Opinion
August 23, 1999
Jeffrey Mintz, New York City, for plaintiff.
Jeffrey M. Zalkin, Hempstead, for defendants.
OPINION OF THE COURT
May a judgment creditor proceed in state court for a turnover of funds allegedly fraudulently transferred into a pension plan organized under ERISA [Employee Retirement Income Security Act of 1974] whose provisions prohibit the assignment or alienation of benefits. [ 29 U.S.C. § 1056 [d][1])?
Plaintiff seeks to enforce a money judgment against defendant, AVL, an insolvent corporation. Relying upon tax returns and financial statements prepared by AVL's accountants, plaintiff alleges that monies acquired from the sale of AVL's property in Ohio were fraudulently transferred to Martin Weiner ($50,000.00 and $54,000.00); Philip Peerless ($50,000.00 and $54,000.00); Atlantic Veal Corp. ($65,363.75); Atlantic Veal Pension Fund ($8,973.60); and Jackmar Brokerage Pension Fund, ($25,000.00) in alleged violation of sections 273 Debt. Cred., 273-a Debt. Cred., and 276 Debt. Cred. and 276-a Debt. Cred. of the Debtor and Creditor Law and of Section 720 of the Business Corporation Law. Plaintiff moves for summary judgment on its claims.
In a prior proceeding in this matter [index number 15406/93] on August 5, 1997 this Court granted summary judgment upon plaintiffs' first cause of action against Atlantic Veal Corp and AVL Corp which alleged that plaintiffs made two loans to the defendants in July and October of 1990 for $300,000 and $250,000 of which $434,076.82 remains unpaid and upon the second cause of action against Atlantic which seeks repayment of the balance of the July 1990 loan; and the third cause of action against AVL which seeks repayment of the balance of the October 1990 loan. The fourth cause of action against AVL which asserted that AVL is the alter ego of Atlantic was dismissed. The individual defendants, Martin Weiner and Philip Peerless were granted summary judgment dismissing the action as against them by a decision and order of this Court dated August 16, 1994.
Martin Weiner is "a former officer, shareholder and director of the defunct corporate defendants [AVL Corporation] and Atlantic Veal Corporation as well as a Trustee of Atlantic Veal Pension Fund (and former Trustee of Jackmar Brokerage Pension Fund, which in the early 1990s merged into Atlantic Veal Pension Fund)."
The defendants vigorously contesting this schedule of disbursements, cross move for summary judgment, asserting that any assets remaining in the defunct corporation were used to repay an antecedent debt owed by AVL to the pension fund defendants and it is this borrowed money that was replaced when, in 1994, AVL sold its only remaining asset, a building and some land located in Ohio to YHL Realty Corporation for $400,000 from which a total of $317,220.01 was disbursed to the Pension fund.
In support of this assertion, annexed as Exhibit "A" to Martin Weiners affidavit were the following: Check no. 102 dated September 13, 1984 in the amount of $45,000 payable to AVL from Jackmar Brokerage Pension Plan. Check no. 104 dated January 31, 1986 in the amount of $25,000 payable to AVL from Jackmar Brokerage Pension Plan. Check no. 113 in the amount of $100,000 payable to AVL from Jackmar Brokerage Martin Weiner asserts that "the ERISA trusts actually lent AVL more monies than those set forth in Exhibit "A" but because of the passage of time and relocations of my offices, I have been unable to locate any other checks."
According to Weiner, the payments were distributed as follows: at closing $100,328.25 to Bankone to satisfy the purchase money mortgage it held and $59,671.75 to the Atlantic Veal Pension Fund. Thereafter, $31,548.26 (the net balance of the down payment of $40,000) was disbursed to the Atlantic Veal Pension Fund. Over the next two years the following payments were made to the Atlantic Veal Pension Fund: $66,000 on August 28, 1995, $51,000 on November 29, 1995, $58,000 on August 26, 1996, $51,000 on November 26, 1996.
The thrust of defendants' arguments is that any monies traceable to loans repaid to the pension fund defendants cannot be recovered in a turnover proceeding because of the preemption and anti-alienation provisions of ERISA and thus raise the question of whether the preemption and anti-alienation provisions of ERISA, protect these funds.
On facts not distinguishable from those at bar, this very question has been answered in the negative by the Court of Appeals in 1988 in Planned Consumer Marketing v. Coates and Clark. Inc., 71 N.Y.2d 442 (1988).
In so holding, this Court rejects defendants' efforts to distinguish Planned Consumer Marketing, supra, 71 N.Y.2d 442. Defendants argue that our circumstances would require a different result since in contrast to Planned Consumer Marketing, the benefit plan here was formed before the creditor's claim arose and the natural person defendants here have a fiduciary duty to the ERISA plans. In so arguing defendants misperceive the ratio decidendi of this case which is-that the pension plan was used as a vehicle for the corporation's president to shield the assets of the corporation from its creditors. These are precisely the allegations that are being made here and this case is thus indistinguishable from our own.
Ordinarily, the inquiry would begin and end with the determination of the New York Court of Appeals in Planned Consumer Marketing, supra, 71 N.Y.2d 442, to the effect that "the application of State laws voiding conveyances made in defraud of creditors does not impermissibly conflict with the identified purposes of the anti-alienation provision in ERISA." Id. at 455. In so holding, the Court of Appeals indicated that "[t]he Federal circuits appear to be split with respect to ERISA's anti-alienation provision and the garnishment or attachment of an employee's ERISA funds". Id. at 453n.7.
The Court contrasted United Metal Prods. v. National Bank, 811 F.2d 297 (6th Cir. 1987) which found "no implied exception to [the] anti-alienation provision allowing employer to garnish employee's ERISA pension when employee commits fraud against employer" with Crawford v. La Boucherie Bernard, 815 F.2d 117 [DC Cir 1987] cert denied sub nom. Goldstein v. Crawford, U.S., 98 L Ed 2d 355 which held that "traditional trust remedies for wrongful depletion of assets not preempted by [the] anti-alienation provision of ERISA."
However, since Planned Consumer Marketing was decided the United States Supreme Court, in a series of decisions, resolved the ambiguities clouding the interplay between state garnishment provisions and ERISA's anti-alienation provision by unequivocally refusing to approve "any generalized equitable exception . . . to ERISA's prohibition on the assignment or alienation of pension benefits." Guidry v. Sheet Metal Workers National Pension Fund, 493 U.S. 365, 376 (1990). In Guidry, the Supreme Court held that ERISA's prohibition of the assignment or alienation of pension benefits foreclosed the imposition by a union of a constructive trust upon retirement benefits accruing to a union official convicted of embezzling funds from the union.
Particularly instructive is Guidry's exhortation that "courts should be loath to announce equitable exceptions to legislative requirements or prohibitions that are unqualified by the statutory text. The creation of such exceptions, in our view, would be especially problematic in the context of an anti-garnishment provision. Such a provision acts, by definition, to hinder the collection of a lawful debt. A restriction on garnishment therefore can be defended only on the view that the effectuation of certain broad social policies sometimes takes precedence over the desire to do equity between particular parties. It makes little sense to adopt such a policy and then to refuse enforcement whenever enforcement appears inequitable." Guidry, supra, 493 U.S. at 376-377.
Approximately two years later, in Patterson v. Shumate, 504 U.S. 753, 760 (1992) the Court reiterated its position inGuidry, citing to Guidry and opining: "Indeed, this Court itself vigorously has enforced ER ISA's prohibition on the assignment or alienation of pension benefits, declining to recognize any implied exceptions to the broad statutory bar."
In Patterson, the Court held that an "anti-alienation provision in a qualified pension plan constituted a restriction on transfer enforceable under "applicable non bankruptcy law' for purposes of § 541 (c)(2) of the of the Bankruptcy Code."Patterson v. Shumate, 504 U.S. 753 (1992).
In 1997, the Supreme Court revisited this area and held, citingGuidry, supra, that "Statutory anti-alienation provisions are potent mechanisms to prevent the dissipation of funds . . . ERISA's pension plan anti-alienation provision is mandatory and contains only two explicit exceptions. See §§ 1056 (d)(2), (d)(3)(A), which are not subject to judicial expansion." Boggs v. Boggs, 520 U.S. 833, 851 (1997).
§ 1056 (d)(2) provides in pertinent part: "For the purposes of paragraph (1) of this subsection, there shall not be taken into account any voluntary and revocable assignment of not to exceed 10 percent of any benefit payment, or of any irrevocable assignment or alienation of benefits executed before September 2, 1974.
§ 1056 (d)(3)(A) provides in pertinent part: "Paragraph (1) shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order, except that paragraph (1) shall not apply if the order is determined to be a qualified domestic relations order. Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order."
The simple, straightforward approach enunciated by the United States Supreme Court provides for the uniform enforcement of "a considered congressional policy choice, a decision 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."Guidry v. Sheet Metal Workers National Pension Fund, supra, 493 U.S. 365, 376.
However lucid the decisions of the Supreme Court in Guidry, Shumate and Boggs are, they nonetheless conflict with the determination of our Court of Appeals in Planned Consumer Marketing, supra, 71 N.Y.2d 442. See Tompkins Trust Co v. Gowin, 163 Misc.2d 418 (Sup Court, Tompkins County, 1994) (questioning the continued reliability of Planned Consumer Marketing in the wake of these decisions). Presently we, peering up from below, must determine how to proceed without violating principles ofstare decisis. Whether the Court of Appeals would have reached the conclusion it did if prior thereto the Supreme Court had rendered these decisions, cannot be determined with complete certainty. Yet, it seems fair to assume that the Court of Appeals, mindful of the need to scrutinize a plaintiff's claims to ensure that they do not "'conflict with the provisions of ERISA or operate to frustrate its [objectives]'", Nealy v. US Healthcare HMO, 93 N.Y.2d 209 (1999) (citing Boggs v. Boggs, supra, 520 U.S. at 841), would have followed the United States Supreme Court, as, indeed, at this juncture this Court is obligated to do. People v. P.J. Video, 68 N.Y.2d 296, 302 (1986); See In re Roper's Estate, 269 A.D. 941 (2d Dept. 1945) affd 296 N.Y. 676 (1946) (grappling with the selfsame problem and deciding to follow the decision of the Supreme Court which contradicted a long line of decisions announced by the Court of Appeals).
Interestingly in Rogers' Estate the Court of Appeals affirmed without opinion the Appellate Division decision which correctly assumed that the Court of Appeals would overrule "a long line of decisions by this court, in the interests of uniformity, because the Supreme Court of the United States has recently decided contrariwise." Rogers' Estate, supra, 296 N.Y. 676, 678 (dissenting opinion).
Thus, although the ultimate resolution of the factual dispute between the parties with respect to the disbursements of the sale proceeds and the question of whether the transfers were wrongful must be left for the trier of fact CPLR 5225 (b); McKinney's Practice Commentary: C5225:6, 7; See Federal Deposit Insurance Corporation v. Heilbrun, 167 A.D.2d 294 (1st Dept. 1990), this Court holds that any proceeds from the sale of the AVL property unlawfully paid to the pension fund defendants which remain within the fiduciary responsibility of the plan managers are protected by the anti-alienation provisions of section 2006 (d)(1) of ERISA. However, "[f]ollowing distribution of benefits to the plan participant or beneficiary, a creditor no longer has a right against the plan. Instead, the creditor must collect directly from the participant of beneficiary, or [if need be may] initiate an enforceable garnishment procedure against a third-party bank who holds the funds paid to the participant or beneficiary."Guidry v. Sheet Metal Workers Nat. Pension Fund, 39 F.3d 1078, 1082-1083 (10th Cir. 1994). Accord Trucking Employees of North Jersey Welfare Fund. Inc v. Colville, 16 F.3d 52 (3d Cir, 1994);Brosamer v. Mark, 561 N.E.2d 767 (Supreme Court, Indiana, 1990).