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

• Decision Date: 24 March 1988
• Citation: 522 N.E.2d 30,527 N.Y.S.2d 185,71 N.Y.2d 442
• Parties: , 522 N.E.2d 30, 56 USLW 2568, 9 Employee Benefits Cas. 1796 PLANNED CONSUMER MARKETING, INC., Appellant, v. COATS AND CLARK, INC., Respondent. In the Matter of COATS AND CLARK, INC., Respondent, v. DRY DOCK SAVINGS BANK, et al., Respondents, and Edwin Lee, Individually and as Alleged Trustee of the Planned Consumer Marketing, Inc., Profit Sharing Plan, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 185

527 N.Y.S.2d 185

71 N.Y.2d 442, 522 N.E.2d 30, 56 USLW 2568,

9 Employee Benefits Cas. 1796

PLANNED CONSUMER MARKETING, INC., Appellant, v. COATS AND CLARK, INC., Respondent.

In the Matter of COATS AND CLARK, INC., Respondent, v. DRY DOCK SAVINGS BANK, et al., Respondents, and Edwin Lee, Individually and as Alleged Trustee of the

Planned Consumer Marketing, Inc., Profit Sharing

Plan, Appellant.

Court of Appeals of New York.

March 24, 1988.

Stanley Geller, New York City, for Planned Consumer Marketing, Inc., appellant.

Edwin Lee, pro se.

Joseph J. Schiavone and Edwin David Robertson, New York City, for Coats & Clark, Inc., respondent.

OPINION OF THE COURT

ALEXANDER, Judge.

The Employee Retirement Income Security Act (ERISA) (29 U.S.C. § 1001 et seq.) mandates that all State laws, insofar as they relate to employee benefit plans, are superseded (29 U.S.C. § 1144 [a] ) and that benefits provided by an employee benefit plan qualified under the act may not be assigned or alienated (29 U.S.C. § 1056 [d] [1] ). The question presented is whether these provisions preclude a judgment creditor from proceeding in State court for a turnover of funds deposited into a qualified ERISA plan allegedly in violation of State laws prohibiting fraudulent conveyances (see, Debtor and Creditor Law §§ 273, 273-a, 274, 276; Business Corporation Law §§ 510, 719; EPTL 7-3.1). We conclude that ERISA does not preempt vindication of these State laws whose purpose is to inhibit the transfer of money in defraud of creditors, not to assess or regulate employee benefit plans.

I.

Planned Consumer Marketing, Inc. (PCM), was incorporated in 1972 by Edwin Lee and his brother as a joint venture. In 1973 and 1974 PCM entered into two contracts with Coats and Clark, Inc. (C & C), agreeing to promote that company's products. When C & C refused to pay the full amount due under the contracts, PCM sued for breach; C & C, alleging inadequate performance, counterclaimed for recovery of money already received. At trial, C & C prevailed on its counterclaim and judgment was entered in 1981 in the amount of $72,838.75. ¹ PCM failed to satisfy the judgment, claiming to have had no employees and not to have conducted any business since 1977 or 1978. C & C subsequently discovered, however, that PCM--by Edwin Lee, its president--had deposited various sums of money into accounts at Dry Dock Savings Bank and Dollar Savings Bank (since merged) amounting to over $200,000 in the name of Planned Consumer Marketing Profit Sharing Plan (Plan). The Plan had been established in 1974, and qualified by the Internal Revenue Service as an employee benefit fund under the Employee Retirement Income Security Act of 1974 (29 U.S.C. § 1001 et seq.) The beneficiaries under the Plan were identified as Edwin Lee, Lee's brother and Lee's secretary; Edwin Lee and his brother were the trustees.

C & C commenced a special proceeding pursuant to CPLR article 52, seeking to have both banks turn over the funds out of which C & C might satisfy the judgment against PCM. ² The petition contains nine causes of action alleging, among other things, that PCM created and contributed to the Plan during the period PCM was purportedly inoperative in order to defraud C & C in violation of various provisions of the Debtor and Creditor Law (§§ 273, 273-a, 276), the Business Corporation Law (§§ 510, 719) and EPTL (7-3.1), and that Edwin Lee operated PCM and the Plan for his personal benefit. PCM and Lee moved to dismiss the proceeding on the ground that Supreme Court lacks subject matter jurisdiction over the Plan insofar as ERISA preempts State laws that relate to employee benefit plans, and, in any event, precludes the alienation of assets in a trust regulated by that act.

Supreme Court denied the motion, concluding that the gist of the petition was the violation of State fraud laws, not provisions of ERISA. The Appellate Division modified by dismissing the first two causes of action as relating solely to issues regulated by ERISA, ³ striking the relief requested in the seventh and eighth causes of action as improperly seeking to reach ERISA funds, ⁴ and finding ERISA did not preempt the third, fourth, fifth, sixth and ninth causes of action. ⁵ The court held that these claims were not preempted by ERISA because "Congress never intended that ERISA be invoked to shield the use of an employee benefit plan as an instrumentality of fraud to defeat the rights of creditors" (127 A.D.2d 355, 370, 513 N.Y.S.2d 417). The appeal is before this court by leave of the Appellate Division, certifying the following question: "Was the order of this Court, which modified the order of the Supreme Court, properly made?" For the reasons that follow, we affirm the order of the Appellate Division and answer the question certified in the affirmative.

II.

A.

After careful study of the inequities and inconsistencies plaguing private retirement pension programs, Congress enacted ERISA in 1974 to protect "the interests of participants in employee benefit plans and their beneficiaries" (29 U.S.C. § 1001 [b]; Shaw v. Delta Air Lines, 463 U.S. 85, 90-91, 103 S.Ct. 2890, 2896-2897, 77 L.Ed.2d 490; Sasso v. Vachris, 66 N.Y.2d 28, 31, 494 N.Y.S.2d 856, 484 N.E.2d 1359). As described by the United States Supreme Court, ERISA is "a 'comprehensive and reticulated statute' * * * adopted * * * to ensure that 'if a worker has been promised a defined pension benefit upon retirement--and if he has fulfilled whatever conditions are required to obtain a vested benefit * * * he actually receives it' " ( Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 510, 101 S.Ct. 1895, 1899, 68 L.Ed.2d 402, quoting Nachman Corp. v. Pension Benefit Guar. Corp., 446 U.S. 359, 361, 375, 100 S.Ct. 1723, 1726, 1733, 64 L.Ed.2d 354). In furtherance of these purposes, ERISA prescribes requirements for reporting and disclosure of financial information, authorizes certain methods of funding and vesting of benefits, and establishes standards of conduct and responsibility for the fiduciaries of employee benefit plans (29 U.S.C. §§ 1021-1114).

To assure uniformity in the creation and administration of these plans, Congress eliminated the potential for conflicting or inconsistent State regulation by including a supersedure clause, stating that ERISA "shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan" (29 U.S.C. § 1144 [a]; see generally, Hutchinson & Ifshin, Federal Preemption of State Law Under the Employee Retirement Income Security Act of 1974, 46 U.Chi.L.Rev. 23 [1978] ). ⁶ This preemption clause has been described as "virtually unique" in its breadth and scope ( Franchise Tax Bd. v. Laborers Vacation Trust, 463 U.S. 1, 24, n. 26, 103 S.Ct. 2841, 2854, n. 26, 77 L.Ed.2d 420). The language, "relate to", is to be interpreted broadly ( Shaw v. Delta Air Lines, 463 U.S. 85, 96-97, 103 S.Ct. 2890, 2899-2900, supra), and the statute itself defines the term "State" for purposes of preemption as "a State, any political subdivisions thereof, or any agency or instrumentality of either, which purports to regulate, directly or indirectly, the terms and conditions of employee benefit plans" (29 U.S.C. § 1144 [c] [2] [emphasis added] ). Hence, ERISA "preclude[s] the States from avoiding through form the substance of the preemption provision" ( Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 525, 101 S.Ct. 1895, 1907, supra).

Relying on these principles, and on our decision in Retail Shoe Health Commn. v. Reminick, 62 N.Y.2d 173, 476 N.Y.S.2d 276, 464 N.E.2d 974, cert. denied sub nom. Reminick v. Maltz, 471 U.S. 1022, 105 S.Ct. 2034, 85 L.Ed.2d 316, PCM and Edwin Lee, individually, challenge the finding of subject matter jurisdiction over the third, fourth, fifth, sixth and ninth causes of action, arguing that application of the State Debtor and Creditor Law, the Business Corporation Law, and EPTL to funds deposited into a trust regulated by ERISA is expressly preempted by that act.

In Retail Shoe, an ERISA plan brought an action in State court against its accountants for alleged negligence in failing to detect and report the misappropriation of fund assets. The accountants subsequently asserted third-party claims against the individual trustees for contribution or indemnity based on allegations that they contributed to the losses sustained by the plan due to breaches of their fiduciary duties as ERISA trustees ( Retail Shoe Health Commn. v. Reminick, 62 N.Y.2d 173, 176, 476 N.Y.S.2d 276, 464 N.E.2d 974, supra). We held that State courts were foreclosed from entertaining the claims against the trustees. The gravamen of the claims over, we said, was liability due to breaches of fiduciary duties established by ERISA. "It is substantive claims of just this character that fall squarely within the scope and thus the pre-emption of ERISA" ( Retail Shoe Health Commn. v. Reminick, 62 N.Y.2d 173, 178, 476 N.Y.S.2d 276, 464 N.E.2d 974, supra). Insofar as the act (29 U.S.C. § 1132) provides that the District Courts of the United States shall have exclusive jurisdiction over civil actions arising under ERISA (with certain exceptions not relevant), the claims against the individual trustees could not be entertained in State court.

The exercise of Federal supremacy, however, is not lightly presumed ( Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 522, 101 S.Ct. 1895, 1905, 68 L.Ed.2d 402, supra), and preemption of State laws " 'is not favored "in the absence of persuasive reasons--either that the nature of the regulated subject matter permits no other conclusion, or that the Congress has unmistakably so ordained" ' " ( Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 522, 101 S.Ct. 1895, 1905, 68 L.Ed.2d 402, supra, quoting Florida Lime & Avocado Growers v. Paul, 373 U.S. 132, 142, 83 S.Ct. 1210, 1217, 10 L.Ed.2d 248). Although Congress expressly reserved for Federal jurisdiction regulation of...