Changing Views On Pension Plan Loans In Bankruptcy' Is It A "Debt"?

• Published date: 08 September 2022
• Subject Matter: Employment and HR, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Retirement, Superannuation & Pensions, Employee Benefits & Compensation
• Law Firm: Ice Miller LLP
• Author: Mr Tyson Crist and Robert Gauss

In the event a plan participant files bankruptcy'typically chapter 7 or 13'a number of issues can arise for a pension plan. Since the modern Bankruptcy Code ¹ of 1978 was enacted, 2 many courts have taken the view that a pension plan loan does not create a "debt" for purposes of the bankruptcy. This view, which avoids various thorny issues that could otherwise arise for both the pension plan and participant, emanates from a decision by the United States Court of Appeals for the Second Circuit, In re Villarie, 648 F.2d 810 (2d Cir. 1981). Recently, however, a bankruptcy court has challenged this seemingly well established concept, which could have ramifications for pension plans. This article will provide further background, an explanation of the recent decision, and identify one potential effect.

The Villarie decision concerned a loan from the New York City Employees' Retirement System (NYCERS) to a member who later filed chapter 7 bankruptcy. The Second Circuit ruled that because NYCERS could not sue the member to recover the advance (it could only recoup from future benefits), the loan did not create a "debt" for purposes of the Bankruptcy Code. The landmark 2005 amendments to the Bankruptcy Code ³ and subsequent case law largely followed this approach, at least to the extent of ensuring that bankruptcy does not impact the repayment of an outstanding plan loan. ⁴ The United States Court of Appeals for the Ninth Circuit later echoed this position. See Egebjerg v. Anderson (In re Egebjerg), 574 F.3d 1045 (9th Cir. 2009).

Notwithstanding this established treatment of plan loans in bankruptcy, a court in New Mexico, within the Tenth Circuit, has recently challenged the status quo. See Montoya v. Dubbin (In re Dubbin), Adv. No. 21 1004 t, 2021 WL 3476959 (Bankr. D.N.M. Aug. 6, 2021). Although the court acknowledged "[t]here is substantial support for Defendant's position that pension plan loans are not debts under the Bankruptcy Code," the court went on to hold that "[p]ension plan loans are bona fide debts outside of bankruptcy and are recognized as such by the Bankruptcy Code." Id. at *2, 8. This opinion adopts the view that the Supreme Court undercut the Villarie analysis when it held, a...