High Court to Hear Arguments on ERISA Beneficiary Designation

In October 2008, the U.S. Supreme Court heard arguments regarding whether a qualified domestic relations order (QDRO) under the Employee Retirement Income Security Act trumps a woman's voluntary waiver of her ex-husband's pension benefits, an issue that has divided federal appeals courts and left divorce lawyers unsure how to advise clients.

South Texas College of Law (STCL) professor James Paulsen, who teaches courses on family law, marital property and federal courts, says Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, et al., 497 F.3d 426, 427'28 (5th Cir. 2007), should be a “cautionary tale” for lawyers advising their clients about what actions to take after a divorce.

Background

In 2007, the Fifth U.S. Circuit Court of Appeals held in Kennedy that ERISA's QDRO provision, 29 U.S.C. ' 1056(d)(B)(i), provides the only valid way a divorcing spouse can waive her right to receive her ex-husband's pension benefits under ERISA. The pension plan participant in Kennedy did not change his ex-wife's beneficiary designation by giving the plan administrator a QDRO, an order a court or government agency issues to transfer benefits. The Fifth Circuit found that the divorce decree did not waive the ex-wife's rights to the benefits.

Thompson & Knight partner David Furlow of Houston argued before the U.S. Supreme Court on behalf of Kari Kennedy, who seeks to recover $402,000 from the pension plan. Furlow says Kennedy is a test case, because the federal circuits have been split since 1990 on whether a QDRO is required to change a beneficiary designation. Furlow said the Fifth Circuit's decision also conflicts with the Texas Supreme Court's 5-4 decision in 2003's Keen v. Weaver. Writing for the majority in Keen, Justice Harriet O'Neill noted, “We do not believe that applying the federal common law of waiver implicates or interferes with ERISA's anti-alienation provision.”

Furlow noted that divorce lawyers in Texas do not know whether to follow the Fifth Circuit's ruling in Kennedy or the state supreme court's decision in Keen.

Two Ways to Win

Furlow's client, who is the independent executrix of her father's estate, has the federal government, as well as DuPont and its administrator, opposing her. However, they have taken different positions.

In its May 12 amicus curiae brief to the Supreme Court, the U.S. government argued that the Fifth Circuit “reached the correct result for the wrong reasons.” The government argued that “ERISA's provision forbidding assignment or alienation of pension benefits does not preclude a divorcing spouse from waiving her beneficiary interest in a pension plan.” The government also argued that the entry of a divorce decree purported to waive an ex-spouse's interest in the benefits “is neither necessary nor sufficient to accomplish that end.”

The federal circuit courts have taken very different positions on the issue. For example, the Seventh U.S. Circuit Court of Appeals in Chicago, in an en banc decision in 1990's Fox Valley & Vicinity Construction Workers Pension Fund v. Brown, 897 F2d 275 (7th Cir 1990), cert denied 498 US 820 [1990] held that in a court-approved separation agreement, ERISA did not pre-empt a wife's waiver of any interest in her husband's pension. Nevertheless, in 1990's McMillan v. Parrott, 913 F.2d 310, 311 (6th Cir.1990), the Sixth U.S. Circuit Court of Appeals in Cincinnati noted that ERISA requires a plan administrator to discharge his duties “in accordance with the documents and instruments governing the plan.”

The Fifth Circuit's Opinion

The Fifth Circuit's opinion provides the following background on the instant case: William Patrick Kennedy, a DuPont employee and participant in the company's savings and investment plan (SIP), signed a beneficiary-designation form in 1974, identifying his wife, Liv Kennedy, as the sole beneficiary of the plan. When the couple divorced in 1994, Liv agreed to be divested from the proceeds of her ex-husband's pension plan. William obtained a QDRO providing instructions for disbursement of his non-SIP employee benefits. However, he never obtained a QDRO for the SIP and never removed his wife as the beneficiary on that plan. William retired from DuPont in 1998 and died in 2001.

Kari Kennedy demanded the SIP funds be distributed to the estate, claiming that her mother Liv's beneficiary designation was invalid. DuPont refused, relying on William's beneficiary designation. The estate also requested that Liv relinquish her SIP interest, but she declined to do so and collected about $400,000. Kari sued DuPont and the plan administrator in 2004 in the U.S. District Court for the Eastern District in Beaumont, TX, alleging an ERISA claim and a state law breach-of-contract claim. DuPont subsequently filed a third-party claim against Liv Kennedy, who died in 2007.

U.S. Magistrate Judge Keith Giblin granted summary judgment to the estate, concluding that federal common law applied, and determining that Liv waived her right to her ex-husband's SIP benefits in the divorce decree and, as a matter of law, that decree constituted a valid waiver. DuPont and the plan administrator appealed to the Fifth Circuit.

The Fifth Circuit concluded that ERISA's anti-alienation provision, ' 1056(d)(1), controls in the case because William Kennedy's SIP was an ERISA pension plan. “In the marital-dissolution context, the QDRO provisions supply the sole exception to the anti-alienation provision; they exempt a state domestic-relations order determined to be a QDRO, under the standards set forth in ERISA,” Judge Rhesa Barksdale wrote for the Fifth Circuit panel in Kennedy. Judge Emilio Garza and Senior Judge Will Garwood joined in the decision. Kari Kennedy filed a petition for writ of certiorari, which the U.S. Supreme Court granted in February.

The High Court

Furlow's argument in Kennedy marked his first appearance before the High Court. Part of his preparations for arguments included an hour-long moot court on Oct. 2 at the Supreme Court Institute of the Georgetown University School of Law.

Kari argued in her May 8 brief on the merits to the Supreme Court that this case involves a waiver of benefits, not an assignment or alienation of pension benefits under ERISA's anti-alienation provision, 29 U.S.C. ' 1056(d)(1). Houston solo Stacy L. Kelly, Kari Kennedy's lead counsel, says, “We've always recognized waivers. You can waive your right to appeal your death sentence [in a habeas corpus writ application]. If you can waive that, surely you can waive your right to pension benefits.”

Mark I. Levy, counsel at Kilpatrick Stockton in Washington, DC, who argued on behalf of the plan administrator and E.I. DuPont De Nemours & Co., said, “The question in the case is not whether the designated beneficiary can relinquish her right to pension benefits. Instead, it's whether she has to comply with the procedures enacted by Congress in the ERISA statute in order to do so.” He declined further comment.

The plan administrator and DuPont argued in their July 8 response brief, “Where a divorcing spouse has been designated by her spouse as his beneficiary under a pension plan in which he participates, she can give up those rights in the divorce proceeding only by means of a valid QDRO.”

However, the U.S. government contends in its amicus brief to the Supreme Court that ERISA requires a retirement plan administrator to distribute benefits to the designated beneficiary or under the terms of the plan. “Thus, the appropriate mechanism for eliminating the beneficiary interest of an ex-spouse is for the participant to change the beneficiary designation in accordance with plan terms,” the government asserts in its brief. Erik Ablin, spokesman for the U.S. Department of Justice, which filed the government's amicus brief, declined comment.

Furlow says that William Kennedy may have felt that changing the beneficiary designation was unnecessary, because the Fifth Circuit held in 1994's Brandon v. Travelers Insurance Co., 18 F.3d 1321, that a divorce decree was a bona fide waiver of an ex-wife's right to welfare benefits ' in this case, her former spouse's insurance policy proceeds. The Fifth Circuit issued its decision in Brandon in April 1994, and the Kennedys divorced in June 1994, Furlow says.

DuPont and the plan administrator argue in their response brief to the Supreme Court that the federal government is wrong. They argue ERISA's anti-alienation provision barred the plan administrator from following the Kennedys' divorce decree. They further argue that the Kennedys' divorce decree was a nonqualified domestic order and that ERISA's QDRO provision prohibits pension plans from paying benefits based on such orders.

Paulsen, the STCL professor, says, “The federal government has weighed in with an interpretation of ERISA that is different from either party's approach.” In Paulsen's view, DuPont and the plan administrator now have two ways to win. Either a plan participant must obtain a QDRO to change the beneficiary, or the participant must follow the plan documents for making such a change, Paulsen says. Paulsen says Kennedy should remind lawyers to make sure, after a divorce, that the client takes any action that the client alone can take ' such as changing the beneficiary on a pension plan. “It will make life easier,” he says.

Mary Alice Robbins is a senior reporter for The Texas Lawyer, an Incisive Media sister publication of this newsletter in which this article first appeared.

In October 2008, the U.S. Supreme Court heard arguments regarding whether a qualified domestic relations order (QDRO) under the Employee Retirement Income Security Act trumps a woman's voluntary waiver of her ex-husband's pension benefits, an issue that has divided federal appeals courts and left divorce lawyers unsure how to advise clients.

South Texas College of Law (STCL) professor James Paulsen, who teaches courses on family law, marital property and federal courts, says Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, et al., 497 F.3d 426, 427'28 (5th Cir. 2007), should be a “cautionary tale” for lawyers advising their clients about what actions to take after a divorce.

Background

In 2007, the Fifth U.S. Circuit Court of Appeals held in Kennedy that ERISA's QDRO provision, 29 U.S.C. ' 1056(d)(B)(i), provides the only valid way a divorcing spouse can waive her right to receive her ex-husband's pension benefits under ERISA. The pension plan participant in Kennedy did not change his ex-wife's beneficiary designation by giving the plan administrator a QDRO, an order a court or government agency issues to transfer benefits. The Fifth Circuit found that the divorce decree did not waive the ex-wife's rights to the benefits.

Thompson & Knight partner David Furlow of Houston argued before the U.S. Supreme Court on behalf of Kari Kennedy, who seeks to recover $402,000 from the pension plan. Furlow says Kennedy is a test case, because the federal circuits have been split since 1990 on whether a QDRO is required to change a beneficiary designation. Furlow said the Fifth Circuit's decision also conflicts with the Texas Supreme Court's 5-4 decision in 2003's Keen v. Weaver. Writing for the majority in Keen, Justice Harriet O'Neill noted, “We do not believe that applying the federal common law of waiver implicates or interferes with ERISA's anti-alienation provision.”

Furlow noted that divorce lawyers in Texas do not know whether to follow the Fifth Circuit's ruling in Kennedy or the state supreme court's decision in Keen.

Two Ways to Win

Furlow's client, who is the independent executrix of her father's estate, has the federal government, as well as DuPont and its administrator, opposing her. However, they have taken different positions.

In its May 12 amicus curiae brief to the Supreme Court, the U.S. government argued that the Fifth Circuit “reached the correct result for the wrong reasons.” The government argued that “ERISA's provision forbidding assignment or alienation of pension benefits does not preclude a divorcing spouse from waiving her beneficiary interest in a pension plan.” The government also argued that the entry of a divorce decree purported to waive an ex-spouse's interest in the benefits “is neither necessary nor sufficient to accomplish that end.”

The federal circuit courts have taken very different positions on the issue. For example, the Seventh U.S. Circuit Court of Appeals in Chicago, in an en banc decision in 1990's Fox Valley & Vicinity Construction Workers Pension Fund v. Brown , 897 F2d 275 (7th Cir 1990), cert denied 498 US 820 [1990] held that in a court-approved separation agreement, ERISA did not pre-empt a wife's waiver of any interest in her husband's pension. Nevertheless, in 1990's McMillan v. Parrott , 913 F.2d 310, 311 (6th Cir.1990), the Sixth U.S. Circuit Court of Appeals in Cincinnati noted that ERISA requires a plan administrator to discharge his duties “in accordance with the documents and instruments governing the plan.”

The Fifth Circuit's Opinion

The Fifth Circuit's opinion provides the following background on the instant case: William Patrick Kennedy, a DuPont employee and participant in the company's savings and investment plan (SIP), signed a beneficiary-designation form in 1974, identifying his wife, Liv Kennedy, as the sole beneficiary of the plan. When the couple divorced in 1994, Liv agreed to be divested from the proceeds of her ex-husband's pension plan. William obtained a QDRO providing instructions for disbursement of his non-SIP employee benefits. However, he never obtained a QDRO for the SIP and never removed his wife as the beneficiary on that plan. William retired from DuPont in 1998 and died in 2001.

Kari Kennedy demanded the SIP funds be distributed to the estate, claiming that her mother Liv's beneficiary designation was invalid. DuPont refused, relying on William's beneficiary designation. The estate also requested that Liv relinquish her SIP interest, but she declined to do so and collected about $400,000. Kari sued DuPont and the plan administrator in 2004 in the U.S. District Court for the Eastern District in Beaumont, TX, alleging an ERISA claim and a state law breach-of-contract claim. DuPont subsequently filed a third-party claim against Liv Kennedy, who died in 2007.

U.S. Magistrate Judge Keith Giblin granted summary judgment to the estate, concluding that federal common law applied, and determining that Liv waived her right to her ex-husband's SIP benefits in the divorce decree and, as a matter of law, that decree constituted a valid waiver. DuPont and the plan administrator appealed to the Fifth Circuit.

The Fifth Circuit concluded that ERISA's anti-alienation provision, ' 1056(d)(1), controls in the case because William Kennedy's SIP was an ERISA pension plan. “In the marital-dissolution context, the QDRO provisions supply the sole exception to the anti-alienation provision; they exempt a state domestic-relations order determined to be a QDRO, under the standards set forth in ERISA,” Judge Rhesa Barksdale wrote for the Fifth Circuit panel in Kennedy. Judge Emilio Garza and Senior Judge Will Garwood joined in the decision. Kari Kennedy filed a petition for writ of certiorari, which the U.S. Supreme Court granted in February.

The High Court

Furlow's argument in Kennedy marked his first appearance before the High Court. Part of his preparations for arguments included an hour-long moot court on Oct. 2 at the Supreme Court Institute of the Georgetown University School of Law.

Kari argued in her May 8 brief on the merits to the Supreme Court that this case involves a waiver of benefits, not an assignment or alienation of pension benefits under ERISA's anti-alienation provision, 29 U.S.C. ' 1056(d)(1). Houston solo Stacy L. Kelly, Kari Kennedy's lead counsel, says, “We've always recognized waivers. You can waive your right to appeal your death sentence [in a habeas corpus writ application]. If you can waive that, surely you can waive your right to pension benefits.”

Mark I. Levy, counsel at Kilpatrick Stockton in Washington, DC, who argued on behalf of the plan administrator and E.I. DuPont De Nemours & Co., said, “The question in the case is not whether the designated beneficiary can relinquish her right to pension benefits. Instead, it's whether she has to comply with the procedures enacted by Congress in the ERISA statute in order to do so.” He declined further comment.

The plan administrator and DuPont argued in their July 8 response brief, “Where a divorcing spouse has been designated by her spouse as his beneficiary under a pension plan in which he participates, she can give up those rights in the divorce proceeding only by means of a valid QDRO.”

However, the U.S. government contends in its amicus brief to the Supreme Court that ERISA requires a retirement plan administrator to distribute benefits to the designated beneficiary or under the terms of the plan. “Thus, the appropriate mechanism for eliminating the beneficiary interest of an ex-spouse is for the participant to change the beneficiary designation in accordance with plan terms,” the government asserts in its brief. Erik Ablin, spokesman for the U.S. Department of Justice, which filed the government's amicus brief, declined comment.

Furlow says that William Kennedy may have felt that changing the beneficiary designation was unnecessary, because the Fifth Circuit held in 1994's Brandon v. Travelers Insurance Co. , 18 F.3d 1321, that a divorce decree was a bona fide waiver of an ex-wife's right to welfare benefits ' in this case, her former spouse's insurance policy proceeds. The Fifth Circuit issued its decision in Brandon in April 1994, and the Kennedys divorced in June 1994, Furlow says.

DuPont and the plan administrator argue in their response brief to the Supreme Court that the federal government is wrong. They argue ERISA's anti-alienation provision barred the plan administrator from following the Kennedys' divorce decree. They further argue that the Kennedys' divorce decree was a nonqualified domestic order and that ERISA's QDRO provision prohibits pension plans from paying benefits based on such orders.

Paulsen, the STCL professor, says, “The federal government has weighed in with an interpretation of ERISA that is different from either party's approach.” In Paulsen's view, DuPont and the plan administrator now have two ways to win. Either a plan participant must obtain a QDRO to change the beneficiary, or the participant must follow the plan documents for making such a change, Paulsen says. Paulsen says Kennedy should remind lawyers to make sure, after a divorce, that the client takes any action that the client alone can take ' such as changing the beneficiary on a pension plan. “It will make life easier,” he says.

Mary Alice Robbins is a senior reporter for The Texas Lawyer, an Incisive Media sister publication of this newsletter in which this article first appeared.