Creditors are often frustrated when they discover that the debtor has a substantial amount of money on deposit in a retirement or other similar trust account and these accounts cannot be reached. Retirement accounts are clearly exempt from judgment execution under Section 5205 (c) of New York’s Civil Practice Law and Rules (“CPLR”) which states that except for other provisions set forth in the subsection, “all property while held in trust for a judgment debtor, where the trust has been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor, is exempt from application to the satisfaction of a money judgment.” The subsection goes on to state that “all [accounts]…qualified as an individual retirement account…or other plan..qualified under section 401 of the United States Internal Revenue Code…shall be considered a trust…
One of the exceptions provided by the subsection concerns additions to the trust and provides that “Additions to an asset described in paragraph two of the subdivision [i.e. qualified trusts] shall not be exempt from application to the satisfaction of a money judgment if (i) made after the date that is ninety days before the interposition of the claim on which such judgment was entered, or (ii) deemed to be fraudulent conveyances under article ten of the debtor and creditor law.”
So, for example, an action on a monetary debt is commenced on May 1, 2015 and subsequently a money judgment is entered against the debtor. The creditor undertakes post-judgment discovery and finds that the debtor has a traditional IRA account with a value of $120,000.00. Further examination reveals that on April 1, 2015, the debtor deposited $20,000.00 in the IRA account which came from a salary check earned by the debtor.
The creditor commences a turnover proceeding against the institution where the IRA is maintained, claiming that the $20,000.00 deposited by the debtor one month prior to the commencement of the action is not exempt by reason of the exception in CPLR Section 5205 (c) which provides that any such addition to the trust made ninety days before the interposition of a claim on such judgment is not exempt property. The debtor, however, argues that since the money deposited is income of the debtor it is subject to the 90 percent income exemption under CPLR 5205 (d) and that the exemption applies and take precedence over the addition exemptions under CPLR 5205 (c).
Although an interesting argument on the part of the debtor, a recent decision out of Nassau County’s Supreme Court ruled that the source of the income was irrelevant once the non-exempt period established in CPLR Section 5205 (c) comes into play. Matter of Breslin Realty Development Corp. v. Stanley, 14-010789, NYLJ 1202724615166, at *1 (Sup., NA, Decided April 8, 2015) (“Breslin”). The court in Breslin reasoned that “the income exemption is clearly directed to current expenses, and deposits into a retirement account, by their nature, are not to be used for those expenses.”
The Breslin court also reached two other important issues concerning exceptions to the retirement account post-judgment exemption. First, a debtor who transfers money from an existing retirement account into another retirement account does not create an “addition” to the particular account which then becomes subject to execution if made within the 90 day exception period. As long as what is being transferred is from one qualified retirement account to another the money remains exempt. Second, the establishment of a retirement account can still be subject to scrutiny for fraud. A debtor who establishes a retirement account after the commencement of an action to enforce a debt is subject to the provisions of Debtor and Creditor Law Section 273-a, which renders such a transfer fraudulent, without regard to intent, if the debtor does not satisfy the judgment.
The lesson to be learned is that the prudent creditor must carefully examine the debtor’s account statements of purported qualified retirement accounts to determine when such accounts were established and when they were funded.