(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience
of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of
brevity, portions of any opinion may not have been summarized).
Argued March 30, 1999 -- Decided June 14, 1999
GARIBALDI, J., writing for a unanimous Court.
The issue in this appeal is whether Lea Gilchinsky's transfer of funds from her New York pension plan,
established pursuant to the Employee Retirement Income Security Act of 1974 (ERISA), into a New Jersey individual
retirement account (IRA) constituted a fraudulent conveyance, thereby removing the funds from the exemption from
attachment conferred by N.J.S.A. 25:2-1.
Lea Gilchinsky was employed as a bookkeeper by Rodgers and Hammerstein Organization (R&H) from 1987
through 1991. During that period she embezzled over $700,000 from the company. She was criminally prosecuted and in
May 1992, she pled guilty to attempted second-degree grand larceny. She was sentenced to one year in prison.
In July 1992, R&H filed a civil action against Gilchinsky in New York to recover $935,643, consisting of the
amount embezzled plus the $204,474 R&H had paid her in salary and bonuses during the period of the theft. In
December 1994, the New York Supreme Court issued a final restraining order prohibiting Gilchinsky from making “any
sale, assignment or transfer of, interference with any property, in which [she has] an interest.”
In February 1993, the New York Supreme Court awarded R&H a money judgment against Gilchinsky in the
amount of $226,455.93 for partial damages. A special master was appointed to determine the remainder of the award.
Throughout the next year and a half, R&H attempted to negotiate with Gilchinsky to resolve the lawsuit. Her only
admitted asset was $84,280.55, vested in R&H's ERISA Profit Sharing Plan. In June 1994, Gilchinsky requested that
R&H roll that money over to an IRA account she had opened in the Fort Lee branch of National Westminster Bank
(NatWest). R&H did not immediately comply with her request, but rather pursued settlement discussions with her
regarding the ERISA funds throughout the summer and fall of 1994.
At a deposition in October 1994, Gilchinsky testified that she had closed out all of her New York bank accounts
and withdrew all the money she had accrued in a New York IRA after the judgment had been entered against her. She
claimed that with the exception of the money in R&H's pension, she was insolvent, having spent all of her money in
Atlantic City to fuel her gambling addiction.
In November 1994, the settlement discussions fell through. In a letter to R&H's general counsel, Gilchinsky
demanded that R&H transfer her share of the profit sharing plan in one lump-sum payment to NatWest. Under federal
law, R&H had no choice but to comply with the request and transferred Gilchinsky's ERISA pension to the New Jersey
IRA.
R&H immediately filed suit in New Jersey to domesticate the New York judgment and to place a lien on the
funds. On January 9, 1995, the Superior Court issued an Order to Show Cause. On January 10, 1995, the court issued a
Writ of Attachment, placing a lien on all of Gilchinsky's personal property located in the State of New Jersey.
Gilchinsky never answered the Order to Show Cause and did not oppose the order attaching her IRA. Instead,
her attorney filed a separate lawsuit collaterally attacking the orders. Her action was subsequently dismissed under the
entire controversy doctrine. In February 1995, the court entered an order domesticating the New York judgment and
directing the turnover of all property levied upon by the January 10th Writ of Attachment. NatWest subsequently delivered
the funds contained in Gilchinsky's New Jersey IRA to R&H.
In June 1996, over sixteen months later, Gilchinsky moved for relief from the February 1995 order, claiming that
the funds in the IRA were immune from attachment under N.J.S.A. 25:2-1(a). The court granted Gilchinsky's motion for
reconsideration, limited to the question of whether R&H's attachment of the funds in the New Jersey IRA violated
N.J.S.A. 25:2-1. On a subsequent motion for summary judgment, the trial court concluded that given the timing of the
transfer of the funds, the New York restraining order, Gilchinsky's lack of contacts with New Jersey, and the fact that she
was otherwise insolvent, the purpose of the transfer of the funds into the New Jersey IRA was to evade, thwart and hinder
creditors. Accordingly, it held that the money was not exempt from attachment under N.J.S.A. 25:2-1.
The Appellate Division reversed, finding that the trial judge considered only a few of the factors under N.J.S.A.
25:2-1 and concluding that Gilchinsky did not have an actual intent to defraud her creditors. In reaching its conclusion,
the panel noted that the funds would have been protected from attachment in either New York or New Jersey and that
Gilchinsky therefore gained no advantage by the transfer. The Appellate Division held that the money in the NatWest
IRA was entitled to the safe harbor protection the Legislature created for pension funds and was immune from
attachment under N.J.S.A. 25:2-1(a).
The Supreme Court granted R&H's petition for certification.
HELD: Gilchinsky's transfer of funds from her New York pension plan established pursuant to ERISA into a New Jersey
IRA constituted a fraudulent conveyance, and the transferred funds thus were not exempt from attachment under N.J.S.A.
25:2-1.
1. While ERISA contains an anti-alienation provision prohibiting the assignment or garnishment of pension benefits, the
tax code contains no such provision and does not address the validity of attachment of IRA funds. Thus, the question of
whether Gilchinsky's IRA funds were exempt from attachment is governed by State law. (pp. 8-9)
2. Although N.J.S.A. 25:2-1 provides a qualified immunity for funds deposited in a New Jersey IRA to prevent creditors
from attaching money earmarked for retirement, that immunity is not absolute and is lost if funds are transferred into an
IRA in preference of other creditors or as a fraudulent conveyance. (pp. 9-10)
3. The purpose of the Fraudulent Transfer Act, N.J.S.A. 25:2-20 to -34, is to prevent a debtor from placing his or her
property beyond a creditor's reach. (pp. 12-13)
4. In determining whether the circumstances of a particular transaction give rise to the conclusion that the transferor
intended to thwart or evade creditors, courts generally look to the “badges of fraud” enumerated in N.J.S.A. 25:2-26. The
Appellate Division made a critical error by giving controlling weight to the absence of two factors in a list of eleven, as the
proper inquiry is whether the badges of fraud are present and not whether some factors are absent. (pp. 13-16)
5. Gilchinsky's transfer of the funds to the New Jersey IRA was laced with at least seven of the badges of fraud
enumerated in N.J.S.A. 25:2-26. (pp. 17-20)
6. Gilchinsky herself is an “insider” within the meaning of N.J.S.A. 25:2-26(a). (pp. 17-18)
7. By rolling the money over to an IRA, Gilchinsky retained greater control over the sums and clearly retained possession
and control of the property after the transfer. (p. 18)
8. The fact that Gilchinsky transferred the money in violation of the New York restraining order is further evidence of
her fraudulent intent. (p. 19)
9. The openness and veracity of the transaction is irrelevant where other factors establish the debtor's intent to impede
exaction. Thus, R&H's knowledge of the transfer is insufficient to counteract the other badges of fraud that accompanied
this conveyance. (pp. 20-21)
10. Although it is true that R&H could not have reached the money while it remained in the ERISA plan, Gilchinsky
never would have been able to use the money in that account as withdrawal would have been subject to attachment
pursuant to the New York restraining order. (pp. 21-23)
11. The funds would not necessarily have been protected from attachment had Gilchinsky transferred them to a New York
IRA. (pp. 23-24)
12. The totality of the circumstances clearly and convincingly demonstrates that Gilchinsky intended to hinder, delay, and
defraud R&H. (pp. 24-25)
13. Although a court need not find a specific number of factors before characterizing a transaction as fraudulent, where
several badges of fraud accompany one transaction, a strong inference of fraud arises. (pp. 25-26)
Judgment of the Appellate Division is REVERSED.
CHIEF JUSTICE PORITZ and JUSTICES HANDLER, POLLOCK, O'HERN, STEIN and COLEMAN join in
JUSTICE GARIBALDI's opinion.
SUPREME COURT OF NEW JERSEY
A-
36 September Term 1998
LEA GILCHINSKY,
Plaintiff-Respondent,
v.
NATIONAL WESTMINSTER BANK N.J., THE
ESTATE OF RICHARD RODGERS, THE
ESTATE OF DOROTHY RODGERS, THE
ESTATE OF OSCAR HAMMERSTEIN II,
JACK TERHUNE, SHERIFF OF BERGEN
COUNTY and JOHN DOES 1-10 (whose
identities are not yet known),
Defendants,
and
THE RODGERS AND HAMMERSTEIN
ORGANIZATION,
Defendant-Appellant.
__________________________________
THE RODGERS AND HAMMERSTEIN
ORGANIZATION,
Plaintiff-Appellant,
v.
LEA GILCHINSKY,
Defendant-Respondent.
Argued March 30, 1999 -- Decided June 14, 1999
On certification to the Superior Court,
Appellate Division, whose opinion is reported
at
311 N.J. Super. 339 (1998).
Charles C. Abut argued the cause for appellant.
Merrill M. O'Brien argued the cause for
respondent (Dollinger & Dollinger, attorneys;
Howard B. Leopold, of counsel and on the
brief).
The opinion of the Court was delivered by
GARIBALDI, J.
N.J.S.A. 25:2-1 generally exempts property held in an
individual retirement account ("IRA") from attachment by
creditors. Although providing a safe harbor for retirement
assets, N.J.S.A. 25:2-1(b)(1) specifically states that assets
fraudulently conveyed in violation of the Uniform Fraudulent
Transfer Act are not immune from attachment. The question raised
in this appeal is whether defendant's transfer of funds from her
New York pension plan, established pursuant to the Employee
Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§
1001 to-1461, into a New Jersey IRA constituted a fraudulent
conveyance, thereby removing the funds from the exemption under
N.J.S.A. 25:2-1(a).
I.
Lea Gilchinsky was employed as a bookkeeper by Rodgers and
Hammerstein Organization ("R&H") from 1987 through 1991.See footnote 1
During that period, she embezzled over $700,000 from the company.
In August 1991, Gilchinsky was indicted for second-degree grand
larcenySee footnote 2 by a New York grand jury. In May 1992, she pled guilty
to attempted second-degree grand larceny and was sentenced to one
year in prison.
In July 1992, R&H filed a civil action against Gilchinsky in
New York to recover $935,643, consisting of the amount embezzled
plus the $204,474 R&H had paid Gilchinsky in salary and bonuses
during the period of the theft. In January 1993, the New York
Supreme Court issued a temporary restraining order prohibiting
“any sale, assignment, transfer, or interference with any”
interest of defendant in personal and/or real property located in
the State of New York. On December 29, 1994, a final restraining
order was issued prohibiting defendant from making "any sale,
assignment or transfer of, interference with any property, in
which you have an interest."
In February 1993, the New York Supreme Court awarded R&H a
money judgment against defendant in the amount of $226,455.93,
for partial damages suffered as a result of the embezzlement. A
Special Master was appointed to determine the remainder of the
award. The court also finalized the Order of Attachment, placing
a lien on all of defendant's property located in the State of New
York.
Throughout the next year and a half, R&H attempted to
negotiate with defendant to resolve the lawsuit. Defendant's
only admitted asset was $84,280.55, vested in R&H's ERISA Profit
Sharing Plan. In June 1994, defendant requested that R&H roll
that money over to an IRA account she had opened in the Fort Lee,
New Jersey branch of National Westminster Bank (“NatWest”). R&H
did not comply immediately with her request. Instead, the
company pursued settlement discussions with defendant regarding
the ERISA funds throughout the summer and fall of 1994.
At a deposition in October 1994, defendant testified that
she had one demand checking account in the Fort Lee branch of
NatWest bank that she had opened in 1991. She stated that her
brother deposited money into that account so she could pay her
rent and credit card debts. She further testified that she had
no individual retirement accounts and no personal property of
substantial value. She admitted that she had closed out all of
her New York bank accounts and withdrew all the money she had
accrued in a New York IRA after the judgment had been entered
against her. She claimed that she was currently insolvent,
having spent all of her money in Atlantic City to fuel her
gambling addiction. The R&H pension was the only money defendant
allegedly had.
R&H continued to negotiate with defendant regarding the
pension until November 1994, when the discussions fell through.
In a letter to R&H's General Counsel, defendant demanded that her
share of the Rodgers and Hammerstein Profit Sharing Plan be
transferred immediately in one lump-sum payment into an IRA
account opened in her name at NatWest Bank in Fort Lee, New
Jersey. Under federal law, R&H had no choice but to comply with
the request.
29 U.S.C. §1056(d). On December 30, 1994, R&H
transferred defendant's ERISA pension to the New Jersey IRA.
R&H immediately filed suit in New Jersey to domesticate the
New York judgment and place a lien on the funds. On January 9,
1995, the Superior Court issued an Order to Show Cause. On
January 10, 1995, the court issued a Writ of Attachment, placing
a lien on all of defendant's personal property located in the
State of New Jersey.
Defendant never answered the Order to Show Cause and did not
oppose the order attaching her IRA. Instead, her attorney filed
a separate lawsuit collaterally attacking the orders. Ruling
that defendant's action was barred by the entire controversy
doctrine, the court dismissed her claims. On February 2, 1995,
the court entered an Order domesticating the foreign judgment and
directing the turnover of all property levied upon by the January
10 Writ of Attachment. On April 4, 1995, NatWest delivered the
funds contained in defendant's New Jersey IRA to R&H.
In June 1996, over sixteen months later, defendant moved for
relief from the February 2, 1995 Order. Defendant contended that
the funds in the IRA were immune from attachment under N.J.S.A.
25:2-1(a). The court granted defendant's motion for
reconsideration, limited to the question of whether R&H's
attachment of the funds in the New Jersey IRA violated N.J.S.A.
25:2-1.
Both parties agreed that the facts were not in dispute and
the matter was ripe for summary judgment. After oral argument,
the trial court concluded that given the timing of the transfer,
the New York restraining order, defendant's lack of contacts with
New Jersey, and the fact that she was otherwise insolvent, "[n]o
rational fact finder . . . objectively could come to any
conclusion but that the purpose of this across the Hudson
transfer was for no other purpose than to evade, thwart, [and]
hinder creditors and to preclude, or at least make [collection]
extremely difficult . . . ." Accordingly, it held the money was
not exempt from attachment under N.J.S.A. 25:2-1. See N.J.S.A.
25:2-1(b)(1).
The Appellate Division reversed, finding that the "motion
judge considered only a few of the factors under N.J.S.A. 25:2-26
in reaching his decision[.]" Gilchinsky v. Westminster Bank,
311 N.J. Super. 339, 349 (1998). Giving controlling weight to the
absence of three factors enumerated in N.J.S.A. 25:2-26, the
Appellate Division concluded that defendant did not have an
actual intent to defraud her creditors. According to the panel,
the "controlling factors" indicating the transfer was not a
fraudulent conveyance were: “that the transfer was not concealed;
the creditor, R&H, participated in the transfer; and the funds
continued to be held in a trust account after the transfer." The
panel reasoned that the funds were protected from attachment in
both New York and New Jersey. Therefore, defendant gained no
advantage by the transfer. The Appellate Division also did not
believe that the transfer violated any New York restraining
order. Accordingly, it held that the money in the NatWest IRA
was "entitled to the safe harbor protection the Legislature
created for pension funds" and was immune from attachment under
N.J.S.A. 25:2-1(a). Gilchinsky, supra, 311 N.J. Super. at 350.
We granted R&H's petition for certification, ___ N.J. ___ (1998),
and now reverse.
II.
ERISA contains an anti-alienation provision prohibiting the
assignment or garnishment of pension benefits.
29 U.S.C. §1056(d)(1). Had defendant left her money in the R&H Profit
Sharing Plan, there is no doubt that it would have been exempt
from attachment. Guidry v. Sheet Metal Workers Nat'l Pension
Fund,
493 U.S. 365, 376,
110 S. Ct. 680, 687,
107 L. Ed.2d 782,
795 (1990) (refusing to carve out equitable exception to Section
1056(d) even where employee engaged in malfeasance and/or
criminal misconduct), appeal after remand,
10 F.2d 700 (10th Cir.
1993), reh'g
39 F.3d 1078 (10th Cir. 1994), cert. denied,
514 U.S. 1063,
115 S. Ct. 1691,
131 L. Ed.2d 556 (1995); see also
State v. Pulasty,
136 N.J. 356, 361 (refusing to attach funds
while in ERISA account but allowing attachment once funds in
pensioner's possession), cert. denied,
513 U.S. 1017,
115 S. Ct. 579,
130 L. Ed 2d 494 (1994). Unlike ERISA, however, the tax
code contains no anti-alienation provision. Nor does it address
the validity of attachment of IRA funds. Therefore, that issue
is governed by State law. C.P. v. Township of Piscataway Bd. of
Educ.,
293 N.J. Super. 421, 437 (App. Div. 1996); Halliburton Co.
v. Mor,
231 N.J. Super. 197, 199 (Law Div. 1988); In re Yuhas,
104 F.3d 612 (3d Cir.), cert. denied, Orr v. Yuhas,
521 U.S. 1105,
117 S. Ct. 2481,
138 L. Ed.2d 990 (1997). Accordingly, by
transferring the money to a New Jersey IRA, the money lost the
blanket protection afforded by ERISA and became subject to New
Jersey law.
N.J.S.A. 25:2-1 governs the rights of creditors to attach
funds in an IRA. N.J.S.A. 25:2-1 provides in part:
a. Except as provided in subsection b. of this
section, every deed of gift and every conveyance,
transfer and assignment of goods, chattels or things in
action, made in trust for the use of the person making
the same, shall be void as against creditors.
b. Notwithstanding the provisions of any other law to
the contrary, any property held in a qualifying trust
and any distributions from a qualifying trust,
regardless of the distribution plan elected for the
qualifying trust, shall be exempt from all claims of
creditors and shall be excluded from an estate in
bankruptcy, except that:
(1) no exemption shall be allowed for any preferences
or fraudulent conveyances made in violation of the
"Uniform Fraudulent Transfer Act," R.S. 25:2-20 et.
seq., or any other State or federal law; . . .
. . . .
For purposes of this section, a "qualifying trust"
means a trust created or qualified and maintained
pursuant to federal law, including, but not limited to,
section 401, 403, 408, or section 409 of the federal
Internal Revenue Code of 1986 (
26 U.S.C. §401, 403,
408 or 409).
[N.J.S.A. 25:2-1, as amended by L. 1993, c. 177.]
An IRA is created pursuant to Internal Revenue Code section 408.
26 U.S.C. §408(d)(3)(governing IRAs created from rollover
contribution from employee retirement plan). Thus, it is a
“qualifying trust” under New Jersey law. C.P., supra, 293 N.J.
Super. at 437; In re Yuhas, supra, 104 F.
3d at 613.
N.J.S.A. 25:2-1 provides a “qualified immunity” for funds
deposited in a New Jersey IRA. The purpose behind such expansive
protection is to prevent creditors from attaching money earmarked
for retirement. That immunity, however, is not absolute.
N.J.S.A. 25:2-1(b). Creditors can attach funds transferred into
an IRA in “preference” of other creditors, as a “fraudulent
conveyance,” or if the money is subject to a support order.
N.J.S.A. 25:2-1(b); C.P., supra, 293 N.J. Super. at 437-38;
Assembly Financial Institutions Comm. Statement to Assembly Comm.
Substitute for Assembly, Nos. 288 and 1462 (Sept. 14, 1992). In
exempting fraudulent conveyances from the otherwise broad-based
immunity, the Legislature clearly intended to prevent debtors
from using New Jersey law to shield their assets from creditors.
This case requires the Court to determine whether defendant's
transfer constituted a fraudulent conveyance, thereby removing
her IRA from the general exemption in N.J.S.A. 25:2-1.
R&H alleges that defendant transferred the assets in her ERISA fund to place them beyond the reach of her creditors. By rolling over the money into a New Jersey IRA, defendant was able to circumvent the New York restraining order and prevent collection of the New York judgment. As evidence of defendant's fraudulent intent, R&H argues that defendant never would have realized the benefit of the funds had she rolled them over to a New York IRA. The money would have been subject to seizure the moment defendant attempted a withdrawal. In transferring the money to New Jersey, defendant placed it beyond the reach of the New York judgment. Defendant could take an early withdrawal without hindrance. The fact that defendant was otherwise insolvent and had absolutely no contacts with New Jersey, R&H contends, is further evidence of her fraudulent intent. Moreover, R&H argues, transferring the funds in violation of the New York restraining order is, by itself, a fraudulent conveyance, thereby placing the funds outside the protection of N.J.S.A. 25:2-1(a).
Defendant, on the other hand, argues that her intentions were entirely proper. She contends that the money would have been exempt from levy in New York whether it was deposited in an ERISA or IRA account. The funds also were exempt from attachment in New Jersey, pursuant to N.J.S.A. 25:2-1(a). Because the funds were transferred from one protected account to another, and the roll-over did not affect the creditor's ability to access the funds, the creditor cannot complain that the transfer hindered or delayed its ability to satisfy its judgment. Defendant further argues that the timing of the rollover was not relevant. Defendant asserts that the transfer was not a fraudulent conveyance and is protected from attachment by N.J.S.A. 25:2-1 (a).
N.J.S.A. 25:2-25 defines fraudulent conveyance. It
provides that:
A transfer made or obligation incurred by a debtor is
fraudulent as to a creditor, whether the creditor's
claim arose before or after the transfer was made or
the obligation was incurred, if the debtor made the
transfer or incurred the obligation:
a. With actual intent to hinder, delay, or defraud any
creditor of the debtor . . . .
The purpose of the Fraudulent Transfer Act, N.J.S.A. 25:2-20 to -34See footnote 3, is to prevent a debtor from placing his or her property beyond a creditor's reach. In re Wintz Companies, 230 B.R. 848, 859 (B.A.P. 8th Cir. 1999). Underlying the Act is the notion that a debtor cannot deliberately cheat a creditor by removing his property from "the jaws of execution." See Klein v. Rossi, 251 F. Supp. 1, 2 (E.D.N.Y. 1966). Fraudulent conveyance claims thus allow the creditor to undo the wrongful transaction so as to bring the property within the ambit of collection. Hearn 45 St. Corp. v. Jano, 283 N.Y. 139, 142, 27 N.E.2d 814, 816 (N.Y. 1940).
In determining whether a transfer constitutes a fraudulent conveyance, there are two relevant inquiries. The first is "whether the debtor [or person making the conveyance] has put some asset beyond the reach of creditors which would have been available to them" at some point in time "but for the conveyance." In re Wolensky's Ltd. Partnership, 163 B.R. 615, 626-27 (Bankr. D.C. 1993); Grand Lab., Inc. v. Midcon Labs of Iowa, 32 F.3d 1277, 1282 (8th Cir. 1994) (requiring creditor to “show that [it] would have received something which has become lost to [it] by reason of the conveyance.”); cf. In re Joel I. Kimmel, 131 B.R. 223, 229 (Bankr. S.D. Fla. 1991) (finding no fraudulent conveyance where defendant transferred funds from one form of exempt account to another since creditor could not have looked to account assets to satisfy claim). The second is whether the debtor transferred property with an intent to defraud, delay, or hinder the creditor. Transfers calculated to hinder, delay, or defeat collection of a known debt are deemed fraudulent because of the debtor's intent to withdraw the assets from the reach of process. Klein, supra, 251 F. Supp. at 2; In re Joel Kimmel, supra, 131 B.R. at 229. Both inquiries involve fact-specific determinations that must be resolved on a case-by-case basis. The person seeking to set aside the conveyance bears the burden of proving actual intent. United States v. McCombs, 30 F.3d 310, 328 (2d Cir. 1994); Hassett v. Goetzmann, 10 F. Supp.2d 181, 188 (N.D.N.Y. 1998).
In determining whether the circumstances of a particular transaction give rise to the conclusion that the transferor intended to thwart or evade creditors, courts generally look to factors commonly referred to as "badges of fraud." "Badges of fraud" represent circumstances that so frequently accompany fraudulent transfers that their presence gives rise to an inference of intent. Hassett, supra, 10 F. Supp. 2d at 188. As one court has stated, "badges of fraud"
are said to be facts which throw suspicion on a transaction, and which call for an explanation . . . . More simply stated, they are signs or marks of fraud. They do not of themselves or per se constitute fraud, but they are facts having a tendency to show the existence of fraud [. . . .] Often a single one of them may establish and stamp a transaction as fraudulent. When, however, several are found in the same transaction, strong, clear evidence will be required to repel the conclusion of fraudulent intent. . . ."
[Schall v. Anderson's Implement, Inc.,
484 N.W.2d 86, 91 (Neb. 1992) (emphasis added)
(citations omitted).]
N.J.S.A. 25:2-26 lists the "badges of fraud" that New Jersey
courts are to consider in determining whether a debtor conveyed
property with the actual intent to place it beyond the reach of
creditors. That section provides:
In determining actual intent under subsection a. of
R.S. 25:2-25 consideration may be given, among other
factors, to whether:
a. The transfer or obligation was to an insider;
b. The debtor retained possession or control of
the property transferred after the transfer;
c. The transfer or obligation was disclosed or
concealed;
d. Before the transfer was made or obligation
was incurred, the debtor had been sued or
threatened with suit;
e. The transfer was of substantially all the
debtor's assets;
f. The debtor absconded;
g. The debtor removed or concealed assets;
h. The value of the consideration received by
the debtor was reasonably equivalent to the
value of the asset transferred or the amount
of the obligation incurred;
i. The debtor was insolvent or became insolvent
shortly after the transfer was made or the
obligation was incurred;
j. The transfer occurred shortly before or
shortly after a substantial debt was
incurred; and
k. The debtor transferred the essential assets
of the business to a lienor who transferred
the assets to an insider of the debtor.
In determining actual intent to defraud, courts should
balance the factors enumerated in N.J.S.A. 25:2-26, as well as
any other factors relevant to the transaction. Accordingly, the
Appellate Division made a critical error by giving controlling
weight to the absence of two factors in a list of eleven. The
proper inquiry is whether the badges of fraud are present, not
whether some factors are absent. Although the presence of a
single factor, i.e. badge of fraud, may cast suspicion on the
transferor's intent, the confluence of several in one transaction
generally provides conclusive evidence of an actual intent to
defraud. Max Sugarman Funeral Home, Inc. v. A.D.B. Investors,
926 F.2d 1248, 1254-55 (1st Cir. 1991) ("Max Sugarman").
"[F]raudulent intent, by its very nature, is rarely susceptible
to direct proof . . . ." Marine Midland Bank v. Murkoff,
508 N.Y.S.2d 17, 21 (N.Y. App. Div. 1986), appeal dismissed,
69 N.Y.2d 875 (N.Y. 1987). A defendant rarely will acknowledge that
she transferred funds to place them beyond the reach of
creditors. Actual intent often must be established through
inferential reasoning, deduced from the circumstances surrounding
the allegedly fraudulent act. Max Sugarman, supra, 926 F.
2d at
1254; Hassett, supra, 10 F. Supp. at 188; Palmer v. Murphy,
677 N.E.2d 247, 255 (Mass. App. Ct.), review denied,
680 N.E.2d 102
(Mass. 1997); Marine Midland, supra, 508 N.Y.S.
2d at 20.
In this case, the transfer was laced with at least seven of
the "badges of fraud" enumerated in N.J.S.A. 25:2-26.See footnote 4 First,
the transfer was to an "insider." Although defendant technically
does not fall within the definition of "insider" contained in
N.J.S.A. 25:2-22(a)See footnote 5, an analysis of the purpose underlying the
"insider" factor and fraudulent conveyance law in general
undoubtedly supports the conclusion that she qualifies as an
insider under the unusual facts of this case.
Simply stated, the list of “insiders” contained in N.J.S.A.
25:2-22(a) describes the relationship between the transferor and
transferee. The unifying theme among the enumerated persons is
that they stand in such close relation to the debtor as to give
rise to the inference that they have the ability to influence or
control the debtor's actions. Norton Bankruptcy Law and
Practice2d § 57:31 (1999) (defining insider). Concluding that
defendant is not an “insider” because the list does not
specifically refer to transfers made to one's self elevates the
technical over the substantive We refuse to give the statute
such an unreasonable construction.
If a relative or business entity controlled by the debtor is
an "insider," it follows that the debtor herself is an insider.
Transactions with those entities allow the debtor to take the
assets out of her name and place them beyond the reach of
creditors. Since that is essentially what defendant did in this
case, we conclude that she is an "insider" within the meaning of
N.J.S.A. 25:2-26(a).
Second, defendant transferred the money to an account of
which she was the beneficiary and over which she retained
control. Had the money remained in the ERISA plan, the fund's
trustee technically would have been in charge of it. By rolling
the money over to an IRA, defendant gained greater control over
the sums. Because defendant clearly retained possession and
control of the property after the transfer, we find that factor
(b) has been met. N.J.S.A. 25:2-26(b).
Third, indisputably, this transfer was made after the debtor
had been sued or threatened with suit. N.J.S.A. 25:2-26(d). In
fact, not only had defendant been sued, but R&H already had
recovered a judgment against her.
Fourth, defendant confessed to transferring “substantially
all” of her assets. N.J.S.A. 25:2-26(e). Defendant testified at
her deposition that she had lost all of her money gambling. She
claimed to have no assets other than the money vested in R&H's
Profit Sharing Plan. She testified that she had closed out all
of her New York bank accounts and her New York IRA, spending the
money to fuel her gambling addiction. Although she admitted to
owning a few pieces of jewelry and some furniture, they were of
minimal value. She is unemployed, has no salary and no other
source of income. Because defendant's only admitted asset is the
money in the New Jersey IRA, we find that factor (e) has been
met.
Fifth, in transferring the assets from New York to New
Jersey, defendant effectively prevented them from being attached
by R&H pursuant to the New York restraining order. See N.J.S.A.
25:2-26(g) (“The debtor removed or concealed assets.”) Had R&H
not been so quick to domesticate its foreign judgment, defendant
could have withdrawn all of the money from the New Jersey IRA,
leaving R&H with no remedy. The fact that defendant transferred
the money in violation of the New York restraining order is
further evidence of her fraudulent intent.
Sixth, since defendant transferred the property after
incurring a substantial debt to R&H, we find that factor (j) has
been met as well. N.J.S.A. 25:2-26(j) (applying to transfers
occurring shortly before or after a substantial debt is
incurred.)
Seventh, defendant's own deposition testimony and affidavit
of indigence establish that the sum of her debts is greater than
her assets. N.J.S.A. 25:2-26(i) (“The debtor was insolvent or
became insolvent shortly after the transfer was made or the
obligation was incurred”). She claims that the money in the IRA
is her only remaining asset. Because defendant owes R&H
$226,455.93 and the value of the assets in her IRA is only
$84,280.55, she is clearly insolvent within the meaning of
N.J.S.A. 25:2-23(a). ("A debtor is insolvent if the sum of the
debtor's debts is greater than all of the debtor's assets . .
."). Accordingly we find that factor (i) has been met.
Because the record establishes that seven badges of fraud
are present, we find that defendant transferred the money to
secure access to the funds with the intent to hinder or delay
R&H's ability to satisfy its New York judgment. By focusing on
concealment, the Appellate Division placed paramount weight on a
factor that is only marginally relevant here. The panel reasoned
that there was no fraudulent conveyance because R&H knew about
the transfer and was the one to effectuate it. That analysis,
however, ignores the critical fact that R&H had no choice but to
make the transfer.
29 U.S.C. §1104 (requiring trustee to
administer plan solely in interests of employees); Frary v. Shorr
Paper Products, Inc.,
494 F. Supp. 565, 568-69 (N.D. Ill. 1980)
(holding that plan trustee could not deny participant lump-sum
payment).See footnote 6 Courts examining fraudulent transfers uniformly have
held that "the creditor need establish only that the transferor
intended by the conveyance to avoid payment of his obligation or
to hinder its collection . . . ." Reconstruction Fin. Corp. v.
United Distillers Prod. Corp.,
229 F.2d 665, 667 (2d Cir. 1956).
The openness and veracity of the transaction is irrelevant where
other factors establish the debtor's intent to impede exaction.
Boston Trading Group, Inc. v. Burnazos,
835 F.2d 1504, 1508 (1st
Cir. 1987); United States v. Tabor Court Realty Corp.,
803 F.2d 1288, 1296-97 (3d Cir. 1986), cert. denied, McClellan Realty Co.
v. United States,
483 U.S. 1005,
107 S. Ct. 3229,
97 L. Ed.2d 735
(1987). Accordingly, we find that R&H's knowledge of the
transfer is insufficient to counteract the other badges of fraud
that accompanied this conveyance.
We also disagree with defendant's assertion that the funds
are protected because they were moved from one trust account to
another. Missing from that analysis is consideration of the
benefit defendant reaped by transferring the funds out of New
York into New Jersey. It is true that R&H could not have reached
the money while it remained in the ERISA plan. Guidry, supra,
493 U.S. at 376, 110 S. Ct. at 687, 107 L. Ed.
2d at 795. That,
however, is where the inquiry begins, not ends. Defendant never
would have been able to use the money in that account.
Withdrawals would have been subject to attachment pursuant to the
New York restraining order. National Bank of N. Am. v.
International Bhd. of Elec. Workers Local #3,
400 N.Y.S.2d 482
(N.Y. Sup. Ct. 1977), aff'd,
419 N.Y.S.2d 127 (N.Y. App. Div.),
appeal dismissed,
48 N.Y.2d 752,
397 N.E.2d 1333 (1979). See
also Pulasty, supra, 136 N.J. at 356 (holding ERISA anti-alienation provision does not apply to funds in pensioner's
possession); Hawxhurst, supra, 318 N.J. Super. at 86; Velis v.
Kardanis,
949 F.2d 78 (3d Cir. 1991) (concluding pension benefits
were includable asset of bankruptcy estate once distributed);
Houck v. Houck,
181 B.R. 187, 189 (Bankr. E.D. Pa. 1995)
(concluding that ERISA's anti-alienability provision does not
protect pension funds once they are distributed); NCNB Fin.
Servs., Inc. v. Shumate,
829 F. Supp 178, 180 (W.D. Va.
1993)(stating funds no longer protected from alienation once in
pensioner's possession), aff'd,
45 F.3d 427 (4th Cir. 1994),
cert. denied,
515 U.S. 1161,
115 S. Ct. 2616,
132 L. Ed.2d 859
(1995). By transferring the money to an account in New Jersey,
defendant bypassed the New York judgment and evaded her creditor.
We also disagree 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
seeking to enforce money judgments, C.P.L.R. § 5205(c); Bank
Leumi Trust Co. of New York v. Dime Sav. Bank of New York,
650 N.E.2d 846 (N.Y. 1995), that exemption is unavailable where the
debtor secretes funds into an IRA in an attempt to avoid paying a
money judgment. C.P.L.R. § 5205(5)See footnote 7; Pauk v. Pauk,
648 N.Y.S.2d 134, 135 (N.Y. App. Div. 1996); Tompkins County Trust Co. v.
Gowin,
621 N.Y.S.2d 476, 478 (N.Y. Sup. Ct. 1994) (stating
general exemption for IRAs not available where asset is
transferred within ninety days before action in which judgment is
entered against defendant). Under New York's Debtor and Creditor
law, the conveyance also would be void since it was “made [by] a
defendant . . . [during the pendency of an action] for money
damages or [after] a judgment . . . has been docketed . . . .”
(N.Y. Debtor and Creditor Law § 273-a, McKinney 1990). Because
the money would not have been immune from attachment in New York,
defendant effectuated the transfer in hopes the money would be
protected by N.J.S.A. 25:2-1. Attempting to place the money
beyond her creditor's reach is the essence of a fraudulent
conveyance. We are certain that the Legislature did not intend
to allow debtors to funnel money into a New Jersey IRA to thwart
the judgments of sister states. N.J.S.A. 25:2-1(b).
III.
In sum, the totality of the circumstances clearly and
convincingly demonstrates that defendant intended to hinder,
delay, and defraud her creditor, R&H. Nearly all of the classic
indicia of fraud are present here. Defendant transferred her
only remaining asset after a judgment had been entered against
her. N.J.S.A. 25:2-26(d),(e),(j). The transfer was in violation
of a restraining order. N.J.S.A. 25:2-26(g). She retained
possession of the asset after the transfer. N.J.S.A. 25:2-26(b).
In fact, by transferring the asset, defendant gained greater
control over it. Moreover, by transferring the asset to New
Jersey, defendant was able to evade enforcement of the New York
judgment. N.J.S.A. 25:2-26(g).
Coupling these “badges of fraud” with defendant's previous
actions and admissions leads to the inevitable conclusion that
she was using the New Jersey IRA account to evade enforcement of
the New York judgment and restraining order. At a deposition in
October 1994, defendant testified that she had closed out her New
York bank accounts and cashed in the money in her New York IRA,
despite the restraining order that prohibited her from spending
any money.See footnote 8 Defendant's own testimony further established that
she opened a checking account at NatWest Bank in Fort Lee, New
Jersey because she could not get any money out of her New York
accounts. In light of defendant's previous actions, it is plain
that defendant transferred her pension money out of New York to
shield it from her creditor.
We do not suggest that a court must find a specific number
of factors before characterizing a transaction as fraudulent. In
some cases, the presence of a single factor may suffice. In re
Ingersoll,
124 B.R. 116, 122 (Bankr. M.D. Fla. 1991). Where
several badges of fraud accompany one transaction, however, a
strong inference of fraud arises. Ibid. Unless a sufficient
explanation is supplied, clearly rebutting the inference of
actual fraudulent intent, the conclusion that the debtor
possessed the requisite intent is inescapable. In this case we
have no doubt that defendant acted with an actual intent to
hinder, delay, and defraud her creditors.
The judgment of the Appellate Division, therefore, is
reversed.
CHIEF JUSTICE PORITZ and JUSTICES HANDLER, POLLOCK, O'HERN,
STEIN, and COLEMAN join in JUSTICE GARIBALDI's opinion.
NO. A-36 SEPTEMBER TERM 1998
ON APPEAL FROM
ON CERTIFICATION TO Appellate Division, Superior Court
LEA GILCHINSKY,
Plaintiff-Respondent,
v.
NATIONAL WESTMINSTER BANK N.J., et al.,
Defendants,
and
THE RODGERS AND HAMMERSTEIN
ORGANIZATION,
Defendant-Appellant.
--------------------------------------------------------------
THE RODGERS AND HAMMERSTEIN
ORGANIZATION,
Plaintiff-Appellant,
v.
LEA GILCHINSKY,
Defendant-Respondent.
DECIDED June 14, 1999
Chief Justice Poritz PRESIDING
OPINION BY Justice Garibaldi
CONCURRING OPINION BY
DISSENTING OPINIONS BY
Footnote: 1 Gilchinsky was employed by R&H in various positions from 1980 through 1991.
Footnote: 2 Second-degree grand larceny is defined as stealing property in
excess of $50,000. It is a class C felony. N.Y. Penal Law §
155.40(1) (McKinney 1990).
Footnote: 3 The Uniform Fraudulent Conveyances Law, N.J.S.A. 25:2-7 to -19, was repealed by
the Uniform Fraudulent Transfer Act, effective January 1, 1989. Flood v. Caro Corp.,
272 N.J. Super. 398, 403 (App. Div. 1994).
Footnote: 4 We need not address the question of whether the transfer of funds from the
ERISA account to the IRA constituted a conveyance. Courts in this state already have
answered that question in the affirmative. E.g., Hawxhurst v. Hawxhurst,
318 N.J. Super. 72 (App. Div. 1998).
Footnote: 5 N.J.S.A. 25:2-22(a) defines insider to include: a relative or debtor of the individual;
a partnership in which the debtor is a general partner; another general partner in the
debtor's partnership; a corporation in which the debtor is a person in control.
Footnote: 6 Because neither party disputes this contention, we assume that the terms of the
Plan require the trustee to honor all beneficiary requests to withdraw funds.
Footnote: 7 C.P.L.R. § 5205(5) provides:
Additions to an [individual retirement account qualified
under § 408 of the Internal Revenue Code] shall not be
exempt from application to the satisfaction of a money
judgment if (i) made after the date that is ninety days before
the interposition of the claim on which such judgment was
entered . . . .
Footnote: 8 One bank account remained open in New York because it had been frozen
pursuant to the restraining order served on defendant in September 1994.