Friday, November 7, 2008

Family Case in the Supreme Court

A case before the US Supreme Court may make divorce (even a no-fault divorce) a little more complicated. Under current law, parties to a divorce can release their right to the other spouse’s pension by signing a property settlement agreement which says so.  They can also lose any interest in the other spouse’s pension when a Final Decree is entered which does not award them the pension (or otherwise reserve their rights).

In Kennedy v. Plan Adm’r for DuPont Sav. & Inv. Plan, 497 F.3d 426, 427-28 (5th Cir. 2007), the Supremes will decide if a spouse may waive his or her interest in the other spouse’s pension without a Qualified Domestic Relations Order (”QDRO”).  QDROs are not exactly do-it-yourself documents so requiring one every time a spouse releases his or her right to any interest in the other spouse’s pension will likely mean more attorney fees and fewer do-it-yourself divorces.

In Kennedy, the parties were divorced in Texas in 1994. They entered into a marital settlement agreement in which the wife waived her interest in the husband’s DuPont Savings & Investment Plan (”SIP”) benefits. The parties did not prepare or sign a QDRO to that effect. The husband never removed the wife’s name as the plan’s beneficiary.

When the husband died in 2001, the Estate requested the benefits. DuPont refused and sent the benefits to the ex-wife. The Estate sued DuPont in the U.S. District Court for the Eastern District of Texas for recovery of the SIP benefits under ERISA, 29 U.S.C. § 1132(a)(1)(B). ERISA federal law preempts state laws pertaining to employee benefit plans. See 29 U.S.C. § 1144(a). Therefore, the text of ERISA is generally applied to determine such cases. If ERISA is silent on an issue, however, federal common law is applied instead. The district court applied federal common law, under which the wife’s waiver was valid because it was “explicit, voluntary, and made in good faith.” 497 F.3d at 428. The district court consequently granted summary judgment to the Estate and awarded it the benefits.

The United States Court of Appeals for the Fifth Circuit reversed and held that federal common law does not apply, because ERISA’s “antialienation” provision prohibits the wife’s divorce decree waiver. The antialienation provision prevents beneficiaries from transferring their pension plan benefits, including transfers through Domestic Relations Orders (”DRO”), such as divorce decrees. On the other hand, QDROs, which satisfy ERISA criteria, provide an exception to the antialienation provision and can be used by beneficiaries to transfer plan benefits. However, the divorce decree waiver at issue was not a QDRO. The Fifth Circuit consequently held that the wife’s waiver violated ERISA’s antialienation provision because the waiver constituted an “indirect” transfer from the wife to the Estate: When the wife relinquished her right to the benefits, the Estate, as the next beneficiary in line under the SIP, automatically received the right to them. According to the Fifth Circuit, however, the wife would have to have submitted a QDRO to transfer her interest in the pension benefits, because QDROs are the “sole exception” to the antialienation provision in cases of divorce.

The Court’s decision on this issue could have a significant impact on those who failed to prepare a QDRO to waive their pension benefits. Should the Court decide that the only valid means of waiving a pension is through a QDRO, the impact on attorneys will also be significant, as former clients will need QDROs to effect their settlement agreements.

Stay tuned….

Source: The Nat’l Legal Research Group’s “Lawletter.”

 

 

Jon D. McLaughlin, Esq.

Cannell & Maulson, P.C.

211 West Jefferson Street

Bloomington, Illinois 61701

(309) 828-5600

Jon@CannellandMaulson.com