The Uniform Fraudulent Transfer Act (UFTA), and its latest revision, the Uniform Voidable Transactions Act (UVTA), does not require a creditor to file a new lawsuit for a fraudulent transfer. Among other things, the remedies section of the Act, section 7, allows a creditor holding a judgment (a/k/a "judgment creditor") to levy directly on an asset that has been fraudulently transferred, even if no court has yet determined that a fraudulent transfer has occurred.
The levy of a judgment creditor has the effect of creating a statutory shortcut for a creditor to unwind a fraudulent transfer. Instead of filing a new lawsuit for fraudulent transfer that would normally take a year or more to litigate, the creditor can simply levy directly on the asset, and then -- if and only if there is an objection -- the court can conduct a summary evidentiary hearing (known to creditor rights attorneys as the "mini trial") and more expeditiously resolve the matter. This process is often completely within a couple of months, and so therefore is an attractive process for creditors to use.
The court opinion that I am about to relate occurred in Arizona. For whatever reason, the Arizona legislature has in its wisdom supplanted the term "garnishment" at some places in Arizona statutes for what would normally be a levy in most other states. One of these places is section 7 of the Arizona UFTA (ARS 44-1007). The upshot is that a judgment creditor in Arizona can use the same procedure, with the difference that the judgment creditor uses the garnishment procedure instead of the levy procedure. Thus, a judgment creditor in Arizona may obtain under ARS 44-1007(A)(1):
1. Garnishment against the fraudulent transferee or the recipient of the fraudulent obligation, in accordance with the procedure prescribed by law in obtaining such remedy.
This may not seem like much of a difference, but keep it in mind for what follows.
Creditor (Shah) obtained a judgment in Arizona against the debtor (Baloch) for $411,505. Shortly after the judgment was entered, the debtor contributed several thousand dollars to his 401(k) account, which was held at Wells Fargo.
Creditor next moved to garnish Wells Fargo for the debtor's 401(k) account, alleging a fraudulent transfer and (presumably, since the Creditor had not sued yet sued for a fraudulent transfer) invoking ARS 44-1007(A)(1). While the Court of Appeals' decision is unclear here, I think we can safely presume that it was for the several thousand dollars transferred into the 401(k) and not the full $50,000.
Wells Fargo objected to the garnishment, and the lower court quashed the garnishment under the so-called ERISA anti-alienation provision, 29 U.S.C. § 1056(d)(1), which provides that:
(1) Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.
Creditor appealed.
The Court of Appeals noted that ARS 1007(A)(1) allows a creditor to garnish assets which are alleged to have been fraudulently transferred. On the other hand, the ERISA anti-alienation provision generally preempts state laws relating to employee benefit plans, though with certain exceptions.
The Court of Appeals then noted U.S. Supreme Court precedent against allowing the garnishment of an ERISA plan, being Guidy v. Sheet Metal Workers Nat'l Pension Plan , 493 U.S. 365, 367 (1990). In that case, a union official embezzled from the union, and the union obtained a judgment and attempted to garnish the official's union plan benefits.
The creditor argued that Guidry was inapplicable, since that case did not involve a fraudulent transfer to the ERISA plan, but instead sought to garnish funds that were already there. The Court of Appeals brushed off this important distinction in a footnote by stating that there were two exceptions to ERISA garnishment, being a voluntary or revocable assignment of not more than 10% of any benefit payment, or pursuant to a qualified domestic relations order, citing 29 U.S.C. 1056(d)(2) and (d)(3) respectively.
The Court of Appeals similarly brushed off two federal opinions arising from the District of New Mexico, Wagner v. Galbreth , 500 B.R. 42 (D.N.M. 2013) and In re Vaughan Realtors , 493 B.R. 597 (Bk.D.N.M. 2013). Those cases involved a Ponzi scheme where a bankruptcy trustee was able to use a fraudulent transfer theory to unwind transactions where the ERISA plan trustee had received moneys from the Ponzi scheme as ostensible investment returns. The Court of Appeals attempted to distinguish these cases on the basis that:
the anti-alienation bar did not apply because the transfers to be unwound there were between the perpetrator and the respective trustees of the pension plans, not between the perpetrator and a plan participant.
Further, said the Court of Appeals, the Treasury Regulations that comport with the ERISA anti-alienation provisions define "assignment" and "alienation" to those situations where a party acquires from a participant a right to payment from the plan. Thus:
whether funds fraudulently transferred to a pension plan may be recovered depends on the circumstances of the transfer giving rise to the claim. The anti-alienation rule did not bar recovery in Vaughan and Wagner because the claims there arose out of investment transactions between the trustees of the two plans and the perpetrator, who was otherwise a stranger to the plans. By contrast, Shah has a judgment against Baloch, a plan participant, and seeks to enforce that judgment against Baloch's transfers into the plan.
[In English, the Court of Appeals is saying that if the person making the fraudulent transfers into an ERISA plan is not a participant in the plan then the fraudulently transferred assets may be recovered, but if the person making the transfers is also a participant, then the transfers may not be unwound.]
The Court of Appeals also dismissed the creditor's argument that it violated public policy by allowing debtor to make late transfers of assets into their ERISA plans, simply by noting that ERISA preemption prevented the states from creating new exceptions to ERISA's anti-alienation provisions. Thus, the Court of Appeals concluded:
As in the cases cited above, the result here is distasteful. [Citations omitted] The superior court order that we are affirming leaves Shah unable to satisfy his judgment from funds Baloch allegedly fraudulently transferred to his pension plan to avoid the judgment. But the case authorities interpreting 29 U.S.C. sec. 1056(d) do not permit exceptions that Congress has not authorized.
The Court of Appeals then affirmed the quashing of the garnishment.
ANALYSIS
In my opinion, the Court of Appeals used flawed reasoning to reach an incorrect result. One must wonder whether this was a consequence of the relatively small dollars involved in this controversy, which quite probably did not incentivize the highest level of briefing by the parties concerned.
Where the Court of Appeals makes its first incorrect turn was at the very outset, when it fell into the common briefer's trap of immediately jumping into case law and trying to find supportive language in cases of dubious analogy, instead of first focusing on statutory construction of the law causing the dispute in the first place.
That law is the anti-alienation provision of ERISA, 29 U.S.C. 1056(d)(1), which states:
(1) Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.
The key word here is "benefits", which is not the same as plan "assets". ERISA clearly distinguishes between "benefits" and "assets", e.g., compare 29 U.S.C. 1002(22) ("normal retirement benefit") and (23) ("accrued benefit") against 29 U.S.C. 1002(38) (defining the an investment manager as a fiduciary "who has the power to manage, acquire, or dispose of any asset of a plan"). Similarly, "benefits" are not the same as "contributions", the latter having an entire segment of ERISA (Subtitle B, Part III, 29 U.S.C. 1081-1085a) dedicated to how contributions fund the plan.
Thus, the money involved in an ERISA plan goes through three phases:
- The money that goes into the plan is a contribution ;
- When the money is in the ERISA plan and being managed as an investment, it is an asset ; and
- When the employee has vested his rights to his share of the assets, that money becomes a benefit of that employee.
That section 1056(d)(1) only and exclusively applies to benefits is clearly demonstrated by the legislative history of ERISA as to that section, which indicates that its purpose was to keep employees from using their benefits to back personal loans, such as loans to buy a car, and likewise to protect the benefits from unsecured creditors as well as secured ones:
Alienation
[A] plan must provide that benefits under the plan may not be assigned or alienated. However, the plan may provide that after a benefit is in pay status, there may be a voluntary revocable assignment (not to exceed 10 percent of any benefit payment) by an employee which is not for purposes of defraying the administrative costs of the plan. For purposes of this rule, a garnishment or levy is not to be considered a voluntary assignment.
H.R. CONF. REP. 93-1280, H.R. Conf. Rep. No. 1280, 93TH Cong., 2ND Sess. 1974, 1974 U.S.C.C.A.N. 5038 at 5061, 1974 WL 11542 (Leg.Hist.).
In other words, basic statutory construction demonstrates that "benefits" are what will exit a plan, not what goes into the plan (contributions) or what of value is in the plan (assets). Section 1056(d)(1) only and exclusively by its own clear language only applies to protect benefits. Congress could have extended similar provisions to protect contributions and plan assets, but did not do so.
Once these terms are properly understood, the precedential opinions mentioned by the Court of Appeals make a lot more sense -- and highlight the Court of Appeal's errors.
Let's start with Guidry , which is the U.S. Supreme Court decision that the Court of Appeals primarily hangs it hat. You'll recall that Guidry involved an attempt by a union to garnish the benefits of a union officer who had embezzled from the union. In other words, the union was trying to keep the embezzler from receiving his benefits, which has utterly nothing to do with a fraudulent transfer allegation to void contributions from going into the plan. Apples and orangutans.
Next, the Court of Appeals attempts to distinguish the two New Mexico opinions where fraudulent transfers to an ERISA plan were set aside, being the Vaughan and Wagner decisions. The Court of Appeals' conclusion here is that if the debtor making the fraudulent transfer is an outsider who is not a plan participant, then the fraudulent transfers may be avoided, but if the debtor is also a plan participant then hands-off because of section 1056(d)(1). The Court of Appeals does not point to any authority to support this position, and there is none.
Arguably, the Court of Appeals position as to Vaughan and Wagner does not rise to the level of respectable nonsense, for there is no earthly reason to distinguish who is making the transfer as to whether it should be set aside on fraudulent transfer grounds. As noted above, plain statutory construction establishes that a plan participant is only protected by section 1056(d)(1) to the extent of his benefit, and that section does not protect either contributions to the plan or assets of the plan.
Reductio ad absurdum , the Court of Appeals' attempted distinction would mean that if a non-sponsor employer (i.e., a third-party outsider to the plan) made a contribution to an ERISA plan, that contribution could be unwound as a fraudulent transfer, but if the employee herself made a contribution to an ERISA plan, then hands-off.
Moreover, if a creditor can set aside a transfer to an ERISA plan which becomes an asset , then the creditor certainly should be able to set aside a transfer in the nature of a contribution , which precedes an asset in the ERISA scheme of things. A contribution to an ERISA plan that is a fraudulent transfer is little different than somebody who sends in a hot check as their contribution, and are given credit for the check before it bounces -- it is simply a contribution that never actually made its way into the plan, and can be avoided.
Finally, the Court of Appeals was simply wrong to brush off the various authorities cited by the creditor (and string-cited in the opinion with no individual analysis) as simply dicta , since the issue was an important part of those cases, and they flatly go against the grain of the Court of Appeals' decision in this case. There are other authorities directly contrary to the Court of Appeals holding as well, such as Planned Consumer Marketing, Inc. v. Coats and Clark, Inc., 71 N..Y.2d 442, 522 N.E.2d 30, 527 N.Y.S.2nd 185 (N.Y.App., 1988), where the President of a company that was being sued for breach of contract, contributed $200,000 to the company's ERISA plan. The creditor brought a fraudulent transfer lawsuit against the banks that held the ERISA plan assets. Those banks asserted a variety of defenses, such that ERISA pre-empted all state action in regard to ERISA plans. This argument and the other defenses failed, that court stating:
The antialienation provision, however, has never been held to be absolute, and indeed several courts have recognized, for example, an exception for family support orders [ ]. These purposes neither expressly nor impliedly conflict with the prevention of debtor fraud—a field traditionally within the power of the States to police. We conclude, therefore, that the application of State laws voiding conveyances made in defraud of creditors does not impermissibly conflict with the identified purposes of the antialienation provision in ERISA.
The Court of Appeals' decision is simply wrong, and demonstrably so. One wonders whether the Court of Appeals took the wrong path because of the procedural posture of this case, i.e ., the creditor elected not to bring a separate fraudulent transfer action but to invoke the expedited procedure available to a judgment creditor under ARS 44-1007(A)(1), and in that provision Arizona changed "levy" as it appears in the Uniform Fraudulent Transfer Act, to "garnishment" as it appears in the Arizona version of the UFTA, and then the whole idea of garnishment opened a can of worms since there are numerous opinions dealing with the attempted garnishment of ERISA benefits that have utterly nothing to do with fraudulent transfers into the plan.
At best, the Court of Appeals holding in Shah v. Baloch is at best dubious, and should be the subject of challenges in subsequent cases. Hopefully, another panel of the Court of Appeals will look at the issue in the correct light, but if not then it is an issue worthy of being taken up to the Arizona Supreme Court or even the U.S. Supreme Court if need be. I have little doubt that if this issue ever makes it before the U.S. Supreme Court, based on the language of their rulings in other cases, that the highest court will tightly limit the application of section 1056(d)(1) to benefits only, and will not block attempts by creditors to unwind fraudulent transfers into plans.
CITE AS
Shah v. Baloch , 2017 WL 4543694 (Az.App., Oct. 12, 2017). Full opinion at https://voidabletransactions.com/2017-shah-arizona-opinion-voidable-transactions-and-fraudulent-transfers.html
