Planned Consumer Marketing, Inc. v. Coats & Clark, Inc.

• Decision Date: 26 March 1987
• Citation: 513 N.Y.S.2d 417,127 A.D.2d 355
• Court: New York Supreme Court — Appellate Division
• Parties: PLANNED CONSUMER MARKETING, INC., Plaintiff-Appellant, v. COATS & CLARK, INC., Defendant-Respondent. COATS & CLARK, INC., Petitioner-Respondent, v. DRY DOCK SAVINGS BANK, DOLLAR SAVINGS BANK, Respondent, and Edwin Lee, individually and as alleged "trustee" of the "Planned Consumer Marketing, Inc.", "Profit Sharing Plan", Respondents-Appellants.

Page 417

513 N.Y.S.2d 417

127 A.D.2d 355

PLANNED CONSUMER MARKETING, INC., Plaintiff-Appellant, v. COATS & CLARK, INC., Defendant-Respondent.

COATS & CLARK, INC., Petitioner-Respondent, v. DRY DOCK SAVINGS BANK, DOLLAR SAVINGS BANK, Respondent, and Edwin Lee, individually and as alleged "trustee" of the

"Planned Consumer Marketing, Inc.", "Profit

Sharing Plan", Respondents-Appellants.

Supreme Court, Appellate Division First Department.

March 26, 1987.

Stanley Geller, of counsel (Butler, Jablow & Geller, New York City, attorneys), for plaintiff-appellant Planned Consumer Marketing, Inc.

Edwin Lee, pro se.

Joseph J. Schiavone, of counsel (Edwin David Robertson, with him, on the brief; Cadwalader, Wickersham & Taft, New York City, attorneys), for petitioner-respondent.

Before MURPHY, P.J., and CARRO, MILONAS and WALLACH, JJ.

CARRO, Justice.

This proceeding was brought by Coats & Clark, Inc., pursuant to CPLR 5225 and 5227, seeking a turnover to petitioner of funds contained in bank accounts in the name of the Planned Consumer Marketing, Inc., Profit Sharing Plan, in order to satisfy a judgment awarded to Coats & Clark against Planned Consumer Marketing in 1981. As this appeal presents the very difficult issue of whether there are any circumstances which permit a party to commence a proceeding in a state court to void transfers of corporate assets made to an employee benefit plan subject to federal regulation under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq., it is important to set forth the facts of this case from the beginning.

Planned Consumer Marketing entered into two contracts, dated May 1, 1973 and July 1, 1974, with Coats & Clark, agreeing to promote Coats & Clark's products. Coats & Clark refused to make payments under the second contract on the ground that Planned Consumer Marketing had not performed its obligations. Planned Consumer Marketing responded by commencing suit in 1975 against Coats & Clark seeking $150,000 for breach of the 1974 contract. Coats & Clark counterclaimed for recovery of the $100,000 paid under the 1973 contract and the $50,000 already paid under the 1974 contract.

The case was tried before a jury which rendered a verdict in favor of Planned Consumer Marketing on the first counterclaim relative to the 1973 contract, and in favor of Coats & Clark in the amount of $50,000 on the second counterclaim, concerning the 1974 contract. The total judgment entered against Planned Consumer Marketing in August of 1981, including interest and additional costs, amounted to $72,838.75, which amount, with post judgment interest still accruing, has now surpassed $100,000.

Having been unable to collect any monies from Planned Consumer Marketing, Coats & Clark commenced supplementary proceedings in May of 1982, at which it deposed Edwin Lee, President of Planned Consumer Marketing, Inc. According to Lee, Planned Consumer Marketing, the judgment debtor, had conducted no business and had no employees since 1977 or 1978. Although Lee claimed that in 1980 and 1981 the judgment debtor had no assets, its bank accounts at Irving Trust Company and Chemical Bank during that time totalled between $150,000 to $200,000. These assets have since been entirely dissipated, despite the lack of corporate operations or expenses. Judgment creditor, Coats & Clark, has been able to trace a substantial portion of the dissipated assets to accounts at Dollar-Dry Dock Savings Bank in the name of Planned Consumer Marketing, Inc., Profit Sharing Plan.

The Profit Sharing Plan, [the Plan], an employee benefit plan such as described in and covered by ERISA, was established in December of 1974, after Coats & Clark had entered into a contract with Planned Consumer Marketing. In a letter dated June 7, 1979, the Internal Revenue Service found the Plan to be a qualified ERISA plan. The Plan's beneficiaries are Edwin Lee, his brother Jules Lee, whose services to Planned Consumer Marketing could not be substantiated, and Carolyn Curtis, Edwin Lee's secretary. Edwin and Jules Lee are the trustees of the Plan.

In 1977, during the pendency of Coats & Clark's counterclaims, the Plan's assets increased from approximately $20,000 to $100,000. Lee explained this suspicious increase as representing a legitimate rollover of assets of a plan of another corporation that he controlled and which he later dissolved. However, Lee failed to present any documentation supporting that claim. By 1981, the Plan's assets had inexplicably grown to over $150,000.

Despite the fact that the beneficiaries of the Plan are no longer employees of the judgment debtor and the Plan provides for distribution of benefits upon a beneficiary's termination of employment, no distribution to any beneficiary has ever been declared or made. Having discovered this information, Coats & Clark served restraining notices on Dry Dock Savings and Dollar Savings Banks, now merged as Dollar-Dry Dock Savings Bank, effectively freezing the assets of the Profit Sharing Plan for the last four years.

In May of 1983, Coats & Clark then commenced a turnover proceeding pursuant to CPLR 5225 and 5227 against Dollar-Dry Dock Savings Bank and Edwin Lee, individually and as alleged trustee of the Profit Sharing Plan, asserting nine causes of action. The first cause of action alleges that the Plan does not legally exist, based upon Planned Consumer Marketing's refusal to produce any indenture of trust, despite being under court order to do so. However, as the result of this motion to dismiss, the judgment creditor has since been supplied with the terms of the purported Profit Sharing Plan and the trust agreement, both dated December 1974.

The second cause of action alleges that the purported trustees, Edwin and Jules Lee, commingled funds in the Plan accounts, failed to keep records, allowed unqualified persons to participate in the Plan, and used assets of the Plan for corporate purposes and the personal purposes of the trustees, in violation of federal and state law and in contravention of the terms of the Plan, thus requiring that the Plan be disregarded as a separate legal entity and treated merely as an asset of the judgment debtor.

The third, fourth, fifth and seventh causes of action allege that the Plan was created and enhanced in value through fraudulent conveyances, as defined in the Debtor and Creditor Law, Sections 273, 273-a, 274 and 276, such that the rights of the judgment creditor, Coats & Clark, to the Plan's assets are superior to those of any other person. The sixth cause of action alleges that Edwin Lee, as Director of Planned Consumer Marketing, made distributions of corporate assets to the Plan which were unlawful under the Business Corporation Law, rendering Lee personally liable to the judgment debtor, for the benefit of the judgment creditor, out of Lee's interest in the Plan assets.

The eighth cause of action seeks to pierce the corporate veil of Planned Consumer Marketing and disregard its separate legal existence vis-a-vis Edwin Lee, so that the judgment against the corporation can be enforced against Lee's interest in the Plan assets. Finally, the ninth cause of action alleges that the Plan was created and enhanced in value by the corporation and Lee for the benefit of the corporation and the personal benefit of Edwin Lee, in violation of EPTL 7-3.1, which bars use of a self-settled trust to evade creditors, with the result that the judgment against the corporation can be enforced against the Plan assets.

The answer asserted various affirmative defenses, including lack of subject matter jurisdiction based upon the pre-emptive provisions of ERISA, and the failure to join Jules Lee and Carolyn Curtis as necessary parties to this action.

In the judgment appealed from, Justice Ostrau rejected these defenses. The court found that it was not necessary to join the other individual beneficiaries, so long as the judgment creditor did not seek to reach their interest in the Plan. As to the arguments of pre-emption and exclusive federal court jurisdiction, the court found that, as opposed to an action which would affect the regulation of a qualified plan, ERISA does not preclude a state court action which seeks to set aside allegedly fraudulent transfers of corporate assets to a Profit Sharing Plan.

In March of 1985, the Plan and Lee moved to renew their motion to dismiss the petition for lack of subject matter jurisdiction on the basis of Retail Shoe Health Commission v. Reminick, 62 N.Y.2d 173, 476 N.Y.S.2d 276, 474 N.E.2d 974. That decision barred a third-party complaint against the trustees of an employee welfare plan, because the gravamen of that complaint was the breach of the trustees' fiduciary duties, duties specifically regulated under ERISA. The movants herein argued that the judgment debtor's nine causes of action involve the breach of Edwin Lee's fiduciary duties as Plan trustee, requiring dismissal of the petition on the authority of Retail Shoe Health Commission v. Reminick, supra. The court below granted renewal but adhered to its original determination to deny the motion to dismiss in its entirety.

In the absence of persuasive evidence to the contrary, a presumption exists that state law is not pre-empted by Federal statute. Sasso v. Vachris, 66 N.Y.2d 28, 33, 494 N.Y.S.2d 856, 484 N.E.2d 1359. Determining whether or not pre-emption is required is largely a question of congressional intent, and that inquiry commences with the statutory language itself. Northwest Airlines, Inc., v. Roemer, 603 F.Supp. 7, 9.

In 1974, Congress enacted ERISA with the express purpose of protecting the financial interests of participants and beneficiaries of qualified employee welfare and pension plans by preserving the soundness and stability of such plans through comprehensive federal supervision. 29 U.S.C. § 1001(a). Provisions were enacted which, among other things, require certain disclosures and detailed reporting,...