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CCH® PENSION AND BENEFITS — 04/03/09

ERISA's anti-alienation provision bars law firm's access to vested benefits

A law firm that challenged a defined benefit plan's denial of benefits to a class of participants was not entitled to a percentage of vested benefits in order to recover attorney's fees because allotting any portion of the benefits to the law firm would violate ERISA's anti-alienation provision, according to the U.S. Court of Appeals in New York (CA-2) in Kickham Hanley P.C. v. Kodak Retirement Income Plan, an ERISA Plan.

Background

A participant hired a law firm to represent him when his employer sold his business group to a holding company. The employer informed him that, because he had worked for it for less than five years, he was not entitled to benefits from the employer's defined benefit plan, since his benefits had not yet vested. The law firm challenged the plan's denial of benefits, on behalf of the participant and "a class of similarly situated persons." The law firm contended that the plan participants were entitled to benefits because there had been a partial plan termination. The law firm never identified any other participants by name.

The plan eventually implied that it would consider declaring a partial termination and vesting certain participants. The law firm then filed a complaint in district court, seeking attorney's fees, and moved for a preliminary injunction, so that if the plan granted the participant's claim for benefits or declared a partial termination, 30% of the newly vested funds would not be distributed to participants, but would, instead, be placed in a common fund to eventually be paid to the law firm. The district court granted the law firm's motion, finding that the balance of hardships tilted in the firm's favor. The law firm would suffer irreparable harm, the court reasoned, if it were required to seek fees from plan participants once benefits were distributed. The plan then appealed.

Law firm's claim barred by ERISA anti-alienation provision

The appellate court reversed, holding that the law firm's claim was barred by the anti-alienation provision of ERISA §206(d)(1), which provides that a "pension plan shall provide that benefits provided under the plan may not be assigned or alienated." The court agreed with the law firm that it was not entitled to attorney's fees under the fee-shifting provision of ERISA §502(g)(1) because that provision does not permit recovery for attorney's fees incurred during an initial administrative process.

The law firm argued that ERISA §206(d)(1) was not applicable because the equitable common fund doctrine granted it an interest in the portion of benefits that it helped to create or preserve. The court pointed out, however, that IRS Reg. §1.401(a)-13(b)(1) mandates that plan benefits "may not be anticipated, assigned (either at law or in equity) ...."

The law firm had also argued that it had a contested pension claim. The court conceded that it agreed with the Seventh Circuit's holding in Lynn v. CSX Transp., Inc., 84 F.3d 970, 975 (CA-7 1996), which pointed to a distinction between pension entitlements arising from the plan terms, and contested pension claims, arising from settlement agreements. Pension entitlements are subject to ERISA's anti-alienation provision but contested pension claims are not. The court responded, however, that whether or not the anti-alienation provision was applicable depended upon the type of claim the plan participants had to benefits, not on the type of claim that the law firm said it had. The law firm had acknowledged that the plan funds were vested benefits, not settlement proceeds, said the court. Whether or not the law firm prodded the plan into recognizing the participants' entitlement to their vested benefits was irrelevant.

The district court's entry of a preliminary injunction was reversed, and the case was remanded with instructions that law firm's claim be dismissed.

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