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Yes, the Government CAN Ignore Your Order

State Farm Life & Assurance Co. v. Goecks, F. Supp. 3d       , 2016 WL 1715205 (W.D. Wis. 2016)

Facts: A Wisconsin divorce decree provided:

The respondent [Gary] shall be required to maintain the petitioner [Sharon] as the primary, irrevocable beneficiary on one third of the face value of all his life insurance policies in effect as of the date of the final hearing or in the amount of Seventy Five Thousand Dollars ($75,000) of the face value of said policies, whichever sum is greater. Respondent shall provide the petitioner proof of said insurance and beneficiary designations. Petitioner shall pay the respondent the sum of Twenty Five Dollars ($25.00) per month toward the cost of said insurance. The parties further agree to designate the children as primary beneficiaries of all life insurance policies except as set forth above.  2016 WL 1715205, at *1. The divorce decree was not submitted to the employer for qualification as a QDRO.

The husband initially complied with the above provision, but later changed the beneficiary on some of his life insurance to his new wife. Upon his death, the insurers paid some of the benefits to the new wife, and interpleaded the remainder. Both wives asserted competing claims to the proceeds.

Of the various insurance policies at issue, one was an employer-provided policy regulated by ERISA.

Issue: Who is entitled to the proceeds from the employer-provided policy?

Answer to Issue: The husband’s wife at the time of his death.

Summary of Rationale: The court first held that the husband had breached the contract, rejecting a rather weak state law argument that the agreement only required the husband to name his former wife and children as a beneficiary of the insurance, and not as the exclusive beneficiary.

The employer-provided life insurance policy was part of a benefit plan, and it was therefore subject to ERISA. Benefits regulated by ERISA can be transferred only under terms of a QDRO. No QDRO was ever submitted. Thus, federal law preempted state law and barred enforcement of the decree with regard to the ERISA- regulated policy.

The husband’s new wife argued that the court could impose a constructive trust on the benefits, but the court rejected this claim under Melton v. Melton, 324 F.3d 941 (7th Cir. 2003), which held that ERISA preempted a constructive trust claim.

Important Note: ERISA is most commonly applied to retirement plans. But as Goecks demonstrates, ERISA also applies to employer-provided life insurance plans. Any order directing a party to change or not change the beneficiary of employer-provided life insurance is therefore enforceable against the plan only if it is a QDRO.

Problem: Goecks missed an issue. In Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285 (2009), in its infamous footnote 10, the Supreme Court would not rule on if state law rights of action could exist between beneficiaries who were competing under ERISA plans if the plan administrator was not involved. Since Kennedy, the circuits have split on whether competing beneficiaries can sue each other over the benefits outside of ERISA. For circuits allowing such action, see Estate of Kensinger v. URL Pharma, Inc., 674 F.3d 131 (3d Cir. 2012), and Andochick v. Byrd, 709 F.3d 296 (4th Cir. 2013). For circuits not allowing such actions, see VanderKam v. VanderKam, 776 F.3d 883 (D.C. Cir. 2015).

Goecks seemed to construe Melton v. Melton, 324 F.3d 941 (7th Cir. 2003), to prohibit constructive trust actions between competing beneficiaries after payment is made by the plan. But Kennedy, which was decided six years after Melton, viewed this issue as open. The Goecks court did not cite Kennedy, and acted as if nothing had changed since Melton. This was an incorrect assumption. The court was perfectly free to agree with the VanderKam side of the split, but the issue required more discussion than the court provided.

Lesson: Until and unless the Supreme Court positively adopts the Kensinger/Andochick side of the split, it is unwise to assume that a spouse has any remedy for failure to transfer any ERISA-regulated benefits unless a QDRO has been entered and submitted to the plan. State court orders dividing ERISA-regulated benefits, in the absence of a QDRO, may very well prove to be worthless.