Patterson v. Shumate

Background

A long-time employee, Joseph B. Shumate Jr., held a $250,000 interest in his employer’s pension plan. The Coleman Furniture plan met federal ERISA rules and included a strict anti-alienation clause that barred assignment or transfer. Company and individual bankruptcies followed; a trustee sought Shumate’s pension interest for the bankruptcy estate, and lower courts split over whether ERISA’s clause could keep that money out of the estate.

Reasoning

The Court focused on the plain language of the Bankruptcy Code. Section 541(c)(2) excludes a debtor’s trust interest when a transfer restriction is enforceable under “applicable nonbankruptcy law.” The Court read that phrase to include federal law, not just state law. It found ERISA’s anti-alienation rule and related tax rules create a clear, enforceable restriction because plan fiduciaries must follow plan terms and ERISA provides civil enforcement. The Court concluded the Plan’s anti-alienation clause is an enforceable restriction and therefore Shumate’s pension interest can be excluded from the bankruptcy estate. The Court affirmed the appeals court and did not decide Shumate’s separate argument about a federal exemption.

Real world impact

The decision means ERISA-qualified pensions are generally protected from being turned into bankruptcy estate assets. It promotes uniform national treatment of retirement benefits, reduces the chance creditors can use bankruptcy to get around otherwise protected pensions, and preserves ERISA’s goal of securing promised retirement income. The judgment of the Court of Appeals was affirmed.