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Gilchinsky v. National Westminster Bank N.J.

June 14, 1999

LEA GILCHINSKY, PLAINTIFF-RESPONDENT,
v.
NATIONAL WESTMINSTER BANK N.J., THE ESTATE OF RICHARD RODGERS, THE ESTATE OF DOROTHY RODGERS, THE ESTATE OF OSCAR HAMMERSTEIN II, JACK TERHUNE, SHERIFF OF BERGEN COUNTY AND JOHN DOES 1-10 (WHOSE IDENTITIES ARE NOT YET KNOWN), DEFENDANTS, AND THE RODGERS AND HAMMERSTEIN ORGANIZATION, DEFENDANT-APPELLANT. THE RODGERS AND HAMMERSTEIN ORGANIZATION, PLAINTIFF-APPELLANT,
v.
LEA GILCHINSKY, DEFENDANT-RESPONDENT.



The opinion of the court was delivered by: Garibaldi, J.

Argued March 30, 1999

On certification to the Superior Court, Appellate Division, whose opinion is reported at 311 N.J. Super. 339 (1998).

N.J.S.A. 25:2-1 generally exempts property held in an individual retirement account ("IRA") from attachment by creditors. Although providing a safe harbor for retirement assets, N.J.S.A. 25:2-1(b)(1) specifically states that assets fraudulently conveyed in violation of the Uniform Fraudulent Transfer Act are not immune from attachment. The question raised in this appeal is whether defendant's transfer of funds from her New York pension plan, established pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001 to-1461, into a New Jersey IRA constituted a fraudulent conveyance, thereby removing the funds from the exemption under N.J.S.A. 25:2-1(a).

I.

Lea Gilchinsky was employed as a bookkeeper by Rodgers and Hammerstein Organization ("R&H") from 1987 through 1991. *fn1 During that period, she embezzled over $700,000 from the company. In August 1991, Gilchinsky was indicted for second-degree grand larceny *fn2 by a New York grand jury. In May 1992, she pled guilty to attempted second-degree grand larceny and was sentenced to one year in prison.

In July 1992, R&H filed a civil action against Gilchinsky in New York to recover $935,643, consisting of the amount embezzled plus the $204,474 R&H had paid Gilchinsky in salary and bonuses during the period of the theft. In January 1993, the New York Supreme Court issued a temporary restraining order prohibiting "any sale, assignment, transfer, or interference with any" interest of defendant in personal and/or real property located in the State of New York. On December 29, 1994, a final restraining order was issued prohibiting defendant from making "any sale, assignment or transfer of, interference with any property, in which you have an interest."

In February 1993, the New York Supreme Court awarded R&H a money judgment against defendant in the amount of $226,455.93, for partial damages suffered as a result of the embezzlement. A Special Master was appointed to determine the remainder of the award. The court also finalized the Order of Attachment, placing a lien on all of defendant's property located in the State of New York.

Throughout the next year and a half, R&H attempted to negotiate with defendant to resolve the lawsuit. Defendant's only admitted asset was $84,280.55, vested in R&H's ERISA Profit Sharing Plan. In June 1994, defendant requested that R&H roll that money over to an IRA account she had opened in the Fort Lee, New Jersey branch of National Westminster Bank ("NatWest"). R&H did not comply immediately with her request. Instead, the company pursued settlement Discussions with defendant regarding the ERISA funds throughout the summer and fall of 1994.

At a deposition in October 1994, defendant testified that she had one demand checking account in the Fort Lee branch of NatWest bank that she had opened in 1991. She stated that her brother deposited money into that account so she could pay her rent and credit card debts. She further testified that she had no individual retirement accounts and no personal property of substantial value. She admitted that she had closed out all of her New York bank accounts and withdrew all the money she had accrued in a New York IRA after the judgment had been entered against her. She claimed that she was currently insolvent, having spent all of her money in Atlantic City to fuel her gambling addiction. The R&H pension was the only money defendant allegedly had.

R&H continued to negotiate with defendant regarding the pension until November 1994, when the Discussions fell through. In a letter to R&H's General Counsel, defendant demanded that her share of the Rodgers and Hammerstein Profit Sharing Plan be transferred immediately in one lump-sum payment into an IRA account opened in her name at NatWest Bank in Fort Lee, New Jersey. Under federal law, R&H had no choice but to comply with the request. 29 U.S.C. § 1056(d). On December 30, 1994, R&H transferred defendant's ERISA pension to the New Jersey IRA.

R&H immediately filed suit in New Jersey to domesticate the New York judgment and place a lien on the funds. On January 9, 1995, the Superior Court issued an Order to Show Cause. On January 10, 1995, the court issued a Writ of Attachment, placing a lien on all of defendant's personal property located in the State of New Jersey.

Defendant never answered the Order to Show Cause and did not oppose the order attaching her IRA. Instead, her attorney filed a separate lawsuit collaterally attacking the orders. Ruling that defendant's action was barred by the entire controversy doctrine, the court dismissed her claims. On February 2, 1995, the court entered an Order domesticating the foreign judgment and directing the turnover of all property levied upon by the January 10 Writ of Attachment. On April 4, 1995, NatWest delivered the funds contained in defendant's New Jersey IRA to R&H.

In June 1996, over sixteen months later, defendant moved for relief from the February 2, 1995 Order. Defendant contended that the funds in the IRA were immune from attachment under N.J.S.A. 25:2-1(a). The court granted defendant's motion for reconsideration, limited to the question of whether R&H's attachment of the funds in the New Jersey IRA violated N.J.S.A. 25:2-1.

Both parties agreed that the facts were not in dispute and the matter was ripe for summary judgment. After oral argument, the trial court concluded that given the timing of the transfer, the New York restraining order, defendant's lack of contacts with New Jersey, and the fact that she was otherwise insolvent, "[n]o rational fact finder . . . objectively could come to any Conclusion but that the purpose of this across the Hudson transfer was for no other purpose than to evade, thwart, [and] hinder creditors and to preclude, or at least make [collection] extremely difficult . . . ." Accordingly, it held the money was not exempt from attachment under N.J.S.A. 25:2-1. See N.J.S.A. 25:2-1(b)(1).

The Appellate Division reversed, finding that the "motion Judge considered only a few of the factors under N.J.S.A. 25:2-26 in reaching his decision[.]" Gilchinsky v. Westminster Bank, 311 N.J. Super. 339, 349 (1998). Giving controlling weight to the absence of three factors enumerated in N.J.S.A. 25:2-26, the Appellate Division concluded that defendant did not have an actual intent to defraud her creditors. According to the panel, the "controlling factors" indicating the transfer was not a fraudulent conveyance were: "that the transfer was not concealed; the creditor, R&H, participated in the transfer; and the funds continued to be held in a trust account after the transfer." The panel reasoned that the funds were protected from attachment in both New York and New Jersey. Therefore, defendant gained no advantage by the transfer. The Appellate Division also did not believe that the transfer violated any New York restraining order. Accordingly, it held that the money in the NatWest IRA was "entitled to the safe harbor protection the Legislature created for pension funds" and was immune from attachment under N.J.S.A. 25:2-1(a). Gilchinsky, supra, 311 N.J. Super. at 350. We granted R&H's petition for certification, ___ N.J. ___ (1998), and now reverse.

II.

ERISA contains an anti-alienation provision prohibiting the assignment or garnishment of pension benefits. 29 U.S.C. § 1056(d)(1). Had defendant left her money in the R&H Profit Sharing Plan, there is no doubt that it would have been exempt from attachment. Guidry v. Sheet Metal Workers Nat'l Pension Fund, 493 U.S. 365, 376, 110 S. Ct. 680, 687, 107 L. Ed.2d 782, 795 (1990) (refusing to carve out equitable exception to Section 1056(d) even where employee engaged in malfeasance and/or criminal misconduct), appeal after remand, 10 F.2d 700 (10th Cir. 1993), reh'g 39 F.3d 1078 (10th Cir. 1994), cert. denied, 514 U.S. 1063, 115 S. Ct. 1691, 131 L. Ed.2d 556 (1995); see also State v. Pulasty, 136 N.J. 356, 361 (refusing to attach funds while in ERISA account but allowing attachment once funds in pensioner's possession), cert. denied, 513 U.S. 1017, 115 S. Ct. 579, 130 L. Ed.2d 494 (1994). Unlike ERISA, however, the tax code contains no anti-alienation provision. Nor does it address the validity of attachment of IRA funds. Therefore, that issue is governed by State law. C.P. v. Township of Piscataway Bd. of Educ., 293 N.J. Super. 421, 437 (App. Div. 1996); Halliburton Co. v. Mor, 231 N.J. Super. 197, 199 (Law Div. 1988); In re Yuhas, 104 F.3d 612 (3d Cir.), cert. denied, Orr v. Yuhas, 521 U.S. 1105, 117 S. Ct. 2481, 138 L. Ed.2d 990 (1997). Accordingly, by transferring the money to a New Jersey IRA, the money lost the blanket protection afforded by ERISA and became subject to New Jersey law.

A.

N.J.S.A. 25:2-1 governs the rights of creditors to attach

funds in an IRA. N.J.S.A. 25:2-1 provides in part:

"a. Except as provided in subsection b. of this section, every deed of gift and every conveyance, transfer and assignment of goods, chattels or things in action, made in trust for the use of the person making the same, shall be void as against creditors."

"b. Notwithstanding the provisions of any other law to the contrary, any property held in a qualifying trust and any distributions from a qualifying trust, regardless of the distribution plan elected for the qualifying trust, shall be exempt from all claims of ...


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