United States District Court, S.D. New York
[Copyrighted Material Omitted]
For VFS Financing, Inc., Plaintiff: Eduardo Jorge Glas, McCarter & English, LLP (NYC), New York, NY; Lisa S. Bonsall, PRO HAC VICE, McCarter & English, L.L.P., Newark, NJ.
For Elias-Savion-Fox LLC, Ronnie Savion, Philip Elias, Defendants: Glenn Allan Jacobson, LEAD ATTORNEY, James Edward Kimmel, Abrams, Gorelick, Friedman& Jacobson, P.C, New York, NY; Christopher Michael Jacobs, Robert Jaeger Behling, PRO HAC VICE, Dapper, Baldasare, Benson Behling & Kane, P.C., Pittsburgh, PA.
For Richard Fox, Defendant: Brett Andrew Nadler, LEAD ATTORNEY, Ballon, Stoll, Bader and Nadler, New York, NY.
OPINION & ORDER
PAUL A. ENGELMAYER,
United States District Judge
Plaintiff VFS Financing, Inc. (" VFS" ) seeks a turnover order enabling it to reach two assets of its debtor, defendant Richard Fox (" Fox" ): an " SRA/IRA" retirement account containing approximately $600,000 and a joint marital cash account containing approximately $7,000. VFS seeks this order in partial satisfaction of a $2.4 million judgment it obtained before this Court, pursuant to a settlement with Fox and his co-defendants. The parties dispute whether VFS can reach either account. The two accounts present different legal issues. VFS's ability to reach the retirement account primarily turns on whether the Employee Retirement Income Security Act of 1974 (" ERISA" ), 29 U.S.C. § § 1001 et seq., preempts state anti-garnishment laws that shelter such accounts from judgment creditors, whereas VFS's ability to reach the joint marital cash account depends on whether Pennsylvania or New York law applies.
The Court's rulings, fully explained below, are as follows. Based on the parties' written agreements, New York law applies to this dispute, including New York Civil Practice Law and Rules (" CPLR" ) § 5205, which shields the SRA/IRA retirement account from garnishment by creditors (save for contributions made during, or after, the 90-day window that preceded the filing of the creditor's lawsuit). The Court holds that ERISA does not preempt this statute. Thus, VFS is not entitled to a turnover order with respect to Fox's retirement account, except as to funds added after January 12, 2012, which is 90 days before VFS filed this lawsuit. As to the joint marital account, New York law does not protect that account from creditors, and therefore VFS is entitled to a turnover order as to that account.
A. The Underlying Lawsuit
The underlying lawsuit in this case involved a loan to finance a private jet. As alleged in VFS's Complaint, in July 2001, VFS loaned $5 million to defendant Elias-Savion-Fox LLC (which has three members--Fox, Philip Elias, and Ronnie Savion) to enable it to purchase a Cessna Model No. 560. See Dkt. 1 (" Compl." ), ¶ 9. The loan was evidenced by a $5 million note, which was secured by an Aircraft Security Agreement (" ASA" ) that granted VFS a security interest in the Cessna aircraft. Id. ¶ ¶ 10-11. In connection with the loan, the three individual defendants (Fox, Elias, and Savion) each executed an absolute and unconditional guaranty in favor of VFS. Id. ¶ 12.
In November 2007, the parties refinanced the 2001 loan (for $4.27 million) pursuant to a new note. Id. ¶ 14. The note again gave VFS a security interest in the Cessna; Fox, Elias, and Savion again each executed an absolute and unconditional guaranty in VFS's favor. Id. ¶ 1820. Each of " the debt documents" --the note, the ASA, and the individual guaranties--provided that New York law would govern its interpretation, and that any dispute relating to " the debt documents" would be resolved in a New York forum. Id. Exs. A, B, C, D, E.
Under the ASA, defendants were required to maintain the Cessna in airworthy condition. Id. ¶ 22. In December 2011, defendants notified VFS that the aircraft was inoperable. Id. ¶ 24. VFS then notified the defendants that they were in breach. Id. ¶ 25. After defendants failed to cure the breach, VFS brought suit on April 11, 2012 against all four defendants--the LLC and its three members--
alleging that they had defaulted and breached the debt documents. VFS sought to recover on, inter alia, the note. Id. ¶ 46. A bench trial was scheduled for July 2013. Dkt. 29.
The day before trial, VFS settled with all defendants. Dkt. 34. On July 9, 2013, pursuant to the settlement agreement, the Court entered a consent judgment. The judgment entitled VFS to $2,404,606 (plus interest and attorneys' fees and costs in enforcing its judgment) from the defendants, each of whom was made jointly and severally liable. Dkt. 35, 36, 37, 38.
B. VFS's Attempt to Collect on the Judgment
VFS has since attempted to collect on the judgment. At oral argument, it represented that it has recovered approximately $200,000 by selling the Cessna jet, the one asset held by defendant Elias-Savion-Fox LLC, and has turned now to pursuing assets of the individual defendants. See Oral Arg. Tr., 4-5.
On May 19, 2014, the Clerk of Court entered a Writ of Execution against Fox's property. Dkt. 39-1, at 7-8. On May 23, 2014, VFS faxed a copy of the writ of execution to Merrill Lynch, Pierce, Fenner & Smith, Inc. (" Merrill Lynch" ), the brokerage firm, at which Fox holds two accounts--a retirement account containing approximately $600,000 and a joint marital bank account containing approximately $7,000. See id. at 10; Oral Arg. Tr., 27. The writ directed Merrill Lynch immediately to freeze and turn over any assets it held in Fox's name. On June 6, 2014, the U.S. Marshals Service served the writ on Merrill Lynch. On or about June 19, 2014, Merrill Lynch notified VFS that Merrill Lynch had frozen the two accounts, and that it would turn over the assets to VFS if VFS obtained a court order to that effect. See Dkt. 39-1, at 18.
C. VFS's Turnover Motion
On June 30, 2014, VFS filed a turnover motion in this Court with respect to Fox's two Merrill Lynch accounts, and supporting documentation. Dkt. 39. On July 29, 2014, Fox filed a memorandum of law in opposition, arguing that the two accounts are protected from creditors by state law. Dkt. 44. Fox took the position that Pennsylvania law--which would protect both the retirement account and the joint marital account from creditors--applied. Id. On August 6, 2014, VFS filed a reply, arguing that it could reach Fox's retirement account because ERISA preempts state laws sheltering SRA/IRA retirement accounts, and that it could reach Fox's CMA account because New York (not Pennsylvania) law applies, and New York law does not protect joint marital accounts from creditors. Dkt. 45. On September 29, 2014, Fox moved to strike VFS's reply, or, in the alternative, for leave to file a sur-reply. Dkt. 52. On October 1, 2014, the Court denied the motion to strike but permitted Fox to file a sur-reply, which he did. Dkt. 54.
The Court heard argument on October 3, 2014. The parties agreed that the relevant facts are undisputed, see Oral Arg. Tr., 3, and that VFS's turnover motion turns purely on questions of law. Argument focused on the retirement account--in particular, whether the retirement account is governed by ERISA, and, if so, whether ERISA preempts state law from sheltering an SRA/IRA retirement account from creditors. On October 10, 2014, VFS submitted a letter responding to questions at argument. Dkt. 55. On October 25, 2014, Fox submitted a letter in reply. Dkt. 59.
D. Nature of the Two Accounts
Fox's retirement account is a Savings Incentive Match Plan for Employees
(" SIMPLE" ) Retirement Account/Individual Retirement Account--for short, an " SRA/IRA." An SRA/IRA is a type of retirement account. An SRA/IRA is available only to employers with 100 or fewer employees. See IRS Pub. 4334, " SIMPLE IRA Plans for Small Businesses" (Rev. 11-2013) Catalog No. 38508F. The employer sets up the SRA/IRA account and must make a contribution when an eligible employee contributes. Id. Once the retirement account is created, the employee has full control over the funds in the account. Money in an SRA/IRA account appreciates tax-free; funds in the account are taxed only upon withdrawal. Id.
An employer may create an SRA/IRA program by, inter alia, using an IRS-approved default form or a financial institution's approved prototype. To create its program, Fox's employer used a prototype, created by Merrill Lynch and approved by the Department of the Treasury, known as the " Merrill Lynch Simple Retirement Account Program." Dkt. 52 (" Def. Sur-Reply" ), Ex. A. Under that program, the employer sets up the SRA/IRA; an employee is eligible to participate-- i.e., to receive money in his or her SRA/IRA account--if he or she is expected to earn at least $5,000 in compensation from the employer and earned at least that amount from that employer in any two preceding years; if an employee participates, the employer must make contributions (of 1%--3% of the employee's compensation for the plan year). See id. As the parties agree, the Merrill Lynch program is governed by ERISA: The U.S. Department of Labor (DOL) lists " Savings Incentive Match Plans for Employees of Small Employers (SIMPLEs)" among the retirement plans that ERISA governs. See U.S. Dep't of Labor, Employee Benefits Security Administration, Frequently Asked Questions About Retirement Plans and ERISA , available at http://www.dol.gov/ebsa/faqs/faq_compliance_pension.html (last visited December 1, 2014).
Fox's second account at Merrill Lynch is a cash management account (" CMA" ) held jointly with his wife, Celine. It can be used for savings and investment purposes. It is not a retirement account. A CMA account has the benefits of a traditional checking account, in that interest is earned on its contents; the accountholder can make deposits into and write checks upon the account.
VFS argues that it is entitled to a turnover order with respect to both of Fox's Merrill Lynch accounts. Fox opposes this motion on various grounds: that (1) VFS waived its right to pursue this remedy; (2) VFS failed to comply with the New York Civil Practice Law and Rules (" CPLR" ); and (3) VFS's turnover application is precluded by state law.
The Court first addresses, and rejects, Fox's waiver and CPLR arguments; then resolves the parties' dispute as to whether New York or Pennsylvania law applies to this dispute, an issue that bears on VFS's turnover applications as to both accounts; and then resolves VFS's turnover claims on the merits.
A. Fox's Claims of Waiver and of Non-Compliance with the CPLR
Fox argues that VFS waived its right to pursue its turnover claims by failing, in its initial turnover motion, to cite supporting case law. Def. Sur-Reply, 1. That is wrong. To be sure, VFS's motion was unhelpfully cursory; the Court would have benefited from more thorough briefing given the complexity of the issues, including on the issue of ERISA preemption. But ...