Planned Consumer Marketing, Inc. v. Coats and Clark, Inc., 71 N.Y.2d 442 (1988)
ERISA does not preempt state laws aimed at preventing fraudulent conveyances, even when the assets are deposited into an ERISA-qualified plan, if the plan itself is used as a vehicle for fraud.
Summary
Coats and Clark (C&C) obtained a judgment against Planned Consumer Marketing (PCM). Suspecting PCM was shielding assets, C&C discovered PCM deposited funds into an ERISA-qualified profit-sharing plan. C&C sued, alleging PCM fraudulently conveyed assets into the plan to avoid paying the judgment, violating state debtor-creditor laws, business corporation laws, and EPTL. The New York Court of Appeals held that ERISA does not preempt state laws that seek to prevent fraudulent conveyances, even when the assets are in an ERISA plan, if the plan itself is the tool of fraud. The court reasoned that Congress did not intend ERISA to shield fraudulent activity.
Facts
PCM contracted with C&C to promote products but C&C refused full payment, leading PCM to sue for breach of contract.
C&C counterclaimed, alleging inadequate performance and seeking recovery of prior payments; C&C won a judgment of $72,838.75 in 1981.
PCM claimed it had no employees and was inactive since 1977/1978, unable to satisfy the judgment.
C&C discovered PCM, through its president Edwin Lee, deposited over $200,000 into accounts in the name of the Planned Consumer Marketing Profit Sharing Plan (the Plan).
The Plan, established in 1974, was ERISA-qualified, with beneficiaries being Edwin Lee, his brother, and his secretary; Edwin Lee and his brother were trustees.
Procedural History
C&C initiated a special proceeding under CPLR Article 52 to compel the banks to turn over the funds in the Plan to satisfy the judgment.
PCM and Lee moved to dismiss, asserting lack of subject matter jurisdiction due to ERISA preemption and the anti-alienation provisions of ERISA.
The Supreme Court denied the motion.
The Appellate Division modified, dismissing some causes of action as ERISA-related but upholding others based on state fraud laws.
The Court of Appeals granted leave to appeal, certifying the question of whether the Appellate Division’s order was properly made.
Issue(s)
Whether ERISA preempts state laws, such as the Debtor and Creditor Law, Business Corporation Law, and EPTL, when those laws are applied to funds deposited in an ERISA-regulated trust where the cause of action alleges fraudulent conveyance into the plan to avoid creditors.
Whether the application of state fraudulent conveyance laws conflicts with ERISA’s anti-alienation clause.
Holding
No, because ERISA does not preempt state laws aimed at preventing fraudulent conveyances when the ERISA plan is used as a tool of fraud, as these laws do not directly or indirectly regulate the terms and conditions of employee benefit plans.
No, because the application of state laws voiding conveyances made in defraud of creditors does not impermissibly conflict with the purposes of ERISA’s anti-alienation provision.
Court’s Reasoning
The court distinguished this case from Retail Shoe Health Commn. v Reminick, where the claims directly related to fiduciary duties established by ERISA. Here, the causes of action allege the Plan was used to shield assets from creditors, not to challenge the administration or terms of the Plan.
State laws like the Debtor and Creditor Law aim to prevent fraudulent conveyances and protect creditors. They do not regulate ERISA plans nor do they prohibit or permit any method of administering an ERISA plan or calculating benefits. C&C is not seeking to enforce rights under the Plan.
Regarding the Business Corporation Law claim, the court noted corporations are creatures of state law, and the law at issue here furnishes a means of redressing wrongful disposition of corporate assets.
Regarding the EPTL claim, the court found that Lee’s interest in the ERISA account may be reached if he created the trust for his own benefit to defraud creditors, as EPTL 7-3.1(a) provides that a disposition in trust for the use of the creator is void against creditors.
The court noted a later amendment to EPTL 7-3.1 specifically stated that conveyances to retirement plans are not exempt from judgment satisfaction if deemed fraudulent conveyances under the Debtor and Creditor Law.
Addressing the anti-alienation clause, the court distinguished Helmsley-Spear, Inc. v Winter and Ellis Natl. Bank v Irving Trust Co., because in those cases, the fraud was independent of the ERISA plan, while here, the creation and enhancement of the trust were alleged to be in defraud of creditors.
The court stated that purposes of the antialienation clause include protecting spendthrift employees and preventing involuntary levies. These purposes do not conflict with the prevention of debtor fraud, a field traditionally within the power of the states to police. The court emphasized that C&C only seeks to reach Lee’s interest in the plan, and those funds may not be shielded simply because they are in an ERISA trust.
The court quoted Shaw v. Delta Air Lines noting that some state actions “may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law ‘relates to’ the plan”.