Make sure your beneficiary designations are correct to avoid entanglement between your former spouse and your current spouse. Don’t invite that fight with poor planning!

I.R.C. § 414(p) and 29 U.S.C. § 1056

Morris v. Metropolitan Life Ins. Co., 751 F. Supp. 2d 955 (E.D. Mich. 2010)

(a) Facts: When the husband and the wife were divorced, the state court divorce decree extinguished all rights held by one in any life insurance of the other.  But the husband retained the wife as beneficiary of his employer-provided life insurance.  Upon his death, the plan paid the proceeds to the first wife, and the husband’s second wife sued to recovery the proceeds.

(b) Issue: Who is entitled to the proceeds?

(c) Answer to Issue: The first wife holds the proceeds in constructive trust for benefit of the second wife.

(d) Summary of Rationale: The state court’s divorce decree did not meet any of the requirements for a QDRO.  Thus, under Kennedy, the plan properly paid the first wife.

But that does not resolve the question of which wife should ultimately receive the benefits.  Under Kennedy’s rapidly-becoming-famous footnote 10, the Supreme Court held only that the plan must follow the beneficiary designation in the absence of a contrary QDRO.  The Court did not consider whether there might be other remedies, between the competing claimants themselves, not involving the plan.  In other words, the plan must follow the designation, but after the plan does that, it is possible that the designated beneficiary might have to pay the benefits to someone else.

Expressly invoking footnote 10, the Morris court held that the first wife held the proceeds in constructive trust for the second wife.  “Equity permits the imposition of a constructive trust upon the funds in such similar circumstances.”  Id. at 961.  The court relied expressly upon a similar holding in the pre-Kennedy case of Met. Life Ins. Co. v. Mulligan, 210 F. Supp. 2d 894 (E.D. Mich. 2002).

Important Discussion: The effect of footnote 10 in Kennedy is one of the hottest issues in ERISA law.  Some courts, like Morris, read footnote 10 as a license to reach an end result very different from the end result reached in Kennedy.  Other courts, like Boyd and Matschiner, are giving footnote 10 little or no attention.

The court should ignore footnote 10, of course, if the plaintiff files a claim only against the plan administrator.  But after Kennedy, suing the plan administrator is useless unless the beneficiary designation is contradicted by a valid QDRO.  Without a QDRO, the plan administrator is clearly required to follow the beneficiary designation, and to ignore all contrary orders and agreements from state courts.

When arguing against the beneficiary designation, therefore, it is utterly essential to file a claim against the designated beneficiary for payment of the proceeds or imposition of a constructive trust, without involving the plan in any way.  Under footnote 10, such a claim is clearly outside the parameters of the existing Kennedy decision, and there is at least a possibility that the claim may be successful.

But the claim may also be rejected.  Kennedy did not allow such claims; it merely refused to consider them.  As cases like Morris continue to multiply, the chances are good that the issue avoided in footnote 10 will be presented at least to the Circuit Courts.  If a split develops, and Boyd and Matschiner are some evidence that a split is likely, the issue may well return to the Supreme Court.