Watson, In re

• Citation: 161 F.3d 593
• Decision Date: 06 October 1998
• Docket Number: Nos. 97-17411,s. 97-17411
• Parties: , Bankr. L. Rep. P 77,865, 22 Employee Benefits Cas. 2091, 98 Cal. Daily Op. Serv. 8759, 98 Daily Journal D.A.R. 12,168, Pens. Plan Guide (CCH) P 23949K, 3 Cal. Bankr. Ct. Rep. 49 In re: David Warren WATSON, Debtor. David Warren WATSON, Appellant, v. James PROCTOR; Central Bank; Suzanne Nebeker, Appellees. . Submitted *
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 593

161 F.3d 593

33 Bankr.Ct.Dec. 675, Bankr. L. Rep. P 77,865,

22 Employee Benefits Cas. 2091,

98 Cal. Daily Op. Serv. 8759,

98 Daily Journal D.A.R. 12,168,

Pens. Plan Guide (CCH) P 23949K,

3 Cal. Bankr. Ct. Rep. 49

In re: David Warren WATSON, Debtor David Warren WATSON, Appellant, v. James PROCTOR; Central Bank; Suzanne Nebeker, Appellees.

Nos. 97-17411.

United States Court of Appeals Ninth Circuit.

Submitted ^* Oct. 6, 1998.

Decided Dec. 1, 1998.

William M. O'Mara, Reno, Nevada, for appellant.

William A. Van Meter, Van Meter & Matteoni, Reno, Nevada, for appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel; Volinn, Russell and Ryan, Judges, Presiding. BAP No. NV-96-01465-RuRyVo.

Before: SNEED, HALL, and RYMER, Circuit Judges.

SNEED, Circuit Judge:

Debtor David W. Watson, M.D., ("Watson") appeals from the Bankruptcy Appellate Panel ("BAP") judgment that the David W. Watson, M.D., P.C. Profit Sharing Plan and Trust Agreement ("Plan") is not excluded from his bankruptcy estate under 11 U.S.C. § 541(c)(2) because it does not constitute an "employee benefit plan" under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1003(a) (1988).

Watson argues that he is an "employee" under ERISA despite the fact that he is the sole shareholder in his own corporation. Watson concedes that his Plan is not ERISA-qualified under the relevant Department of Labor regulations, but he contends that those regulations are inconsistent with ERISA, no longer applicable, and violative of his right to equal protection of the laws.

We are not persuaded. We hold that ERISA, read in tandem with the Department of Labor regulations, does not cover "employee benefit plans" such as Watson's where the lone participant is a self-employed sole shareholder in his own corporation. We therefore affirm the BAP.

I. BACKGROUND

Watson, an anesthesiologist, is the sole owner of his medical corporation. The Plan, which he established in 1985, contains a valid anti-alienation provision, i.e., a restriction on the transfer of Watson's beneficial interest, and qualifies for favorable tax treatment by the Internal Revenue Service. Watson is the sole sponsor, participant and (along with his ex-wife) beneficiary of the plan. ¹

In 1987, Watson entered into partnership with Dr. Clisto D. Beaty, M.D. The partnership employed four nurses from 1987 until it was dissolved, in 1992. During that period, the partnership established and maintained an IRS-approved pension plan ("joint venture plan") for the four nurses which was separate and distinct from Watson's Plan. At no time did the nurses participate in Watson's Plan.

When Watson and Beaty dissolved their partnership in 1992, the nurse employees established their own professional corporations and rolled their pension funds from the joint venture plan into separate individual pension plans. Again, at no time were these plans part of Watson's Plan.

Watson eventually moved his practice from Utah to Nevada several months before his divorce was finalized. On July 7, 1995, the same date that the final divorce decree was filed in Utah state court, Watson filed his chapter 7 bankruptcy case in Nevada.

On his Schedule "C," Property Claimed as Exempt, Watson listed his interest in the Plan, valued at $290,000, along with his $6,000 interest in a separate Individual Retirement Account. The chapter 7 trustee objected to Watson's claim that the Plan is excludable pursuant to ERISA, maintaining instead that only state law exemptions are applicable. The trustee argued that, under Nevada law, the exemption is limited to $100,000. ²

On February 13, 1996, the bankruptcy court concluded that the Plan was not excludable from the bankruptcy estate under 11 U.S.C. § 541(c)(2) because it did not qualify for ERISA protection. The court held that the Plan was not an "employee benefit plan" under ERISA because it never provided benefits to "employees" as defined by the Secretary of Labor and never had any "participants" other than Watson. Thus, Watson was only entitled to the $100,000 Nevada exemption.

On March 11, 1996, Watson moved the bankruptcy court to reconsider its decision, arguing that his constitutional right to equal protection had been denied and that the Department of Labor had exceeded its administrative authority in issuing the ERISA regulations. The bankruptcy court affirmed its prior ruling and Watson timely filed his notice of appeal.

In October, 1997, the BAP affirmed the lower court's decision, holding that the Plan was partially exempt only under Nevada law for the following reasons: (1) the debtor's Plan was not ERISA-qualified because the debtor was a self-employed sole shareholder who did not meet the definition of "employee" under ERISA and the Department of Labor regulations; (2) the Secretary of Labor's regulations are consistent with ERISA; We affirm the judgment of the BAP.

and (3) application of the regulations did not result in a violation of Watson's right to equal protection.

II. STANDARD OF REVIEW

Findings of fact below are scrutinized for clear error. See In re Windmill Farms, Inc., 841 F.2d 1467, 1469 (9th Cir.1988). We review de novo conclusions of law. See id.

III. DISCUSSION

A. ERISA Qualification

1. Importance of ERISA Qualification

Both parties agree that if the Plan is considered an "employee benefit plan" under ERISA, then Watson can exclude it in its entirety pursuant to 11 U.S.C. § 541(c)(2). See Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) (holding that Bankruptcy Code and ERISA establish that the anti-alienation provision in qualified pension plan constitutes restriction on transfer enforceable under "applicable nonbankruptcy law" for purposes of 11 U.S.C. § 541(c)(2)).

If the Plan is not ERISA-qualified, only $100,000 of the total $290,000 in the Plan is exempted under Nevada law from the bankruptcy estate. ³ We now turn to the statute itself and the ancillary regulations.

2. "Employee" Issue

Petitioner claims, to repeat, that he is an "employee" for purposes of ERISA-qualification. An ERISA employee benefit plan must have "participants" which are present or former employees of an employer. ⁴ 29 U.S.C. § 1002(6). The Department of Labor regulations, issued pursuant to 29 U.S.C. § 1135, provide in pertinent part:

(b) Plans without employees. For purposes of Title I of [ERISA], the term "employee benefit plan" shall not include any plan, fund or program, other than an apprenticeship or other training program, under which no employees are participants covered under the plan, as defined in paragraph (d) of this section. For example, a so-called "Keogh" or "H.R. 10" plan under which only partners or only a sole proprietor are participants covered under the plan will not be covered under Title I. However, a Keogh plan under which one or more common law employees, in addition to the self-employed individuals, are participants covered under the plan, will be covered under Title I....

29 C.F.R. § 2510.3-3(b) (1998) (emphasis added).

While it is clear that ERISA-qualified plans must have "employee" participants, the statute does not adequately define the term "employee." Under ERISA, an "employee" is "any individual employed by an employer," 29 U.S.C. § 1002(6), but this definition is "completely circular and explains nothing." Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323, 112 S.Ct. 1344, 1348, 117 L.Ed.2d 581 (1992). Therefore, the text of ERISA alone does not resolve the issue now before us, i.e., whether a "dual status" employer/employee is considered an "employee" for purposes of ERISA-qualification.

For the answer to that query, we turn instead to the Department of Labor regulations. Congress authorized the Secretary of Labor to "prescribe such regulations as he finds necessary or appropriate to carry out the provisions of this [ERISA] subchapter." 29 U.S.C. § 1135. Pursuant to that grant of authority, the Secretary promulgated regulations which have been in effect for over twenty years. The regulations provide, in pertinent part, that: "[a]n individual and his Watson must therefore attack the legitimacy of the regulations to the extent they preclude qualification of his Plan under ERISA. He contends that Darden, 503 U.S. at 323, 112 S.Ct. at 1348, 117 L.Ed.2d 581, effectively replaces the Department of Labor definition of "employee" with the traditional agency law definition. Darden has no such effect.

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 and his or her spouse...." 29 C.F.R. § 2510.3-3(c)(1) (1998) (emphasis added). Inasmuch as Watson wholly owns his own medical corporation, under the regulations, he is not an "employee" for purposes of ERISA.

In Darden, the Supreme Court addressed a different issue. Whereas here, the issue is one of a "dual status" employer-employee, in Darden the issue involved the distinction between "employees" and "independent contractors." Darden, an insurance salesman, contracted with Nationwide Mutual Insurance Company, promising to sell only Nationwide policies. 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." Darden, 503 U.S. at 319, 112 S.Ct. at 1346, 117 L.Ed.2d 581 (emphasis added).

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...