Ditto v. McCurdy, 21859.

• Decision Date: 12 May 1999
• Docket Number: No. 21859.,21859.
• Citation: 90 Haw. 345,978 P.2d 783
• Parties: Janie DITTO, Plaintiff-Appellee, v. John A. McCURDY, Jr., Defendant-Appellant, and Karla Scarpiova, Defendant.
• Court: Hawaii Supreme Court

978 P.2d 783

90 Haw. 345

90 Hawai`i 345

Janie DITTO, Plaintiff-Appellee, v. John A. McCURDY, Jr., Defendant-Appellant, and Karla Scarpiova, Defendant.

No. 21859.

Supreme Court of Hawai`i.

May 12, 1999.

Tom C. Leuteneker, Wailuku, Maui, James L. Starshak, Honolulu, and Randall H. Endo, Wailuku, Maui (of Carlsmith Ball), on the briefs, for defendant-appellant John A. McCurdy, Jr.

David C. Schutter and Christopher A. Dias (of David C. Schutter & Associates), on the briefs, Honolulu, for plaintiff-appellee Janie Ditto.

MOON, C.J., KLEIN, LEVINSON, NAKAYAMA, and RAMIL, JJ.

Opinion of the Court by MOON, C.J.

Defendant-appellant John A. McCurdy, Jr. (McCurdy or Defendant) has taken consolidated appeals¹ from the first circuit court's (1) August 19, 1998 order granting in part and denying in part plaintiff-appellee Janie Ditto's motion for issuance of garnishee summons after judgment, (2) September 22, 1998 garnishee order, and (3) October 16, 1998 order denying Defendant's motion for stay on appeal and for an interlocutory appeal. Briefly stated, this appeal arises out of a medical malpractice suit in which Ditto prevailed and thereby obtained a judgment against McCurdy. Notwithstanding that McCurdy filed for bankruptcy, Ditto instituted garnishment proceedings, seeking to collect on the judgment from McCurdy's interests in two pension plans.

In this appeal, we are asked to determine whether the anti-alienation provision, or section 206(d)(1), of the Employee Retirement Income Security Act of 1974 (ERISA), Pub.L. 93-406, 88 Stat. 829 (codified as amended at 29 U.S.C. § 1001, et seq. (1994)), precludes the garnishment of two ERISA-qualified pension plans, thereby preempting Hawai`i Revised Statutes (HRS) § 651-124 (1993), which governs attachment and execution with respect to pension money. Pursuant to HRS § 651-124, the right of a debtor to pension money is "exempt from attachment, execution, seizure, the operation of bankruptcy or insolvency laws under 11 U.S.C. section 552(b), or under any legal process whatever." The statute provides, however, that "this section shall not apply to," inter alia, "contributions made to a plan or arrangement within the three years before the date a debtor files for bankruptcy, whether voluntary or involuntary, or within three years before the date a civil action is initiated against the debtor." The circuit court, relying upon this exception, granted Ditto's motion for issuance of garnishee summons after judgment and "ordered that a garnishee summons be issued to Hawaiian Trust Company, Ltd. (Hawaiian Trust) directing it to disclose and immediately deliver the amount of $65,910.00 to Ditto's attorneys."

McCurdy challenges the circuit court's orders, arguing that, because section 206(d)(1) of ERISA prohibits garnishment of his ERISA pension plan benefits, the exception to HRS § 651-124 is preempted. For the reasons stated below, we agree with McCurdy and, accordingly, reverse.

I. BACKGROUND

A. The Underlying Case

Ditto was disfigured as a result of breast augmentation surgery performed by McCurdy and numerous complications that arose therefrom. In 1989, Ditto filed a medical malpractice action against McCurdy, alleging negligence and fraud and claiming punitive damages. Following a three-week trial, the jury, in a special verdict, found McCurdy liable for negligence, fraud, and punitive damages, awarding Ditto $3,500.00 in special damages, $1,000,000.00 in general damages, $400,000.00 in damages for fraud, and $600,000.00 in punitive damages. Judgment was entered on July 7, 1992 hereinafter, the July 7, 1992 judgment.

On appeal, the Intermediate Court of Appeals (ICA) affirmed the jury's award of special, general, and punitive damages for negligence, but vacated the jury's finding of liability for fraud and remanded the case for a new trial on the fraud claim. See Ditto v. McCurdy, 86 Hawai`i 93, 947 P.2d 961 (App. 1997), aff'd in part and rev'd in part, 86 Hawai`i 84, 947 P.2d 952 (1997) hereinafter, Ditto I. After granting McCurdy's petition for writ of certiorari, this court reversed the jury's finding of liability with respect to fraud, vacated the jury's award of punitive damages, and remanded the case with instructions to the trial court to dismiss the fraud count and conduct a new trial solely on the issue of the amount of punitive damages owed. See Ditto v. McCurdy, 86 Hawai`i 84, 86, 947 P.2d 952, 954 (1997) hereinafter, Ditto II. On January 7, 1998, this court entered notice and judgment on appeal as follows:

Pursuant to the Opinion of the Supreme Court of the State of Hawaii entered on November 6, 1997 (Ditto II) :

1. The jury's finding of liability with respect to fraud is reversed and the Circuit Court is directed to dismiss the fraud count;

2. The jury's award of punitive damages is vacated;

3. A new trial is ordered solely on the issue of the amount of punitive damages to be awarded;

4. The June 9, 1997 Decision of the ICA is affirmed in all other respects; and

5. Pursuant to Rule 37 of the Hawaii Rules of Appellate Procedure, interest at ten percent (10%) per year pursuant to Hawaii Revised Statutes § 478-3 shall be applied to the $1,045,606.30 affirmed ($3,500.00 in special damages, $1,000,000.00 in general damages and $42,106.39 in costs not appealed) from the date of the July 7, 1992 Judgment.

B. McCurdy's Bankruptcy

Shortly after Ditto prevailed at trial, McCurdy, on October 20, 1992, filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code hereinafter, Bankruptcy Code in the United States Bankruptcy Court for the District of Hawai`i. The case was thereafter converted to a petition for liquidation under Chapter 7 of the Bankruptcy Code. On December 24, 1996, the bankruptcy court ordered, adjudged, and decreed that all debts set forth in the July 7, 1992 judgment were nondischargeable pursuant to 11 U.S.C. § 523. On May 7, 1997, Ditto sought relief from the automatic bankruptcy stay in order to execute upon her nondischargeable debt. On August 22, 1997, the bankruptcy court granted relief from the automatic stay as to two of McCurdy's pension plans, specifically, "Pension Plan No. XXXXXXXXX at American Trust Company of Hawaii, Inc., which is now Account No. 3506470004 at the Hawaiian Trust Company hereinafter, Pension Plan No. 1, and Pension Plan No. XXXXXXXXX at American Trust Company of Hawaii, Inc., which is now Account No. 350647012 at the Hawaiian Trust Company hereinafter, Pension Plan No. 2." The parties also refer to Pension Plan No. 1 as McCurdy's "Profit Sharing Plan" and Pension Plan No. 2 as McCurdy's "Transferred Defined Benefit Pension Plan." We note that previously, on June 6, 1997, the bankruptcy court had declared that Pension Plan Nos. 1 and 2 hereinafter, collectively, the Plans or Pension Plan Nos. 1 and 2 were not the property of the bankruptcy estate.

C. Garnishment Proceedings In Circuit Court

On October 10, 1997, Ditto filed an ex parte motion for issuance of garnishee summons after judgment, requesting that the circuit court issue a garnishee summons to Hawaiian Trust. That same day, the circuit court issued a garnishee summons and order hereinafter, first garnishee summons, directing Hawaiian Trust, as garnishee, to disclose under oath

whether you have, or at the time of service:

a. Had any of the goods or effects of McCurdy ("Debtor") in your hands, and if so, their nature, amount and value; OR

b. Were or are you indebted to the DEBTOR, and if so, the nature and amount of the debt; OR

c. Debtor has in receipt from you any salary, wages, commissions, stipend, annuity, net income or a portion of net income under a trust, and if so, the amount or rate thereof.

On October 15, 1997, Hawaiian Trust filed its answer and disclosure, stating in pertinent part that, at the time process was served, "there was on deposit with Garnishee Hawaiian Trust a Profit Sharing Plan ("Plan") qualified under Section 401(a) of the Internal Revenue Code with Garnishee as Trustee, of which McCurdy is a participant." Hawaiian Trust claimed, however, that "said Plan is exempt from the garnishee process under Section 12.01 of the Plan and Section 206(d)(1) of ERISA. This exemption from garnishee process preempts state law ...."

The circuit court issued a garnishee order hereinafter, first garnishee order on November 19, 1997, stating:

Based upon Hawaiian Trust Company, Ltd.'s disclosure that it has funds belonging to McCURDY and good cause appearing therefore,

IT IS HEREBY ORDERED, ADJUDGED AND DECREED that Garnishee Hawaiian Trust Company, Ltd. remit payment of funds it holds belonging to McCurdy to DITTO, through her attorneys . . . upon proper service of this Order. . . .

On December 1, 1997, McCurdy and Hawaiian Trust filed a motion to set aside and vacate the first garnishee order hereinafter, motion to set aside. On December 17, 1997, McCurdy's ex-wife, Marivic McCurdy (Marivic), joined in the motion to set aside, stating that the family court of the first circuit had awarded "an interest in the subject pension plans of McCurdy to me, his ex-wife" as part of the divorce settlement.

The motion to set aside and Marivic's joinder came on for hearing on December 23, 1997. The circuit court, via minute order dated January 22, 1998, granted the motion and Marivic's joinder. In granting the relief sought by McCurdy, Hawaiian Trust, and Marivic, the circuit court reasoned in relevant part that the parties, "including but not limited to Ditto, McCurdy, and Marivic may have substantial and competing rights in the subject pension plan which should be the subject of further hearing and a more complete evidentiary record." The written order granting the motion to set aside and the joinder was entered on September 9, 1998.

In the meantime, Ditto filed a second motion for issuance of garnishee summons after judgment hereinafter, second garnishee motion on May 8, 1998, which is the subject of the instant...