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Always get assurance on the insurance beneficiaries

McCarthy Estate of McCarthy, 145 F. Supp. 3d 278 (S.D.N.Y. 2015)

Facts: A husband and wife were divorced in Florida in In an agreement incorporated into the decree, the husband agreed to maintain his wife and daughters as beneficiaries of $4 million in life insurance.

When the husband died in 2013, he had only $50,000 in life insurance payable to his former wife and daughters. He had another $500,000 policy, which was employer-provided, but he had named his girlfriend as beneficiary. He had also given almost $360,000 to the girlfriend during his lifetime.

The husband’s estate was insolvent and unable to pay damages. The wife filed suit against the girlfriend, seeking to enforce a constructive trust on the proceeds of the $500,000 policy.

Issue: Are the former wife and daughters entitled to a constructive trust on the policy proceeds?

Answer to Issue: Yes.

Summary of Rationale: The husband’s clear breach of the divorce decree was sufficient under state law to justify imposition of a constructive But the policy at issue was employer-provided and regulated by ERISA. Thus, the only question was whether state law was preempted by federal law.

Following Andochick v. Byrd, 709 F.3d 296 (4th Cir.2013), the court addressed the question which the Supreme Court refused to consider in footnote 10 of Kennedy, and held that ERISA does not preempt state law claims between claiming beneficiaries after payment of benefits by the plan administrator. “As many courts have held in the wake of that decision, after proceeds have been distributed, parties’ rights and equities may be determined without regard to ERISA because post- distribution suits do not interfere with any of those objectives.” McCarthy, 145 F. Supp. 3d at 288.

Observations:

McCarthy did not expressly cite VanderKam VanderKam, 776 F.3d 883 (D.C. Cir. 2015), or any of the other cases holding that ERISA does preempt postpayment causes of action between competing beneficiaries.

The girlfriend insisted upon representing herself, and then failed to comply with many court deadlines despite ample As a result, she was precluded from submitting evidence. This unusual procedural setting may reduce the persuasive value of the case, as applied in more traditional settings where both parties followed the rules.

It is not wise to assume that the Supreme Court will eventually accept the reasoning of Andochick and Kensinger, but it is possible that the court will do so. At present, Andochick and Kensinger are the majority position.

The former wife could have taken measures to protect herself, such as requiring the husband to produce proof that the insurance remained in Getting a QDRO may not have been an option, as it is unclear how many of the life insurance policies the husband owned at the time of divorce were employer-provided. Also, a QDRO might not have helped, as the $500,000 policy was clearly a new policy acquired after the divorce. The wife cannot reasonably be expected to run to state court and get a new QDRO every time the husband gets a new employer-provided policy.

It is not uncommon for former spouses, especially when their life expectancy is short, to refuse to comply with divorce decrees requiring maintenance of life insurance. This is an area in which enforcement options are unfortunately limited. Where possible, it might be better to transfer ownership of the policy to the spouse receiving the benefits, so that the former owning spouse cannot change the beneficiary or let the policy lapse. But this may not be possible for an employer-provided policy. In all cases, it is essential to obtain a QDRO where the insurance at issue is employer- provided.