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Gilchinsky v. National Westminster Bank N.J.

159 N.J. 463, 732 A.2d 482 (1999)

IRA ACCOUNTS; FRAUDULENT TRANSFERS—New Jersey law does not protect against a creditor’s invasion of an IRA account if funds were transferred to the account in an attempt to place the funds beyond the creditor’s reach.

A bookkeeper embezzled a significant amount of money from her New York employer. The employer obtained a monetary judgment for a portion of the embezzled funds. During the course of that proceeding, the New York court issued a temporary restraining order prohibiting “any sale, assignment, transfer, or interference with any interest” of the employee’s personal and/or real property located in the State of New York. After the judgment was awarded, the Court placed a lien on all of the employee’s property located in the State of New York. The employee unsuccessfully attempted to negotiate with her employer to resolve the law suit. During the course of the negotiations, she requested that the employer rollover her only significant asset, money in her ERISA profit sharing plan, into an IRA account that the employee had opened in New Jersey. Even though the employer didn’t want to transfer the profit sharing funds to the IRA, it was forced to do so because federal law gave it no choice. Immediately thereafter, the employer filed suit in New Jersey to domesticate the New York judgment and to place a lien on the New Jersey funds. By order to show cause, a lien was placed on the funds and the funds in the IRA account ultimately were delivered to the employer. The embezzling employee contended that the funds in the IRA were immune from attachment under New Jersey law. The lower court concluded that given the timing of the transfer, the New York restraining order, the employee’s lack of contacts with New Jersey, and the fact that she was otherwise insolvent, it could reasonably conclude that the transfer of the funds to the New Jersey IRA was for the purpose of evading, thwarting, and hindering creditors and to preclude collection, or at least make collection extemely difficult. Accordingly, under an exception for fraudulent transfers in the New Jersey statute protecting IRA accounts, it was held that the money was not exempt from attachment. The Appellate Division reversed the lower court because it concluded that the employee did not have an actual intent to defraud her creditors.

The New Jersey Supreme Court recognized that ERISA contains an anti-alienation provision prohibiting the assignment or garnishing of pension benefits. Had the employee left her money in the Profit Sharing Plan, there would have been no doubt that it would have been exempt from attachment. Federal law, however, does not similarly protect all IRA accounts. Consequently, when transferred to a New Jersey IRA, the money lost the blanket protection afforded by ERISA and became subject to New Jersey law which permits attachment of IRA funds in cases of fraudulent transfer. One of the purposes of the Fraudulent Transfer Act is to prevent a debtor from placing property beyond a creditor’s reach. Underlying the Act is the notion that a debtor cannot deliberately cheat a creditor by removing property from “the jaws of execution.” To determine whether the transfer constituted a fraudulent conveyance, the Court made two inquiries. The first was “whether the debtor [or person making the conveyance] had put some asset beyond the reach of creditors which would have been available to them” at some point in time “but for the conveyance.” The second was whether the debtor transferred property with an intent to defraud, delay, or hinder the creditor. Such transfers are deemed fraudulent because of the debtor’s intent to withdraw the assets from the reach of process. One of the key factors in the Court’s analysis was that the employee transferred the money to an account of which she was the beneficiary and over which she maintained control, whereas if the money had remained in the ERISA plan, the fund’s trustee technically would have been in charge of it. While it was true that the employer could not have reached the money while it remained in the profit sharing plan, the employee would never have been able to use the money in that account. Withdrawals would have been subject to attachment pursuant to the New York restraining order. Further, the New Jersey Supreme Court disagreed with the employee’s contention that the funds would have been protected had they been transferred to a New York IRA. Although New York law generally exempts IRA funds from attachment by creditors, that exemption is unavailable where a debtor secretes funds into an IRA in an attempt to avoid paying a judgment. In sum, the totality of the circumstances clearly and convincingly demonstrated to the Court that the employee intended to hinder, delay, and defraud her creditor. It found that nearly all the classic indicia of fraud were present. In reaching that conclusion, the Court emphasized that the employee’s own testimony established that she opened a checking account in New Jersey because she could not get any money out of her New York accounts.


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