Kennedy v. Plan Adm. for DuPont Savings (07-636)

Oral argument: Oct. 7, 2008

Appealed from: United States Court of Appeals, Fifth Circuit (Aug. 15, 2007)

EMPLOYEE RETIREMENT INCOME SECURITY ACT ("ERISA"), PENSION PLAN, QUALIFIED DOMESTIC RELATIONS ORDER ("QDRO"), ANTI-ALIENATION, COMMON LAW

Under the federal Employee Retirement Income Security Act ("ERISA"), a divorcing spouse can waive the right to an ex-spouse's pension benefits by obtaining a Qualified Domestic Relations Order ("QDRO"). When William and Liv Kennedy divorced, Liv voluntarily waived her right to receive William’s E.I. du Pont de Nemours and Company pension benefits but did not submit a QDRO for the DuPont benefits. Upon William’s death, DuPont disbursed the pension benefits to Liv, claiming that Liv’s non-QDRO waiver was invalid under ERISA's anti-alienation provision. William’s estate sued DuPont to recover William’s pension benefits, contending that obtaining a QDRO is one, but not the only, exception to ERISA's anti-alienation provision, and that Liv’s waiver was valid under applicable federal common law. In deciding this case, the Supreme Court will determine whether a divorcing spouse must obtain a QDRO to waive his or her right to receive an ex-spouse's pension benefits under ERISA.

· [Question(s) presented]

· [Issue(s)]

· [Facts]

· [Discussion]

· [Analysis]

Question(s) presented

Was the Fifth Circuit correct in concluding that ERISA's Qualified Domestic Relations Order provision, 29 U.S.C. § 1056(d)(3)(B)(i), is the only valid way a divorcing spouse can waive her right to receive her ex-husband's pension benefits under ERISA?

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Issue(s)

Must a divorcing spouse obtain a Qualified Domestic Relations Order to waive the right to receive an ex-spouse's pension benefits under the federal Employee Retirement Income Security Act ("ERISA"), or is a voluntary waiver of those benefits sufficient?

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Facts

William Kennedy was an employee of E.I. du Pont de Nemours and Company and participated in its employee benefit plans, including its savings and investment plan (“SIP”). See Kennedy v. Plan Adm’r for DuPont Sav. & Inv. Plan, 497 F.3d 426, 427–28 (5th Cir. 2007). The SIP is a pension plan governed by the Employee Retirement Income Security Act (“ERISA”), a federal statute that regulates private employers' pension and welfare plans. See 29 U.S.C. § 1002(3). William married Liv Kennedy in 1971 and designated her as the sole beneficiary of his SIP benefits in 1974. See Kennedy, 497 F.3d at 427. In 1994, William and Liv filed for divorce in Texas state court. See id.at 427–28. In their final divorce decree, Liv waived her interest in the SIP benefits. See id. After the divorce, however, William never removed or replaced Liv as his SIP beneficiary. See id.at 428.

William retired from DuPont in 1998 and died in 2001. See Kennedy, 497 F.3d at 428. Kari Kennedy, William and Liv’s daughter, became executrix of his estate ("the Estate"). See id. Acting for the Estate, Kari requested William’s SIP benefits from DuPont, arguing that Liv had waived her right to the benefits in the divorce decree and that the Estate was the next beneficiary in line under the SIP. See Brief for Petitioner at 5–6. DuPont denied this request and instead paid the approximately $400,000 SIP balance to Liv as William's designated beneficiary. See Kennedy, 497 F.3d at 428.

The Estate sued DuPont for recovery of the SIP benefits under ERISA, 29 U.S.C. § 1132(a)(1)(B), in the U.S. District Court for the Eastern District of Texas. Kennedy v. Plan Adm’r for DuPont Sav. & Inv. Plan, 497 F.3d at 428. ERISA federal law preempts state laws pertaining to employee benefit plans. See 29 U.S.C. § 1144(a). Therefore, the text of ERISA is generally applied to determine such cases. See Kennedy, 497 F.3d at 429. If ERISA is silent on an issue, however, then federal common law is applied instead. See id.The district court applied federal common law, under which Liv's waiver was valid because it was "explicit, voluntary, and made in good faith."Id. The district court consequently granted summary judgment to the Estate and awarded it the benefits. See id. at 428.

The United States Court of Appeals for the Fifth Circuit reversed and held that federal common law does not apply because ERISA's "anti-alienation" provision prohibits Liv's divorce decree waiver. See id. The anti-alienation provision prevents beneficiaries from transferring their pension plan benefits, including transfers through Domestic Relations Orders ("DRO"), such as divorce decrees. See 29 U.S.C. § 1056(d). See alsoBrief for Petitioner at 17–19. However, certain orders that satisfy ERISA criteria, called Qualified Domestic Relations Orders ("QDRO"), provide an exception to the anti-alienation provision and can be used by beneficiaries to transfer plan benefits. See 29 U.S.C. §1056(d)(3)(A), (B). Liv's divorce decree waiver was not a QDRO. See Kennedy, 497 F.3d at 428. The Fifth Circuit consequently held that Liv's waiver violated ERISA's anti-alienation provision, because the waiver constituted an "indirect" transfer from Liv to the Estate. See id.at 430. When Liv relinquished her right to the benefits, the Estate automatically received the right to the benefits instead because it was the next beneficiary in line under the SIP. See id. According to the Fifth Circuit, Liv needed to submit a QDRO to transfer her interest in the pension benefits because QDROs are the "sole exception" to the anti-alienation provision in cases of divorce. Id.at 430–31.

On February 19, 2008, the U.S. Supreme Court granted certiorari on only the third of four questions presented by the Estate to decide whether QDROs are the only method by which a divorcing spouse can waive an interest in an ex-spouse’s pension plan benefits.

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Discussion

Must a divorcing spouse use a Qualified Domestic Relations Order (“QDRO”) to relinquish an interest in an ex-spouse’s pension plan governed by the Employee Retirement Income Security Act (“ERISA”)? The Supreme Court’s decision in this case will impact the administration of ERISA pension plans and will affect not only pension plan participants and their beneficiaries but also employers nationwide.

William Kennedy's Estate ("the Estate," represented by Kari Kennedy) contends that non-qualified waivers should effectively terminate a divorcing spouse’s interest. See Brief for Petitioner at 11. The Estate argues that federal common law applies because ERISA's text does not mention waivers, leaving a gap in the statute. See id. at 17, 21. The Estate maintains that, under federal common law, non-qualified waivers are permitted so long as they meet certain standards. See id. at 12–13, 15. E.I. du Pont de Nemours and Company contends, however, that ERISA’s anti-alienation provision prohibits non-qualified waivers because they constitute an "indirect" transfer of pension plan benefits. Brief for Respondent at 11. According to DuPont, divorcing spouses must therefore use QDROs, an exception to the anti-alienation provision, to relinquish interest in plan benefits. See id. at 17.

DuPont and amici American Benefits Council ("ABC"), ERISA Industry Committee ("ERIC"), National Association of Manufacturers ("NAM") and the Western Conference of Teamsters Pension Trust Fund ("Teamsters Pension Trust Fund") argue that a decision permitting non-qualified waivers would increase the burdens and costs on plan administrators. Before disbursing pension benefits, administrators would have to search for documents such as divorce decrees, wills, and settlements in which the designated beneficiary might have waived his or her rights. See Brief of Amici Curiae of the American Benefits Council et al. ("ABC") in Support of Respondents at 9–10. Plan administrators would then have to interpret the potential waivers, which is often difficult because they lack uniformity. See Brief for Respondent at 32–33. Divorce decree waivers, for instance, are based on state laws and include terms with state-specific definitions that plan administrators cannot easily interpret. See id. In addition, plan administrators do not have the legal capability for determining the validity of waivers and would need to hire legal counsel, which is costly. See Brief of Amicus Curiae Western Conference of Teamsters Pension Trust Fund ("Teamsters Pension Trust Fund") in Support of Respondents at 8, 16.

The Teamsters Pension Trust Fund also argues that the additional burdens and costs of administering pension plans could negatively impact employees. Employers who offer pension plans, for instance, might decrease the benefits to offset the additional costs. See Brief of Teamsters Pension Trust Fund at 16. Some employers might choose not to offer pension plans at all to avoid the extra expense. See id. The amici further contend that allowing non-qualified waivers will negatively affect pension plan participants and beneficiaries because the ambiguity of such waivers will leave them unsure of their rights. See id. at 17. Moreover, ABC argues that time spent searching for and interpreting non-qualified waivers could delay payment of pension plan benefits to the correct beneficiaries. See Brief of ABC at 13.

The Estate, on the other hand, argues that a decision prohibiting non-qualified waivers will thwart the expectations of plan participants and beneficiaries who assumed such waivers were effective. See Brief for Petitioner at 50–51. Divorcing spouses, for instance, often use such waivers when negotiating compromises. See id.Finding non-qualified divorce decree waivers to be invalid, however, could ruin these compromises and harm the non-waiving ex-spouse. See id. at 52.

Furthermore, the Estate contends that a decision prohibiting non-qualified waivers would lead to unfair and “absurd results.” Brief for Petitioner at 60. In cases of divorce decree waivers, for instance, the waiving ex-spouse will unfairly receive a windfall of pension plan benefits. See id. at 60–61. In addition, courts have previously prohibited beneficiary murderers from receiving their victims' plan benefits because murderers waive their rights to the benefits through their wrongdoing. See id. at 60–62. If the Supreme Court decides that QDROs provide the only exception to ERISA's anti-alienation provision, however, then murderers could inherit their victims' benefits. See id. The Estate concludes that "[t]his Court should avoid rewarding murderers—and people who waive their rights in return for valuable consideration, only to demand more money later." Id. at 62.

The Supreme Court’s decision in this case will have broad implications for employees nationwide and for divorcing pension plan participants in particular. As of March 2006, 54% of employers offered pension plans and 51% of employees participated in a pension plan. Brief for Petitioner at 42. Moreover, in 2005, 7.5% of every 1,000 people married, totaling 2,230,000 marriages, while 3.6% of every 1,000 people divorced, totaling approximately one million divorces. Id. Because 51% of employees participate in a pension plan, the Court’s decision will affect some 300,000 to 400,000 divorcing employees per year and their heirs. Id.

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Analysis

Enacted in 1974, the federal Employee Retirement Income Security Act (“ERISA”) established minimum standards for private employers administering voluntary pension plans. See 29 U.S.C., Ch. 18. ERISA covers most private industry pension plans. See U.S. Dep't of Labor Retirement Plans, Benefits & Savings. ERISA has an anti-alienation provision, which provides that pension benefits “may not be assigned or alienated.” See 29 U.S.C. § 1056(d)(1). Assignment and alienation involve the transfer of a right or title to property from one person to another. See Brief for Petitioner at 17­–19.

A Qualified Domestic Relations Order ("QDRO") is an exception to ERISA’s anti-alienation provision. 29 U.S.C. § 1056(d)(1). In this case, the Supreme Court will decide if, under ERISA, a divorcing spouse must obtain a QDRO to waive the right to receive an ex-spouse’s pension benefits. See 29 U.S.C. § 1056(d)(3)(A). ERISA, however, does not define assignment, alienation, or waiver; and the Estate and DuPont disagree about whether a voluntary, non-QDRO waiver is either an alienation or assignment. See Brief for Petitioner at 17; Brief for Respondent at 4. If a waiver is an alienation or assignment, it is invalid under ERISA. See 29 U.S.C. § 1056(d)(1); Brief for Respondent at 13. If, however, a waiver is not an alienation or assignment, it may be enforceable under federal common law. See Brief for Petitioner at 15. In this case, the Supreme Court will decide if a waiver is an alienation or assignment prohibited by ERISA’s anti-alienation provision, or is instead a valid way for a divorcing spouse to give up the right to an ex-spouse’s pension benefits.

Is a waiver an alienation or assignment under ERISA?

The distinction between assignment, alienation, and waiver is central to both the Estate and DuPont's arguments. The Estate argues that a waiver of an ex-spouse’s pension benefits does not constitute an alienation or assignment under ERISA. See Brief for Petitioner at 17. If a waiver is not an alienation or assignment, ERISA's anti-alienation provision does not prohibit it. See id. at 17; see also Petitioner’s Reply Briefat 26. In reaching this conclusion, the Estate relies on the federal common law definitions of assignment, alienation, and waiver. See Brief for Petitioner at 17. Federal common law is law derived from federal court decisions instead of federal statutes. According to the Estate, “waivers of rights” are not assignments or alienations under federal common law. See id. at 19. Unlike assignments and alienations, a waiver does not involve the transfer of property to another. See id. at 17–19. Instead, a waiver is the “relinquishment” of a right to property without transferring that right to another. Id. at 19–21. In addition, amicus United States agrees that a waiver is not an assignment or alienation under ERISA. See Brief of Amicus Curiae United States in Support of Neither Party at 10–12.

DuPont counters that a waiver of an ex-spouse’s pension benefits is an alienation or assignment under ERISA. See Brief for Respondent at 13. If a waiver is an alienation or assignment, ERISA's anti-alienation provision prohibits it. See Brief for Respondent at 13. Because ERISA does not define alienation and assignment, DuPont relies on the U.S. Treasury Department’s definitions of these terms. See id. at 4; see also 26 C.F.R. § 1.401(a)-13(c)(1)(ii).The Treasury Department defines assignment and alienation as any “direct or indirect arrangement” through which a person “acquires” a right to pension benefits from a pension beneficiary or participant. See Brief for Respondent at 4, 15 quoting 26 C.F.R. § 1.401(a)-13(c)(1)(ii). According to DuPont's interpretation of the Treasury's definitions, assignment and alienation do not require the transfer of property to another party. See id. at 14–15. Therefore, a waiver, as an indirect arrangement, is an assignment or alienation. See id. at 2–3, 16. Furthermore, DuPont argues that even if assignment and alienation required the transfer of property to another, William and Liv’s divorce decree would satisfy that requirement. See id. at 14–16.

Is ERISA or Federal Common Law Controlling?

The Estate argues that if a waiver is not an assignment or alienation, the court should apply federal common law to determine the validity of non-qualifying waivers. See Brief for Petitioner at 15. According to the Estate, federal common law is necessary to fill “major gaps in [ERISA’s] coverage.” Id. at 21. Both before and after ERISA’s enactment, federal common law courts “routinely” decided waiver cases. Id. at 14. Most of those courts held that federal common law is “an essential aspect” of ERISA. Id. at 31. Moreover, the Estate contends that ERISA superseded only state laws governing employee benefit plans, not federal common law. See 29 U.S.C. § 1144(a);see also Brief for Petitioner at 15. Therefore, according to the Estate, the Fifth Circuit erred by applying ERISA instead of federal common law. See Brief for Petitioner at 9. The Estate contends that, under federal common law, Liv validly waived her right to receive William’s SIP benefits. See id. at 9.

Conversely, DuPont argues that if a waiver is an assignment or alienation, ERISA controls, and waivers of pension benefits are invalid. See 29 U.S.C. § 1056(d)(1); see also Brief for Respondent at 13. DuPont contends that federal common law does not apply because ERISA does not contain any gaps regarding non-QDRO waivers. See Brief for Respondent at 13. According toDuPont, Congress explicitly addressed the issue of waivers by amending ERISA to include the QDRO provision, which, when read with ERISA’s anti-alienation provision, prohibits all assignments, alienations, and waivers except QDROs. See id. at 34–35. Furthermore, courts cannot create federal common law that is inconsistent with congressional enactments such as ERISA. See id. at 37. Therefore, DuPont maintains the Fifth Circuit correctly held that ERISA controls, and that under ERISA’s anti-alienation provision, Liv’s waiver is invalid. See id. at 11.

In contrast to the Estate and DuPont’s arguments, the United States argues that neither ERISA nor federal common law control the determination of validity of a waiver and distribution of benefits. See Brief of United States at 10. Instead, the United States contends that pension plan documents and beneficiary designation control, because “ERISA requires plan administrators to administer plans in accordance with plan documents, and to distribute benefits to participants and their designed beneficiaries.” Id. at 10.

Is a QDRO the only valid way a divorcing spouse can waive the right to an ex-spouse’s pension benefits?

DuPont argues that a QDRO is the only valid way a divorcing spouse can waive the right to an ex-spouse’s pension benefits in divorce cases. See Brief for Respondent at 27. According to DuPont, a waiver is an alienation or assignment and therefore is invalid under ERISA’s anti-alienation provision. See id. at 27. In addition, the federal common law of waiver does not apply because ERISA explicitly addresses that issue in its anti-alienation and QDRO provisions, prohibiting all assignments, alienations, and waivers except QDROs. See id. at 35. Thus, according to DuPont, the Fifth Circuit correctly held that a QDRO is the “sole exception” to ERISA’s anti-alienation provision in divorce cases. See id. at 27 (emphasis in original). Therefore,Liv’s waiver is invalid, and Liv was the proper recipient of William’s SIP benefits. See id. at 11.

Conversely, the Estate argues that a QDRO is one, but not the only, way a divorcing spouse can waive the right to an ex-spouse’s pension benefits in divorce cases. See Brief for Petitioner at 30. Divorcing spouses can also use a non-qualifying waiver to give up rights to pension benefits. See id. at 30. According to the Estate, ERISA’s anti-alienation and QDRO provisions do not preclude enforcement of voluntary waivers under federal common law because waivers are not assignments or alienations. See id. at 25 and 17. Therefore, under federal common law, Liv's divorce decree waiver was valid, and William and Liv Kennedy were not required to obtain a QDRO for William’s SIP benefits. See id. at 45. Because Liv’s waiver was valid, the Estate was the proper recipient of William’s SIP benefits. See id. at 45.

In addition, amicus United States explains that a divorcing spouse can also waive the right to receive an ex-spouse’s pension benefits by modifying the beneficiary designation. See Brief of United States at 10. The United States contends that, because a waiver is not an assignment or alienation, the pension plan documents and beneficiary designation control payment of plan benefits. See id. at 10–12. According to the United States, Liv was the proper recipient of William’s SIP benefits because William did not remove Liv from his beneficiary designation. See id. at 10.

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Conclusion

In Kennedy v. Plan Adm. for DuPont Savings, the Supreme Court will determine whether a divorcing spouse must obtain a Qualified Domestic Relations Order to waive the right to receive an ex-spouse's pension benefits under the federal Employee Retirement Income Security Act ("ERISA"). A decision upholding the Fifth Circuit will make Qualified Domestic Relations Orders ("QDRO") the only method by which an ex-spouse can waive rights to pension plan benefits, while a reversal would permit voluntary non-qualified waivers as well. In either case, the Supreme Court's decision will impact pension plans, their employee plan members, and beneficiaries.

Authors

Prepared by: Lauren Jones and Sarah Soloveichik

Edited by: Courtney Zanocco

Additional Sources

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