First Circuit Upholds Garnishment Order on Convicted CFO's Retirement Account

(Parker Tax Publishing February 2021)

The First Circuit affirmed a district court's order allowing the government to garnish the 401(k) retirement account of an individual who was convicted of wire fraud, money laundering, and other crimes and apply the proceeds to his criminal restitution obligations. The court rejected an argument by the individual's spouse that the district court could not garnish the account without allocating to her a portion of the funds after finding that she had no vested legal interest in her husband's account under either state law or the plan itself. U.S. v. Abell, 2021 PTC 16 (1st Cir. 2021).

Background

Edward Abell, III and Shilo Abell are married and residents of Massachusetts. Between 2006 and 2017 Edward Abell served in finance-related positions including Chief Financial Officer and Vice President of Finance at four companies in the Boston area. Mr. Abell used these roles to embezzle millions of dollars. At each of the victim companies, he created fake vendor profiles for a company called Pinehurst, which he controlled. He then created fake invoices for work Pinehurst never performed, and issued checks to Pinehurst on behalf of his employers. Once the money was deposited in the Pinehurst accounts, Mr. Abell either spent it directly, or transferred it to his own personal and investment accounts. In total, Mr. Abell embezzled approximately $3.8 million between 2006 and 2017. In 2018, he pleaded guilty to eight counts of wire fraud, money laundering, and unlawful monetary transactions relating to this scheme.

At his sentencing hearing, Mr. Abell represented to the court that he was able and willing to pay substantial restitution to his victims. The district court sentenced him to 97 months' incarceration and three years of supervised release and ordered him to pay $3.8 million in restitution. Mr. Abell also forfeited an investment account and other assets, including two cars and a property in Maine. Mr. Abell did not challenge the restitution order in any direct appeal. In an appeal from his sentence, he again made the representation that he could make significant restitution, including from his 401(k) account. The district court upheld his sentence.

Despite his promise to make substantial restitution, Mr. Abell paid only $7,875 towards his restitution obligations -- most of which came from the sale of one of his forfeited vehicles. He took no money from his 401(k) account to meet his restitution obligations. With accrued interest his outstanding balance grew to over $3.9 million. In 2019, the government asked the district court for a writ of garnishment directed at Mr. Abell's 401(k) plan, which Mr. Abell held individually in his own name. The account had a value of roughly $393,500. After deducting taxes and early withdrawal fees, the government asked that the full balance of the account be paid towards Mr. Abell's restitution balance.

Both Mr. and Mrs. Abell opposed the government's motion for a writ of garnishment. Mr. Abell argued that his 401(k) account was exempt from forfeiture under 18 U.S.C. Sec. 3613(a)(1) and Code Sec. 6334. He also joined in his wife's objections. Even though she has not divorced her husband, Mrs. Abell argued that the district court should find that Massachusetts divorce law implicitly recognizes a vested legal interest by spouses in their husband's or wife's property, entitling her to a portion of the account payout. The district court rejected these objections and issued a garnishment order. The district court noted that the Abells were still married and found that, in the absence of a divorce decree or other qualifying domestic relations order, state property law did not displace federal law. The district court found that Mrs. Abell did not have a vested legal interest in the 401(k) account because, under the plan, Mr. Abell was entitled to receive, without spousal consent, $393,500, the approximate total value of the vested funds in his account.

Mrs. Abell appealed to the First Circuit. She renewed her argument that, even though her husband held the 401(k) account in his name only, under Massachusetts divorce law both spouses have a vested property interest in a retirement account that one spouse holds individually. She also argued for the first time on appeal that Mr. Abell's 401(k) plan itself gave her a vested interest in the account because she would be entitled to a death benefit if her husband were to pass away. She pointed to language in the plan stating that, if the account holder is married at the time of his or her death, the account holder's spouse will be the beneficiary of the entire death benefit unless an election is made to change the beneficiary.

Analysis

The First Circuit affirmed the garnishment order after finding that Mrs. Abell did not have an interest in her husband's 401(k) account under either Massachusetts law or the plan itself. The court found that the relevant Massachusetts law governs only the division of property between spouses as it exists at the time of divorce. Further, the court found that the Massachusetts statute authorizes the court to "assign" all or any part of the estate of one spouse to the other, and the court reasoned that a divorce court could not assign a portion of one spouse's estate to the other if both spouses had a pre-existing vested interest in the property. In the court's view, the fact that Massachusetts law recognizes that each spouse individually holds an estate composed of their own property refuted Mrs. Abell's claim that Massachusetts law creates some vested interest for one spouse in property held individually in his or her spouse's name.

Regarding Mrs. Abell's argument that the 401(k) plan gave her a vested interest, the court reasoned that the plan language requiring consent from both spouses to change the beneficiary during marriage did not give Mrs. Abell a vested interest in the death benefit. The court noted that, indeed, the death benefit in the plan would be explicitly contingent on a number of circumstances. The court explained that under the plan, the designation of a spouse as a beneficiary for all or part of the death benefit would no longer be valid in the event of a divorce. In addition, the court observed that Mr. Abell could choose to have his vested account balance distributed to him following the termination of his employment, and receiving this lump sum would not require spousal consent. The court further found that any death benefit was contingent on the balance that remained in the account and the beneficiary surviving the plan holder. In the court's view, in these circumstances Mrs. Abell failed to show how she had a vested legal interest in the account. The court said that she would be entitled to payment only if (1) Mr. Abell did not unilaterally choose to receive his full 401(k) balance in a single lump-sum payment before his death, (2) there were still assets in the account at the time of Mr. Abell's death, (3) Mr. and Mrs. Abell remained married until Mr. Abell's death, and (4) Mr. Abell predeceased Mrs. Abell. The court found that there was no requirement in the plan that some portion of the plan funds be administered for the benefit of the current death beneficiary. Thus, the court concluded that the district court did not err when it issued the writ of garnishment without compensating Mrs. Abell for her contingent death benefit under the policy.

For a discussion of property exempt from levy, see Parker Tax ¶260,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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