2017 Shah Arizona Opinion Voidable Transactions And Fraudulent Transfers

 

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VOIDABLE TRANSACTIONS & FRAUDULENT TRANSFERS

 

2017 - Arizona - Shah

Shah v. Blaloch, 2017 WL 4543694 (Az.App., Oct. 12, 2017).

 

Court of Appeals of Arizona, Division 1.

 

Syed Bashir Ahmed SHAH, an individual, Plaintiff/Judgment Creditor/Appellant,

 

v.

 

Abdul J. BALOCH aka Zahid Bhurgi, an individual, Defendant/Judgment Debtor/Appellee,

 

Wells Fargo Bank, N.A., Garnishee/Appellee.

 

No. 1 CA-CV 15-0812

 

FILED 10/12/2017

 

Attorneys and Law Firms

 

Windtberg & Zdancewicz, PLC, Tempe, By Michael J. Zdancewicz, Marc Windtberg, Counsel for Plaintiff/Judgment Creditor/Appellant

 

The Collins Law Firm, PLLC, Mesa, By Ernest Collins, Jr., Counsel for Defendant/Judgment Debtor/Appellee

 

Snell & Wilmer, LLP, Phoenix, By Rebekah Elliott, Carlie Tovrea Counsel for Garnishee/Appellee

 

Presiding Judge Diane M. Johnsen delivered the opinion of the Court, in which Judge Margaret H. Downie and Judge John C. Gemmill joined.1

 

1

 

The Honorable John C. Gemmill, Retired Judge of the Court of Appeals, Division One, has been authorized to sit in this matter pursuant to Article VI, Section 3 of the Arizona Constitution and A.R.S. sec. 12-145 (2017).

 

OPINION

 

JOHNSEN, Judge:

 

*1 Para. 1 Syed Bashir Ahmed Shah appeals the superior court's order quashing garnishment of funds Shah alleges a debtor fraudulently transferred into a retirement plan. Because Shah's claim does not fall within the limited exceptions to the federal law barring recovery from a qualified retirement plan, we affirm.

 

FACTS AND PROCEDURAL BACKGROUND

 

Para. 2 Shah sued Abdul J. Baloch for breach of contract and fraud and obtained a judgment in 2009 for $411,505. Attempting to collect on the judgment, Shah served a writ of garnishment on Wells Fargo Bank, N.A., as the trustee of Baloch's 401(k) account.2 According to the record, Baloch's 401(k) account balance is nearly $50,000; Shah alleged Baloch fraudulently transferred several thousand dollars into the account after entry of Shah's judgment against him. Wells Fargo objected to the garnishment and the superior court quashed the writ, finding the funds in Baloch's 401(k) account exempt from garnishment under the Employee Retirement Income Security Act ("ERISA").

 

2

 

We take judicial notice that Baloch filed a Chapter 7 bankruptcy in 2011. The bankruptcy court ruled Shah's claim was nondischargeable, and that court's judgment was affirmed on appeal.

 

Para. 3 Shah timely appealed the superior court's order. We have jurisdiction pursuant to Article 6, Section 9, of the Arizona Constitution and Arizona Revised Statutes ("A.R.S.") sections 12-2101(A)(4) and (5)(c) (2017) and 12-120.21(A) (2017).3

 

3

 

Absent material revision after the relevant date, we cite a statute's current version.

 

DISCUSSION

 

Para. 4 Under Arizona's version of the Uniform Fraudulent Transfer Act, a creditor may garnish a transfer made with "actual intent to hinder, delay or defraud" the creditor. A.R.S. secs. 44-1004(A) (2017), -1007(A)(1) (2017); see Sackin v. Kersting, 105 Ariz. 464, 465, 466 P.2d 758, 759 (1970). Baloch, however, argues state law prohibits a judgment creditor from executing on or attaching a judgment debtor's retirement account. See A.R.S. sec. 33-1126(B) (2017) (exempting from attachment "money or other assets payable to a participant in or beneficiary of, or any interest of any participant or beneficiary in, a retirement plan [qualified under federal law]"). But with few exceptions, none of which apply here, ERISA preempts state laws that "relate to any employee benefit plan." 29 U.S.C. sec. 1144(a) (2017). Thus, ERISA preempts A.R.S. sec. 33-1126(B) as applied to a qualified pension plan. In re Hirsch, 98 B.R. 1, 2 (Bankr. D. Ariz. 1988) ("A.R.S. sec. 33-1126(B) would undoubtedly be pre-empted in a state court proceeding wherein creditors seek to enforce their claims against an ERISA pension plan."), aff'd sub nom In re Siegel, 105 B.R. 556 (D. Ariz. 1989); see Mackey v. Lanier Collection Agency & Serv., Inc., 486 U.S. 825, 829–30, 108 S.Ct. 2182, 100 L.Ed.2d 836 (1988) (state garnishment provision pertaining to employee pension plan preempted by ERISA).

 

Para. 5 ERISA grants comprehensive protections to qualified pension plan participants and beneficiaries.4 At issue in this case is a rule that, to qualify, a pension plan must "provide that benefits provided under the plan may not be assigned or alienated." 29 U.S.C. sec. 1056(d)(1) (2017). The corresponding Treasury Regulation defines "assignment" and "alienation" to include "[a]ny direct or indirect arrangement ... whereby a party acquires from a participant or beneficiary a right or interest enforceable against the plan in, or to, all or any part of a plan benefit payment which is, or may become, payable to the participant or beneficiary." Treas. Reg. sec. 1.401(a)-13(c)(1)(ii) (2017); see Hoult v. Hoult, 373 F.3d 47, 54–55 (1st Cir. 2004) (anti-alienation regulation entitled to deference under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 844, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984)). Baloch's retirement plan undisputedly is a qualified plan under 26 U.S.C. sec. 401(k) (2017) and contains the required anti-alienation provision.

 

4

 

We review de novo the superior court's determination that federal law exempts funds in an ERISA-qualified account from a writ of garnishment. See Nat'l Collegiate Student Loan Trust 2007–2 v. Rand, 241 Ariz. 169, 171, Para. 7, 384 P.3d 1249, 1251 (App. 2016).

 

*2 Para. 6 ERISA's anti-alienation bar generally prohibits a creditor from garnishing a qualified plan to collect on a judgment against a plan participant. In Guidry v. Sheet Metal Workers Nat'l Pension Fund, 493 U.S. 365, 367, 110 S.Ct. 680, 107 L.Ed.2d 782 (1990), a labor union sought a constructive trust on the pension benefits of an official who had embezzled from the union. The Supreme Court likened a constructive trust to a garnishment, and noted that the anti-alienation provision "erects a general bar to the garnishment of pension benefits from plans covered by" ERISA. Id. at 371, 110 S.Ct. 680. As Wells Fargo argues, under this principle, funds Baloch deposited into his 401(k) plan are not subject to garnishment because they are or may become payable to him as a benefit.

 

Para. 7 Shah argues funds that a participant fraudulently conveys into a 401(k) account may be garnished because such a transfer is void as a matter of law. See also Sackin, 105 Ariz. at 465, 466 P.2d at 759. But under Guidry, even a fraudulent transfer of funds by a participant into his or her qualified plan may not be recovered unless a statutory exception applies.5 A bankruptcy court applied this principle in Matter of Loomer, 198 B.R. 755 (Bankr. D. Neb. 1996), ruling that even if a fraudulent transfer could be proved, the ERISA restraint on alienation precluded enforcement of a judgment against the retirement plan. Id. at 759–60; see Majteles v. AVL Corp., 182 Misc.2d 140, 696 N.Y.S.2d 748, 749, 751–52 (1999) (judgment creditor barred from recovering funds insolvent company fraudulently conveyed to company's pension plan).

 

5

 

There are two statutory exceptions to the anti-alienation rule, neither of which is at issue here. See 29 U.S.C. sec. 1056(d)(2) ( "voluntary and revocable assignment of not to exceed 10 percent of any benefit payment") and (d)(3)(A) (qualified domestic relations order).

 

Para. 8 The cases Shah cites do not apply under the circumstances here. Wagner v. Galbreth, 500 B.R. 42 (D.N.M. 2013), and In re Vaughan Co., Realtors, 493 B.R. 597 (Bankr. D.N.M. 2013), both concerned pension plans that had invested in what turned out to be a Ponzi scheme. See Wagner, 500 B.R. at 45–46; Vaughan, 493 B.R. at 601–03. In unwinding the scheme, a bankruptcy trustee sought to recover transfers the perpetrator had made to the pension plans as returns on their investments before the fraud was discovered. See Wagner, 500 B.R. at 45; Vaughan, 493 B.R. at 601–03. In both cases, the court held the ERISA anti-alienation provision did not bar recovery from the pension plans. See Wagner, 500 B.R. at 49; Vaughan, 493 B.R. at 607–08. But in approving the trustee's recovery of the transfers, the courts did not hold the ERISA anti-alienation rule generally excepts fraudulent conveyances. Instead, they reasoned based on Treas. Reg. sec. 1.401(a)-13(c)(1)(ii) that the anti-alienation bar did not apply because the transfers to be unwound there were between the perpetrator and the respective trustees of the pension plans, not between the perpetrator and a plan participant. See Vaughan, 493 B.R. at 606 (plan trustee contracted with fraudulent investment company as trustee; "no evidence that [he] acted in his capacity as a beneficiary or participant"); Wagner, 500 B.R. at 48.

 

Para. 9 As noted, the regulation defines "assignment" and "alienation" to include "[a]ny direct or indirect arrangement ... whereby a party acquires from a participant ... a right or interest enforceable against the plan in, or to, all or any part of a plan benefit payment which is, or may become, payable to the participant." Treas. Reg. sec. 1.401(a)-13(c)(1)(ii). Under this provision, whether funds fraudulently transferred to a pension plan may be recovered depends on the circumstances of the transfer giving rise to the claim. The anti-alienation rule did not bar recovery in Vaughan and Wagner because the claims there arose out of investment transactions between the trustees of the two plans and the perpetrator, who was otherwise a stranger to the plans. By contrast, Shah has a judgment against Baloch, a plan participant, and seeks to enforce that judgment against Baloch's transfers into the plan.6

 

6

 

Shah argues that Vaughan relied on other cases "that have permitted recovery of fraudulent transfers from ERISA plans." We have reviewed each of the cases Vaughan cites as support for its statement that "[a]lthough only a handful of courts have examined this issue, the majority permitted bankruptcy trustees to use the avoiding power of [bankruptcy law] to recover from ERISA plans." See 493 B.R. at 607 (citing In re Goldschein, 241 B.R. 370, 379 (Bankr. D. Md. 1999), In re CF&I Fabricators of Utah Inc., 163 B.R. 858, 878 (Bankr. D. Utah 1994), Velis v. Kardanis, 949 F.2d 78, 82 (3d Cir. 1991), and In re Key Commc'ns, Inc., No. 93-2899, 1994 WL 242643, at *1 (5th Cir. May 17, 1994)). Although some of the cited cases expressed in dictum the view that a fraudulent transfer might be recovered from a plan, none of the cases actually permitted a creditor of a participant in a qualified plan to recover an alleged fraudulent transfer by the participant to the plan.

 

*3 Para. 10 Shah further cites Batiza v. Superfon, 175 Ariz. 431, 436, 857 P.2d 1285, 1290 (App. 1992), in which the court held the ERISA anti-alienation rule did not bar a claim alleging that a pension plan had fraudulently transferred assets. As in Wagner and Vaughan, however, the underlying claim in that case was against the plan itself (for breach of contract), not a claim against a beneficiary or participant. Id. at 432–33, 435, 857 P.2d at 1286–87, 1289.

 

Para. 11 Shah argues public policy requires us to except fraudulent transfers by plan participants from the anti-alienation rule. But Guidry rejected—in no uncertain terms—the suggestion that courts may create equitable exceptions to the anti-alienation rule. See Guidry, 493 U.S. at 376, 110 S.Ct. 680 ("The identification of any exception" to ERISA's prohibition of the assignment or alienation of pension benefits "should be left to Congress."); see also Loomer, 198 B.R. at 760 ("Courts are forbidden from carving out exceptions to the ERISA alienation restriction."). Guidry held that because Congress has enumerated specific exceptions to anti-alienation, courts may not create other exceptions, even for criminal conduct, and even when the result is that funds are rendered immune from otherwise valid collection efforts:

 

Nor do we think it appropriate to approve any generalized equitable exception—either for employee malfeasance or for criminal misconduct—to ERISA's prohibition on the assignment or alienation of pension benefits. [29 U.S.C. sec. 1056(d)] reflects a considered congressional policy choice, a decision to safeguard a stream of income for pensioners (and their dependents, who may be, and perhaps usually are, blameless), even if that decision prevents others from securing relief for the wrongs done them. If exceptions to this policy are to be made, it is for Congress to undertake that task.

 

As a general matter, courts should be loath to announce equitable exceptions to legislative requirements or prohibitions that are unqualified by the statutory text. The creation of such exceptions, in our view, would be especially problematic in the context of an antigarnishment provision. Such a provision acts, by definition, to hinder the collection of a lawful debt. A restriction on garnishment therefore can be defended only on the view that the effectuation of certain broad social policies sometimes takes precedence over the desire to do equity between particular parties. It makes little sense to adopt such a policy and then to refuse enforcement whenever enforcement appears inequitable. ...

 

Understandably, there may be a natural distaste for the result we reach here. The statute, however, is clear.

 

493 U.S. at 376–77, 110 S.Ct. 680; see Patterson v. Shumate, 504 U.S. 753, 760, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) ("Indeed, this Court itself vigorously has enforced ERISA's prohibition on the assignment or alienation of pension benefits, declining to recognize any implied exceptions to the broad statutory bar."); see also Transamerica Mortg. Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11, 19–20, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979) ("[I]t is an elemental canon of statutory construction that where a statute expressly provides a particular remedy or remedies, a court must be chary of reading others into it.").

 

Para. 12 As in the cases cited above, the result here is distasteful. Guidry, 493 U.S. at 377, 110 S.Ct. 680; Loomer, 198 B.R. at 763. The superior court order that we are affirming leaves Shah unable to satisfy his judgment from funds Baloch allegedly fraudulently transferred to his pension plan to avoid the judgment. But the case authorities interpreting 29 U.S.C. sec. 1056(d) do not permit exceptions that Congress has not authorized.

 

CONCLUSION

 

*4 Para. 13 For the reasons stated, we affirm the superior court's order quashing the writ of garnishment. Wells Fargo and Baloch each seek attorney's fees pursuant to A.R.S. sec. 12-1580(E), under which a prevailing party in a garnishment "may be awarded costs and attorney fees in a reasonable amount determined by the court." We deny both requests for attorney's fees, but award them their costs on appeal pursuant to A.R.S. sec. 12-342(A) (2017).

 

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Many more articles on voidable transactions law found here

 

UVTA - LOGICAL ORGANIZATION

(Designed For Litigators)

 

Click here to go to the Voidable Transactions Decision Chart

 

Overview of UVTA -- The process and result

 

Learn The Vocabulary Of The Act (Main Page)

 

Has A Voidable Transaction Occurred? (Main Page)

 

Does The Transferee Have A Defense? (Main Page)

 

What Remedies Are Available? (Main Page)

 

Other Helpful Provisions (Main Page)

 

UVTA - NUMERICAL ORGANIZATION

(Confusing & Difficult To Use)

 

The Uniform Law Commission's complete copy of the UVTA with comments in PDF format is available here. The webpage for the UVTA, showing states that have enacted and much other information regarding the Act is found here.

 

1 - Definitions

(1) Affiliate -- (2) Asset -- (3) Claim -- (4) Creditor -- (5) Debt -- (6) Debtor -- (7) Electronic -- (8) Insider -- (9) Lien -- (10) Organization -- (11) Person -- (12) Property -- (13) Record -- (14) Relative -- (15) Sign -- (16) Transfer -- (17) Valid Lien

2 - Insolvency - How insolvency is calculated

3 - Value - Issues relating to calculating value

4 - Transfer Or Obligation Voidable As To Present Or Future Creditor

(a)(1) {Intent Test} - To hinder, delay or defraud any creditor

(a)(2)(i) {Overextending Insolvency Test} - The debtor engages in a transaction for which it does not have the financial strength

(a)(2)(ii) {Sinking Insolvency Test} - The debtor is not technically insolvent but headed for insolvency

(b) {Badges of Fraud} - Circumstances available to prove the debtor's intent

5 - Transfer or Obligation Voidable As To Present Creditor

(a) {Insolvency Test} - The test preferred by creditors

(b) {Insider Preference Test} - Not really a fraudulent transfer test at all

6 - When Transfer Is Made Or Obligation Is Incurred - Determines the time of the transfer

7 - Remedies Of Creditor

      {Non-Money Judgment Remedies} - Avoidance, attachment, etc.

8 - Defenses, Liability, And Protection Of Transferee Or Obligee

{Main Provisions} -The transferee's good faith for-value defense

(b) and (c) {Money Judgment Remedy} - Alternative remedy for creditors when avoidance is not good enough

9 - Extinguishment Of Claim For Relief - Similar to Statutes of Limitation

10 - Governing Law - Conflicts of Laws provisions

11 - Application To Series Organization - Applies to intra-series transfers

12 - Supplementary Provisions - Allows application of other law to issues unresolved by the UVTA

13 - Uniformity Of Application And Construction - Court opinions from other states may be looked to for guidance

14 - Relation To Electronic Signatures In Global And National Commerce - Waste of statutory space

15 - Short Title - From fraudulent transfers to voidable transactions

16 - Repeals; Conforming Amendment - Information for enacting legislatures

 

OTHER SOURCES OF

FRAUDULENT TRANSFER LAW

 

Fraudulent Transfers In Bankruptcy - Main Page

 

28 U.S.C. § 3301, et seq. - Where United States is the creditor

 

Common Law Fraudulent Transfer - Still exists in most states

 

Criminal Statutes -- Jurisdictions that criminalize fraudulent transfers

 

Fraudulent Conveyances Act of 1571 a/k/a Statute of 13 Elizabeth - The medieval statute to which the modern American UVTA traces some of its roots.

 

Statutes Of The U.S. Jurisdictions -- State and Territorial Voidable Transaction and Fraudulent Transfer Laws

 

TOPICAL COURT OPINIONS

 

DEFINITIONS

     Creditor Definition - Court opinions on the definition of creditor

     Debtor Insider Affiliate Relative Organization Person Definitions   - Court opinions on the definitions of debtor, insider, etc.

     Claim And Debt Definitions  - Court opinions on the definitions of claim and debt

     Asset And Property Definitions  - Court opinions on the definitions of assets and property

     Lien And Valid Lien Definitions  - Court opinions on the definitions of lien and valid lien

     Transfer Definition  - Court opinions on the definition of transfer

     Value And Reasonably Equivalent Value (REV) Definition  - Court opinions on the definitions of value and reasonably equivalent value

     Insolvency Definition  - Court opinions on the definition of insolvency

TESTS

     Insolvency Test  - Court opinions relating to the Insolvency Test

     Insider Preference Test  - Court opinions relating to the Insider Preference Test

     Overextending Insolvency Test  - Court opinions relating to the Overextending Insolvency Test

     Sinking Insolvency Test  - Court opinions relating to the Sinking Insolvency Test

     Intent Test  - Court opinions relating to the Intent Test

           Badges Of Fraud  - Court opinions relating to the Badges of Fraud

DEFENSES

     Extinguishment Periods a/k/a (incorrectly) Statute Of Limitations  - Court opinions relating to the extinguishment periods

     Transferee Good Faith  - Court opinions relating to the transferee good faith for-value defense

REMEDIES

     Non-Money Remedies  - Court opinions relating to avoidance and other non-money remedies

     Money Judgment Remedies  - Court opinions relating to money judgments

     Attorney Fees -- Court opinions relating to awards of attorney fees

     Punitive Damages - Court opinions relating to punitive and exemplary damages

OTHER

     Burdens of Proof  - Court opinions relating to the burdens of proof

     Conflict Of Laws  - Court opinions relating to conflict of laws

     Uniformity  - Court opinions relating to uniformity with the laws of other jurisdictions

     Supplementary Law  - Court opinions relating to the interplay of the UVTA with other law

     Jurisdictional Issues - Court opinions relating to jurisdiction of UVTA actions.

BANKRUPTCY

     Section 548  - Court opinions relating to 11 USC 548

 

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Voidable Transactions:

Fraudulent Transfers In American Law

 

by Jay D. Adkisson (Available 2021)

 

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