Securities and Exchange Commisison v. Da Silva Prado Neto
OPINION AND ORDER re: 50 MOTION for Reconsideration re; 46 Judgment filed by Wells Fargo Company 401(k) Plan: The Plan's motions for reconsideration pursuant to Local Civil Rule 6.3 and Rule 60(b) of the Federal Rules of Civil Pr ocedure are DENIED. The Court orders the transfer of the $130,292.53, representing Prado's liquidation and distribution of his 401(k) plan, to Plaintiff in satisfaction of the Final Judgment. The Clerk of Court is directed to terminate Docket Entry 50. (Signed by Judge Katherine Polk Failla on 6/23/2014) (tn)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE
WALDYR SILVA PRADO NETO,
DOC #: _________________
DATE FILED: ______________
June 23, 2014
12 Civ. 7094 (KPF)
OPINION AND ORDER
KATHERINE POLK FAILLA, District Judge:
Non-party Wells Fargo & Company 401(k) Plan (the “Plan”) moves for
reconsideration of or, in the alternative, relief from this Court’s January 7,
2014 Order entering a final judgment against Defendant Waldyr Silva Prado
Neto. That Order, among other things, imposed a civil penalty and required the
disgorgement of certain profits obtained by Prado from insider trading in
securities; the Court ordered that the penalty and disgorgement could be
satisfied by, among other assets, funds ostensibly representing Defendant’s
liquidated assets in the Plan (the “Funds”). The Order further required that the
Funds be transmitted by the Plan and by Wells Fargo Bank, N.A., the financial
institution at which the Funds are being kept (the “Bank”), to Plaintiff
Securities and Exchange Commission (the “SEC”).
The Plan now seeks relief from the Court under Local Civil Rule 6.3 and
Federal Rule of Civil Procedure 60(b), arguing that the Employment Retirement
Income Security Act of 1974 (“ERISA”), Pub. L. 93-406, 88 Stat. 829, prohibits
it from transferring the Funds to Plaintiff. Indeed, the Plan argues, if it does
transfer those funds, it will lose its tax-qualified status. The Plan’s motion
under Rule 60(b) is denied because it lacks standing to pursue that motion.
The Plan’s motion for reconsideration is denied because the Plan has failed to
demonstrate that the Funds are Plan assets subject to ERISA’s anti-alienation
On September 20, 2012, Plaintiff SEC filed a complaint against
Defendant Prado that alleged violations of Sections 10(b) and 14(e) of the
Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) & 78n(e), and Exchange
Act Rules 10b-5 and 14e-3, 17 C.F.R. §§ 240.10b-5 & 240.14e-3, predicated on
Prado’s insider trading in the securities of Burger King Holdings, Inc. (Dkt. #1).
That same day, Plaintiff sought ex parte emergent relief from the Court, filing a
temporary restraining order, order to show cause, order freezing assets, and
other requests for relief against Defendant. (See Dkt. #3).
Plaintiff’s ex parte application was granted that day, and Defendant was
ordered to show cause why a preliminary injunction and asset freeze should
not be granted in accordance with Plaintiff’s application. (Dkt. #3). Defendant
did not respond to the order to show cause, and on October 10, 2012, the
The Court assumes familiarity with the facts of this case, and only includes those facts
pertinent to the pending motion. Certain facts set forth herein are drawn from the
Declaration of Dee Dee Holland (“Holland Decl.”) (Dkt. #52), and from the Declaration of
David S. Brown (“Brown Decl.”) (Dkt. #9). For convenience, the parties’ memoranda of
law will be referred to as follows: the Plan’s opening brief as “Plan Br.”; the SEC’s brief
in opposition as “Pl. Opp.”; and the Plan’s reply brief as “Plan Reply.”
Court granted Plaintiff’s request for a preliminary injunction freezing
Defendant’s assets, including assets contained in accounts maintained by the
Bank, Wells Fargo Advisors, LLC, and the Plan. (Dkt. #15).
On January 7, 2014, after Defendant defaulted, the Court entered a final
judgment (the “Final Judgment”) holding Defendant liable for disgorgement of
$397,110.01, representing profits gained as a result of the conduct alleged in
the complaint, together with prejudgment interest thereon in the amount of
$41,622.90; the Court further found that Defendant was liable for a civil
penalty of $5,195,500 pursuant to Section 21A of the Exchange Act, 15 U.S.C.
§ 78u(a). (Dkt. #46). 2 The Court further ordered that the judgment against
Defendant could be satisfied by relinquishing all legal and equitable right, title,
and interest in the assets and funds frozen subject to the Court’s asset freeze
orders, including, as relevant to the pending motion, the Funds. (Id.). To that
end, the Court ordered the Bank and the Plan to transmit the Funds to Plaintiff
within 14 days of the Final Judgment. (Id.).
Defendant’s 401(k) Plan Account
Defendant Prado was a former employee of Wells Fargo Advisors, LLC,
and, in that capacity, maintained an ERISA-governed retirement plan account
with the Plan. (Holland Decl. ¶ 9). On September 6, 2012 — immediately prior
to (and presumably in expectation of) the actions taken by the SEC — Prado
submitted or caused to be submitted a request to the Plan to liquidate his
To date, Defendant has failed to appear in this action or otherwise contact the Court
with regard to this case. It is the Court’s understanding that Defendant fled the
country in or about the fall of 2012. (Brown Decl. ¶¶ 17-19).
assets in the Plan, and to distribute to him the resulting proceeds. (Brown
Decl. ¶ 24). Pursuant to that request, on September 7, 2012, the Plan
liquidated Defendant’s assets, resulting in a cash balance of $162,431.74.
(Id.). Thereafter, on September 11, 2012, a check in the amount of
$130,292.53 (net of withholdings for federal taxes) made payable to Defendant
was issued and sent to Defendant. (Id.; see also Holland Decl. ¶ 10).
Plaintiff was informed that Defendant received the check. (Brown
Decl. ¶ 20). The check, however, was not negotiated before the Court entered
its order freezing Defendant’s assets on September 20, 2012. (Holland Decl.
¶ 10). Currently, Funds totaling $162,431.74, consisting of $130,292.53 that
was payable (and paid) to Defendant and $32,139.21 that was withheld for the
IRS, are being held in a clearing account at the Bank. (Id. at ¶ 11).
On January 22, 2014, the Plan filed a motion for reconsideration of, or in
the alternative, relief from the Court’s Final Judgment. (Dkt. #50). Among
other things, it requested that “[i]f the Court finds that Mr. Prado’s 401(k)
retirement plan funds are plan assets that are subject to ERISA’s antialienation provision . . . the Court clarify the Preliminary Injunction Order
dated October 5, 2012, regarding the freeze on Mr. Prado’s assets.” (Plan
Br. 2). In support of this motion, Dee Dee Holland averred on behalf of the
Plan that the Plan is governed by ERISA, and that it is also a tax-qualified plan,
in compliance with the Internal Review Code (“IRC”). (Holland Decl. ¶¶ 5-6).
Plaintiff filed its opposition on February 5, 2014 (Dkt. #59), and the motion was
fully submitted on February 18, 2014, when the Plan filed its reply (Dkt. #62).
In light of certain deficiencies in the record, the Court convened oral
argument in the matter on June 5, 2014; counsel for the Plan and for Plaintiff
SEC attended. At oral argument, the Court requested proof — be it Plan
documents, ERISA provisions, or interpretive regulations and case law — that
the Funds had not been “distributed” (since distribution would vitiate the antialienation provision), in spite of the liquidation of Defendant Prado’s 401(k)
account and the subsequent issuance to him of a check reflecting those
benefits. Counsel for the Fund contended that “[i]t’s pretty clear, we believe,
from the [P]lan’s position and from the Department of Labor and the available
case law that until that money is actually in Mr. Prado’s hands, it is subject to
ERISA and the plan, and its fiduciaries are legally responsible for those funds.”
(June 5 Tr. 4). Counsel noted, however, that she did not believe there was a
Plan provision specifically addressing uncashed distribution checks. (Id. at 3).
Counsel for Plaintiff disputed the underlying factual premise of the Plan’s
arguments, namely that the Funds had not been “distributed”:
It raises the question that calls into doubt whether the funds are
within the plan’s control, which is the representation that was made
here today. The funds are being held in a noninterest bearing
account at Wells Fargo Bank only because the plan had to put the
money somewhere, pending a final determination from this Court as
to what to do with that. So I believe that it is a misapplication and
mischaracterization of the facts in this case to say that ERISA
applies at all because the fund[s] had been withdrawn from the
account and, but for the asset freeze, [Defendant] probably would
have gotten them.
Wells Fargo as an entity had to put the cash somewhere and chose
to put it in a noninterest-bearing checking account. I believe it is a
red [herring] to say that the anti-alienation clause of ERISA protects
these funds at all because they are not held in the plan.
(June 5 Tr. 13; see also id. at 16 (“The only reason they have not left Wells
Fargo as an entity is because of the asset freeze, not because of any obligation
for them to remain at Wells Fargo because of the plan.”)). As support for
Plaintiff’s argument, counsel introduced an October 5, 2012 letter from
Lawrence J. Brundick, Senior Counsel in Wells Fargo’s Law Department, to
Plaintiff (the “Brundick Letter”); in it, Brundick suggested that the Funds be
“returned to Mr. Prado’s 401(k) Plan account” — a suggestion obviated by this
Court’s asset freeze order.
One day after the oral argument, on June 6, 2014, counsel for the Plan
submitted a letter to the Court correcting a misstatement made during the
argument. (Dkt. #92). In particular, counsel noted that the Plan in fact
contained a provision for uncashed checks, and included that excerpt from the
Plan documents. Of significance to the instant motion, counsel did not attempt
in the letter to provide substitute legal or documentary support for the
arguments she had made at oral argument, which arguments were predicated,
in varying degrees, on her erroneous recollection of Plan provisions. Counsel
for Plaintiff responded by letter dated June 10, 2014, arguing that the language
of the Plan provision for uncashed checks “underscores the fact that funds are
removed from the Plan when the check is issued” (Dkt. #94 at 1), and, further,
that the Plan’s language regarding distributions dovetailed with Plaintiff’s
interpretation of the Brundick Letter.
A word about these two documents, the Plan and the Brundick Letter, is
in order. Section 10.19 of the Plan is entitled “Uncashed Checks or Inability to
Locate Distributee.” (Holland Decl., Ex. A § 10.19). With respect to the former
category, Section 10.19(a) proposes three alternatives (based on the status of
the distributee) for situations in which “all or part of the benefit of a
Participant, Beneficiary or Alternate Payee has been distributed pursuant to
the provisions of the Plan to the individual entitled to the benefit but the check
representing such distribution remains uncashed.” (Id.). Two of the
alternatives involve the Plan redepositing or reinvesting the funds into the Plan,
while the third involves a forfeiture; all three are subject to reversal if the
distributee later comes forward to claim his or her benefits. 3 Thus, under the
plain language of the Plan, issuance of a check is itself distribution of the
benefits to which the participant or distributee is entitled, even if “the check
representing such distribution remains uncashed.”
This definition of “distribution” is also evident from the text of the
Brundick Letter. As a preliminary matter, Brundick acknowledges that the
check issued to Defendant Prado was a “distribution check” by terming it
thusly. (Brundick Letter at 1). More importantly, Brundick’s letter makes
clear that, at least to Wells Fargo’s Law Department, issuance of the check to
Defendant Prado constituted distribution of Prado’s interest in the Plan.
Among other things, Brundick notes that (i) as of October 5, 2012, the Funds
Each of the alternatives contemplates some form of prior notice to the plan participant
or distributee. The Plan has not argued that these notice requirements have been
satisfied with respect to Defendant Prado.
“have not been redeposited into . . . Mr. Prado’s 401(k) Plan account”; (ii) the
Plan believes that the Funds “must be returned to Mr. Prado’s 401(k) Plan
account”; and (iii) the Plan proposes “returning these monies” or “placing this
money back” into Defendant’s 401(k) plan account. (Id. at 1-2). 4
Motions for Reconsideration Under Local Rule 6.3
“The decision to grant or deny a motion for reconsideration is within the
sound discretion of the district court.” In re Optimal U.S. Litig., 813 F. Supp.
2d 383, 403 (S.D.N.Y. 2011) (citing Patterson v. United States, No. 04 Civ. 3140
(WHP), 2006 WL 2067036, at *1 (S.D.N.Y. July 26, 2006)). Under Local Rule
6.3, the moving party must “point to controlling decisions or data that the
court overlooked — matters, in other words, that might reasonably be expected
to alter the conclusion reached by the court.” Shrader v. CSX Transp. Inc., 70
F.3d 255, 57 (2d Cir. 1995) (internal citations omitted) (noting that the
standard for granting motions for reconsideration is “strict”). “A motion for
reconsideration may not be used to advance new facts, issues or arguments
not previously presented to the Court, nor may it be used as a vehicle for
relitigating issues already decided by the Court.” Davidson v. Scully, 172 F.
Supp. 2d 458, 461 (S.D.N.Y. 2001) (citing Shrader, 70 F.3d at 257).
Plaintiff rejected Brundick’s suggestion in a letter dated October 9, 2012, that attached
several orders of this Court. Plaintiff echoed Brundick’s suggestion that the
distribution had already taken place by, for example, referring to the monies at issue as
Defendant’s “401(k) Plan distribution funds.”
Such a motion should not be made to “reflexively  reargue those issues
already considered when a party does not like the way the original motion was
resolved,” and is not a substitute for an appeal. In re Optimal U.S. Litig., 813 F.
Supp. 2d at 387 (citing Makas v. Orlando, No. 06 Civ. 14305 (DAB) (AJP), 2008
WL 2139131, at *1 (S.D.N.Y. May 19, 2008)); Grand Crossing, L.P. v. U.S.
Underwriters Ins. Co., No. 03 Civ. 5429 (RJS), 2008 WL 4525400, at *3
(S.D.N.Y. Oct. 6, 2008) (citing Morales v. Quintiles Transnational Corp., 25 F.
Supp. 2d 369, 372 (S.D.N.Y. 1998)). At its core, “[r]econsideration of a court’s
previous order is an ‘extraordinary remedy to be employed sparingly in the
interests of finality and conservation of scarce judicial resources.’” Parrish v.
Sollecito, 253 F. Supp. 2d 713, 715 (S.D.N.Y. 2003) (citing In re Health Mgmt.
Sys. Inc. Secs. Litig., 113 F. Supp. 2d 613, 614 (S.D.N.Y. 2000)).
Motions for Relief from a Court Order Under Federal Rule of
Civil Procedure 60(b)
Federal Rule of Civil Procedure 60(b) provides:
On motion and just terms, the court may relieve a party or its legal
representative from a final judgment, order, or proceeding for the
following reasons: (1) mistake, inadvertence, surprise, or excusable
neglect; (2) newly discovered evidence that, with reasonable
diligence, could not have been discovered in time to move for a new
trial under Rule 59(b); (3) fraud (whether previously called intrinsic
or extrinsic), misrepresentation, or misconduct by an opposing
party; (4) the judgment is void; (5) the judgment has been satisfied,
released or discharged; it is based on an earlier judgment that has
been reversed or vacated; or applying it prospectively is no longer
equitable; or (6) any other reason that justifies relief.
Fed. R. Civ. P. 60(b). “The decision whether to grant a party’s Rule 60(b) motion
is committed to the ‘sound discretion’ of the district court.” Stevens v. Miller,
676 F.3d 62, 67 (2d Cir. 2012) (quoiting Montco, Inc. v. Barr (In re Emergency
Beacon Corp.), 666 F.2d 754, 760 (2d Cir. 1981)). As relevant here, relief under
Rule 60(b)(6) “is warranted where there are extraordinary circumstances, or
where the judgment may work an extreme and undue hardship, and should be
liberally construed when substantial justice will thus be served.” United
Airlines, Inc. v. Brien, 588 F.3d 158, 176 (2d Cir. 2009) (internal quotation
marks omitted); United States v. Int’l Bhd. of Teamsters, 247 F.3d 370, 391 (2d
Cir. 2001) (Rule 60(b) relief is “generally not favored and is properly granted
only upon a showing of exceptional circumstances.”). Motions under Rule
60(b) “must be made within a reasonable time — and for reasons (1), (2), and
(3) no more than a year after the entry of the judgment or order or the date of
proceeding.” Fed. R. Civ. P. 60(c).
The Plan’s Motion for Reconsideration
The Plan Has Standing to Bring a Local Rule 6.3 Motion
Plaintiff charges that the application of Rule 6.3 is limited to parties, and
because the Plan is not a party to this litigation it cannot avail itself of this
rule. (Pl. Opp. 12). Plaintiff points to the rule’s requirement that “[n]o
affidavits shall be filed by any party unless directed by the Court.” Local Rule
6.3 (emphasis added). Plaintiff has not cited, and the Court has not located,
any case explicitly limiting Rule 6.3 to parties to the litigation. To the contrary,
and as the Plan points out, courts in this District have allowed affected nonparties to a litigation to file motions for reconsideration under Rule 6.3. See,
e.g., Intellectual Property Watch v. U.S. Trade Representative, No. 13 Civ. 8955
(ER), 2014 WL 852168, at *1 (S.D.N.Y. Jan. 31, 2014) (denying a non-party’s
motion for reconsideration of the court’s denial of the non-party’s motion to
intervene); Wultz v. Bank of China Ltd., 291 F.R.D. 42, 45 (S.D.N.Y. 2013)
(adjudicating motion of non-party Office of the Comptroller of the Currency for
reconsideration challenging the court’s order granting plaintiffs’ motion to
compel certain documents); Tiffany (NJ) LLC v. Forbse, No. 11 Civ. 4976 (NRB),
2012 WL 3686289, at *1 (S.D.N.Y. Aug. 23, 2012) (denying non-party’s motion
for reconsideration challenging the court’s order requiring the non-party “to
comply with discovery provisions of the preliminary injunction entered by the
Court”); In re Currency Conversion Fee Antitrust Litig., MDL No. 1409 (WHP),
2004 WL 1663601, at *1 (S.D.N.Y. July 27, 2004) (denying a non-party’s
motion for reconsideration of the court’s order granting the defendant’s motion
to compel the non-party’s compliance with a subpoena).
Allowing a non-party to move the court to reconsider a prior decision is
both equitable and judicially prudent. If a non-party were prohibited from
filing a motion for reconsideration, this traditional avenue of recourse would be
unavailable to challenge, for example, a denial of a motion to intervene or a
motion to comply with a subpoena, both of which customarily implicate nonparties. What is more, denying the non-party this avenue of equitable relief
would do a disservice to the judicial system by allowing decisions that may call
out for reconsideration to go unnoticed, thereby enshrining erroneous
precedent. In line with other courts in this District, the Court will permit the
Plan’s motion for reconsideration to go forward, and address the merits of the
motion below. 5
The Funds Are Not Plan Assets, and Thus Are Not Subject to
ERISA’s Anti-Alienation Provision
The Plan’s arguments for reconsideration stem from its position that the
Funds remain Plan assets. Because the Plan has failed to substantiate this
position, the Court declines its request for reconsideration.
Section 1056(d)(1) of Title 29 of the United States Code, commonly
referred to as ERISA’s anti-alienation provision, provides that: “[e]ach pension
plan shall provide that benefits provided under the plan may not be assigned or
alienated.” 29 U.S.C. § 1056(d)(1). The relevant Plan documents comply with
this provision by stating: “[e]xcept as otherwise expressly permitted by the Plan
or required by law, the interests of persons entitled to benefits under the Plan
may not in any manner whatsoever be assigned or alienated, whether
voluntarily or involuntarily, or directly or indirectly.” (Holland Decl., Ex. A
As previously indicated, Rule 6.3 provides that “[n]o affidavits shall be filed by any party
unless directed by the Court.” Plaintiff argues that because the Plan submitted the
Holland Declaration in support of its motion without permission from the Court, its
motion should be denied. (Pl. Opp. 12). The Plan counters by arguing that the Holland
Declaration was properly submitted in connection with its Rule 60(b) motion, and
because it is not a party to this litigation (and therefore was not represented at the
proceedings that resulted in the Final Judgment) the Holland Declaration was the only
way by which it could provide the necessary evidence before the Court. (Plan Reply 7
n.5). “A district court has broad discretion to determine whether to overlook a party’s
failure to comply with local court rules.” Holtz v. Rockefeller & Co., Inc., 258 F.3d 62, 73
(2d Cir. 2001). In that regard, the Court may overlook the Plan’s submission of the
Holland Declaration without prior approval. There is even more reason to do so here.
The Court accepted evidence from both parties at oral argument, the substance of
which was the same as that contained in the Holland Declaration. Accordingly, there is
no reason not to consider the Holland Declaration, and the Court declines to deny the
Plan’s motion on this procedural hiccup.
The Supreme Court has held that Section 1056(d)(1) “erects a general bar
to the garnishment of pension benefits from plans covered by [ERISA].” Guidry
v. Sheet Metal Workers Nat’l Pension Fund, 493 U.S. 365, 371 (1991). In
Guidry, the Supreme Court explained that Section 1056(d)(1) “reflects a
considered congressional policy choice, a decision to safeguard a stream of
income for pensioners … even if that decision prevents others from securing
relief for the wrongs done them.” Id. at 376. The Second Circuit has similarly
recognized that “the principal rationale behind ERISA’s anti-alienation
provision is ‘the prohibition of involuntary levies by third party creditors on
vested plan benefits.’” Kickham Hanley P.C. v. Kodak Retirement Income Plan,
558 F.3d 204, 210 (2d Cir. 2009) (quoting Ellis Nat’l Bank of Jacksonville v.
Irving Trust Co., 786 F.2d 466, 470 (2d Cir. 1986)). “Such a prohibition
supports Congress’s primary objective of ensuring through ERISA 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.’” Id. (quoting Ellis Nat’l Bank of Jacksonville, 768 F.2d
It is against this backdrop that the Plan mounts its motion for
reconsideration in arguing — albeit implicitly — that the Court overlooked
controlling decisions that prohibit the assignment or alienation of funds vested
in ERISA-covered plans. For starters, the Plan contends that it is prohibited
from transmitting the Funds to Plaintiff because to do so would violate ERISA’s
anti-alienation provision. (Plan Br. 1-2). From there, the Plan points to
Section 401 of the IRC, which provides that “[a] trust shall not constitute a
qualified trust under this section unless the plan … may not be assigned or
alienated,” 26 U.S.C. § 401(a)(13), from which it reasons that if it does transmit
the Funds to Plaintiff, it will lose its tax-qualified status under the IRC, which
will have detrimental consequences (including significant adverse tax
consequences) to the Plan and its remaining participants. (Id. at 13).
The Second Circuit has made clear that ERISA’s anti-alienation provision
does not apply once the benefits “have left the hands of the administrator.”
Robbins ex rel. Robbins v. DeBuono, 218 F.3d 197, 203 (2d Cir. 2000), (“Section
1056(d)’s requirement that pension plans contain a provision against
assignment or alienation of benefits does not read comfortably as a prohibition
against creditors reaching pension benefits once they have left the hands of the
administrator.”), abrogated on other grounds by Wojchowski v. Daines, 498 F.3d
99 (2d Cir. 2007); accord United States v. Jaffe, 417 F.3d 259, 267 (2d Cir.
2005). In that regard, “once the proceeds of the pension plan have been
released to the beneficiary’s hands, … creditors and others [may] pursue claims
against the funds and the funds’ owner(s).” United States v. All Funds
Distributed To, or o/b/o Weiss, 345 F.3d 49, 57 (2d Cir. 2003); accord Kickham
Hanley P.C., 558 F.3d at 211.
The Plan does not dispute the inapplicability of ERISA’s anti-alienation
provision once the benefits have been distributed. (Plan Br. 9). Rather, it
contends that because the check to Prado for the post-liquidation, postwithholdings Funds was stopped by the Court’s order freezing his assets, and
thus was never deposited by Prado, the Funds are still “plan assets and subject
to ERISA.” (Id. at 12). The Court cannot accept this argument, and the cases
on which the Plan relies in support of its position do not convince the Court
The principal problem with the Plan’s arguments is that they lack record
support. The Plan admits that “[a] distribution request was made for the funds
in Mr. Prado’s account with the [Plan], and a check payable to Mr. Prado was
issued.” (See Holland Decl. ¶ 10). It further acknowledges that the Funds are
being held in a non-interest bearing clearing account at the Bank. (Id. at ¶ 11;
Brundick Letter at 1). The Plan concedes that the only reason that the Funds
were placed in this clearing account was to comply with the Court’s order
freezing the assets in the Plan. (See Holland Decl. ¶¶ 10-11). Thus, it is only
because this Court froze Defendant’s assets that the Funds remain in the
clearing account as opposed to in Defendant’s custody.
Section 10.19 makes clear that a participant’s benefits are distributed,
for anti-alienation purposes, at the time the check is issued. As Plaintiff notes
(Dkt. #94 at 1), the provision explicitly recites that it applies where “all or part
of the benefit of a Participant, Beneficiary or Alternate Payee has been
distributed pursuant to the provisions of the Plan to the individual entitled to
the benefit but the check representing such distribution remains uncashed.”
(Holland Decl., Ex. A § 10.19 (emphasis added)). In other words, distribution
under the Plan occurs with the issuance of the check, irrespective of when and
whether it is cashed.
If the text of the Plan were not sufficiently clear, the Brundick Letter
confirms the Court’s understanding of when distribution occurs under the
Plan. Brundick advised Plaintiff that “monies … covering Mr. Prado’s
distribution check” (i.e., the Funds) were being held in a non-interest bearing
account after the Court issued a temporary restraining order freezing
Defendant’s assets. (Brundick Letter at 1). He then repeatedly noted that the
Funds had not been redeposited into the Plan, and sought Plaintiff’s agreement
for the Plan administrators to “return” or “redeposit” or “place back” the Funds
into the Plan — again underscoring that distribution had already occurred and
the Funds were no longer part of the Plan. (Id. at 1-2).
It bears noting that at no point in the letter did Brundick suggest that
the anti-alienation provision was in any way implicated, or that the Plan
needed to redeposit those funds in order to maintain its tax-qualified status.
(Cf. id. at 1 (“However, since there was a ‘stop payment’ issued on this
distribution check, Plan Administration for the 401(k) Plan has concerns about
simply keeping these funds in the account maintained by the 401(k) Plan’s
record keeper, and they believe as plan fiduciary that these monies must be
returned to Mr. Prado’s 401(k) Plan account.”)). Perhaps more importantly,
despite receiving copies of the relevant asset freeze orders in September and
October of 2012, at no time during the pendency of the asset freeze did the
Plan advise the Court of its view that the anti-alienation provision required
return of the Funds. Indeed, such an argument, if valid, should have been
raised immediately after each freeze order was entered, inasmuch as the Plan’s
current arguments suggest that the only course of action available to the Court
was return of the Funds to the Plan.
Given the Plan’s text, the cases relied on by Wells Fargo (which are not
binding on this Court in any event) are inapposite. For example, in Mogel v.
Unum Life Ins. Co. of Am., when plan participants submitted claims for death
benefits in accordance with the terms of their policies, the insurance company
issued each participant a checkbook and letter explaining that the death
benefits plus any applicable interest had been deposited in a security account
with the insurance company and that the participants could write checks, not
to exceed the balance in the account. 547 F.3d 23, 25 (1st Cir. 2008). The
court held that issuing the check books to the plan participants did not equate
to a transfer of the funds to which the participants were entitled, and thus the
funds remained plan assets. Id. at 26. In reaching this conclusion, the court
recognized that “the difference between delivery of a check and a checkbook …
is the difference between” the insurance company “retaining” and “divesting
possession of [the plaintiff’s] funds.” Id. Here, by contrast, the Plan issued a
check for the Funds and made repeated statements indicating that the Funds
were no longer part of the Plan. In that respect, under Mogel, it divested its
possession of the funds.
Commonwealth Edison Co. v. Vega, another case on which the Plan
relies, is also unhelpful. 174 F.3d 870 (7th Cir. 1999). In Vega, the state of
Illinois sought to apply its Uniform Disposition of Unclaimed Property Act (the
“Uniform Act”) to benefits payable under a pension plan that were not yet
claimed by a plan beneficiary. Id. at 872. Under the terms of that plan, when
benefits were due to a participant in the plan, the plan issued a check to the
participant. Thus, the money due to participants remained in the plan’s
coffers, until the participant deposited or cashed the check, at which point the
check was paid by the plan through the system of clearing bank transactions.
Id. When the check was issued, it is placed in a separate account, but if the
check was not cashed within one year, the money was retransferred to a
general account where is became available to pay other participants. Id.
The Vega Court held that ERISA preempted the Uniform Act, and in so
doing reasoned that the “until the check to the beneficiary is actually presented
to the plan for payment through the banking system, and paid, the money due
to the beneficiary is an asset of the plan.” 174 F.3d at 873. The Plan has not
indicated that it employs a structure similar to the plan in Vega, under which
that the Funds remain plan assets. More to the point, the Plan does not retain
control over the Funds like the administrators in Mogel and Vega. Indeed, its
request for direction from the Court as to what to do with the Funds if the
Court grants its motion, if anything, further underscores its lack of authority
over these funds.
Nor can the Plan take comfort in the Department of Labor provisions and
related case law regarding “float accounts.” (See Plan Br. 10-11). A float
account may be created where a fiduciary transfers funds to an account of a
financial institution in connection with the issuance of a check to make a plan
distribution or disbursement, and then earns interest on that account until the
checks are presented for payment. Department of Labor Field Assistance
Bulletin 2002-3 (Nov. 5, 2002). According to the Brundick Letter, the clearing
account into which the Funds were deposited is non-interest bearing, and the
Plan has not provided other evidence that the clearing account is a float
account potentially subject to ERISA.
The Funds stand on a different footing from other benefit funds for which
a check is issued to a participant that the participant fails to deposit. The
record indicates beyond credible dispute that Defendant would have deposited
the check he received for the Funds had the Court not entered the order
freezing his assets. And in that regard, unlike the vast majority of Section
1056(d)(1) cases, the Funds are in “a kind of pension fund purgatory,” to which
ERISA’s anti-alienation provision does not apply.
The defendants in United States Sec. & Exchange Comm’n v. Moskop,
No. 10 Civ. 7462 (HDL), 2011 U.S. Dist. LEXIS 68780 (N.D. Ill. June 27, 2011),
invoked the anti-alienation provision in seeking access to monthly pension
payments that were deposited into an account that had previously been
controlled by the defendants, but was then subject to an asset freeze. The
district court denied the request:
Defendants argue that ERISA’s anti-alienation provision protects
this pension from the court-imposed asset freeze. 29 U.S.C.
§ 1056(d)(1) (“Each pension plan shall provide that benefits provided
under the plan may not be assigned or alienated.”). The flaw in
Defendants’ argument is that all but one circuit which has
considered this issue has held that this provision applies to
retirement benefits when they are held by the plan administrator,
not when they reach the beneficiary. A court in this circuit has
adopted the majority rule.
The catch that exists here is that Moskop does not currently have
access to the funds once they are deposited into his bank account,
as the account is frozen. This has the practical effect of alienating
Moskop’s pension funds prior to his possession of them and after
the plan administrator has relinquished control of them — a kind of
pension fund purgatory. However, assuming, arguendo, that the
funds are removed from the frozen account, they would enter into
Moskop’s possession, at which time they would immediately become
subject to the November 27, 2010, asset freeze. ERISA’s antialienation provision in § 1056(d)(1), therefore, simply does not apply
to the situation that exists with Moskop’s Prudential pension. The
monthly pension payments are properly subject to the Court’s asset
Id. at *2-3 (internal citations omitted).
Prado elected to withdraw the funds available in his 401(k) plan. At the
moment he made that voluntary election, he forfeited the protection provided
under ERISA. Cf. United States v. Kalani, No. S3 98 Cr. 1238-06 (SAS), 2003
WL 21222546, at *2 (S.D.N.Y. May 27, 2003) (“Where any employee elects to
draw on [his] ERISA plan prior to [his] retirement, [he] forfeits the protection
provided by the Act.” (quoting United States v. Smith, 47 F.3d 681 (4th Cir.
1995)). To hold otherwise would incentivize individuals, like Plaintiff, to
attempt to secrete 401(k) assets with the comfort of knowing that if efforts to
obtain those assets fail, the funds will not be subject to any subsequent
The Kalani Court also noted the conclusions of several Circuit Courts of
Appeals that “ERISA’s anti-alienation provision applies only to actions brought
against a retirement plan, not to actions against a beneficiary.” 2003 WL
The Plan is correct that Kalani and Smith arose in the context of criminal prosecutions.
(See Plan Reply 2-3). However, the particular principles of law for which they are cited
exist irrespective of whether the matter is civil or criminal.
21222546, at *2 (citing, inter alia, Trucking Employees of N. Jersey Welfare
Fund, Inc. v. Colville, 16 F.2d 52, 56 (3d Cir. 1994) (“The regulation construes
the statute to forbid alienation of rights to future payments, rather than
alienation of the actual money paid out.”)). This case, quite obviously, is an
action against a beneficiary, and Plaintiff is correct that the Final Judgment
was filed as to Prado, and “placed ‘no restraint on funds that remain in the
custody of an ERISA plan administrator.’” (Pl. Opp. 10-11 (quoting United
States v. Jaffe, 417 F.3d at 267)).
Put simply, the Court does not doubt the existence, or the significance, of
the anti-alienation provision. Instead, it must conclude on this record that the
Plan has failed to demonstrate that the Funds are Plan assets subject to that
provision. The cases on which the Plan relies are rendered inapposite by the
language of the Plan (and the conduct of Plan personnel), which make clear
that funds are no longer Plan assets when they are liquidated and a check is
issued to the participant or distributee. The policy concerns animating the
provision are, similarly, not at all implicated here, where a sophisticated
insider trader cashed out his Plan account before fleeing the country.
Accordingly, the Funds are not subject to the anti-retaliation provision, and the
Plan’s motion for reconsideration must be denied.
The Plan’s Motion for Relief Under Rule 60(b)
The Plan’s alternative request for relief under Federal Rule of Civil
Procedure 60(b) fails because it lacks standing to bring such a motion. Rule
60(b) states, in part, that a “court may relieve a party or a party’s legal
representative from a final judgment, order, or proceeding.…” Fed. R. Civ. P.
60(b). Unlike Rule 6.3, the application of Rule 60(b) is, by the text of the rule,
reserved for parties to the lawsuit. Wells Fargo is neither a party to this action
nor a party’s legal representative.
Although Rule 60(b) relief is “not ordinarily … available to non-parties,”
the Second Circuit has allowed non-parties to move pursuant to Rule 60(b)
where “on the facts of th[e] case [the movants] were sufficiently connected and
identified with the … suit to entitle them to standing to invoke [Rule 60(b)].”
Dunlop v. Pan Am. World Airways, Inc., 672 F.2d 1044, 1052 (2d Cir. 1982); see
also Grace v. Bank Leumi Trust Co. of NY, 443 F.3d 180, 188 (2d Cir. 2006).
This exception, however, is extraordinarily narrow. Indeed, in Dunlop and
Grace, where the Second Circuit recognized this exception, the Court made
clear that the holdings were limited to the facts of those cases. Dunlop, 672
F.2d at 1052 (“Although Rule 60(b) (6) would not ordinarily be available to nonparties to modify final judgments, we hold that on the facts of this case
appellants were sufficiently connected and identified with the Secretary’s suit
to entitle them to standing to invoke Rule 60(b)(6).” (emphasis added)); Grace,
443 F.3d at 188 (“Today, as in Dunlop, we limit our decision to the facts of this
In Dunlop, the Court held that non-parties had standing to move under
Rule 60(b) to amend a stipulation of dismissal entered in a federal action to
which they were not a party where, under the terms of the stipulation, the non-
parties were barred from bringing any subsequent age discrimination state-law
claims. 672 F.2d at 1052. In Grace, the Court held that:
[W]here plaintiffs enter into a settlement agreement with a
judgment-proof, pro se defendant with the intent at the time of the
settlement to collect from a third party that allegedly received
fraudulent conveyances, and further, they attempt to use the
judgment as a predicate for a fraudulent conveyance action against
the third party, the third party is “strongly affected” by the judgment
and entitled to standing to bring a Rule 60(b) motion.
Grace, 443 F.3d at 188.
The Plan’s circumstances do not fall within the parameters of Dunlop or
Grace, and thus this is not such an “extraordinary circumstance” to warrant
this Court to “expand the narrow exception to the general rule that non-parties
cannot bring Rule 60(b) motions.” Federman v. Artzt, 339 F. App’x 31, 34 (2d
Cir. 2009) (summary order). The Plan was neither individually involved in nor
sufficiently connected to this lawsuit. Rather, it is only tangentially related to
the instant case through its involvement with the Funds that the Court ordered
could be used to satisfy the penalty and disgorgement awards. Accordingly,
the Plan lacks standing to bring its Rule 60(b) motion. See Federman, 339 F.
App’x at 34 (holding that the movants did not have standing to bring a Rule
60(b) motion seeking relief from a global settlement that restricted the movants’
ability to file suit); In re Britannia Bulk Holdings Inc. Sec. Litig., No. 08 Civ. 9554
(DLC), 2010 WL 446529, at *2 (S.D.N.Y. Feb. 9, 2010) (holding that the nonparty did not have standing to bring a Rule 60(b) motion because “[t]he
circumstances of [that] litigation [did] not resemble those of either Dunlop or
Grace”); see also Estate Shefner v. Tuchman, No. 08 Civ. 4443 (LTS), 2013 WL
2922387, at *3 (S.D.N.Y. June 14, 2013) (holding that non-parties were
precluded from bringing a motion under Rule 60(b) because “[t]he limited
exception recognized in Grace [was] inapplicable”).
The Plan’s motions for reconsideration pursuant to Local Civil Rule 6.3
and Rule 60(b) of the Federal Rules of Civil Procedure are DENIED. The Court
orders the transfer of the $130,292.53, representing Prado’s liquidation and
distribution of his 401(k) plan, to Plaintiff in satisfaction of the Final Judgment.
The Clerk of Court is directed to terminate Docket Entry 50.
Dated: June 23, 2014
New York, New York
KATHERINE POLK FAILLA
United States District Judge
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