Opinion
2013-02-28
J.K.C., Plaintiff, v. T.W.C., Defendant.
Maurice J. Verrillo, Esq., Rochester, Attorney for Plaintiff. Maureen Pineau, Esq., Rochester, Attorney for Defendant.
Maurice J. Verrillo, Esq., Rochester, Attorney for Plaintiff. Maureen Pineau, Esq., Rochester, Attorney for Defendant.
Angelo T. Calleri, Esq., Rochester, Attorney, Applicant.
RICHARD A. DOLLINGER, J.
In this matter, an attorney seeks to enforce a charging lien against his former client's IRA, which was funded through a roll-over of her marital share of the husband's IRA. This application requires the court to determine if a charging lien under the broad language of Section 475 of the Judiciary Law can be asserted against an IRA, which is otherwise exempt from creditor's claims pursuant to CPLR § 5205. The clash between these two statutory commands, with competing legislative policy objectives, appears to be an issue of first impression in New York.
The attorney represented the wife in a divorce action.
In the retainer agreement, the attorney noted that if fees were due and owing at the time of his discharge, the attorney had the right to seek a charging lien which the agreement described as “a lien upon the property that was awarded to you as a result of equitable distribution in the final order or judgment in the case.” The client also signed a “statement of client's rights and responsibilities” which stated that a court could give the attorney a charging lien which “entitled your attorney to payment for services already rendered at the end of the case out of the proceeds of the final order or judgment.” The retainer agreement further provided that if a dispute over fees arose, the client had a right to seek arbitration of the fee dispute. This right is triggered by the attorney sending a notice, and the client would have 30 days to seek binding arbitration of the contested fees.
The attorney's application is properly before the court. Judiciary Law § 475, which establishes a statutory attorney's lien, permits enforcement of the lien either by way of motion in the main action or by plenary action. Miller v. Kassatly, 216 A.D.2d 260, 628 N.Y.S.2d 687 (1st Dept.1995).
After a trial of the divorce action, the referee directed that the husband's IRA account was marital property subject to equitable distribution. When the coverture fraction was applied under Majauskas v. Majauskas,
the wife received 38.6% of the account which was to be distributed according to a qualified domestic relations order (QDRO). Pursuant to the judgment of divorce, the court later signed a QDRO which provided, in pertinent part:
The coverture fraction is a method of allocating marital shares of retirement assets derived from Majauskas v. Majauskas, 61 N.Y.2d 481, 463 N.E.2d 15, 474 N.Y.S.2d 699 (1984); see also Rodriguez v. Rodriguez, 70 A.D.3d 799, 894 N.Y.S.2d 147 (2nd Dept.2010).
the plaintiff's (wife's) share ... shall be transferred to the plaintiff ... by way of a trustee to trustee transfer to an individual retirement account ... this instrument is designed to satisfy, and this court deems it to satisfy, the definition of a qualified domestic relations order as that term is defined in Internal Revenue Code of 1986, the Retirement Equity Act of 1984 and the Retirement Income Security Act of 1974.
The QDRO permitted a roll-over of the wife's marital share into an IRA in her name. While the total amount transferred pursuant to the QDRO is unknown, the wife, in May 2012, told her attorney that she had $72,000 still held in her IRA account.
At the end of the divorce, the wife and her attorney discussed paying the bill, but when all was said and done, she owed him $26,874.58, for which the attorney, in his application before this court, now seeks a charging lien.
The wife, in opposition, contests the amount of fees owed and whether either a retaining lien or a charging lien can be asserted against the IRA. The court heard oral argument and reserved decision subject to arbitration.
In a contemporaneous application, the husband brought a contempt action against the wife, seeking enforcement of the judgment of divorce. The court held a hearing on that application and has reserved decision awaiting final submissions. It appears that the funds held in the wife's IRA are the only available resource to pay any claims made by the husband in the contempt proceeding.
The amount of any fees is subject to arbitration. 22 NYCRR 137.0; Eiseman Levine Lehrhaupt & Kakoyiannis, P.C. v. Torino Jewelers, 44 A.D.3d 581, 844 N.Y.S.2d 242 (1st Dept.2007). The retainer agreement required the attorney to give his client 30 days notice of her right to elect the arbitration process. There is no evidence before the court indicating that such notice was given. Therefore, the client's right to seek arbitration still exists and the mandatory fee arbitration under the court rules should occur. Mahler v. Campagna, 60 A.D.3d 1009, 1011–1012, 876 N.Y.S.2d 143 (2nd Dept.2009) (fee arbitration in matrimonial case); Lousissiant v. DePaolo, 2010 N.Y.Misc LEXIS 5418 (Sup.Ct. Queens Cty 2010) (if no 30–day notice is given, the attorney may not recover a fee in matrimonial matter). However, the fee dispute does not preclude enforcement of the charging lien. Moody v. Sorokina, 50 A.D.3d 1522, 1523–1524, 856 N.Y.S.2d 755 (4th Dept.2008).
This court grants the attorney a retaining lien, which allows him to keep the client's file until paid, even though the wife may not need to recover her file from her three-year-old completed divorce. Ventola v. Ventola, 112 A.D.2d 291, 292, 491 N.Y.S.2d 736 (2nd Dept.1985); Dialcom, LLC v. AT & T Corp., 2012 N.Y. Slip Op. 52213(U), p. 26, n. 1, 2012 WL 6051842 (Sup.Ct. Kings Cty. 2012). The attorneys remedies for a retaining and charging lien are not exclusive, but cumulative. Balestriere PLLC v. BanxCorp, 96 A.D.3d 497, 947 N.Y.S.2d 7 (1st Dept.2012). It is noteworthy that “[an] attorney with a [retaining] lien on a file which no one wants is like a garage mechanic with an abandoned junk car in his possession” Theroux v. Theroux, 145 A.D.2d 625, 627, 536 N.Y.S.2d 151 (2nd Dept.1988).
Several facts are pertinent to this court's analysis. First, there is no evidence that the wife ever contested her attorney's charges until after the judgment of divorce. Second, there is no allegation before the court that the wife ever agreed to pay the attorney's fees specifically from the IRA account. Third, there is no evidence that the wife possesses any other assets, distributed under the divorce judgment, available to satisfy the charging lien. Finally, there is no allegation that the client, in the divorce judgment, engaged in any collusive or other improper behavior to thwart the attorney's recovery of his fees.
Before reviewing the law in this matter, it is important to recognize several factors regarding the QDRO and the roll-over of the IRA from the husband to the wife. First, there is no dispute that the wife's account, created when her marital share was rolled-over by the plan administrator, qualifies as an IRA under the Internal Revenue Code. 26 U.S.C. § 408(a) (2000 ed. and Supp. II). The wife, as the designated beneficiary, has a nonforfeitable right to the balance held in the rolled-over IRA account.
Second, the roll-over of the marital share from the husband's IRA to the wife's IRA was properly done by the QDRO, which “creates or recognizes the existence of an alternate payee's right to ... receive all or a portion of the benefits payable with respect to a participant under a plan.” Duhamel v. Duhamel, 4 A.D.3d 739, 772 N.Y.S.2d 437 (4th Dept.2004). Pursuant to the QDRO, the transfer of funds occurs between trustees and the recipient does not, during the transfer, have access to, or outright ownership, of the trust funds. See Boggs v. Boggs, 520 U.S. 833, 846, 117 S.Ct. 1754, 138 L.Ed.2d 45 (1997) (a QDRO is a type of domestic relations order which creates or recognizes an alternate payee's right to, or assigns to an alternate payee the right to, a portion of the benefits payable with respect to a participant under a plan). The QDRO in this case specifically refers to a “ trustee-to-trustee” transfer of the IRA funds. The “trustee-to-trustee” roll-over preserves the tax-free nature of the transaction. Anonymous v. Anonymous, 27 Employee Benefits Cas. 1293 (S.D.N.Y.2001) (QDRO is an statutory exception to ERISA's general bar on the assignment of plan benefits, and is a mechanism whereby a qualified individual, known as an “alternate payee,” can serve certain domestic relation orders on the administrator of another person's without any immediate tax impact); Cadet v. Cadet, 216 N.Y.L.J. 113 (Sup.Ct. Rockland Cty.1996) (a QDRO permits a roll over to be effected from defendant's account to plaintiff's account in a manner which will result in a tax-free transaction); see also Waggener v. Waggener, 51 P.3d 379, 2002 Haw.App. LEXIS 136, p. 8 (Hi.Ct.App.2002) (all or any portion of the interest in a qualified plan that is awarded to a spouse by a QDRO may be rolled over tax free to an IRA or to another qualified plan, subject to the same rules that apply in the case of a distribution to a participant, citingInternal Revenue Code § 402[c] and [e][1][B] ); Rodoni v. Commissioner, 105 T.C. 29, 34 (Tax Ct.1995), (Section 402[a][6][F] of the Code provides an exception to the general rule for certain rollovers by recipients of distributions made pursuant to a QDRO, if the recipient transfers, or rolls over, the distributed property into an IRA or other qualified plan).
In order to preserve the tax-free roll-over of these funds, the wife, while the beneficiary of the IRA account, is not the titled owner of the funds transferred into her IRA. See Winter v. Boskin, 181 A.D.2d 1000, 582 N.Y.S.2d 573 (4th Dept.1992) (discussing the tax impact of certain roll-overs); Fleischmann v. Fleischmann, 24 Misc.3d 1225(A), 2009 WL 2217384 (Sup.Ct. Westchester Cty 2009) (discussing tax and other questions relating to an IRA rollover, including that the IRA is “set up for the benefit of the plaintiff” and further that the plaintiff is not the titled owner of the funds). Finally, any withdrawal from wife's IRA, after the roll-over, does have tax impacts. Under the Internal Revenue Code, there are two types of withdrawals from IRAs—qualified and unqualified. When the account owner withdraws money from the IRA upon reaching a certain age or for specified purposes relating to retirement, the contributions, together with whatever amounts those contributions had earned, are considered a “qualified withdrawal” and are taxed as part of gross income. 26 USCS § 408(d)(1); Kitt v. United States, 288 F.3d 1355, 1356 (Fed.Cir.2002); Swanton v. Comm'r, 99 T.C.M. (CCH) 1576, T.C. Memo 2010–140, p. 9 (Tax Ct.2010) (withdrawals from IRAs were taxed as part of gross income under Section 72 of the IRC). Congress also provided that an IRA account holder who makes an unqualified withdrawal from the account (i.e., before reaching the specified age or for a non-retirement related purpose) would find his taxable gross income increased by an amount equal to 10 percent of the portion of such amount. 26 USCS § 72(t).
Kitt v. United States, 288 F.3d at 1356;see generally Rousey v. Jacoway, 544 U.S. 320, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005).
The IRC allows penalty-free distributions because of factors apart from age in certain circumstances. See 26 USC. § 72(t)(2)(A)(ii)-(iv) (permitting penalty-free distributions due to the death of or disability of the IRA-holder, or as substantially equal periodic payments for the life expectancy of the accountholder); § 72(t)(2)(B) (medical expenses); §§ 72(t)(2)(D)-(F) (health insurance premiums, certain higher education expenses, and first-time home purchase). These circumstances are confined to specific and narrow uses and none applies here.
Against this federally-painted landscape governing the roll-over and taxation of IRAs, two New York statutes create a seeming conflict between the rights of IRA holders to be immune from claims of creditors, and the rights of attorneys to protect earned fees.
The Supreme Court noted that Congress has made it extremely difficult to make any withdrawals from an IRA prior to the designated age because the 10–percent penalty applies proportionally to any amounts withdrawn; it “effectively prevents access to the entire balance” in the IRA. Rousey v. Jacoway, 544 U.S. 320, 328, n. 1 & 2, 125 S.Ct. 1561, 161 L.Ed.2d 563.
In 1989 and 1994, the New York State Legislature, through amendments to CPLR § 5205, clarified that IRAs were exempt from claims of creditors. Bank Leumi Trust Co. v. Dime Sav. Bank, FSB, 85 N.Y.2d 925, 626 N.Y.S.2d 999, 650 N.E.2d 846 (1995) (Under CPLR § 5205[c][1] and [2] as amended in 1989, an Individual Retirement Account created pursuant to 26 USC § 408[d] [3], as a result of rollovers from either “a Keogh (HR–10), retirement or other [qualified section 401] plan established by a corporation” is exempt from a judgment creditor's levy). In Pauk v. Pauk, 232 A.D.2d 392, 648 N.Y.S.2d 134 (2nd Dept.1996), the Second Department reviewed this legislative design:
Effective September 1, 1994, CPLR § 5205(c)(2) was amended to include IRAs as accounts that are “conclusively presumed to be spendthrift trusts” under CPLR § 5205(c)(3), and exempt from attachment to enforce a money judgment except in certain circumstances not relevant here. Prior to this amendment only those IRAs which were created as a result of “rollovers” from an exempt trust or pension plan qualified as exempt (citations omitted), whereas IRAs established by funds traceable to the judgment debtor were not protected ... A review of the legislative history of the 1994 amendment establishes that its purpose was to exempt “IRAs from the application of money judgments which will provide protection to individuals who establish IRA accounts for their retirement” (Mem. of Sen. Volker, ch. 127, 1994 Legis. Ann., at 73). The Office of Court Administration likewise notes that the amendment exempts “any trust” qualifying as an Internal Revenue Code § 408 IRA (Mem. of Off. of Ct. Admin., 1994 McKinney's Session Laws of N.Y. at 3278).
Id. at 393, 648 N.Y.S.2d 134. The amended CPLR exemption expressly applies to “roll-overs” from IRAs.
CPLR § 5205(c)(2) (exemptions applies to funds “qualified under section 401 of the United States Internal Revenue Code of 1986, as amended, or created as a result of rollovers from such plans”); Lauder v. Jacobs, 10 Misc.3d 1052(A), 2005 WL 3115332 (Sur. Ct. Westchester Cty.2005) (IRAs are exempt if derived from a roll-over of otherwise exempt pension funds).
The author of this opinion was a member of the New York State Senate during the debate over the 1994 amendment to CPLR § 5205.
In an attempt to rebut this legislative command, the attorney in this case cites several cases that suggest that IRAs are subject to creditor claims. Long Island Jewish Hillside Medical Center v. Prendergast, 134 Misc.2d 93, 509 N.Y.S.2d 697 (Sup.Ct. Queens Cty 1986); Abrahams v. New York State Tax Com., 131 Misc.2d 594, 500 N.Y.S.2d 965 (Sup.Ct. Westchester Cty 1986); Helmsley–Spear, Inc. v. Winter, 74 A.D.2d 195, 426 N.Y.S.2d 778 (1st Dept.1980). However, these cases predate the 1994 amendments to the CPLR and the court no longer considers them as having any precedential value on this subject.
The foregoing exemption is unavailable where: (1) the asset is transferred within 90 days before commencement of the action upon which the judgment is entered; and (2) the transfer is deemed fraudulent under Debtor and Creditor Law Article 10. CPLR § 5205(c)(5). Neither circumstance is present in this case.
Against this seemingly insurmountable federal taxation of IRAs and the limitation on withdrawals and direct state command regarding the immunity granted to IRAs from creditor's claims, this court finds another compelling statutory command in Section 475 of the New York Judiciary Law which contains broad language regarding the extent of an attorney's charging lien:
... the attorney who appears for a party has a lien upon his client's cause of action, claim or counterclaim, which attaches to a verdict, report, determination, decision, judgment or final order in his client's favor, and the proceeds thereof in whatever hands they may come;Jud. Law. § 475 ( emphasis added ). This unequivocal language clearly suggests that the legislature intended that attorneys seeking to be paid could reach funds held by third parties. At first blush, the broad language strongly suggests that the mere fact that IRA is held in trust for the wife, does not prevent assertion of a charging lien against it and also suggests any tax complications, caused to the wife if the lien is paid from trust funds, are not a justification to deny the lien.
A brief review of the elements of a charging lien under Section 475 of the Judiciary Law supports this broad reading of the statute's reach and the Legislature's use of the words “in whatever hands they may come.” A charging lien automatically comes into existence, without notice or filing, upon commencement of the action, and is measured by the reasonable value of the attorney's services in the action, unless fixed by agreement. N.K. v. M.K., 19 Misc.3d 1124, 2008 N.Y. Slip Op. 50837(U), p. 7, 2008 WL 1837392 (Sup.Ct. Kings Cty 2008); Resnick v. Resnick, 24 A.D.3d 238, 239, 806 N.Y.S.2d 200 (1st Dept.2005); see also Theroux v. Theroux, 145 A.D.2d 625, 536 N.Y.S.2d 151 (2nd Dept.1989). The charging lien creates an “equitable ownership interest” in the client's cause of action. Chadbourne & Parke, LLP v. AB Recur Finans, 18 A.D.3d 222, 223, 794 N.Y.S.2d 349 (1st Dept.2005), cited in Dominguez v. Zinnar, 2012 N.Y. Slip Op. 30138(U), 2002 WL 34707968 (Sup.Ct. New York Cty 2012). The Court of Appeals has concluded that because a cause of action is a species of property, the attorney can acquire a vested property interest—an “equitable ownership interest”—which cannot subsequently be disturbed by the client or anyone claiming through or against the client. LMWT Realty Corp. v. Davis Agency Inc., 85 N.Y.2d 462, 467, 626 N.Y.S.2d 39, 649 N.E.2d 1183 (1995); In re Lubin, 213 N.Y.S.2d 143, 147 (Sup.Ct. Kings County 1961) (the “lien of an attorney attaches from the time of the commencement of the action and not the time of the presentment of a notice of claim to an alleged debtor”); Resnick v. Resnick, 24 A.D.3d 238, 806 N.Y.S.2d 200 (1st Dept.2005). “Manifestly, then, an attorney's charging lien is something more than a mere claim against either property or proceeds; an attorney's charging lien is a vested property right created by law and not a priority of payment.” LMWT Realty Corp. v. Davis Agency Inc., at 467–468, 626 N.Y.S.2d 39, 649 N.E.2d 1183. There are three prerequisites to the creation of a charging lien, as a result of the attorney's efforts: (1) the client must assert a claim, (2) which results in proceeds, (3) payable to or for the benefit of the client. Batista v. KLS–Kachroo Legal Servs., P.C., 2012 N.Y. Slip Op. 32016(U), p. 9, 2012 WL 3186608 (Sup. Cy. New York Cty.2012); City of Troy v. Capital Dist. Sports, 305 A.D.2d 715, 716, 759 N.Y.S.2d 795 (3rd Dept.2003) (the attorney's charging lien “attaches only when proceeds in an identifiable fund are created by the attorney's efforts in that action or proceeding”); Tunick v. Shaw, 6 Misc.3d 1014(A) at p. 7, 2004 WL 3133245 (N.Y.Sup.Ct.2004); Moody v. Sorokina, 50 A.D.3d 1522, 856 N.Y.S.2d 755 (4th Dept.2008); Theroux v. Theroux, 145 A.D.2d 625, 536 N.Y.S.2d 151 (2nd Dept.1989). In a matrimonial action, a charging lien is available only to the extent that an equitable distribution award reflects the creation of a new fund by an attorney greater than the value of the interests already held by the client. Noble v. Noble, 2011 N.Y. Slip Op. 30835(U), 2011 WL 1430041 (Sup.Ct. Albany Cty. 2011); Resnick v. Resnick, 24 A.D.3d 238, 806 N.Y.S.2d 200 (1st Dept.2005). Importantly, the Court of Appeals has repeatedly recognized the sweeping reach of charging lien under Section 475. In Cohen v. Grainger, Tesoriero & Bell, 81 N.Y.2d 655, 658, 602 N.Y.S.2d 788, 622 N.E.2d 288 (1993), the court intoned that the lien, as drafted by the legislature, reflected the intention to protect attorney claims for fees: “the lien is imposed on the cause of the action and that the proceeds, wherever found, are subject to it.” A century of Court of Appeals holdings affirm this wide dimension of the charging lien, even in its earlier statutory iteration:
the general rule is that a lien upon property attaches to whatever the property is converted into and is not destroyed by changing the nature of the subject It follows its subject and cannot be shaken off by a change of form or substance. It clings to any property or money into which the subject can be traced
Fischer–Hansen v. Brooklyn H.R. Co., 173 N.Y. 492, 501, 66 N.E. 395 (1903), cited in Tunick v. Shaw, 45 A.D.3d 145, 148–49, 842 N.Y.S.2d 395 (1st Dept.2007). While Fischer–Hansen v. Brooklyn H.R. Co. interpreted the earlier version of the Code of Civil Procedure, it noted that the phrase “proceeds thereof in whosoever hands they may come” was added by the Legislature in 1897. The court concluded that the statute was remedial in character, and hence should be construed liberally in aid of the object sought by the legislature, which was to furnish security to attorneys by giving them a lien upon the subject of the action. Fischer–Hansen v. Brooklyn H.R. Co. at 499, 66 N.E. 395.
In his argument before this court, the attorney repeatedly notes that in addition to the expansive sweep of the language in Section 475, the charging lien is “equitable in character.” He cites two century-old cases, both of which cite a predecessor statute of the current charging lien statute.
These cases, which have contemporary counterparts, simply suggest the court must consider all the facts and circumstances in a case before enforcing the lien. One case, cited by the attorney, does provide an instance in which a court enforced a charging lien against an otherwise exempt IRA. In Memmo v. Perez, 63 A.D.3d 472, 882 N.Y.S.2d 24 (1st Dept.2009), the husband stipulated to a charging lien against the husband's share of any equitable distribution. The court held the stipulation could be enforced against the husband's IRA funds which were transferred to him as part of the divorce settlement. Because the husband stipulated to it, the court held that CPLR § 5205(c)(2), which otherwise exempted the roll-over of retirement accounts, could not be asserted as a defense to the charging lien. The appeals court noted that the settlement agreement left the husband with virtually no “liquid assets with which to defray” the lien and the lower court had “providently exercised its discretion to look behind the settlement.” The Appellate Division enforced the lien. Id. at 473, 882 N.Y.S.2d 24. The court also noted that the transfer of IRA accounts occurred within 90 days of the husband's stipulation to the lien, which further rendered the funds subject to the lien. NY CPLR § 5205(c)(5)(I).
See Thomasson v. Latourette, 63 A.D. 408, 71 N.Y.S. 559 (2nd Dept.1901)(citing Section 66 of the Code of Civil Procedure and noting the “remedy given is equitable in character, and we think the equity side of the court has jurisdiction.”). This court notes that the Civil Code Section, enacted in 1899, contains the same broad language as its contemporary Judiciary Law counterpart. It expressly applies the lien to any “proceeds thereof in whosoever hands they may come.” NY Code Civ. Proc. § 66, cited in In re Pieris, 82 A.D. 466, 81 N.Y.S. 927 (2nd Dept.1903).
The facts easily distinguish Memmo v. Perez from this case. Here, there is no evidence that the wife colluded to isolate the IRA funds and thwart the attorney's claims for fees. There is no evidence of a stipulated charging lien. The attorney only sought the charging lien in July 2012, more than eight months after the QDRO was signed, and entered in the Monroe County Clerk's Office. Given these facts, the attorney's charging lien, even if granted by the court, would not fall under the exception in CPLR § 5052(c)(5) (ii). In Memmo v. Perez, the court did not discuss any of the tax implications to the husband if the law firm were able to collect its lien from the IRA, never considered whether the withdrawal would be qualified under the IRC, and did not discuss whether the withdrawal could be accomplished by a further QDRO to minimize the tax impact. In fact, in Memmo v. Perez the court declined to consider the central question which is at heart of this matter: whether the transfer of the marital share of retirement funds from one spouse to another creates a “new fund greater than the assets already held by the husband.” Id. at 472, 882 N.Y.S.2d 24.
The husband in Memmo v. Perez argued that despite the stipulation, the transfers of the IRA funds did not create a “new fund” because he already held a marital share of his wife's IRA and transfer from one IRA to another did not create a “new fund” greater than the value of the interests already held by the husband. The court, faced with a stipulated lien and for equitable reasons that emerge in the later course of the opinion, declined to even consider that argument.
The court in Memmo v. Perez cited two cases after its conclusion that the IRA was a “new fund,” but neither case mentions IRAs and both cases rest, as does Memmo v. Perez, on the impact of a stipulated lien on the attorneys' rights to recover. Miller v. Kassatly, 216 A.D.2d 260, 628 N.Y.S.2d 687 (1st Dept.1995); Resnick v. Resnick, 24 A.D.3d 238, 239, 806 N.Y.S.2d 200 (1st Dept.2005).
Based on extensive research, there is no other New York precedent on the question of whether a judgment of divorce, that awards a party their equitable share of tax-sheltered retirement funds qualifies as the “distribution of some proceeds” or “a new fund” under the charging lien statute. The majority of precedents on this question hold that, for want of a better term, some “available cash proceeds” must be created in order to provide a corpus to satisfy the lien. See e.g., Moody v. Sorokina, 50 A.D.3d 1522, 856 N.Y.S.2d 755 (4th Dept.2008) (conversion of a marital interest in a vehicle into a solely-titled interest in the vehicle represents “proceeds” under the lien statute).
If “available cash proceeds” are a prerequisite to satisfy the lien, the mere fact that the funds are held in trust for the wife—as exists in this case—does not appear to defeat the assertion of the lien because the statute expressly permits the lien to reach funds held by a third-party. See Goldstein, Goldman, Kessler & Underberg v. 4000 East River Road Ass., 64 A.D.2d 484, 409 N.Y.S.2d 886 (4th Dept.1978) (to enforce the lien, the court may trace “proceeds” into the hands of a third person).
There is no dispute that the QDRO is a “final order” that fits within the language of Section 475 of the Judiciary Law.
In Noble v. Noble, the court held that the transfer of an interest in a home, held by the wife as a tenant-by-entirety with her husband, created “proceeds” under the Judiciary Law. The logic of the court in reviewing the question of the wife's interest in the house is illustrative for resolving the “proceeds” question as it applies to the IRA roll-over in this case. In Noble v. Noble, the wife, through the transfer and sale of her marital interest in the marital residence, received cash proceeds, even though she was simply converting her marital share into cash. The court held that the charging lien could be asserted against those proceeds.
The Fourth Department in Goldstein Goldman, Underberg & Kessler v. 4000 East River Ass., stated, by way of illustration that “proceeds” are not created by successful litigation which results in enhancing the value of real estate by securing a zoning change from residential to commercial ( Matter of Desmond v. Socha, 38 A.D.2d 22, 327 N.Y.S.2d 178,affd.31 N.Y.2d 687, 337 N.Y.S.2d 261, 289 N.E.2d 181, supra); a declaration that reconnection fees charged to gas users were illegal and uncollectible ( Kovarsky v. Brooklyn Union Gas Co., 170 Misc. 855, 11 N.Y.S.2d 286,affd.261 App.Div. 822, 25 N.Y.S.2d 784); a declaration that a real property mortgage is invalid, and staying its foreclosure ( Matter of Snitow v. Jackson, 4 Misc.2d 351, 158 N.Y.S.2d 304). Conversely, “proceeds” from which counsel fees may be secured have been identified from: a refund of contract moneys ( Gerzof v. Sweeney, 22 N.Y.2d 297, 292 N.Y.S.2d 640, 239 N.E.2d 521); money payments due on a client's assigned invoices ( Todd v. Mutual Factors, 3 A.D.2d 537, 161 N.Y.S.2d 738,affd.4 N.Y.2d 759, 172 N.Y.S.2d 169, 149 N.E.2d 94); the equity of redemption to real property ( Robinson v. Rogers, 237 N.Y. 467, 143 N.E. 647).Goldstein, Goldman, Kessler & Underberg v. 4000 East River Road Ass., 64 A.D.2d at 487, 409 N.Y.S.2d 886.
On the basis of these precedents, this court faces the question that the First Department declined to consider in Memmo v. Perez: whether the distribution of the IRA through a QDRO constitutes creation of “new fund” or “proceeds” under the lien statute. Under equitable distribution in the Domestic Relations Law, the wife had a statutory “marital share” of the husband's IRA. As a matter of law, the wife's marital share existed at the time of the commencement of the action, even though the IRA, in which her share was held, was titled solely in her husband's name. When the court, through the QDRO, rolled-over the IRA, it did not create “proceeds” for the wife. It simply, as a matter of law, transferred her marital share from a trust, in which her husband was the beneficial owner and she held a marital interest, into a trust in which she was the beneficial owner. As noted above, the wife never had access to “available cash proceeds” as the wife had access to in Noble v. Noble. Thus, in this court's view, the tax-free roll-over of the IRA through the QDRO does not create “proceeds” or “a new fund” within the meaning of that term under prior judicial interpretations of Section 475 of the Judiciary Law.
The court reaches this conclusion well aware that the Judiciary Law gives this court the power to trace the IRA funds to the wife, even though held by a third-party in trust for her and despite the repeated incantations from the Court of Appeals to protect the attorney's charging lien. In fashioning the exemptions for IRAs under CPLR § 5052, the legislature wanted to preserve the integrity of retirement funds and IRA roll-overs from all creditors. If the legislature had intended to allow attorney charging liens, however meritorious, to be an exception to that blanket rule, the legislature would have easily created that exception. Having made no mention of the charging lien exception to CPLR § 5205, this court declines to countenance one by judicial interpretation, In addition, the New York courts have held that the charging lien does not attach to family support provisions in matrimonial settlements. A charging lien does not attach to an award of maintenance. Rosen v. Rosen, 97 A.D.2d 837, 468 N.Y.S.2d 723 (2nd Dept.1983). Child support is also immune from a charging lien. Haser v. Haser, 271 A.D.2d 253, 707 N.Y.S.2d 47 (2nd Dept.2000). There is no suggestion in the Domestic Relations Law that an attorney has a charging lien on the marital interests in tax-sheltered retirement accounts. Section 237 of the Domestic Relations Law permits attorneys to maintain an action for fees against either spouse, but makes no mention of any charging liens or their use against IRAs. DRL § 237. The absence of statutory guidance in the Domestic Relations Law, which governs fees chargeable in matrimonial actions, is some evidence that the Legislature did not intend the charging lien to interfere with court-ordered transfers of retirement accounts. Finally, this court declines to credit the attorney's argument and read the retainer agreement as constituting a waiver of the wife's right to object to the charging lien against her IRA. The retainer agreement merely mentions that the attorney may “seek a charging lien” against property awarded under equitable distribution, but no where in the agreement does the wife consent to a charging lien against her otherwise exempt property.
Before concluding, the attorney in this case does not request the issuance of a QDRO for his fees, although, as a practical matter, by seeking to enforce the lien against the IRA, he seeks its practical equivalent. The New York courts have granted spouses QDROs for legal fees awarded to the spouse. Adler v. Adler, 224 A.D.2d 282, 638 N.Y.S.2d 29 (1st Dept.1996); Renner v. Blatte, 170 Misc.2d 579, 650 N.Y.S.2d 943 (Sup.Ct. New York Cty. 1996) (including attorneys fees in the QDRO and adding that, as between spouses, while a “QDRO may trigger negative tax implications, this is no reason to allow a spouse with a pension or profit-sharing plan to escape his or her obligations”); AB v. GH, 31 Misc.3d 945, 948, 924 N.Y.S.2d 761 (Sup.Ct. New York Cty. 2011). The Supreme Judicial Court in Massachusetts authorized a QDRO to permit one spouse to claim attorneys from another spouse's ERISA-protected retirement accounts. Silverman v. Spiro, 438 Mass. 725, 784 N.E.2d 1 (Mass.2003). Two facts easily distinguish these cases from the matter at hand. First, the QDRO was based on an award of fees to one spouse from the other, unlike here, where the attorney is seeking fees from his former client. Second, in the cited cases, the party seeking the QDRO was an “alternate payee.” Pursuant to the QDRO exception to ERISA's spendthrift provision, only an “alternate payee” may be the beneficiary of a QDRO. 29 USC § 1056(d)(3) (B)(I)(I). The term “alternate payee” is defined as “any spouse, former spouse, child, or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to such participant.” Id. at § 1056(d)(3)(K). Here, the intended beneficiary of any requested charging lien-related QDRO would be the attorney, who does not qualify as an “alternate payee” and hence the QDRO would be illegal under ERISA. See also AT&T Management Pension Plan v. Tucker, 902 F.Supp. 1168 (C.D.Cal.1995) (orders for attorneys' fees are not QDROs and constitute a prohibited assignment or alienation of moneys held by the Plan and its trust to provide pension benefits to its participants and beneficiaries).
In reaching this conclusion, this court declines to read the phrase in the Judiciary Law that permits the charging lien to be pursued into “whatever hands they may come” to contravene the federal taxation treatment, ERISA-protection, and state exemption scheme which inheres in IRAs. As a matter of state law, reading the Judiciary Law to create a lien against the IRA roll-over would elevate the attorney's claims for fees over all other creditors, secured or otherwise, and give him a right unknown to any other creditor under the CPLR. The court, in resolving the conflict between the language of the CPLR and the Judiciary Law, sides with more recent changes to the CPLR, enacted after the creation of IRAs under federal law.
The Judiciary Law charging lien has existed, in large measure unchanged, since 1909. It was amended in 2012 to extend the lien to mediation and settlement negotiations. In contrast, ERISA, which established IRAs as a matter of federal law, was enacted in 1974 and the amendments to the CPLR making IRAs exempt from creditor claims date from 1989 and 1994. Chronologically, the recent CPLR amendments involving claims against IRAs could have easily exempted attorney charging liens, but the legislature chose not to.
Granting the lien would also be inequitable in this court's view. If the lien were recognized, then the attorney could, without the wife's consent, withdraw funds from the IRA, or presumably, the attorney could require the wife to withdraw funds to satisfy the lien. There is no federal exemption which permits a non-party to withdraw funds from the IRA. The withdrawal would be considered an unqualified withdrawal, which would require the wife to pay tax on the withdrawal and the 10% penalty as well. In this case, in order to pay the attorney the entire amount of his fees—$26,874.58—the wife, assuming a modest 15% overall tax bracket—would need to withdraw more than $4,031 to pay the income taxes and $2,687 to pay the 10% penalty, resulting in a total tax payment of $6,718 and a total withdrawal of $33,592 from the IRA. In short, the attorney, to collect his lien, would punish the wife by having her pay 25% in additional taxes on his fees. This court declines to authorize any such penalty, under the guise of granting her former attorney a charging lien against the IRA.
This court is not without sympathy for the attorney in this case, who may experience substantial difficulty in recovering any fees, even after arbitration. The funds transferred to the wife's IRA represent the last available corpus of funds from the marital dissolution to satisfy the attorney's fees. In considering the attorney's request, the question arises of whether the court would enforce a charging lien if it had been asserted earlier, for example, prior to the IRA roll-over and the filing of the QDRO. The New York courts have frowned on delay by attorneys in asserting charging liens. Kaplan v. Reuss, 113 A.D.2d 184, 495 N.Y.S.2d 404 (2nd Dept.1985), aff'd68 N.Y.2d 693, 506 N.Y.S.2d 304, 497 N.E.2d 671 (1986) (failing to timely assert the charging lien within a reasonable time after it attached). In this case, the attorney delayed seeking the charging lien until after completion of the divorce and well after the IRA roll-over. But even if the attorney has asserted the lien prior to the entry of the QDRO, this court, in view of the policy reasons articulated above and the statutory restrictions, would be equally skeptical of allowing the attorney to “ intercept” the IRA funds prior to their roll-over into the wife's account. Despite all of these policy considerations, this court does not rule out a circumstance in which an attorney obtains his client's consent for a charging lien—such as the stipulated lien which was featured in Memmo v. Perez. Even then this court would most likely require extensive disclosure by the attorney about the federal income and tax penalties to his client before concluding that the client had consented to withdraw funds from the IRA to compensate their counsel. And, even if such disclosure occurred, this court would have great difficulty in concluding that the client voluntarily consented to enforcement of the lien from IRA funds, when paying the attorney would involve a substantial tax penalty to the client.
Under these circumstances, the federal tax consequences on any withdrawal, the penalty imposed when an unqualified withdrawals is made, the actual ownership of the trust funds by the trustee, the “anti-alienation” provisions of ERISA, the wife's never having “available cash proceeds” during the trustee-to-trustee transfer of the funds from the husband's IRA to her own, the broad language protecting IRA roll-overs from the reach of creditors in CPLR § 5205, the lack of express direction in Section 475 in the Judiciary Law to permit a charging lien against retirement funds, and the lack of any provisions relating to a charging lien for attorneys fees under New York's Domestic Relations Law, mandate that the attorney's request for a charging lien against the IRA held by the wife in this case be denied.
The request for a charging lien is denied. The matter of the amount of fees that are encompassed in the attorney's retaining lien is referred to arbitration consistent with the rules of the court. 22 NYCRR § 137.0.