New York and Military Retirement vs. Disability Pay

In last month's newsletter we discussed a recent case in Texas in which the court attempted to protect the spouse of a military service member from having her share of her husband's military retirement cut off by the retiree's decision to opt for disability payments instead. In that case, Gillin v. Gillin, — S.W.3d —-, 2009 WL 4339164 (Tex.App.-San Antonio, 12/2/09), a Texas appellate court found the language of the couple's settlement agreement was in violation of federal law prohibiting state courts from distributing to a former spouse any portion of a retired service member's disability pension. Another case, this one decided by the Alaska Supreme Court (Young v. Lowery, 221 P3d 1006 (Alaska), struck down a determination that a husband's opting to take his retirement payments in the form of a disability pension was so wrongful that it created a constructive trust in his ex-wife's favor.

Is there nothing that can be done during the divorce process to help the military retiree's future ex-spouse to be certain to get the distribution ordered by the court?

New York Court Offers Alternative

An older case, decided in 1999, illustrates another work-around that succeeded in New York. In this case, Hoskins v. Skojec, 265 A.D.2d 706 (3d Dept., 1999), the Appellate Division, Third Department, concluded that contract law could be invoked to protect a non-service member spouse's right to a share of military retirement.

The parties were married just short of 40 years when they entered into a separation agreement in 1992. That agreement addressed the issues of distribution of assets and maintenance. It provided that the husband's monthly maintenance payment would be one half of the net difference between the parties' respective incomes, taking into consideration sources of income specified in the agreement, which included the income from working as well as form government sources of income. These government sources of income included both the husband's Air Force pension and any Veteran's Administration disability compensation. The parties further provided for adjustments in the maintenance payments based on increases or decreases in the income streams, except that at no time would “the
[h]usband's payment be less than one-half (1/2) of the government pension.” The husband retired from his job within a year of the agreement, so his spousal maintenance payments from that time forward had to come from his Air Force pension and veteran's disability benefits. The separation agreement was incorporated into, but not merged with, the judgment of divorce, which was granted in December 1993.

Breach of Contract

For four years the husband made the payments as ordered, but by 1998 he had stopped. When his ex-wife brought suit for breach of contract, Supreme Court granted her motion for summary judgment. The husband appealed, contending that the maintenance provision in the separation agreement was void because state courts are prohibited by the USFSPA from awarding any portion of a veteran's disability benefits as spousal maintenance.

The Third Department noted first that a separation agreement incorporated into but not merged with a divorce decree remains a separate and enforceable contract between the parties. See Merl v. Merl, 67 NY2d 359; Hewlett v. Hewlett, 243 AD2d 964, lv dismissed 91 NY2d 887. While courts are indeed prohibited by the terms of the USFSPA from ordering the payment of spousal maintenance from the proceeds of military disability benefits, the parties themselves are not so hampered. “The Federal statute at issue does not restrict a recipient of disability benefits from entering into a contract with a spouse regarding the dispersion of benefits received,” wrote the court. “Therefore, the parties in this case who voluntarily agreed to an allocation of defendant's disability compensation shall be obligated to abide by its terms” (emphasis provided).

Benefit of Counsel

Of importance was the fact that the husband had had the benefit of counsel prior to entering into the separation agreement, and he had ratified the agreement by complying with its terms and enjoying its benefits for four years prior to his breach.

The same outcome was reached six years later, in Steblein v. Bernard, 6 Misc.3d 1033(A) (Sup. Ct., Niagara Cty. 2005), when Supreme Court, Niagara County, applied the rule set out in Hoskins v. Skojec. The Steblein court found that the parties contracted for “Plaintiff to make certain payments to Defendant. Initially, this payment was to be made directly between the parties. After a QDRO was entered, the payment was to be made from Plaintiff's pension. Regardless of the source of the payment however, it remains a contractual obligation Plaintiff is bound to fulfill, as well as a benefit Defendant is entitled to receive. By unilaterally waiving his pension benefits, thus depriving Defendant of the expected fruits of the contract, Plaintiff breached the Agreement.” Although the contract had been breached, the military retiree was not off the hook. The money the non-military divorced spouse was due under the contract was still owed to her. In addition, because the wife would not have had to take the issue up before the court had it not been for her ex-husbands “improper and willful denial” of her entitlements under the agreement, the ex-husband was ordered to pay the wife's attorney fees.

The Wronged Spouse

Courts nationwide have grappled for years with the unfairness of allowing a military retiree to strip a former spouse of his or her rights to receive payments effectuating court-ordered marital property, maintenance or alimony distributions. The conclusion the Texas appellate court came to in Gillen leaves military spouses at a distinct disadvantage, as they have no control over how their disabled ex-spouses will receive their benefits, and they could be left out in the cold because of an ex-spouse's decisions. But is ordering a litigant not to reduce his retirement pay by opting for disability, as the Alaskan Supreme Court said the trial court could do, really a valid solution? It seems likely that a federal court, if asked to decide the issue on appeal, would determine as the Gillen court did that divorce decrees should not prohibit a military retiree from doing anything that federal law gives him or her the right to do. However, the second portion of the Young court's decision, in which it said the trial court could require the military retiree to indemnify his ex-wife for any amounts by which her payments were reduced due to his election of disability payments, has been advocated by other states' courts. See, e.g., Abernethy v. Fishkin, 699 So. 2d 235 (Fla. 1997).

In New York

For New York military spouses and their advocates, the most workable solution to the problems created by the USFSPA when disability replaces military retirement pensions lies in the separation agreement. That is, if a separation agreement can be reached. The fact that the military spouse, and not the court, is voluntarily encumbering his or her rights to receive disability in lieu of military retirement is the key.

It is obvious, however, that the New York non-military spouse will have to keep his or her fingers crossed in hope that, if the military retiree gets all or a large chunk of retirement funds in the form of disability payments, there will remain other assets from which payment can be sought. If not, the non-military spouse may just be out of luck.

Janice G. Inman, Esq., is Editor-in-Chief of this newsletter.

In last month's newsletter we discussed a recent case in Texas in which the court attempted to protect the spouse of a military service member from having her share of her husband's military retirement cut off by the retiree's decision to opt for disability payments instead. In that case, Gillin v. Gillin, — S.W.3d —-, 2009 WL 4339164 (Tex.App.-San Antonio, 12/2/09), a Texas appellate court found the language of the couple's settlement agreement was in violation of federal law prohibiting state courts from distributing to a former spouse any portion of a retired service member's disability pension. Another case, this one decided by the Alaska Supreme Court ( Young v. Lowery , 221 P3d 1006 (Alaska), struck down a determination that a husband's opting to take his retirement payments in the form of a disability pension was so wrongful that it created a constructive trust in his ex-wife's favor.

Is there nothing that can be done during the divorce process to help the military retiree's future ex-spouse to be certain to get the distribution ordered by the court?

New York Court Offers Alternative

An older case, decided in 1999, illustrates another work-around that succeeded in New York. In this case, Hoskins v. Skojec , 265 A.D.2d 706 (3d Dept., 1999), the Appellate Division, Third Department, concluded that contract law could be invoked to protect a non-service member spouse's right to a share of military retirement.

The parties were married just short of 40 years when they entered into a separation agreement in 1992. That agreement addressed the issues of distribution of assets and maintenance. It provided that the husband's monthly maintenance payment would be one half of the net difference between the parties' respective incomes, taking into consideration sources of income specified in the agreement, which included the income from working as well as form government sources of income. These government sources of income included both the husband's Air Force pension and any Veteran's Administration disability compensation. The parties further provided for adjustments in the maintenance payments based on increases or decreases in the income streams, except that at no time would “the
[h]usband's payment be less than one-half (1/2) of the government pension.” The husband retired from his job within a year of the agreement, so his spousal maintenance payments from that time forward had to come from his Air Force pension and veteran's disability benefits. The separation agreement was incorporated into, but not merged with, the judgment of divorce, which was granted in December 1993.

Breach of Contract

For four years the husband made the payments as ordered, but by 1998 he had stopped. When his ex-wife brought suit for breach of contract, Supreme Court granted her motion for summary judgment. The husband appealed, contending that the maintenance provision in the separation agreement was void because state courts are prohibited by the USFSPA from awarding any portion of a veteran's disability benefits as spousal maintenance.

The Third Department noted first that a separation agreement incorporated into but not merged with a divorce decree remains a separate and enforceable contract between the parties. See Merl v. Merl , 67 NY2d 359; Hewlett v. Hewlett , 243 AD2d 964, lv dismissed 91 NY2d 887. While courts are indeed prohibited by the terms of the USFSPA from ordering the payment of spousal maintenance from the proceeds of military disability benefits, the parties themselves are not so hampered. “The Federal statute at issue does not restrict a recipient of disability benefits from entering into a contract with a spouse regarding the dispersion of benefits received,” wrote the court. “Therefore, the parties in this case who voluntarily agreed to an allocation of defendant's disability compensation shall be obligated to abide by its terms” (emphasis provided).

Benefit of Counsel

Of importance was the fact that the husband had had the benefit of counsel prior to entering into the separation agreement, and he had ratified the agreement by complying with its terms and enjoying its benefits for four years prior to his breach.

The same outcome was reached six years later, in Steblein v. Bernard , 6 Misc.3d 1033(A) (Sup. Ct., Niagara Cty. 2005), when Supreme Court, Niagara County, applied the rule set out in Hoskins v. Skojec. The Steblein court found that the parties contracted for “Plaintiff to make certain payments to Defendant. Initially, this payment was to be made directly between the parties. After a QDRO was entered, the payment was to be made from Plaintiff's pension. Regardless of the source of the payment however, it remains a contractual obligation Plaintiff is bound to fulfill, as well as a benefit Defendant is entitled to receive. By unilaterally waiving his pension benefits, thus depriving Defendant of the expected fruits of the contract, Plaintiff breached the Agreement.” Although the contract had been breached, the military retiree was not off the hook. The money the non-military divorced spouse was due under the contract was still owed to her. In addition, because the wife would not have had to take the issue up before the court had it not been for her ex-husbands “improper and willful denial” of her entitlements under the agreement, the ex-husband was ordered to pay the wife's attorney fees.

The Wronged Spouse

Courts nationwide have grappled for years with the unfairness of allowing a military retiree to strip a former spouse of his or her rights to receive payments effectuating court-ordered marital property, maintenance or alimony distributions. The conclusion the Texas appellate court came to in Gillen leaves military spouses at a distinct disadvantage, as they have no control over how their disabled ex-spouses will receive their benefits, and they could be left out in the cold because of an ex-spouse's decisions. But is ordering a litigant not to reduce his retirement pay by opting for disability, as the Alaskan Supreme Court said the trial court could do, really a valid solution? It seems likely that a federal court, if asked to decide the issue on appeal, would determine as the Gillen court did that divorce decrees should not prohibit a military retiree from doing anything that federal law gives him or her the right to do. However, the second portion of the Young court's decision, in which it said the trial court could require the military retiree to indemnify his ex-wife for any amounts by which her payments were reduced due to his election of disability payments, has been advocated by other states' courts. See, e.g., Abernethy v. Fishkin , 699 So. 2d 235 (Fla. 1997).

In New York

For New York military spouses and their advocates, the most workable solution to the problems created by the USFSPA when disability replaces military retirement pensions lies in the separation agreement. That is, if a separation agreement can be reached. The fact that the military spouse, and not the court, is voluntarily encumbering his or her rights to receive disability in lieu of military retirement is the key.

It is obvious, however, that the New York non-military spouse will have to keep his or her fingers crossed in hope that, if the military retiree gets all or a large chunk of retirement funds in the form of disability payments, there will remain other assets from which payment can be sought. If not, the non-military spouse may just be out of luck.

Janice G. Inman, Esq., is Editor-in-Chief of this newsletter.