Pensions and Restitution

In United States v. Novak, 476 F.3d 1041 (9th Cir. 2007), the Ninth Circuit en banc was 'asked to determine whether ' and if so, under what circumstances ' a criminal defendant's retirement benefits are available as a source of funds to compensate crime victims.' The question arises because the Employee Retirement Income Security Act of 1974 (ERISA) contains an anti-alienation clause: 'Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.' 29 U.S.C. ' 1056(d)(1). On the other hand, the Mandatory Victims Restitution Act of 1996 (MVRA) provides: 'Notwith-standing any other Federal law (including section 207 of the Social Security Act), a judgment imposing a fine may be enforced against all property or rights to property of the person fined ' ' 18 U.S.C. ' 3613(a). In Novak, the district court had granted the defendant's motion to quash a writ of garnishment directed to the defendant's employer, and a divided panel of the Ninth Circuit had reversed the district court's order. The en banc court, in a 10-5 decision, upheld the panel's conclusion that a defendant's retirement assets were generally reachable under the MVRA but vacated the panel decision and remanded the case to the district court to resolve a factual issue with respect to the particular retirement plan in question.

In its en banc decision, the Ninth Circuit stated that answering the question before it required 'reconciling two federal statutory schemes,' each of which reflects 'a weighty policy determination.' MVRA was enacted to 'recognize the impact that crime has on the victim, and, to the extent possible, ensure that [the] offender be held accountable to repay these costs' (quoting from S. Rep. No. 104-179, at 18 (1995)). ERISA was enacted 'to assure that '[r]etirement funds shall remain inviolate until retirement” (quoting from Boggs v. Boggs, 520 U.S. 833, 851 (1997), which, in turn, was quoting from a treatise).

The Ninth Circuit found the resolution of this conflict of policies had been explicitly made by Congress. '[B]y making clear that the 'notwithstanding' clause [of MVRA] 'includes' the one federal anti-alienation provision that demands explicit statutory override, Congress manifested that ' 3613(a) means what it says ' that it reaches 'all property or rights to property' not excepted, 18 U.S.C. ' 3613(a) (emphasis added), including property otherwise covered by federally mandated anti-alienation provisions.'

Having resolved the 'whether' question, the en banc majority then turned to the 'when' question. As the court more precisely framed the issue: 'When is a participant's interest in a retirement plan 'property or [a] right to property' under 18 U.S.C. ' 3613(a)? Only if the defendant's interest is property so categorized can that interest be reached by the government when enforcing a restitution order under MVRA.' ERISA guarantees only that a participant in a retirement plan has the right to receive payments, in accordance with the pay-out rate contained in the plan, after the participant turns 65, completes ten years of service, or leaves the company, whichever occurs latest. So the question for the court was whether, as the government urged, MVRA garnishment required retirement plans to turn over immediately the present value of the defendant's interest.

The en banc court answered this question in the negative. Analogizing the situation to tax levies, in which the IRS acquires only whatever rights the taxpayer possesses, the court concluded that the government can immediately garnish the assets of a retirement plan 'only if the terms of the plan allow the defendant to demand a lump sum payment at the present time ' ' Where ERISA requires spousal consent for a lump sum distribution, the government cannot unilaterally cash out a retirement plan to satisfy an MVRA garnishment.

Questions and Implications

Novak left a number of questions unanswered. In Novak, the defendant was entitled to benefits under two plans, a 'Profit Sharing Plan' and a 'Retirement Plan.' The Profit Sharing Plan was a defined contribution plan, like 401(k) plans and employee stock ownership plans, in which benefits generally are based on the amount contributed. The Retirement Plan was a defined benefit plan, in which a participant receives a specific monthly benefit at retirement. Both of these types of plans are protected under ERISA's anti-alienation provision. Because ERISA only applies to employer-sponsored pension plans, however, IRAs and other individually funded retirements savings are not protected under ERISA. These type of saving accounts may be protected by specific state statutes, the effect of which, in the context of the federal legislation, was not at issue in Novak.

There are many other unresolved questions. For example, the MVRA 'shall not apply in the case of an offense ' if the court finds, from facts on the record, that (A) the number of identifiable victims is so large as to make restitution impracticable; or (B) determining complex issues of fact related to the cause or amount of the victim's losses would complicate or prolong the sentencing process to a degree that the need to provide restitution to any victim is outweighed by the burden on the sentencing process.' 18 U.S.C. ' 3663A(c)(3). The Second Circuit has held that, under the MVRA, the victims who are to receive restitution must be individually identified before the restitution order is entered, and that the final determination of the victim's losses must be made no later than 90 days after sentencing. United States v. Catoggio, 326 F.3d 323 (2d Cir. 2003). Can the initial sentencing be adjourned over the defendant's objection solely to facilitate the determination of victim identity and loss? If so, for how long? At what point is the sentencing process complicated or prolonged 'to a degree that the need to provide restitution to any victim is outweighed by the burden on the sentencing process?' None of these questions has been answered.

Other questions arise with respect to determining loss. Can the prosecutor and the defendant stipulate to the amount of the loss, thereby making the amount of restitution (and pension loss) a matter of negotiation and a further incentive for the defendant to plead guilty? One case has held that the amount of loss is not a matter for negotiation.

In United States v. Catoggio, supra, the defendant pleaded guilty to a RICO charge based on a stock fraud, and stipulated to an 18-level enhancement for fraud with losses exceeding $80 million under the then applicable Sentencing Guidelines. The pre-sentence report noted that there were thousands of victims; it would be impractical to obtain loss affidavits from each victim; the government had trading records from which the loss of each victim could be determined; and that the losses exceeded $80 million for Guidelines purposes. The district court imposed restitution in the amount of $80 million. The Second Circuit vacated the restitution portion of the sentence and remanded for re-sentencing on restitution. The court concluded that the MVRA requires restitution in the amount of the victims' actual losses, and that the amount agreed upon by the government and the defendant for the purpose of determining his upward Guidelines enhancement was not the proper measure of restitution. The court rejected the defendants' argument that remand was not permissible because it was already more than 90 days after his sentencing, but ordered the determination to be made forthwith, thereby shedding only a minimum amount of light on the question how long is too long.

Burden on the Court

To what extent is it permissible, in determining the burden on the sentencing process, to consider, at least in part, the age of the defendant, the terms of the retirement plan, and amount of money projected to be in it at the time the funds become accessible? The MVRA makes restitution mandatory, subject to the burden exception. In assessing burden, how much judicial time should be spent determining actual loss when the fraud is massive and the 40-year-old defendant has a relatively modest pension plan that won't be accessible for 25 years? The MVRA requires the court to impose restitution 'without consideration of the economic circumstances of the defendant.' 18 U.S.C. ' 3664(f)(1)(A). But, as noted, the Act does not apply when resolution of fact issues would 'prolong sentencing to an intolerable degree.' The conflicting factors in a given fact situation, as well as the other questions discussed above (and others not mentioned), remain to be resolved.

Howard W. Goldstein ([email protected]), a member of this newsletter's Board of Editors, is a partner at Fried, Frank, Harris, Shriver & Jacobson LLP in New York and a former federal prosecutor. He acknowledges the research assistance of Yeeta Yeger, a summer associate at the firm.

Being a white-collar defendant is very expensive. Just the cost of putting up a serious defense is more than most business executives can bear, and whether companies must pay their ex-employees' legal fees has been hotly litigated in the much discussed KPMG tax shelter case in the Southern District of New York. After Judge Lewis Kaplan ruled that the government had violated the defendants' Fifth and Sixth Amendment rights by using the threat of prosecution to pressure KPMG to cut off the defendants' legal fees, United States v. Stein , 435 F. Supp. 2d 330, 374 (S.D.N.Y. 2006), the ongoing KPMG saga has focused on whether the defendants could force KPMG to pay their fees and the appropriate procedure and forum for resolving that question, or, conversely, whether dismissal of the indictment is the only appropriate remedy.

Meanwhile, an important en banc decision of the Ninth Circuit addresses the financial impact on individuals at the other end of the criminal process: whether pension trust funds may be reached to satisfy a criminal judgment of restitution.

The Novak Decision

In United States v. Novak , 476 F.3d 1041 (9th Cir. 2007), the Ninth Circuit en banc was 'asked to determine whether ' and if so, under what circumstances ' a criminal defendant's retirement benefits are available as a source of funds to compensate crime victims.' The question arises because the Employee Retirement Income Security Act of 1974 (ERISA) contains an anti-alienation clause: 'Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.' 29 U.S.C. ' 1056(d)(1). On the other hand, the Mandatory Victims Restitution Act of 1996 (MVRA) provides: 'Notwith-standing any other Federal law (including section 207 of the Social Security Act), a judgment imposing a fine may be enforced against all property or rights to property of the person fined ' ' 18 U.S.C. ' 3613(a). In Novak, the district court had granted the defendant's motion to quash a writ of garnishment directed to the defendant's employer, and a divided panel of the Ninth Circuit had reversed the district court's order. The en banc court, in a 10-5 decision, upheld the panel's conclusion that a defendant's retirement assets were generally reachable under the MVRA but vacated the panel decision and remanded the case to the district court to resolve a factual issue with respect to the particular retirement plan in question.

In its en banc decision, the Ninth Circuit stated that answering the question before it required 'reconciling two federal statutory schemes,' each of which reflects 'a weighty policy determination.' MVRA was enacted to 'recognize the impact that crime has on the victim, and, to the extent possible, ensure that [the] offender be held accountable to repay these costs' (quoting from S. Rep. No. 104-179, at 18 (1995)). ERISA was enacted 'to assure that '[r]etirement funds shall remain inviolate until retirement” (quoting from Boggs v. Boggs , 520 U.S. 833, 851 (1997), which, in turn, was quoting from a treatise).

The Ninth Circuit found the resolution of this conflict of policies had been explicitly made by Congress. '[B]y making clear that the 'notwithstanding' clause [of MVRA] 'includes' the one federal anti-alienation provision that demands explicit statutory override, Congress manifested that ' 3613(a) means what it says ' that it reaches 'all property or rights to property' not excepted, 18 U.S.C. ' 3613(a) (emphasis added), including property otherwise covered by federally mandated anti-alienation provisions.'

Having resolved the 'whether' question, the en banc majority then turned to the 'when' question. As the court more precisely framed the issue: 'When is a participant's interest in a retirement plan 'property or [a] right to property' under 18 U.S.C. ' 3613(a)? Only if the defendant's interest is property so categorized can that interest be reached by the government when enforcing a restitution order under MVRA.' ERISA guarantees only that a participant in a retirement plan has the right to receive payments, in accordance with the pay-out rate contained in the plan, after the participant turns 65, completes ten years of service, or leaves the company, whichever occurs latest. So the question for the court was whether, as the government urged, MVRA garnishment required retirement plans to turn over immediately the present value of the defendant's interest.

The en banc court answered this question in the negative. Analogizing the situation to tax levies, in which the IRS acquires only whatever rights the taxpayer possesses, the court concluded that the government can immediately garnish the assets of a retirement plan 'only if the terms of the plan allow the defendant to demand a lump sum payment at the present time ' ' Where ERISA requires spousal consent for a lump sum distribution, the government cannot unilaterally cash out a retirement plan to satisfy an MVRA garnishment.

Questions and Implications

Novak left a number of questions unanswered. In Novak, the defendant was entitled to benefits under two plans, a 'Profit Sharing Plan' and a 'Retirement Plan.' The Profit Sharing Plan was a defined contribution plan, like 401(k) plans and employee stock ownership plans, in which benefits generally are based on the amount contributed. The Retirement Plan was a defined benefit plan, in which a participant receives a specific monthly benefit at retirement. Both of these types of plans are protected under ERISA's anti-alienation provision. Because ERISA only applies to employer-sponsored pension plans, however, IRAs and other individually funded retirements savings are not protected under ERISA. These type of saving accounts may be protected by specific state statutes, the effect of which, in the context of the federal legislation, was not at issue in Novak.

There are many other unresolved questions. For example, the MVRA 'shall not apply in the case of an offense ' if the court finds, from facts on the record, that (A) the number of identifiable victims is so large as to make restitution impracticable; or (B) determining complex issues of fact related to the cause or amount of the victim's losses would complicate or prolong the sentencing process to a degree that the need to provide restitution to any victim is outweighed by the burden on the sentencing process.' 18 U.S.C. ' 3663A(c)(3). The Second Circuit has held that, under the MVRA, the victims who are to receive restitution must be individually identified before the restitution order is entered, and that the final determination of the victim's losses must be made no later than 90 days after sentencing. United States v. Catoggio , 326 F.3d 323 (2d Cir. 2003). Can the initial sentencing be adjourned over the defendant's objection solely to facilitate the determination of victim identity and loss? If so, for how long? At what point is the sentencing process complicated or prolonged 'to a degree that the need to provide restitution to any victim is outweighed by the burden on the sentencing process?' None of these questions has been answered.

Other questions arise with respect to determining loss. Can the prosecutor and the defendant stipulate to the amount of the loss, thereby making the amount of restitution (and pension loss) a matter of negotiation and a further incentive for the defendant to plead guilty? One case has held that the amount of loss is not a matter for negotiation.

In United States v. Catoggio, supra, the defendant pleaded guilty to a RICO charge based on a stock fraud, and stipulated to an 18-level enhancement for fraud with losses exceeding $80 million under the then applicable Sentencing Guidelines. The pre-sentence report noted that there were thousands of victims; it would be impractical to obtain loss affidavits from each victim; the government had trading records from which the loss of each victim could be determined; and that the losses exceeded $80 million for Guidelines purposes. The district court imposed restitution in the amount of $80 million. The Second Circuit vacated the restitution portion of the sentence and remanded for re-sentencing on restitution. The court concluded that the MVRA requires restitution in the amount of the victims' actual losses, and that the amount agreed upon by the government and the defendant for the purpose of determining his upward Guidelines enhancement was not the proper measure of restitution. The court rejected the defendants' argument that remand was not permissible because it was already more than 90 days after his sentencing, but ordered the determination to be made forthwith, thereby shedding only a minimum amount of light on the question how long is too long.

Burden on the Court

To what extent is it permissible, in determining the burden on the sentencing process, to consider, at least in part, the age of the defendant, the terms of the retirement plan, and amount of money projected to be in it at the time the funds become accessible? The MVRA makes restitution mandatory, subject to the burden exception. In assessing burden, how much judicial time should be spent determining actual loss when the fraud is massive and the 40-year-old defendant has a relatively modest pension plan that won't be accessible for 25 years? The MVRA requires the court to impose restitution 'without consideration of the economic circumstances of the defendant.' 18 U.S.C. ' 3664(f)(1)(A). But, as noted, the Act does not apply when resolution of fact issues would 'prolong sentencing to an intolerable degree.' The conflicting factors in a given fact situation, as well as the other questions discussed above (and others not mentioned), remain to be resolved.

Howard W. Goldstein ([email protected]), a member of this newsletter's Board of Editors, is a partner at Fried, Frank, Harris, Shriver & Jacobson LLP in New York and a former federal prosecutor. He acknowledges the research assistance of Yeeta Yeger, a summer associate at the firm.