, none of which were ever made. In June 1992, Yates renewed the loan, but still made no payments until November 1996, when he repaid the loan and all interest due in full from the proceeds of the sale of his house. This repayment brought the balance in the plan to about $87,000. Three weeks after Yates repaid the loan, his creditors filed an involuntary petition against him under Chapter 7 of the Bankruptcy Code.

The trustee in bankruptcy challenged the loan repayment as a preferential transfer under Bankruptcy Code Section 547(b), and the Bankruptcy Court agreed. Yates did not challenge this finding on appeal, but rather urged that the assets in his account in the plan were protected under ERISA's anti-alienation provision. The Bankruptcy Court and the Bankruptcy Appellate Panel of the U.S. Court of Appeals for the Sixth Circuit upheld the trustee's challenge to the application of ERISA, following Sixth Circuit precedent5 that an owner could not be an employee under ERISA, and therefore the anti-alienation provision did not apply to Yates, and creditors could reach his account.

Acknowledging a conflict among the circuits, the U.S. Supreme Court granted certiorari. The First, Sixth and Tenth Circuits have held that an owner cannot be an employee under ERISA, while the Fourth and Fifth Circuits have held that an owner can be an employee and thus entitled to the protections, and subject to the restrictions, of ERISA. The Seventh Circuit has decided cases both ways. U.S. Supreme Court Justice Ruth Bader Ginsburg, writing for the majority, found that an owner clearly could be an employee for purposes of ERISA, as long as non-owners also were participants in the plan.


The Supreme Court first looked to the definitions of “employee” and “participant” under ERISA, but found them “uninformative.” However, in reviewing ERISA's provisions as a whole, the majority found ample indications that Congress intended owners who performed services to be treated as employees. Thus, it was unnecessary to resort to common law. Curiously, the majority determined congressional intent by examining the exemption provisions of ERISA; that is, those provisions that “partially exempt certain plans in which working owners likely participate from otherwise mandatory ERISA provisions.”7 Additionally, said the court, 29 U.S.C. Section1301(b)(1) and Internal Revenue Code Section 401(c)(4) “expressly anticipate that a working owner can wear two hats, as an employer and an employee.”8 Considering working owners to be employees, the court said, also fosters the national uniformity sought by Congress, so that one plan would not be ruled by the differing regimes of state and federal law with respect to employees and owner/employees.

The Supreme Court “finally” noted that there is a 1999 Department of Labor Advisory Opinion, 99-04A9 that “accords with our comprehension of Title I's [of ERISA] definitions and coverage provisions.” The Department of Labor advisory opinion makes it clear that the department interprets ERISA to include owner/employees as employees. The court acknowledges the expertise of the agency charged with administering ERISA, noting that it has a “body of experience” and makes “informed judgments” that may be relied upon.

Analyzing the Sixth Circuit's precedent, the court attacked the underlying rationale of Fugarino v. Hartford Life and Accident Insurance Co., for incorrectly relying upon the language of Labor Department Regulations 29 CFR Section 2510.3-3(b), which complement the definition of “employee benefit plan” found in ERISA Section 3(3). The regulation dealing with owner-employees is, by its own terms, limited to that section, which prohibits a plan without non-owner employees from being treated as an employee benefit plan under ERISA.10 Likewise, the anti-inurement provision of ERISA,11 which prohibits the operation of a plan for the private benefit of the creator of the plan, does not prevent an owner-employee from receiving benefits from a plan. “The purpose of the anti-inurement provision in common with ERISA's other fiduciary responsibility, is to apply the law of trusts to discourage abuses such as self-dealing, imprudent investment, and misappropriations of plan assets, by employers and others.”12

The Supreme Court noted that the trial court did not reach the issue of whether Yates had breached the anti-inurement provision by the way he handled the loans. Therefore, the Supreme Court remanded the case for a determination of whether the loan repayments became a portion of the plan and, if so, whether the loan repayments were beyond the reach of the bankruptcy trustee.

Justice Antonin Scalia concurred, but criticized the court for using a “sledgehammer to kill a gnat.” Scalia wrote that the Supreme Court should be bound by the interpretation of the statute by the Department of Labor as promulgated in its regulations — which was the same argument put forward in an amicus curiae brief by the Department of Justice. He wrote the majority's approach “denies many agency interpretations their conclusive effect.”13 Therefore, he wrote, the majority holding deprives the agency of what Scalia sees as their “principal virtues”: (1) the power to make decisions quickly that are nationwide in effect; and (2) the power to change the “application of ambiguous laws as time and experience dictates.”14

Justice Clarence Thomas also concurred but, amazingly enough, he disagreed with Scalia's reasoning. Thomas found the textual references to ERISA's exemption provisions to be equally open to an interpretation contrary to the majority's view. Therefore, he would resort to the common law definition of employee, which he expected would include owner-employees.

While Yates deals with a sole shareholder of a corporation, it applies equally to partners and sole proprietors who have established plans that also cover common law employees. But at least one commentator has questioned whether the plan must cover common law employees from inception consistently throughout the plan. For example, suppose that at first Yates had a hospital-based practice in which he was the only employee of his wholly owned corporation. Clearly, his plan at that point would not be an ERISA plan. Assume that later he moved to a private office and hired a nurse, who was covered by the plan. What if he then fired her and waited several months before replacing her? Is the plan always never or part of the time covered by, ERISA? Those questions are not answered, but might be determined by future cases. Nonetheless, Yates does resolve a conflict among the circuits, and I believe correctly so.15


A recent First Circuit case, Hoult v. Hoult, dealt with whether payments from an ERISA plan were still protected from creditors by ERISA's anti-alienation provision, even after they were in the hands of recipients. The Court of Appeals for the First Circuit aligned itself with four other courts of appeals in holding that proceeds were no longer protected once out of the hands of plan administrators.16 Only the Fourth Circuit has reached a contrary result, and that court distinguished between lump-sum payments and annuity payouts, holding the latter to be protected even after the plan beneficiary received them.

The facts in Hoult almost compel this result, and are equally as egregious as the facts in the Sixth Circuit case, Lampkins v. Golden.17 In Hoult, Jennifer Hoult obtained a judgment against her father, David, for abuse while she was a child. As detailed in the opinion, the father went to great lengths to circumvent payment of that judgment. Ultimately, the court ordered David to place his retirement plan benefits in a specified bank account and limited the amount he could withdraw for living expenses. David claimed that such an order violated ERISA's anti-alienation provision.

Finding that the statute itself provided little guidance, the court focused on the regulation promulgated by the Secretary of the Treasury, which defines “assignment” and “alienation” as including (1) “any arrangement providing for the payment to the employer of plan benefits which otherwise would be due the participant under the plan,” and (2) “any direct or indirect arrangement (whether revocable or irrevocable) whereby a party acquires from a participant or beneficiary a right or interest enforceable against the plan in, or to, all or any part of a plan benefit payment which is, or may become, payable to the participant or beneficiary.”18

In line with the view of the majority of the federal circuit courts, the First Circuit accorded great deference to the regulation, which it construed to apply only to assets held within the plan. Once the assets leave the plan and are paid to the beneficiary, ruled the court, ERISA's creditor protection is lost.19 While this might be a fair reading of the regulation, it does not seem to comport with the stated policy of ERISA to assure pension beneficiaries the benefit of their pension.

A case in point is Guidry v. Sheet Metal Workers Natl. Pension Fund,20 in which the Supreme Court held that the union could not impose a constructive trust on Curtis Guidry's retirement benefit to reclaim funds which Guidry (then residing in prison) had stolen from the union. On remand, and in an en banc rehearing, the Tenth Circuit permitted garnishment of the pension benefits once deposited in a bank account designated by the warden. It is difficult to reconcile how this differs from Hoult, because Guidry had no choice about depositing the funds once deposited into that bank account.


For planning purposes, it would seem that a plan participant with creditor problems should consider taking benefits as an annuity, which might be protected by state law.21 Additionally, the Supreme Court might grant certiorari in a case such as Hoult because of the conflict between the Fourth Circuit and the other circuits.22 After all, the Supreme Court in Boggs v. Boggs23 (involving whether a nonparticipant spouse in a community property state could devise her interest in the husband's retirement plan) seemed to recognize that post-retirement alienation by force of state law was likewise prohibited. “Respondents' claims, if allowed to succeed, would depart from this framework, upsetting the deliberate balance central to ERISA,” wrote the court in Boggs. “It does not matter that respondents have sought to enforce their rights only after the retirement benefits have been distributed since their asserted rights are based on the theory that they had an interest in the undistributed pension plan benefits. Their state-law claims are pre-empted [by ERISA's anti-alienation provision].”24

Even if the Supreme Court continues to consider when creditors may or may not reach the assets in, and benefits from, retirement plans, as long as retirement benefits constitute a significant asset of the debtor, creditors will continue to pursue them.


  1. Yates v. Herndon, 124 S. Ct. 133 (March 3, 2004).
  2. Hoult v. Hoult (1st Cir. June 22, 2004).
  3. 29 U.S.C. Section 1001, et seq.
  4. ldquo;Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.” ERISA Section 206(d)(1). See also Internal Revenue Code of 1986, Section 401(a)(13).
  5. Agrawal v. Paul Revere Life Ins. Co., 205 F.3d 297 (6th Cir. 2000), SEC v. Johnston, 143 F.3d 260, (6th Cir. 1998), and Fugarino v. Hartford Life and Accident Insurance Co., 969 F.2d 178 (6th Cir. 1992).
  6. For a brief synopsis and citations to the relevant cases, see Yates, 124 S. Ct at 1337. It is important to note that most of these cases do not involve the issue of creditor protection, but many concern the ability of an owner-employee to sue under state law causes of action that would otherwise be preempted by ERISA. Section 514(a).
  7. Yates, 124 S. Ct. at 1339.
  8. Ibid at 1341. Ginsburg cited her dissent in Clackamas Gastroenterology Assoc., P.C. v. Wells, 123 S. Ct. 1673, 1682 (2003).
  9. 26 BNA Pension and Benefits Rptr. 559.
  10. In fact, eight years after Fugarino, a three judge panel questioned the reasoning in Fugarino, but found that it was powerless to overrule precedent. Agrawal at 302.
  11. 29 U.S.C .Section 1103(c)(1).
  12. Yates, 124 S. Ct. at 1345.
  13. Ibid.
  14. I have some concern as to the benefit of allowing administrative agencies to change the rules (interpretations) in the middle of the game and have such change binding on the courts.
  15. See also Provident Life and Accident Insurance Co. v. Sharpless, 364 F.3d 634 (5th Cir. April 9, 2004), holding that a disability insurance plan involving owner-employees was an ERISA plan, following, and perhaps even expanding upon, Yates.
  16. Wright v. Riveland, 219 F.3d 905 (9th Cir. 2000); Robbins v. DuBuono, 218 F. 3d 197 (2d Cir. 2000); Guidry v. Sheet Metal Workers Nat'l. Pension Fund, 39 F.3d 1078 (10th Cir. 1994) (en banc); Trucking Employees of North Jersey Welfare Fund, Inc. v. Colville, 16 F.3d 52 (3rd Cir. 1994). See also State Treasurer v. Abbott, 660 N.W.2d 714 (Mich. 2003).
  17. 2002 WL 74449 (6th Cir. (Mich.); “Piercing shield laws to garnish SEP- IRAs;” Alvin Golden, Trusts & Estates, Aug. 2002, p. 51. At least in Hoult, the court did not have to cast far afield to find precedent.
  18. 26C.F.R.Section1.401(a)-13(c)(1)(i),(ii).
  19. The court also noted that Congress had specifically provided for the protection of benefits even after receipt in other acts. Social Security Act, 42 U.S.C. Section 407(a), provides that “none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.”
  20. 493 U.S. 365 (1990).
  21. Tex. Ins. Code Section 2.22, for example.
  22. The Supreme Court has recently granted certiorari in a case involving a claim of exemption under Bankruptcy Code Section 522(d)(10)(E), a very narrow exemption available only if federal rather than state exemptions are chose. Rousey v. Jacoway, 347 F.3d 689 (8th Cir., October 20, 2003); cert. granted 2004 WL 784917 (Docket # 03-1407, June 7, 2004). Rousey deals with a much less far reaching issue than is dealt with in Hoult.
  23. 520 U.S. 833 (1977); rehearing denied, 521 U.S. 1138 (1997).
  24. 520 U.S. at 854.

Collectors' Spotlight

“Come Along,” painted by James H. Daugherty in 1920 for the U.S. Navy, sold to a private collector for $1,000 at a Swann Galleries auction on Aug. 4 in New York.