Ellis Nat. Bank of Jacksonville v. Irving Trust Co.

• Decision Date: 19 March 1986
• Docket Number: D,No. 68,68
• Citation: 786 F.2d 466
• Parties: , 7 Employee Benefits Ca 1266 ELLIS NATIONAL BANK OF JACKSONVILLE, Plaintiff-Appellee, v. IRVING TRUST COMPANY, Defendant, Bache Group, Inc. and Sam Kalil, Jr., Additional Defendants on Counterclaim, Bache Group, Inc., Additional Defendant on Counterclaim-Appellant. ocket 85-7319.
• Court: U.S. Court of Appeals — Second Circuit

Page 466

786 F.2d 466

54 USLW 2507, 7 Employee Benefits Ca 1266

ELLIS NATIONAL BANK OF JACKSONVILLE, Plaintiff-Appellee, v. IRVING TRUST COMPANY, Defendant, Bache Group, Inc. and Sam Kalil, Jr., Additional Defendants

on Counterclaim,

Bache Group, Inc., Additional Defendant on Counterclaim-Appellant.

No. 68, Docket 85-7319.

United States Court of Appeals,

Second Circuit.

Argued Sept. 4, 1985.

Decided March 19, 1986.

Thomas A. Butler, New York City (Butler, Fitzgerald & Potter, of counsel), for additional defendant on counterclaim-appellant.

Mitchell A. Lowenthal, New York City (George Weisz, Joanne Zack, Loretta K. Davis, Cleary, Gottlieb, Steen & Hamilton, of counsel), for plaintiff-appellee.

Before PIERCE and PRATT, Circuit Judges, and WARD, District Judge. ^*

PIERCE, Circuit Judge:

Appeal from an order of the United States District Court for the Southern District of New York, Richard Owen, Judge, granting Ellis National Bank's motion for Appellant Bache Group, Inc. ("Bache"), a pension plan, argues principally that it is entitled to reclaim certain funds held by Irving Trust Company ("Irving Trust") for Sam Kalil, Jr. ("Kalil"), a former officer of Prudential-Bache Securities, Inc. ("Prudential-Bache"), a member of Bache, because those funds are subject to the imposition of a constructive trust under which Bache might trace and reclaim funds stolen by Kalil. Appellee Ellis National Bank of Jacksonville ("Ellis") contests Bache's asserted entitlement and seeks affirmance of the district court's grant of summary judgment in its favor on the basis of an assignment of the pension funds by Kalil to Ellis.

summary judgment, denying Bache Group, Inc.'s motion for leave to amend its cross-claims, and directing Irving Trust Co., as depositary, to disburse to Ellis certain pension plan funds held by Irving Trust and subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. Secs. 1001 et seq.

We agree with the district court's determination that the funds at issue are pension benefits subject to ERISA's provision against alienation and are not subject to the imposition of a constructive trust for Bache's benefit. We therefore affirm the order of the district court.

BACKGROUND

Sam Kalil, Jr. ("Kalil"), an employee of Bache & Company since June 3, 1974 and later an officer of its successor company, Prudential-Bache, elected to participate in the Bache Group, Inc. Employees Savings Plan in January 1980 and in the Bache Group, Inc. Employees Supplemental Retirement Plan in January 1983. At the commencement of this action, the trustee for these plans (collectively referred to as "the Plans"), Irving Trust Co. ("Irving Trust"), held in trust for Kalil $144,538.61 under the Savings Plan and over $33,000 under the Supplemental Plan. Prudential-Bache had directly deposited all of these funds into the Plans for Kalil's benefit. It is undisputed that Kalil's interest in the Plans is fully vested.

On December 19, 1983 and March 9, 1984, two summary judgments, totaling $210,430.46 plus interest, were entered in a Florida state court against Kalil in favor of the Jacksonville National Bank, predecessor to the Ellis National Bank of Jacksonville ("Ellis"). To satisfy these judgments, Kalil executed an Assignment and Agreement ("Assignment") on or about March 1, 1984 whereby he revocably assigned and transferred to Ellis all of his right, title and interest to the trust funds in the plans. Simultaneously, Kalil directed Irving Trust in writing to disburse these funds to Ellis under the terms of the plans. On or about March 26, 1984, by a separate letter to Irving Trust, Ellis requested such disbursements.

On January 15, 1985, Kalil, having been indicted in state court in Florida, pleaded nolo contendere to eight counts of grand theft and securities fraud in connection with unauthorized transactions in Bache's customer's accounts. At his sentencing hearing, Kalil stated under oath that both he and Prudential-Bache had received commissions on all of his trades, both authorized and unauthorized. Kalil was sentenced to serve twenty-six months in prison and ten years on probation; he was also directed to pay various fines and make restitution to defrauded customers.

On May 24, 1984, Ellis brought an action in the United States District Court for the Southern District of New York against Irving Trust for disbursement of Kalil's funds as Kalil's assignee. Irving Trust disclaimed any interest in the funds and responded as Interpleader Counterclaimant against Ellis and additional defendants Bache and Kalil. On September 26, 1984, the district judge entered an amended order providing that the funds would remain with Irving Trust pendente lite, but would be deemed to have been deposited with the court under the Federal Interpleader Statute, 28 U.S.C. Sec. 1335.

In his answer to Irving Trust's counterclaim, Kalil requested that the funds be disbursed to Ellis. In their responses, Bache and Ellis cross-claimed against each Ellis moved for summary judgment, claiming that Bache had no interest in the funds, that Kalil had never directly deposited the funds into the Plans, that Bache had controlled all such deposits, and that Ellis was thus entitled to immediate disbursement as assignee. Bache moved for leave to file amended cross-claims asserting that it had an "interest in and right to" funds contributed by Kalil to the Plans because certain of these funds "included commissions paid on fraudulent securities transactions."

other and Kalil. Ellis claimed that Bache had no interest or right to the funds, and that it (Ellis) was entitled thereto as Kalil's assignee. Bache claimed that Kalil had converted funds of Prudential-Bache customers, which funds were subsequently deposited into the Plans. Bache further claimed that, having paid over three million dollars to unnamed customers who sustained losses due to Kalil's conversions, it was subrogated to the claims of those customers against Kalil for the return of the converted funds.

By order dated April 2, 1985, the district court granted Ellis's motion for summary judgment and denied leave to Bache to file amended cross-claims. The cause was subsequently certified for appeal pursuant to Fed.R.Civ.P. 54(b).

DISCUSSION

Kalil's assignment to Ellis was "revocable" and therefore apparently satisfies applicable federal law regarding an employee's assignment of his own pension benefit to third parties. ¹ However, Bache claims that it may alienate certain purportedly assigned benefits under an allegedly implied exception to ERISA's provision against assignment and alienation, 29 U.S.C. Sec. 1056(d). The central question in this case is whether the anti-alienation provision of ERISA prohibits an employer from reclaiming certain funds contributed to an employee's pension plans while the employer was unaware that those funds represented monies derived from fraudulent practices for which the employee was subsequently indicted and convicted and for which the employer effectively became liable to defrauded customers. ² Procedurally, the question is whether Bache has presented a triable issue in seeking to impose a constructive trust upon those funds in Kalil's accounts in the Plans that are traceable to the commissions which Kalil generated based on fraudulent securities transactions. ³ We note that the cases on point are divided. Compare Vink v. SHV North American Holding Corp., 549 F.Supp. 268 (S.D.N.Y.1982) (ERISA precludes denial of benefits despite criminal behavior) with St. Paul Fire and Marine Ins. Co. v. Cox, 752 F.2d 550, 552 (11th Cir.1985) (per curiam) ("There is no reason to conclude that ERISA requires the abrogation of the equitable principle that a wrongdoer should not benefit from his misdeeds.").

Bache argues that it is entitled to the imposition of a constructive trust on the funds, stolen by Kalil and traceable into the Plans, under state common law principles of equity, see, e.g., Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 122 N.E. 378 (1919) (Cardozo, J.) ("When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee."), state common law of trusts, see, e.g., United States v. Fontana, 528 F.Supp. 137, 143 (S.D.N.Y.1981) (applying New York law); Garner v. Pearson, 374 F.Supp. 580, 586 (M.D.Fla.1973), and state criminal restitution statutes, see, e.g., Fla.Stat.Ann. Secs. 775.089 (court may impose restitution in addition to other punishment) and 948.03(1)(e) (restitution may be condition of probation) (West Supp.1984); N.Y.Pen.L. Secs. 60.27 (restitution may be part of sentence) and 450.10 (court may order return of stolen property) (McKinney 1980 & Supp.1984). Thus, we must determine whether ERISA preempts these state law principles. Cf. Northwest Airlines, Inc. v. Roemer, 603 F.Supp. 7, 9 (D.Minn.1984).

Preemption is a question of Congressional intent, and may be express or implied by the statute's language, structure or purpose. Northwest Airlines, 603 F.Supp. at 9 (citing Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 103 S.Ct. 2890, 2899, 77 L.Ed.2d 490 (1983); Greyhound Corp. v. Mount Hood Stages, Inc., 437 U.S. 322, 98 S.Ct. 2370, 57 L.Ed.2d 239 (1978)). Preemption may occur where Congress expresses an intent to supersede state law in a given field. See Jones v. Rath Packing Co., 430 U.S. 519, 525, 97 S.Ct. 1305, 1309, 51 L.Ed.2d 604 (1977); see also Bellmore v. Mobil Oil, 783 F.2d 300, 303-04 (2d Cir. 1986). ERISA provides that its provisions "supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan...." 29 U.S.C. Sec. 1144(a). The term "relate to" is broad, and includes even a state human rights law that might be used to modify employee benefits, Shaw, 103 S.Ct. at 2900-01, and we see no reason to except from its breadth the state laws of restitution and...