Opinion
DOCKET NO. A-5190-09T2 DOCKET NO. A-1440-10T2
04-22-2013
SARITA HART, Plaintiff-Appellant v. ROBERT A. SEMON, Defendant. SARITA HART, Plaintiff-Appellant, v. NANCY SEMON, Defendant-Respondent.
Eugene J. Sullivan argued the cause for appellant (Tompkins, McGuire, Wachenfeld & Barry, attorneys; Mr. Sullivan, of counsel and on the briefs). David S. Lafferty argued the cause for respondent Nancy Semon (Kelly, Kelly, Marotta & Lafferty, LLC, attorneys; Mr. Lafferty, of counsel and on the brief).
NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
Before Judges Messano, Ostrer and Kennedy.
On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket Nos. DJ-274498-07 and L-7908-10.
Eugene J. Sullivan argued the cause for appellant (Tompkins, McGuire, Wachenfeld & Barry, attorneys; Mr. Sullivan, of counsel and on the briefs).
David S. Lafferty argued the cause for respondent Nancy Semon (Kelly, Kelly, Marotta & Lafferty, LLC, attorneys; Mr. Lafferty, of counsel and on the brief). PER CURIAM
In this consolidated matter, Sarita Hart, plaintiff and judgment-creditor, appeals from two Law Division orders. The first order was entered in Hart's suit against the judgment debtor, Robert Semon, deceased. Hart appeals from the court's denial of her motion to compel a non-party, the debtor's wife, Nancy, to turnover assets, which Hart alleged were owed to Robert's estate, to satisfy Hart's judgment. The second order granted summary judgment and dismissed with prejudice Hart's separate complaint against Nancy, alleging a violation of the Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 to -34. We affirm.
For convenience, and meaning no disrespect, we refer to the Semons by their first names.
I.
On August 18, 2006, Robert died of pancreatic cancer, ten days after his diagnosis. Robert was a highly-paid employee of Ryan Beck & Co. (Ryan Beck), an investment firm. He earned close to $700,000 in 2005. After his death, Nancy directly received the proceeds of Robert's Individual Retirement Account (IRA), 401k, and deferred compensation plan (DCP) accounts. In 2003, Robert had designated Nancy as the beneficiary of the three accounts. She received $96,716.84 from the IRA; $525,780.19 from the DCP account; and $77,498.36 from the 401k plan.
Robert also maintained $600,000 in life insurance through Ryan Beck, consisting of a $50,000 policy, and a $550,000 supplemental policy. In January 2003, Robert had designated the Robert Semon Irrevocable Trust as the beneficiary of both policies. Nancy was one of the trustees. The insurance proceeds were paid into the trust.
Nancy certified that Robert owned no other real or personal property, aside from his interest in a joint checking account with a $5000 balance. The family home had been placed in Nancy's name around 1998. Although Robert had a will, Nancy testified it was not probated because of the size of the estate.
Five days before Robert died in August 2006, Hart obtained a default judgment from a New York court in the amount of $89,767.36. Hart had filed a complaint in March of that year, alleging that Robert had breached a contract he made with her on July 20, 1994, in which he agreed to pay her $45,401.90, with ten percent interest from April 27, 1987. The agreement was one of a series arising out of a dispute over Robert's investments on Hart's behalf. The 2004 agreement required Robert to pay Hart $500 a month. Hart alleged he ceased payments in April 2004.
In the course of conducting post-judgment discovery, Hart learned of Robert's death in May 2007. Five months later, she domesticated her New York judgment in the Law Division in Bergen County, naming Robert as the defendant. Plaintiff thereafter continued to conduct discovery, ultimately deposing Nancy; her nephew who was Robert's business colleague; and a representative of the successor to Ryan Beck.
On March 5, 2010, Hart filed a notice of motion "for turnover of assets from Nancy Semon to Judgment Creditor of Robert A. Semon[.]" In support of the motion, Hart submitted a brief and an attorney certification that presented evidence of Hart's judgment against Robert, summarized Hart's discovery efforts, and described the four sources — IRA, 401k, DCP, and life insurance proceeds — from which Hart sought a turnover to satisfy her judgment. Nancy opposed the motion in April 2010.
Hart's counsel argued that aside from the life insurance death benefit, the funds paid to Nancy were the property of Robert's estate. Counsel argued that the DCP presented "the least issues." "[T]here's nothing that was produced by the employer, which would indicate that it could be a basis for a defense that it shouldn't be turned over to Robert Semon if our creditor couldn't get to it . . . during his lifetime." Although Hart implied that the transfers upon death violated the UFTA, counsel conceded in oral argument that the transfers did not easily fall within the terms of the UFTA.
Nancy responded that all the funds passed to her outside the estate. She also objected that neither she nor the Estate of Robert Semon were named as parties in the breach of contract action. She also argued that there was no fraudulent transfer.
Judge Brian Martinotti denied the motion by order entered May 27, 2010. Although he questioned Hart's resort to the turnover procedure, the court proceeded to address Hart's substantive right to the assets. Judge Martinotti held the UFTA did not apply because "the act does not prohibit a non-probate transfer of a debtor's property," and there was no transfer made with the intent to defraud a creditor. He also explained the IRA, 401k and DCP were "exempt from execution and transferred to Nancy upon Robert's passing," citing among other authorities, N.J.S.A. 25:2-1. The life insurance policies were also exempt. The court also noted that neither Nancy nor the estate was named in a lawsuit or the judgment.
On July 1, 2010, Hart filed a notice of appeal. However, the following month, Hart filed her separate single-count complaint against Nancy, alleging a violation of the UFTA. Before Nancy filed her answer, Hart filed a motion in October 2010 for a "stay or summary judgment." Counsel explained the second complaint was filed as a protective measure, to "preserve" the statute of limitations in the event this court determined that the turnover motion was the inappropriate means to seek relief, but Hart nonetheless possessed a viable UFTA claim directly against Nancy. Counsel suggested that if the court declined to stay the second action, it should, based on the court's prior ruling, grant Nancy summary judgment.
Nancy sought dismissal on both collateral estoppel and entire controversy grounds. The court agreed, and on November 12, 2010, denied a stay, and entered judgment in Nancy's favor. Plaintiff's appeal from that order followed soon thereafter. We then consolidated the two appeals.
Hart presents the following points for our consideration:
POINT I
A CREDITOR HAS A RIGHT TO A TURN OVER OF A DECEASED DEBTOR'S ASSETS WHICH THE DECEASED DEBTOR'S EMPLOYER TRANSFERRED TO THE DECEASED DEBTOR'S WIDOW OUTSIDE OF PROBATE AS A DESIGNATED BENEFICIARY, INCLUDING DEFERRED COMPENSATION, IRA FUNDS, 401K AND PROFIT SHARING BENEFITS AND, POSSIBLY, EMPLOYEE LIFE INSURANCE.
POINT II
A CREDITOR SEEKING RECOVERY OF A DECEASED DEBTOR'S FUNDS AND BENEFITS WHICH THE DECEASED DEBTOR'S EMPLOYER TRANSFERRED TO
THE DECEASED DEBTOR'S WIDOW OUTSIDE OF PROBATE AS A DESIGNATED BENEFICIARY MAY SEEK RECOVERY BY A MOTION REQUIRING THE WIDOW TO TURN OVER THE DEBTOR'S ASSETS, AND SHOULD NOT NEED TO FILE A COMPLAINT UNDER THE UNIFORM FRAUDULENT TRANSFER ACT.
II.
A.
As a threshold matter, we conclude that Hart was precluded from securing relief by way of a turnover motion. In order for a judgment creditor to secure a turnover of funds held by a third party, the third party must admit that it holds funds due the judgment debtor. That, Nancy did not do. N.J.S.A. 2A:17-63 states:
After a levy upon a debt due or accruing to the judgment debtor from a third person, herein called the garnishee, the court may upon notice to the garnishee and the judgment debtor, and if the garnishee admits the debt, direct the debt, to an amount not exceeding the sum sufficient to satisfy the execution, to be paid to the officer holding the execution or to the receiver appointed by the court[.]
[N.J.S.A. 2A:17-63 (emphasis added).]
As Nancy did not admit that the funds she held were owed to her late husband or his estate, plaintiff was not entitled to the relief. "[A]n order directing the garnishee to pay the money over may be made only when the garnishee admits the debt is due the judgment debtor." Beninati v. Hinchliffe, 126 N.J.L. 587, 589 (E. & A. 1941) (applying predecessor to N.J.S.A. 2A:17-63); see also Lesal Interiors, Inc. v. Echotree Assocs., L.P., 47 F.3d 607, 615 (3d Cir. 1995) (stating that "summary turnover procedure" under N.J.S.A. 2A:17-63 may only be used "when the garnishee 'admits the debt'" and if garnishee disputes the debt, the motion must be denied); Nat'l Cash Register Co. v. 6016 Bergenline Ave. Corp., 140 N.J. Super. 454, 457-58 (App. Div. 1976) (stating that admission of the debt "is a jurisdictional sine qua non to an order" requiring payment); Winchell v. Clayton, 133 N.J.L. 168, 171 (Sup. Ct. 1945) (applying predecessor statute, stating "only a debt admitted by the garnishee to be owing by it to the judgment debtor is reachable by this process"); Piechowski v. Matarese, 54 N.J. Super. 549, 552-53 (Law Div. 1959) (denying turnover motion of corporation's creditor where respondents, corporate officers who received loans from corporation, denied they owed a debt to the corporation-debtor).
In Winchell, supra, the creditor of an estate's administratix sought the turnover of funds of the administratix's daughter, which a bank held on deposit. The creditor alleged the daughter was indebted to her mother, the administratrix. The turnover procedure was inappropriate not only because the daughter denied any indebtedness to her mother, but as in this case, the family member who contested the debt was not a party. "Moreover, the daughter is not a party to this proceeding; and this summary measure cannot be invoked to determine the existence of the asserted debt, for that would constitute an invasion of the right of trial by jury." 133 N.J.L. at 171.
In sum, plaintiff was not entitled to a turnover order.
B.
Although we are not compelled to consider Hart's substantive claims in the turnover application, we nonetheless conclude she failed to satisfy her burden to show she was entitled to relief. "The burden rests upon plaintiff to prove that the moneys thus deposited are the individual property of the judgment debtor, and therefore applicable to the satisfaction of the judgment[.]" Winchell, supra, 133 N.J.L. at 169; see also Esposito v. Palovick, 29 N.J. Super. 3, 10-11 (App. Div. 1953) (same).
Hart's challenge to Nancy's retention of the IRA, 401k and life insurance warrants only brief discussion. It is well-settled that an IRA and 401k are exempt from claims of a decedent's creditors and, pursuant to a valid designation of beneficiary, pass outside a decedent's estate. See N.J.S.A. 25:2-1(b) (stating that any property in a "qualifying trust" and distributions from such a trust, "shall be exempt from all claims of creditors," and defining "qualifying trust" to mean "a trust created or qualified and maintained pursuant to federal law, including, but not limited to, section 401, 403, 408, 408A, 409, 529 or 530 of the federal Internal Revenue Code of 1986 (26 U.S.C. § 401, 403, 408, 408A, 409, 529 or 530)"). In C.P. v. Twp. of Piscataway Bd. of Educ., 293 N.J. Super. 421, 437-38 (App. Div. 1996), we applied N.J.S.A. 25:2-1(b) to IRAs, which are established pursuant to 26 U.S.C.A. § 408, and reversed an order compelling the defendant to turn over IRA assets.
As a 401k is established pursuant to 26 U.S.C.A. § 401, the same protection under N.J.S.A. 25:2-1(b) is afforded to that account. Moreover, the Employee Retirement Income Security Act (ERISA), 29 U.S.C.A. §§ 1001 to 1461, mandates that benefits obtained "under [a qualifying pension] plan may not be assigned or alienated." 29 U.S.C.A. § 1056(d)(1). See Guidry v. Sheet Metal Workers Nat'l Pension Fund, 493 U.S. 365, 371-72, 110 S. Ct. 680, 685, 107 L. Ed. 2d 782, 792 (1990) (holding that ERISA prohibits either a writ of garnishment or the imposition of a constructive trust on qualifying pension plans); see also Patterson v. Shumate, 504 U.S. 753, 765, 112 S. Ct. 2242, 2250, 119 L. Ed. 2d 519, 531-32 (1992) (holding that a debtor's interest in "an ERISA-qualified plan" fell outside his estate in bankruptcy); In re Baker, 114 F.3d 636, 638-39 (7th Cir. 1997) (applying Patterson, supra, and holding that ERISA-qualified profit-sharing plan with anti-alienation provisions was outside bankrupt's estate).
We recognize that once a debtor receives the proceeds of qualified pension plan, they are no longer shielded by ERISA's anti-alienation provisions. See Gilchinsky v. Nat'l Westminster Bank, 159 N.J. 463, 472 (1999) (holding that once funds were withdrawn from ERISA-qualified profit-sharing plan, it lost the protection of anti-alienation provisions); State v. Pulasty, 136 N.J. 356, 361-62 (1994) (stating that "once a defendant has actually received [ERISA-protected] pension benefits, those benefits are subject to judgment"). However, Robert did not live long enough to receive any funds. In order to safeguard a widow's financial security, ERISA, 29 U.S.C.A. § 1055, mandates "automatic survivor benefits to surviving spouses." Hawxhurst, v. Hawxhurst, 318 N.J. Super. 72, 85 (App. Div. 1998); see also Ross v. Ross, 308 N.J. Super. 132, 150 (App. Div. 1998).
The life insurance proceeds are likewise shielded from creditors. "The proceeds of life insurance policies payable to a named beneficiary are generally exempt from claims of a decedent's creditors and do not become part of the decedent's estate." DeCeglia v. Estate of Colletti, 265 N.J. Super. 128, 137-38 (App. Div. 1993); see also N.J.S.A. 17B:24-6(a) (stating generally that a "lawful beneficiary" shall be entitled to life insurance proceeds "against the creditors and representatives of the insured"); N.J.S.A. 17B:24-9(a) (stating that the proceeds of a group life insurance policy shall not be subject to process to pay a debt of the insured).
Plaintiff also questions whether the DCP enjoys the same protection as the 401k and IRA. However, the answer depends on the specific terms of the DCP. A non-qualified DCP is subject to taxation under 26 U.S.C.A. § 409A, which is not one of the Internal Revenue Code provisions expressly stated in N.J.S.A. 25:2-1(b). It is uncertain whether one form of DCP — reserved for a select group of highly paid management executives and known as a "top hat deferred compensation plan" — would be deemed "a trust [otherwise] created or qualified and maintained pursuant to federal law," N.J.S.A. 25:2-1. Such DCPs are exempt from the trust fund, non-forfeiture, and anti-alienation provisions of ERISA. See, e.g., Accardi v. IT Litig. Trust, 448 F.3d 661, 664-66 (3d Cir. 2006) (describing DCPs generally, and noting certain unfunded "top hat" plans are exempt from ERISA-imposed fiduciary duties, and the monies due employees are not set aside in a trust fund, and are general assets of the employer, subject to the reach of its creditors); Carson v. Local 1588, Int'l Longshoremen's Ass'n, 769 F. Supp. 141, 144 (S.D.N.Y. 1991) (holding that ERISA's "non-forfeiture and non-alienation rules" do not apply to unfunded "top hat" DCP); In re Downey Reg'l Med. Ctr-Hosp., Inc., 441 B.R. 120 (B.A.P. 9th Cir. 2010) (stating that assets in "top hat" DCP were not held in trust for participants).
On the other hand, a DCP may take other forms; a DCP may be funded, and, therefore, meet the "qualifying trust" test of N.J.S.A. 25:2-1(b). See Accardi, supra, 448 F.3d at 667-68 (distinguishing between funded DCPs, subject to ERISA substantive provisions, and unfunded DCPs, which are not). In the final analysis, we do not reach the issue whether Robert's DCP was exempt from creditors, because the details of Robert's DCP are not before us. Hart has not expressly addressed whether, based on the DCP's particular terms, it was shielded from creditors by federal or state law. Hart did not meet her burden to establish that the DCP proceeds were owed to the estate.
C.
Finally, we turn to Hart's argument, pertaining to both actions, that "[e]ven if the placement of [monies] in the funds immunized [defendants] from creditors under law, . . . it violated the Uniform Fraudulent Transfer Act." We disagree.
First, the transfer of the 401k to Nancy was apparently mandated by ERISA, as we have discussed. It would appear that, to the extent state law, such as the UFTA, were construed to interfere with the survivor's rights, it would be ineffectual pursuant to ERISA's preemption provision. See 29 U.S.C.A. § 1144. Allowing Robert's creditor to reach his ERISA-qualified plan would frustrate ERISA's goal to provide for the financial security of surviving spouses. See Boggs v. Boggs, 520 U.S. 833, 843, 117 S. Ct. 1754, 1761, 138 L. Ed. 2d 45, 56 (1997).
We note that the surviving spouses' right under 29 U.S.C.A. § 1055 does not apply to a "top hat" DCP. Holloman v. Mail-Well Corp., 443 F.3d 832, 841 (11th Cir. 2006).
Second, Hart has failed to present sufficient evidence of a fraudulent transfer under the UFTA. We recognize that the safe harbor for assets in a qualifying trust under N.J.S.A. 25:2-1(b)(1) does not extend to "fraudulent conveyances made in violation of the 'Uniform Fraudulent Transfer Act'[.]" The Gilchinsky Court observed that ERISA's anti-alienation provisions did not apply to IRAs. Supra, 159 N.J. at 472. The Court concluded that the "qualified immunity" of N.J.S.A. 25:2-1(b)(1) did not shield a "transfer[ ] into an IRA in 'preference' of other creditors, [or] as a 'fraudulent conveyance[.]'" Id. at 473 (emphasis added). In an attempt to frustrate her creditor, the debtor in Gilchinsky transferred funds from an ERISA-qualified profit-sharing plan into an IRA, which the Court deemed a fraudulent conveyance under the UFTA. Id. at 478.
The key to our analysis is our determination of when Robert transferred his interests in the IRA, DCP, and 401k. Concededly, the funds were paid to Nancy after Robert's death. Absent his beneficiary designation, the funds would indeed have passed to his estate for distribution according to his will, but also subject to the reach of his creditors. However, it was in 2003 that Robert granted Nancy the right to receive the funds upon his death. Robert apparently took no affirmative actions in 2006 to affect the disposition of the three funds.
In our view, therefore, the transfer was effective in 2003. A transfer includes the "conditional . . . parting with an asset or an interest in an asset[.]" N.J.S.A. 25:2-22. A transfer is made "when it becomes effective between the debtor and the transferee[.]" N.J.S.A. 25:2-28(c). The beneficiary designations were effective when made.
N.J.S.A. 25:2-28(c) applies when "applicable law does not permit the transfer to be perfected as provided in subsection a" of N.J.S.A. 25:2-28. Subsection (a), as applied to non-real-property, states that a transfer occurs when it "is so far perfected that a creditor on a simple contract cannot acquire a judicial lien otherwise than under this article that is superior to the interest of the transferee[.]" N.J.S.A. 25:2-28(a)(2).
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As there is no evidence that Robert was, or became, insolvent in 2003, Hart has not established a fraudulent transfer under N.J.S.A. 25:2-27(a). That provision states:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
Nor is there sufficient evidence that Robert's transfer was made with "actual intent to hinder, delay or defraud any creditor[.]" N.J.S.A. 25:2-25. We need not review at length the "badges of fraud" to conclude that the balance tips against a finding of fraudulent intent in 2003. N.J.S.A. 25:2-26. Arguably, the transfer was to an insider (subsection a), Robert retained some control over his retirement accounts after the designation (subsection b), and he did not receive "equivalent" value (subsection h). However, these factors are outweighed by others: the beneficiary designations were not concealed (subsection c); Robert was not in default of his payment agreement with plaintiff notwithstanding previous disputes (subsection d); the transfers did not apparently leave Robert asset-less (subsection e); Robert did not abscond (subsection f); he was not insolvent (subsection i); and the transfers did not precede assumption of a large debt (subsection j). Also, Robert was not "engaged or . . . about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction[.]" N.J.S.A. 25:2-25(b)(1). Nor did he "intend[] to incur, or believe[] or reasonably should have believed that [he] . . . would incur, debts beyond [his] . . . ability to pay as they bec[a]me due." N.J.S.A. 25:2-25(b)(2). In sum, plaintiff has not established a fraudulent transfer.
Affirmed.
I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION