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

Oral argument: 
October 7, 2008

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”). 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. William married Liv Kennedy in 1971 and designated her as the sole beneficiary of his SIP benefits in 1974. In 1994, William and Liv filed for divorce in Texas state court. In their final divorce decree, Liv waived her interest in the SIP benefits. After the divorce, however, William never removed or replaced Liv as his SIP beneficiary.

William retired from DuPont in 1998 and died in 2001. Kari Kennedy, William and Liv’s daughter, became executrix of his estate ("the Estate"). 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. DuPont denied this request and instead paid the approximately $400,000 SIP balance to Liv as William's designated beneficiary.

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. ERISA federal law preempts state laws pertaining to employee benefit plans. Therefore, the text of ERISA is generally applied to determine such cases. If ERISA is silent on an issue, however, then federal common law is applied instead. The district court applied federal common law, under which Liv's waiver was valid because it was "explicit, voluntary, and made in good faith." The district court consequently granted summary judgment to the Estate and awarded it the benefits.

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. The anti-alienation provision prevents beneficiaries from transferring their pension plan benefits, including transfers through Domestic Relations Orders ("DRO"), such as divorce decrees. 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. Liv's divorce decree waiver was not a QDRO. 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. 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. 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.

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. The Estate argues that federal common law applies because ERISA's text does not mention waivers, leaving a gap in the statute. The Estate maintains that, under federal common law, non-qualified waivers are permitted so long as they meet certain standards. 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. According to DuPont, divorcing spouses must therefore use QDROs, an exception to the anti-alienation provision, to relinquish interest in plan benefits.

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. Plan administrators would then have to interpret the potential waivers, which is often difficult because they lack uniformity. Divorce decree waivers, for instance, are based on state laws and include terms with state-specific definitions that plan administrators cannot easily interpret. 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.

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. Some employers might choose not to offer pension plans at all to avoid the extra expense. 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. Moreover, ABC argues that time spent searching for and interpreting non-qualified waivers could delay payment of pension plan benefits to the correct beneficiaries.

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. Divorcing spouses, for instance, often use such waivers when negotiating compromises. Finding non-qualified divorce decree waivers to be invalid, however, could ruin these compromises and harm the non-waiving ex-spouse.

Furthermore, the Estate contends that a decision prohibiting non-qualified waivers would lead to unfair and “absurd results.” In cases of divorce decree waivers, for instance, the waiving ex-spouse will unfairly receive a windfall of pension plan benefits. 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. 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. 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."

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. 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. 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.

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Analysis

Enacted in 1974, the federal (“ERISA”) established minimum standards for private employers administering voluntary pension plans. ERISA covers most private industry pension plans. ERISA has an anti-alienation provision, which provides that pension benefits “may not be assigned or alienated.” Assignment and alienation involve the transfer of a right or title to property from one person to another.

A Qualified Domestic Relations Order ("QDRO") is an exception to ERISA’s anti-alienation provision. 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. . 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. If a waiver is an alienation or assignment, it is invalid under ERISA. If, however, a waiver is not an alienation or assignment, it may be enforceable under federal common law. 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. If a waiver is not an alienation or assignment, ERISA's anti-alienation provision does not prohibit it. In reaching this conclusion, the Estate relies on the federal common law definitions of assignment, alienation, and waiver. 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. Unlike assignments and alienations, a waiver does not involve the transfer of property to another. Instead, a waiver is the “relinquishment” of a right to property without transferring that right to another. In addition, amicus United States agrees that a waiver is not an assignment or alienation under ERISA.

DuPont counters that a waiver of an ex-spouse’s pension benefits is an alienation or assignment under ERISA. If a waiver is an alienation or assignment, ERISA's anti-alienation provision prohibits it. Because ERISA does not define alienation and assignment, DuPont relies on the U.S. Treasury Department’s definitions of these terms. 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. According to DuPont's interpretation of the Treasury's definitions, assignment and alienation do not require the transfer of property to another party. Therefore, a waiver, as an indirect arrangement, is an assignment or alienation. 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.

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. According to the Estate, federal common law is necessary to fill “major gaps in [ERISA’s] coverage.” Both before and after ERISA’s enactment, federal common law courts “routinely” decided waiver cases. Most of those courts held that federal common law is “an essential aspect” of ERISA. Moreover, the Estate contends that ERISA superseded only state laws governing employee benefit plans, not federal common law. Therefore, according to the Estate, the Fifth Circuit erred by applying ERISA instead of federal common law. The Estate contends that, under federal common law, Liv validly waived her right to receive William’s SIP benefits.

Conversely, DuPont argues that if a waiver is an assignment or alienation, ERISA controls, and waivers of pension benefits are invalid. DuPont contends that federal common law does not apply because ERISA does not contain any gaps regarding non-QDRO waivers. 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. Furthermore, courts cannot create federal common law that is inconsistent with congressional enactments such as ERISA. Therefore, DuPont maintains the Fifth Circuit correctly held that ERISA controls, and that under ERISA’s anti-alienation provision, Liv’s waiver is invalid.

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. 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.”

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. According to DuPont, a waiver is an alienation or assignment and therefore is invalid under ERISA’s anti-alienation provision. 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. 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. Therefore,Liv’s waiver is invalid, and Liv was the proper recipient of William’s SIP benefits.

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. Divorcing spouses can also use a non-qualifying waiver to give up rights to pension benefits. 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. 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. Because Liv’s waiver was valid, the Estate was the proper recipient of William’s SIP benefits.

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. 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. 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.

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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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