Overview
First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement.
In September 2021, we wrote about various strategies for protecting assets from judgment creditors, including whether employer-sponsored retirement plans – such as 401(k) plans – are protected from collection by judgment creditors. (See here). We noted that some ERISA-qualified plans may be protected from creditors. Last week, the Second Circuit heard oral argument in United States v. Greebel about whether the government can garnish two retirement accounts held by the defendant to aid in the execution of an over $10 million criminal restitution award against the defendant. And, if the government can garnish these funds, whether garnishment is subject to the 25% collection limit under the Consumer Credit Protection Act (CCPA).
Generally speaking, qualified retirement accounts are immune from attachment by creditors. However, the Mandatory Victims Restitution Act "provides that a restitution award may be enforced against 'all property or rights to property of the person,' except for property that falls within" certain exceptions for railroad and military pensions. United States v. Jaffe, 417 F.3d 259, 265 (2d Cir. 2005) (quoting 18 U.S.C. § 3613(a)). The district court found that the "exceptions do not include private retirement accounts, like the ones at issue here. Moreover, 'courts have repeatedly held that [the] provisions of ERISA and the Internal Revenue Code, respectively, that generally preclude the assignment or alienation of pension benefits do not apply to the United States in its efforts to collect on a judgment of restitution.' United States v. Hotte, No. 97-cr-669 (SJ), 2007 WL 2891313, at *3 (E.D.N.Y. Sept. 28, 2007) (collecting cases)." United States v. Greebel, 534 F. Supp. 3d 224, 229 (E.D.N.Y. 2021).
The parties did not challenge on appeal whether the United States can in fact garnish a retirement account to enforce a restitution order. An unresolved question, however, is whether a victim, pursuing the same restitution order via a civil judgment, will be able to enforce against qualified retirement accounts. Pursuant to 18 U.S.C. § 3664 (m)(1)(B),
"[a]t the request of a victim named in a restitution order, the clerk of the court shall issue an abstract of judgment certifying that a judgment has been entered in favor of such victim in the amount specified in the restitution order. Upon registering, recording, docketing, or indexing such abstract in accordance with the rules and requirements relating to judgments of the court of the State where the district court is located, the abstract of judgment shall be a lien on the property of the defendant located in such State in the same manner and to the same extent and under the same conditions as a judgment of a court of general jurisdiction in that State."
While the United States often seeks to enforce restitution orders, that is not always the case. And victims have the option to enforce the restitution order as if it were a civil judgment themselves—something that these authors have helped clients with before and are available to assist. Depending on how the Second Circuit case comes out, it may be left unresolved whether the private victim can also access these accounts when enforcing a restitution order through an abstract of judgment or whether such assets will be only available when the United States seeks to enforce the order. However, the general prohibition on the attachment of retirement accounts would remain (that is for a civil judgment not under the restitution statute).
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In Greebel, the defendant was convicted on two counts of conspiracy to commit wire fraud and one count of conspiracy to commit securities fraud. As part of the sentence, the defendant must pay restitution totaling over $10 million to the victims pursuant to the Mandatory Victims Restitution Act (MVRA). Following the sentencing, and in an effort to enforce the judgment against the defendant, the government filed two writs of garnishment against defendant's interest in two retirement accounts. Defendant objected to the writs of garnishment and requested an evidentiary hearing on the issue.
The US District Court for the Eastern District of New York ruled that defendant's retirement plans are subject to garnishment and the 25% cap under the CCPA does not apply to defendant's plans, meaning the government is entitled to collect the full amount of the plans. US v. Greebel, 534 F. Supp. 3d 224, 233 (E.D.N.Y. 2021). The district court concluded the CCPA cap did not apply because the cap is limited to garnishment of periodic payments made to a retiree and not to long-term investments that can be withdrawn at once (like defendant's plans). Id. Defendant appealed the district court’s ruling. At issue on appeal is whether the government is entitled to garnish the funds in defendant's retirement accounts, and if so, whether the 25% cap under the CCPA applies. The parties' main arguments are summarized below.
Defendant's Main Arguments
The defendant presents two main arguments: (1) the district court erred in allowing garnishment of his retirement accounts because defendant does not have access to the funds in the accounts; and (2) the district court erred in its failure to cap garnishment at 25% of the value of the plans pursuant to the CCPA.
First, the government can only garnish his retirement funds if defendant has a "current, unilateral right to receive payment under the terms of the retirement plans." Def.'s Br. 19. Defendant asserts that the contractual language of his retirement plans does not provide defendant with a "current, unilateral right to receive or request distributions" under either plan. Id. at 1. Defendant argues that the district court's holding improperly analyzed and "ignored key terms under both plans" and improperly concluded that defendant could request a lump sum payment of the value of his plans "at the present time." Id. at 20.
Defendant argues that under one retirement plan, he does not have a "current, unilateral right to withdraw" because the value of defendant's plan exceeds a threshold amount and defendant did not make an election within the specified time frame. Id. As such, defendant must wait until he is 62 to withdraw from his 401(k) plan. Id. Under the second plan, defendant cannot make a withdrawal without submitting an application to the "Applicable Administrative Named Fiduciary." Id. at 29-31. Since a withdrawal cannot occur without this application, defendant does not have a current unilateral right to withdraw from defendant’s second 401(k) plan. Defendant also notes that the plan summary provides that defendant can withdraw from his plan "for any reason" once defendant reaches age 59.5. Id. at 31.
Moreover, defendant alleges that even if he could withdraw funds from his two retirement accounts, he would be subject to a 10% penalty for early withdrawal, which precludes him from having a "unilateral right to receive or request distributions." Id. at 1, 20.
In addition to defendant's main argument that the lower court incorrectly interpreted the contractual language of his retirement plans, defendant made the following arguments:
- The district court improperly relied on Parol Evidence to support its interpretation of defendant's retirement plans. at 25-26. The district court should not have considered hearsay testimony about the retirement plans. Id.
- The district court did not give adequate weight to one of the retirement plan’s summary documents, which stated the funds could not be withdrawn until defendant reached a certain age. at 31-33. Though the summaries are not "formal contract terms," they "reflect[ed] the intentions and understandings of the parties," and should have been considered and given greater weight. Id. at 33.
- The district court’s conclusion is contrary to "central tenants of contract law," which “foundational principles require courts to interpret agreements in a way that reflects and promotes the intentions of the parties.” at 33.
Defendant's second argument is that the district court incorrectly held that garnishment of defendant's retirement plans are not subject to the 25% cap under the CCPA. The CCPA limits garnishment "to 25% of a person's 'earnings,' which are defined as 'compensation paid or payable for personal services." Id. at 34. Defendant argues that 401(k) plans are included in the CCPA's definition of "earnings." Id. As a result, "any garnishment of distributions from [defendant’s] 401(k) accounts should be treated as 'earnings' and capped at 25%." Id. The defendant cites an opinion from the US Department of Labor in support of his view. Id. Defendant argues that any other interpretation of the CCPA would be contrary to Congress’ intent when it enacted the statute, which was to "limit the ills that flowed from the unrestricted garnishment of wages." Id. at 43.
The Government's Main Arguments
On the other hand, the government argues that not only has defendant failed to meet his burden of proving that his 401(k) plans cannot be garnished, but that the district court correctly ruled on these issues in finding that defendant’s retirement plans are subject to garnishment and the 25% limit under the CCPA does not apply to defendant’s plans.
First, the government argues that the contractual provisions in defendant's 401(k) plans clearly provide defendant with a "substantial nonexempt interest in, and unilateral right to demand withdrawal of, the entire balance of the funds held in each of his retirement accounts. As such, the United States may 'step into [defendant's] shoes' and garnish those funds" to aid in the execution of the outstanding judgment against defendant. Pl.'s Br. 19. Not only does the defendant have a right to demand withdrawal of the full balance of his retirement accounts, but defendant incorrectly argued that his 401(k) plans preclude defendant from electing to withdraw funds before defendant reaches a certain age as defined in each plan.
More specifically, under defendant's first 401(k) plan, defendant is entitled to withdraw up to the full amount of the funds in the account after defendant separated with his employer; there is no restriction that defendant make an election within a certain period of time, as defendant alleged. Under the second 401(k) plan, an "inactive participant" – such as defendant – may make a withdrawal up to any amount at any time. Id. at 27-28. Moreover, the application procedures identified by defendant do not disavow defendant’s right to access the full amount of funds in the account. Therefore, the district court correctly determined that the 401(k) plans do not restrict defendant’s ability to elect to withdraw funds before reaching a certain age.
In addition to refuting defendant’s main arguments about the district court’s interpretation of the 401(k) plan language, the government makes the following arguments:
- The government’s witnesses were 30(b)(6) witnesses that were competent to testify about the plans, and did not provide hearsay testimony.
- Contrary to plaintiff's assertion, the district court adequately weighed one of the 401(k) plan summaries and correctly noted that the summary was not relevant to the court’s decision because the summary did not govern the plan's terms.
- Plaintiff disputed defendant’s argument that if the defendant withdrew funds from his retirement accounts he would be subject to a penalty. First, it is unlikely defendant would be subject to the fee; and second, if defendant is subject to the fee, the appropriate remedy to resolve that dispute is in tax court and not by withholding payment to creditors.
- Finally, the US Department of Labor’s opinion letter was non-binding and therefore has "no persuasive weight" in this context. at 13.
Second, the district court "properly determined that the language of the CCPA, particularly regarding the scope of the term "earnings," made clear that the CCPA's 25% cap did not apply to the garnishment of the corpus of a retirement account, and thus it properly denied [defendant's] post-judgment motion." Id. at 14. The purpose of the cap is to limit garnishment of earnings against "an honest debtor" who became financially overextended and is subject to "unscrupulous debt collectors." Id. at 39. Moreover, defendant has not alleged that the retirement distributions are critical to support his family. Id. at 40. Applying the cap in this case would not only fail to meet the goals of the CCPA, but would frustrate the purpose of the MVRA, which is to "make victims of a crime whole." Id.
This case will be an interesting one to watch, to see how much protection—even in the criminal context—qualified retirement plans receive from the courts and whether private victims will have the same powers to enforce. For any questions about enforcing judgments—including restitution orders—please contact us.
