Kennedy v. Plan Adm. for Dupont Savings

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Authorship: Ruth Stevenson

Contents

[edit] Briefs and Documents

Docket: 07-636

Issue: Whether ERISA’s Qualified Domestic Relations Order provision is the only valid way a divorcing spouse can waive her right to receive her ex-husband’s pension benefits under ERISA.

Merit briefs

Amicus briefs

Oral Argument: Transcript

Decision: Affirmed in an opinion by Justice Souter

[edit] Pre-Argument Articles

[edit] Argument Preview

In Kennedy v. Plan Administrator for Dupont Savings and Investment Plan, the Supreme Court will decide whether ERISA’s Qualified Domestic Relations Order (QDRO) provision is the only method by which a divorcing spouse may waive her right to receive her ex-husband’s pension benefits.

[edit] Background

Consistent with its stated purpose of protecting the rights of employees to receive their retirement benefits, ERISA contains an “anti-alienation” provision—largely intended to protect such assets from creditors—which prohibits the assignment of pension benefits to any individual other than the plan participant. One of the limited exceptions to the anti-alienation provision is the QDRO, which is basically a court order issued in a domestic relations case that assigns retirement benefits to someone other than the plan participant. A QDRO is generally used to assign a participant’s rights to pension plan assets to an ex-spouse as part of the division of marital assets.

William P. Kennedy was an employee at Dupont and a participant in its savings and investment plan (SIP). In 1974, William Kennedy signed a beneficiary-designation form designating Liv Kennedy, his wife at the time, as the SIP’s sole beneficiary. The two divorced in 1994. Pursuant to the divorce decree, Liv Kennedy agreed to forfeit “all right, title, interest, and claim” to William Kennedy’s plan assets. In addition to Liv Kennedy’s divorce waiver, the divorce court also approved a QDRO to disburse William Kennedy’s assets held in non-SIP employment benefit plans, as well as some SIP assets not in dispute in this case. However, a separate QDRO was never submitted for the remaining SIP assets, and William Kennedy never replaced Liv Kennedy as the SIP’s sole beneficiary. After William Kennedy died in 2001, his assets from the SIP plan were distributed to Liv Kennedy pursuant to her designation as the plan’s beneficiary. Kari Kennedy, the daughter of William Kennedy and the executrix of his estate, asked Liv Kennedy to relinquish her rights to the SIP assets. When she refused, the estate filed suit against Dupont, claiming that Liv Kennedy waived her rights to the SIP assets through the previous divorce decree and that Dupont had thus incorrectly distributed the plan benefits.

The U.S. District Court for the Eastern District of Texas granted summary judgment for the estate. It first held that federal common law allows an ERISA beneficiary to waive his or her rights to plan assets “provided that the waiver is explicit, voluntary, and made in good faith.” The court found that Liv Kennedy’s waiver of benefits met this test. The court also held that an ex-spouse’s waiver of benefits does not amount to an assignment or alienation and thus does not violate ERISA’s anti-alienation provision.

On appeal, the Fifth Circuit reversed. In that court’s view, the federal common law waiver approach was “in tension” with the “detailed, careful and comprehensive QDRO scheme” outlined by ERISA, which provides a specific statutory scheme for addressing a spouse’s interest in plan benefits. Accordingly, when the QDRO mechanism is not invoked, “there is no basis to formulate a federal common law rule.” Furthermore, the court noted, requiring Dupont to recognize the divorce decree as a waiver would determine rights to plan assets in a manner not authorized by the QDRO provision and would thus conflict with ERISA’s anti-alienation requirement.

[edit] Petition for Certiorari

Kennedy filed a petition for writ of certiorari, arguing that this case presents an opportunity for the Court to resolve the question whether ERISA’s anti-alienation provision and its QDRO provision allow a non-participant beneficiary to waive rights to plan benefits through other means besides a QDRO, such as in a divorce-court waiver.

According to the petition, the courts of appeals are divided in their approach to the interpretation of voluntary waivers. First, the petition asserts that courts are divided over whether federal common law or plan documents determine if an ex-spouse’s voluntary waiver of benefits prevails over ERISA’s anti-alienation provision. The petition further argues that courts have recently split over a “QDRO-one form of waiver” approach and a “QDRO is the only waiver” approach. Those courts adhering to the “one form of waiver” approach allow a pension plan beneficiary to waive benefits through a divorce decree, while those following the “only waiver” approach hold that ERISA’s QDRO provision, when read in light of its anti-alienation provision, bars the enforcement of divorce-court waivers. The petition cites the Seventh Circuit as supporting the “one form of waiver” approach, with the Third, Fifth, Eighth and Ninth Circuits adhering to the “only waiver” approach.

The petition argues that the Fifth Circuit erred in applying the “QDRO is the only waiver” approach, as the “QDRO-one form of waiver” approach is aligned more closely with ERISA’s intent of providing participants with expected benefits. Allowing QDROs as one form of waiver instead of the sole form of waiver also comports with the QDRO provision itself, Kennedy argues, as this provision was intended only to clarify that QDROs constitute a permissible form of waiver notwithstanding ERISA’s anti-alienation provision, rather than that such orders preclude other methods of waiver. (The petition also challenges the Fifth Circuit’s test for awarding attorney’s fees under ERISA, but the court did not grant certiorari on this issue.)

Opposing certiorari, the Plan contends that the Fifth Circuit correctly held that ERISA’s anti-alienation provision prohibits resort to the federal common law of waiver in pension benefit cases. The Plan asserts that the law in this area is settled and in no need of clarification. Indeed, the Plan argues, many of the cases cited by petitioner were outdated and clarified in Boggs v. Boggs, in which the court definitively applied ERISA’s anti-alienation provision to pension plan beneficiaries. Moreover, the Plan argues, the Fifth Circuit cases cited by petitioner that resort to the common law of waiver are “simply inapposite” as they involved benefits under welfare plans, to which the anti-alienation provision of ERISA does not apply. Lastly, the Plan characterizes this case not as resting on a statutory “gap” in need of interpretation but on the failure of the parties to either issue a QDRO directing the entirety of the SIP’s payments or to designate someone besides Liv Kennedy as William Kennedy’s sole beneficiary under the SIP.

The Supreme Court granted certiorari on February 19, 2008, limited to the question whether a QDRO is the only valid way a divorcing spouse can waive the right to receive her ex-husband’s pension benefits under ERISA.

[edit] Merits Briefs

In her brief on the merits, Kennedy begins by focusing on the legislative intent of ERISA and its QDRO provision. She argues that because ERISA was intended to develop a federal common law, not to supersede it, ERISA should not preclude the enforcement of waivers enforceable under federal common law. Moreover, she distinguished Boggs, in which the court did find ERISA preemption, as involving a state statute rather than a common law waiver of benefits.

Kennedy also interprets ERISA’s anti-alienation provision as prohibiting the assignment of pension benefits and not the waiver of such benefits, arguing that “assignment” is legally distinct from the concept of “waiver.” ERISA’s QDRO provision thus does not bar the voluntary arms-length waiver of pension benefits, Kennedy argues, as this is neither an assignment nor an alienation.

Kennedy then turns to the Fifth Circuit’s decision, arguing that it aligned itself with courts applying the “QDRO is the only waiver” approach and that the case law on the subject remains unclear. Furthermore, Kennedy argues, the Fifth Circuit’s holding overrode the Kennedys’ reasonable expectations insofar as Liv Kennedy had voluntarily and knowingly waived her rights to the SIP benefits in a court-approved divorce decree. Applying a flexible common-law analysis, instead of a “QDRO is the only waiver” approach would, according to Kennedy, ensure that such reasonable expectations of plan participants, heirs and beneficiaries would be respected. Finally, Kennedy asserts that enforcing voluntary waivers of ERISA benefits under a common-law standard will not increase the burden on plan administrators because it is “one, simple, uniform, federal common law rule.”

In its brief on the merits, the Plan dismisses Kennedy’s support of a federal common law approach, noting that the development of a common law is inappropriate when Congress has already spoken on the issue. In the view of the Plan, three main provisions of ERISA invalidate a waiver of pension benefits in the form of a non-qualified domestic relations order, such as the divorce decree in this case. The first is the anti-alienation provision of ERISA, which prohibits an assignment or alienation of the beneficiary’s pension benefits to another party. The Plan disputes Kennedy’s argument that a waiver does not constitute an assignment, countering that because Liv Kennedy’s waiver of benefits under the SIP would necessarily result in their assignment to another beneficiary, the waiver in this case would not be exempt from the anti-alienation provision.

Even if the waiver in this case did not constitute an assignment, the Plan argues, the QDRO provision would still prohibit the plan from denying Liv Kennedy the SIP benefits, as it provides that if an order is not a QDRO, a plan “shall pay” benefits as “if there had been no order.” In addition, the Plan argues, following the divorce decree would violate ERISA preemption.

Lastly, the Plan briefly addresses ERISA’s “plan documents” requirement, which mandates that benefits be paid in accordance with the terms of the plan. Here, respondents note, the plan named Liv Kennedy as the SIP beneficiary and thus paying her the SIP benefits was in accordance with the plan documents requirement.

The United States and the AARP both filed amicus briefs in support of neither party. In the view of the United States, “the court of appeals reached the correct result for the wrong reason.” The United States agrees with Kennedy that a waiver of pension benefits does not constitute an assignment or alienation and furthermore, a QDRO is not required for such a “bare” waiver of rights. Yet, the court of appeals reached the correct decision, the United States reasons, because recognizing the divorce decree waiver while Liv Kennedy remained listed as the SIP’s sole beneficiary would force the plan administrator to distribute assets in a manner contrary to the plan documents. The AARP similarly contends that because the petitioner was not a beneficiary under the plan documents she was accordingly not entitled to receive benefits under the plan.

Kennedy’s reply brief emphasizes three main assertions. Kennedy begins by arguing that Congress did not elect to prohibit divorcing spouses from “executing voluntary, court-approved waivers” of pension benefits. In support of this assertion, Kennedy argues that Congress intended to distinguish between the concepts of assignment and alienation and the concept of waiver, and that ERISA’s spendthrift statute prohibits only the former. Kennedy then asserts that ERISA’s QDRO provision is intended to target court orders and not voluntary settlement agreements such as the one entered into by Liv Kennedy. Kennedy further looks to legislative history and the Treasury Department’s interpretation of “assignment” and “alienation” to argue their distinction from the concept of voluntary waiver.

[edit] Oral Argument Recap

David A. Furlow, counsel for petitioner, began by stating he would only address whether a QDRO is the only way an ex-spouse may waive her rights to her ex-spouse’s pension benefits. The Justices then began peppering Furlow with questions concerning the plan documents issue, a question that the Court had originally declined to hear, and the issue enjoyed a fair amount of the case’s argument, with Justices Scalia and Ginsburg in fact suggesting that the question should have been granted certiorari. Furlow suggested if the Court felt the plan documents approach should be considered, then the proper procedure would be to remand the case to the Fifth Circuit. Justice Breyer and Justice Scalia both noted little would be gained from a remand, as the Fifth Circuit already has case law on the plan documents issue.

Justice Kennedy stated he felt it made no sense to ignore the plan documents approach, as Dupont’s plan contained a specific procedure for changing the beneficiary of the plan, a procedure William Kennedy did not follow. Furlow argued that since Liv Kennedy had already waived her rights to the SIP benefits, William Kennedy felt no need to fill out a change in beneficiary form. At the time, Furlow continued, William Kennedy’s counsel was acting under the authority of Brandon v. Travelers Insurance, upholding the common law of waiver. Justice Roberts voiced concerns that plan administrators would have no way of knowing who should receive plan benefits under this approach. Furlow argued that concern did not apply here, because Dupont was aware of Liv Kennedy’s waiver of the SIP benefits.

Furlow then addressed the issue properly before the court, that of whether Liv Kennedy might have waived her rights to the SIP benefits without a QDRO. Furlow argued that a QDRO is necessary only for a transfer of benefits. Since Liv Kennedy merely waived her benefits, he continued, this did not constitute a transfer at all and thus a QDRO was not necessary. Chief Justice Roberts again noted his concern that plan administrators would have difficulty following this rule, stating that “the easiest, most administrable rule is to say whoever’s name appears [on the beneficiary designation] gets the money.” Justice Roberts was particularly concerned with the administrative ease of ERISA plans as employers are not obligated to establish them in the first place.

Leondra R. Kruger, Assistant to the Solicitor General, argued on behalf of the United States as amicus curiae. Kruger stated first that the United States agreed with the petitioner that the Fifth Circuit misinterpreted both the anti-alienation provision and the QDRO exception. However, the United States disagreed that a plan administrator might be required to comply with divorce waivers when those waivers conflict with the beneficiary designation the plan administrator has on file. The Court was again concerned with the lack of a grant of certiorari on the plan documents question. The Court asked Ms. Kruger if she was aware of any case in which the court explicitly did not grant cert. on an issue but then nevertheless decided that issue in court. Ms. Kruger was not, but noted that both the petitioner and respondent briefed the plan documents question. She then emphasized the important statutory interests that the plan documents approach protects -- certainty and administrative ease for ERISA plans. Ms. Kruger asked the Court to follow this approach either by affirming the judgment of the court of appeals on alternative grounds or to remand for further proceedings.

Mark Levy argued on behalf of the Plan, and followed the previous arguments by beginning with the plan documents issue. Levy argued it was well within the discretion of the Court to find for the Plan on the plan documents approach as alternative grounds for affirming the decision of the court of appeals. Levy cited the case of Piper Aircraft v. Rayno, 454 U.S. 235, in which the Court limited its grant of certiorari but then decided the case on a question that was not presented. Justice Roberts disagreed with Levy’s argument, since in the case at hand, the Court explicitly rejected certiorari on the plan documents question. Levy then moved on to the QDRO argument properly before the Court. Levy argued that, according to the statute, an order is either a qualified order or a non-qualified order, and plan administrators may only pay benefits in accordance with a qualified order. He emphasized this is to ensure ease of compliance so that a plan administrator could either make payments in accordance with the plan or follow a QDRO. Justice Breyer then hypothesized that, since this was a case of a waiver, the QDRO non-QDRO distinction did not apply. Levy countered that this went to the question of what constituted an assignment or alienation, which he then addressed.

Levy argued that even though the dispute involved a waiver of benefits, this still constituted an alienation. He noted the point of the anti-alienation provision was to prevent individuals from “trading off” pension benefits for immediate economic gain. Levy argued that this was exactly what Liv Kennedy did—in return for relinquishing her pension benefits, she received a car and other benefits from her divorce. What’s more, he continued, divorcing parties are not foreclosed from alienating pension benefits but must simply follow certain procedures, the two possible ones here being a QDRO or a change of beneficiary designation form.

On rebuttal, Furlow reemphasized that in this case Dupont had the divorce decree and could see the “knowing, voluntary waiver” of Liv Kennedy, yet instead elected to make payments according to the plan documents. He argued this was a calculated move to bring this as a test case before the Court. Furlow then ended by noting that the plan does not define beneficiary designations as official plan documents, and thus even when relying on the plan documents approach payments should not have been made to Liv Kennedy.

[edit] Opinion Analysis

Lyle Denniston originally wrote the following for SCOTUSblog.

The Supreme Court settled two issues of workers’ benefits law on Monday, giving mostly clear directions to employee plan managers on how they are to deal with the consequences of divorce of a worker. In general, the Court said, an administrator must simply ”look at the plan documents and records conforming to them” to find out who is to be paid the benefits; there is no need, it added, to go to court for the answer.

Along the way toward that ruling, the Court made these two rulings, both resolving conflicts that had built up in lower courts over spousal rights once divorce has occurred: first, the Court made clear that a former spouse can give up the right to benefits by agreeing to do so as part of a divorce decree; but, second, the ultimate question of whether the ex-spouse was entitled to the benefits is to be decided by the specific terms of the plan — in short, what the documents say.

The Court, however, did leave open for the future a related question: if an ex-spouse is handed the benefits by a plan manager, might they still have to be surrendered, once the payout was completed? A footnote indicated that the Court on Monday was only resolving how federal benefit law applied to the initial distribution of plan payments, not their subsequent fate.

The case of Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (07-636) was another in the Court’s ongoing attempts to sort out the sometimes vexing language of the Employee Retirement Income Security Act. Although that law has been in effect for 34 years, not a Term of the Court seems to go by without a new test of what it actually means.

In the Kennedy case, Kari Kennedy. the administrator of her father William’s estate, was trying to recover for the estate some $402,000 that had been paid to Liv Kennedy, the divorced wife, because the ex-spouse had joined in a divorce decree in 1994 giving up all right to any of William’s pension or other work-related benefits. William Kennedy was covered by the savings and investment plan for employees of the DuPont Co.; Kennedy worked for the company in Houston.

Liv Kennedy had been named the beneficiary of William’s investment plan assets, should he die. After the divorce in 1994, William did not remove his former wife as the beneficiary. The plan documents provided an easy way for him to do so, but he did not. Following the plan, the administrator sent the money to Liv. (Liv Kennedy died in 2007, but that did not settle the issue over the proceeds paid to her.)

The husband’s estate sued, claiming that Liv surrendered her rights under the divorce decree. Ultimately, the estate lost in the Fifth Circuit Court. Liv Kennedy’s forfeiture at divorce, the Circuit Court ruled, would have amounted to an illegal diversion of benefits to someone else, in violation of ERISA’s provision against such diversion (or “alienation”). A state court divorce decree, the Circuit Court said, is technically not the kind of paper diversion of plan assets that ERISA allows because it was not a “qualified domestic relations order,” in the phrasing of ERISA.

Other Circuit Courts, however, had ruled that a divorce decree could amount to a waiver of benefits, even if it wasn’t a domestic relations order of a kind specified by ERISA.

The Supreme Court agreed to hear Kari Kennedy’s petition, to sort out that conflict. But, as Justice Souter noted in Monday’s opinion, “we subsequently realized that this case implicates the further split” over who was to be paid the benefits if a divorce decree was “inconsistent with plan documents.” Further briefing was ordered.

Ruling against the estate, the Court first ruled that, under ERISA, a divorcing spouse could waive plan benefits through a divorce decree under state law. Consulting the law of trusts, the Justices concluded that an ex-spouse can disclaim an interest in benefits during a divorce proceeding. Disagreeing with the Fifth Circuit, the Court said “we think that the better view is that [Liv’s] waiver” was not an alienation or assignment that was illegal under ERISA.

Going on to the post-argument issue it had added, the Court said “the question remains whether the plan administrator was required to honor Liv’s waiver [in the divorce] with the consequence” that the benefits should have been paid to the estate. “We hold that it was not, and that the plan administrator did its statutory ERISA duty by paying the benefits to Liv in conformity with the plan documents.”

Applying “a straightforward rule of hewing to the directives of the plan documents,” the Court found that William’s failure to drop Liz as his beneficiary on the investment plan, as plan documents allowed him to do but which he did not do, ended the matter so far as the plan distribution was concerned. It concluded: “William’s designation of Liv as his beneficiary was made in the way required; Liv’s waive was not.”

The victory for ex-spouses in Liv Kennedy’s situation, though, may not be complete. The Court said explicitly in footnote 10 that it was leaving open the question of whether the estate could have sued to recover the benefits from Liv after she received them. The footnote mentioned prior rulings that seemed to say that a prior contractual agreement to forfeit funds may be enforceable after the distribution without violating ERISA; once the money is paid out, it loses its ERISA protection, those rulings had indicated.

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