United States v. Shkreli (2d Cir. 2022)

The following is a case update written by Reno Fernandez, a bankruptcy appellate specialist with California Appellate Law Group, LLP, analyzing a recent decision of interest:

SUMMARY

On August 24, 2022, the U.S. Court of Appeals for the Second Circuit approved of a district court’s orders for garnishment of retirement accounts to satisfy a restitution order under the Mandatory Victims Restitution Act, notwithstanding the Consumer Credit Protection Act and the anti-alienation provisions of the Employee Retirement Income Security Act of 1974, but vacated and remanded for a determination of the impact of a potential 10% tax on early distributions.  United States v. Shkreli, 47 F4th 65 (2d Cir. 2022). 

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FACTS

Evan Greebel was attorney and partner with Katten Muchin Rosenman LLP and later was an associate attorney with Fried, Frank, Harris, Shriver & Jacobson LLP.  During his tenure, he built up two 401(k) retirement accounts worth a total of approximately $921,000 as of 2018. 

Greebel also served as outside counsel for Retrophin, Inc.  Although not discussed in the opinion, it is interesting to note that Retrophin was a publicly-traded biopharmaceutical company specializing in the treatment of rare diseases.  (Retrophin’s business continues as Travere Therapeutics, Inc.)  Retrophin was co-founded by Martin Shkreli, nicknamed the “Pharma Bro,” who was a hedge fund manager and is listed as co-inventor of several drugs.  In 2016, Shkreli was convicted of certain felonies for using his companies as a sort of Ponzi scheme.  Shkreli was released from prison in May of 2022, and now he is promoting a cryptocurrency, namely “Martin Shkreli Inu Coin,” which lost 90% of its value in August of 2022.  https://en.wikipedia.org/wiki/Martin_Shkreli. 

In 2017, Greebel was convicted of conspiracy to commit wire fraud (18 U.S.C. § 1349) and conspiracy to commit securities fraud (18 U.S.C. § 371) for supporting Shkreli’s scheme.  In 2018, Greebel was ordered to pay restitution of approximately $10 million to his victims under the Mandatory Victims Restitution Act (18 U.S.C. § 3663A) (MVRA), which makes restitution mandatory under certain circumstances.  At the request of the United States, the district court issued writs of continuing garnishment under section 3205 of the Federal Debt Collection Procedures Act (28 U.S.C. §§ 3001-3308), through which the government sought to obtain all of the assets in both retirement accounts.

Greebel objected and requested a hearing. At the hearing, Greebel called three witnesses, whose testimony turned out to be unfavorable to him. Later, Greebel attempted to exclude the testimony as parol evidence. Greebel’s challenge to the writs of garnishment was unsuccessful, and he appealed.

REASONING

This opinion involves a three-sided battle between four-letter acronyms, namely the MVRA, the Employee Retirement Income Security Act of 1974 (29 U.S.C. §§ 1001-1461) (ERISA), and the Consumer Credit Protection Act (15 U.S.C. §§ 1601-1693r) (CCPA).  Specifically, Greebel contended that ERISA’s anti-alienation provisions prevent garnishment and that the CCPA caps any garnishment at 25% of the value of the retirement accounts.  The district court disagreed.  The Second Circuit supported the district court’s reasoning but vacated and remanded for the purposes of considering the impact, if any, of the 10% tax on early withdrawals.

The Second Circuit found answers to most issues at 18 U.S.C. § 3613(a), which provides an enforcement mechanism for restitution judgments.  Section 3613(a) provides, in part, that:  “Notwithstanding any other Federal law… a judgment imposing a fine may be enforced against all property or rights to property of the person fined….”  The Second Circuit held that this language, aimed at “all” property and excluding “any other Federal Law,” is sufficient to overcome ERISA’s anti-alienation provisions.  The court also noted that restitution orders may be enforced in the same manner as tax levies, which may be made against retirement accounts notwithstanding ERISA.

The extent of the judgment debtor’s interest in the retirement accounts was a related issue.  Citing a Ninth Circuit opinion, Greebel argued that there can be no garnishment unless the debtor has “a current, unilateral right” to the retirement funds (United States v. Novak, 476 F.3d 1041 (9th Cir. 2007)), and he claimed that he lacked the power to make withdrawals under the terms of the retirement plans.  Without adopting or disapproving Novack, the Second Circuit analyzed Greebel’s “tortured contract interpretations,” which focused on administrative impediments to withdrawal.  The court characterized such impediments as merely inconvenient red tape, which is not sufficient to prevent Greebel from making withdrawals.  Accordingly, the court held that neither ERISA nor the plan terms bar garnishment.

The Second Circuit also held that the 25% cap on garnishment under the CCPA does not apply.  At first glance, the statute provides that the government cannot enforce an order in violation of the cap.  15 U.S.C. § 1673(a)(3).  However, the cap applies only to earnings, which the CCPA defines as “compensation… for personal services, whether denominated as wages, salary, commission, bonus, or otherwise, and includes periodic payments pursuant to a pension or retirement program.”  15 U.S.C. § 1672(a).  Accordingly, the court determined that the garnishment cap applies only to “periodic payments” of retirement funds.  Joining an apparent majority of circuits, the court held that a “lump-sum” or “one-time” distribution is not periodic and, therefore, is not subject to the cap. 

 However, the district court did not consider whether the 10% tax on early withdrawals is a sufficient impediment to preclude withdrawal.  The Second Circuit agreed with the government’s position that the tax should not prevent early withdrawals, and that the tax may not apply at all, but the court acknowledged authorities suggesting that the amount necessary to satisfy the tax is restricted from withdrawal.  Accordingly, the court vacated and remanded for the district court to determine whether the tax applies to funds disbursed pursuant to garnishment and, if so, the amount of the tax.  The court advised that, if the parties do not provide clarity on the issues, the district court might order the accounts to be liquidated with the clerk to reserve a portion of the proceeds for taxes.

AUTHOR’S COMMENTS

The Second Circuit is not unique in holding that retirement funds are subject to execution under the MVRA notwithstanding ERISA’s anti-alienation provisions.  In fact, the opinion may be more noteworthy for the issue that received the least discussion:  the potential 10% tax on early withdrawals.  If the tax applies at all, the Second Circuit appears to assume that an amount necessary to pay the tax must be withheld and cannot be turned over to the government, but this is not self-evident.  Perhaps the government elected not to press the issue because fully depleting the accounts might saddle Greebel with tax obligations that he probably cannot pay.  In any event, this issue was strong enough to warrant vacating the writs and remanding.  Query whether this opinion will inspire similarly-situated debtors to seek to vacate writs of garnishment pending a determination of tax issues.

It is also interesting to note that the language of the opinion gives the impression that it applies only to judgments for restitution entered under the MVRA, but the key enforcement mechanism (Section 3613(a)) appears to apply to any judgment imposing a fine.  Subsection (c) mentions the MVRA in the context of liens securing government fines (known as forfeiture liens), but the MVRA is not referenced anywhere else.  In other words, the opinion may provide the federal government with new opportunities and flexibility in enforcing judgments for fines of various kinds.

This review was written by Reno Fernandez, a bankruptcy appellate specialist with California Appellate Law Group, LLP, a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.