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Private Capital Investments, LLC v. Schollard

United States District Court, W.D. New York

June 10, 2014

PRIVATE CAPITAL INVESTMENTS, LLC Plaintiff,
v.
JOSEPH
v.
SCHOLLARD and JEROME J. SCHENTAG, Defendants.

DECISION AND ORDER

H. KENNETH SCHROEDER, Jr., Magistrate Judge.

By Decision and Order entered July 21, 2011, the Hon. John T. Curtin granted plaintiff's motion for summary judgment on it's breach of guaranty claim against defendants and directed entry of judgment in favor of plaintiff in the amount of $774, 314.82, plus post-judgment interest at the annual rate of 11 percent measured from April 19, 2007. Dkt. #39. Judgment was entered on July 28, 2011. Dkt. #40. As of February 1, 2014, the judgment totals approximately $1, 335, 000.00. Dkt. #49-1, ¶ 3.

On March 14, 2013, after discovering that defendant Jerome Schentag maintains financial accounts and retirement plans with Charles Schwab & Co., Inc. ("Charles Schwab"), plaintiff served Charles Schwab with a restraining notice and information subpoena, as well as exemption notices, exemption claim forms and a prepaid return envelope as required by section 5222 and 5222-a of the New York Civil Practice Law and Rules ("CPLR"). Dkt. #49-1, ¶ 5. In response, Charles Schwab identified an account described as the Schentag Corporation Defined Benefit Pension Plan ("Schentag Plan"). Dkt. #49-1, ¶ 6.

Currently before the Court is plaintiff's motion for an Order declaring that the Schentag Plan is not exempt under section 5205(c) of the CPLR and is eligible for levy by service of execution on the custodian, Charles Schwab. Dkt. #49.

In accordance with 28 U.S.C. § 636(c), the parties have consented to the determination of this motion by the undersigned. Dkt. #58.

For the reasons set forth below, the motion is denied.

FACTS

Schentag Corp is an active domestic New York business corporation formed on January 3, 1992 by Mr. Schentag for his consulting and speaking business. Dkt. #49-1, ¶ ¶ 11-12. Mr. Schentag is the Chief Executive Officer and sole employee of Schentag Corp. Dkt. #48, ¶ ¶ 11 & 13. Schentag Corp operates exclusively out of Mr. Schentag's personal residence, which is also the principal executive office and location for service of process. Dkt. #49-1, ¶ 11. Mr. Schentag owns 99% of the shares of stock of Schentag Corp; his adult daughter, Annie Schentag, owns 1% of the shares of stock of Schentag Corp. Dkt. #60, ¶ 5.

The Schentag Plan was established as a single-employer defined benefit pension plan in 2000. Dkt. #49-1, ¶ 14. Schentag Corp has at all times served as employer, plan sponsor and plan administrator of the Schentag Plan, which is funded through a trust fund for which Mr. Schentag has served as the sole trustee. Dkt. #49-1, ¶ 14 & Dkt. #60, ¶ 6. Mr. Schentag is the sole participant of the Schentag Plan. Dkt. #49-1, ¶ 20 & Dkt. #60, ¶ 6. Section 15.03 of the Schentag Plan contains a prohibition on the alienation or assignment of a participant's plan benefit as required by the Employee Retirement Income Security Act of 1974 et seq. ("ERISA"). Dkt. #60, ¶ 8. The estimated value of the Schentag Plan is $1, 008, 131. Dkt. #60-5, p.8.

Between April 4, 2011 and June 14, 2012, Mr. Schentag withdrew funds totaling $361, 000.00 from the Schentag Plan on at least seven occasions, including at least three transfers totaling $186, 000.00 to his personal bank account and $125, 000.00 to Therasyn Sensors Inc., a business entity controlled by plaintiff. Dkt. #49-1, ¶¶ 32 & 34 & Dkt. #60, ¶ 12. At his deposition, Mr. Schentag testified that he often withdrew money from the Schentag Plan to pay expenses and avoid defaulting on personal and business debts. Dkt. #49-1, ¶ ¶ 28-29. Mr. Schentag affirms that the September 9, 2011 withdrawal was returned on October 25, 2011 and that he believed that the other withdrawals were proper under the terms of the Schentag Plan. Dkt. #60, ¶ ¶ 13-14. Specifically, Mr. Schentag avers that he erroneously assumed that the distribution and tax rules applicable to Individual Retirement Accounts ("IRAs"), which generally permit an IRA owner to elect a distribution from the IRA without tax penalty at the age of 59½, applied to the Schentag Plan. Dkt. #60, ¶ 14.

Mr. Schentag affirms that, in order to preserve the qualified status of the Schentag Plan, Schentag Corp will submit to the IRS an application for a Voluntary Correction Plan ("VCP"), pursuant to Revenue Procedure 2013-12. Dkt. #60, ¶ 16. The application concedes that although the Schentag Plan does not provide for in-service or lump sum distributions of a portion of a participant's accrued benefit, seven partial lump sum distributions were made from the Schentag Plan to Mr. Schentag between April of 2011 and June of 2012. Dkt. #60-5, p.16. Specifically, the application states that

Because (a) Mr. Schentag was (and remains) an active employee of the Company, (b) the Plan does not provide for in-service distributions at age 62, and (c) the Plan does not provide for partial lump sum distributions, the distributions were not permitted under the terms of the Plan.

Dkt. #60-5, p.17. The application proposes to repay the 2011 distributions with interest and to amend the Schentag Plan retroactive to January 1, 2012 to provide for lump sum distributions of a portion of the participant's accrued benefit and to provide for in-service distributions upon attainment of age 62. Dkt. #60-5, p.18.

By Order entered February 13, 2014, the Hon. John T. Curtin extended the duration of the restraint of the funds in the Schentag Plan until ...


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