Opinion ID: 2973705
Heading Depth: 3
Heading Rank: 4

Heading: ERISA’s anti-alienation provision

Text: DaimlerChrysler’s next argument, and the one that ultimately persuaded the district court, is that the orders and notices requiring the warden to direct DaimlerChrysler to send benefit payments to a prisoner’s institutional address violates ERISA’s anti-alienation provision. The SCFRA scheme, DaimlerChrysler asserts, accomplishes an involuntary transfer of benefits into the hands of a state representative without the permission of the plan participant, in contravention of both ERISA’s antialienation provision and DaimlerChrysler’s corresponding Pension Plan terms. ERISA’s anti-alienation provision reflects a policy choice on the part of Congress “to safeguard a stream of income for pensioners (and their dependents, who may be, and perhaps usually are, blameless), even if that decision prevents others from securing relief for the wrongs done them.” Patterson v. Shumate, 504 U.S. 753, 765 (1992) (citations and quotation marks omitted). To that end, the anti-alienation provision requires that every pension plan include a prohibition on assigning or alienating benefits provided under the plan. 29 U.S.C. § 1056(d)(1). The Treasury Regulations, which interpret this provision and are entitled to deference under Chevron U.S.A., Inc. v. National Resources Defense Council, 467 U.S. 837 (1984), define the terms “assignment” and “alienation” as including 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. 26 C.F.R. 1.401(a)-13(c)(1). In interpreting ERISA’s anti-alienation provision and its corresponding regulations, the courts have “vigorously . . . enforced ERISA’s prohibition on the assignment or alienation of pension benefits, declining to recognize any implied exceptions to the broad statutory bar.” Patterson, 504 U.S. at 760. Federal courts have thus barred state-court decisions and state laws that result in an assignment of a participant’s right to his or her benefits. See, e.g., id. (holding that a bankruptcy trustee is prohibited from including a debtor’s interest in his employee-benefits plan as a bankruptcyestate asset); Guidry v. Sheet Metal Workers Nat’l Pension Fund (Guidry I), 493 U.S. 365 (1990) (holding that the imposition of a constructive trust on an embezzler’s pension plan, based on the conclusion that he forfeited his right to benefits, violates ERISA’s anti-alienation provision); Gen. Motors Corp. v. Buha, 623 F.2d 455, 460 (6th Cir. 1980) (holding that “federal cases have construed ERISA’s provision against assignment or alienation as prohibiting garnishments generally”). No. 05-1716 DaimlerChrysler Corp. et al. v. Cox et al. Page 7 Following these precedents, other district courts that have confronted provisions of SCFRA have held that the Act violates ERISA’s anti-alienation principle. The district court in Walters v. Cox, 342 F. Supp. 2d 670 (E.D. Mich. 2004), for example, held that, although the Rooker-Felman doctrine barred the court from granting a prisoner relief, the “SCFRA provision allowing the state to redirect [the] prisoner’s pension checks to [his] prison account violated ERISA’s anti-alienation provision.” Id. at 675 (citing Baugh, 968 F. Supp. 1074). Walters therefore invalidated court orders and notices similar to the ones at issue in this case. 342 F. Supp. 2d at 674. In addition, the district court in Baugh and the district court below invalidated the application of SCFRA to the ERISA plans before those courts. The defendants take issue with these district court decisions. They believe that the present case is distinguishable from the classic cases of garnishment because in the present case (1) the state is not acquiring an interest in the payments until after they have been disbursed to the prisoners, and (2) the SFCRA orders and notices do not give the state officials an interest that is “enforceable against the plan.” See 26 C.F.R. 1.401(a)-13(c)(1). These two arguments raise the same issue—namely, whether the warden’s notice to the Pension Plan to redirect benefit payments to a prisoner’s institutional account encumbers the benefit payments before they have left plan control. This circuit, along with a majority of the other circuits, has held that once benefit payments have been disbursed to a beneficiary, creditors may encumber the proceeds. See Cent. States, S.E. & S.W. Areas Pension Fund v. Howell, 227 F.3d 672, 679 (6th Cir. 2000). In Central States, this court allowed a constructive trust to be imposed upon benefit payments “once the benefits ha[d] been released to the properly designated beneficiary.” Id. As the Second Circuit has explained, the “requirement that pension plans contain a provision against assignment or alienation of benefits does not read comfortably as a prohibition against creditors reaching pension benefits once they have left the hands of the administrator.” Robbins v. DeBuono, 218 F.3d 197, 203 (2d Cir. 2000) (holding that the Monroe County Department of Social Services did not violate ERISA’s anti-alienation provision when it included as part of the wife’s income the benefit payments already received by her husband). The legislative history of ERISA’s anti-alienation provision obligates a plan to protect benefits from alienation “at least up to the point of payment.” Guidry v. Sheet Metal Workers Nat’l Pension Fund (Guidry II), 39 F.3d 1078, 1082 (10th Cir. 1994) (en banc) (holding that, once paid, pension benefits in a beneficiary’s bank account are subject to garnishment). Circuit precedent thus stands for the proposition that once a pension plan has sent benefit payments to a beneficiary and relinquished control of those payments, the attachment of those funds by a creditor does not constitute an alienation. In the present case, however, the SCFRA notices operate on plan benefits before they are sent. This case is therefore distinguishable from Central States because the notices, if enforceable against the Pension Plan, divert funds of the prisoners against their wishes before they are paid to the prisoners. Although the warden cannot actually access the money until after it has been disbursed into the prisoner’s institutional account, the state officials procure a judgment entitling the state to 90% of the money—and the warden takes action to inform the Pension Plan where to place the money—while the plan still has control of the funds. This is not a case, therefore, where a plan is no longer obligated to protect pension payments from alienation because the benefits have already been disbursed at the direction of the beneficiary. What if the warden, who had already been granted an interest through SCFRA in 90% of a prisoner’s pension benefits, had informed the Pension Plan that it should deposit the money directly into the warden’s account instead of the prisoner’s account? If “enforceable against the plan,” this would certainly be an alienation of the prisoner’s benefits. Yet the present case differs only to the extent that the accounts at issue are labeled with the prisoner’s name. Even in cases where the courts have required a debtor to place all of his benefits into a specified account for garnishment by a third No. 05-1716 DaimlerChrysler Corp. et al. v. Cox et al. Page 8 party, the beneficiary still received the payments at his specified address and then turned them over to the creditor. In other words, the encumbrance was placed on the funds only after the point where the pension plan involved no longer had control of the funds. See Hoult v. Hoult, 373 F.3d 47, 49-51 (1st Cir. 2004) (holding that “the anti-alienation provision does not apply where, as here, the funds have already been disbursed to the plan beneficiary”). The state officials argue, however, that the SFCRA notices and orders do not constitute an alienation of benefits because the court orders direct the warden to send a notice to the Pension Plan. These notices, the officials argue, are therefore not “enforceable against the plan,” as required by 26 C.F.R. 1.401(a)-13(c)(1), because they do not directly obligate DaimlerChrysler to do anything. The notices, the officials contend, instead direct the warden to notify DaimlerChrysler that it should send benefits to a prisoner’s institutional address. But DaimlerChrysler’s declaratory action seeks a ruling on the Pension Plan’s legal obligations with regard to the SFCRA notices. DaimlerChrysler has brought suit, as the fiduciary responsible for the administration of its Pension Plan, in order to resolve the issue of whether it must follow the SCFRA orders before the state tries to enforce them. If we were to hold that DaimlerChrysler must comply with the SCFRA notices, we would be creating a legal obligation enforceable against the Pension Plan. The state’s interest in 90% of the pension benefits would then be enforced through notices instructing the Pension Plan to send the prisoner’s benefit payments to an account controlled by the warden, which would constitute an alienation of plan assets. We therefore affirm the district court’s holding that the SCFRA orders and notices are void to the extent that they direct DaimlerChrysler to send benefits to an address not designated by a beneficiary. The state may still send the notices, but DaimlerChrysler is not obligated to comply with them. We acknowledge that the Michigan Supreme Court addressed notices and orders under SCFRA that were similar to the notices and orders at issue here in State Treasurer v. Abbott, 660 N.W.2d 714, 719 (Mich. 2003), and that the Michigan Supreme Court reached the opposite conclusion. The Court held that because money had not been transferred from the pension plan at issue to “another person” instead of to the prisoner, no alienation had occurred. Because the prisoners had received their benefit payments at their own institutional addresses, and because these benefits were not attached until they were paid to the prisoners, the Michigan Supreme Court held that there was no alienation. Id. We find the Abbott opinion unpersuasive. Contrary to the reasoning of the Michigan Supreme Court, the fact that the prisoners have received their benefit payments at their “own” addresses is irrelevant to the question of alienation because (1) the prisoners did not want to receive the payments at their institutional addresses, (2) Michigan law strictly controls a prisoner’s bank account and how the funds may be used, and (3) the state already effectively owned 90% of the payments even before they were received. The fact that the payments were sent to the prisoner’s institutional address is therefore a mere formalism that is not dispositive of whether an alienation has occurred in the present case. Although we hold that SCFRA as applied in this case is preempted by ERISA, we are not rendering the state incapable of seeking reimbursement using a prisoner’s pension benefits. Once the benefit payments are received, even if the prisoner tries to conceal them in an illegal account, the state can take action against the prisoner by placing a constructive trust on those already-paid funds. See Guidry II, 39 F.3d at 1082-83. The state must, however, wait for the Pension Plan to send the benefit payments at the direction of the prisoner before the state encumbers those payments. To do otherwise would violate both the letter and the spirit of ERISA’s anti-alienation provision (which, at a minimum, prohibits the attachment of a debtor’s pension plan benefits while still controlled by the pension plan) and the terms of the Pension Plan forbidding the benefits from devolving upon No. 05-1716 DaimlerChrysler Corp. et al. v. Cox et al. Page 9 others. We are not passing, however, on the question of whether state officials can compel prisoners to send their address changes to the Pension Plan because that issue is not before us.