If parties entered into a contract prior to the enactment of a revocation-upon-divorce statute, does applying the statute to the contract violate the Contracts Clause?
The Supreme Court will decide whether the application of a revocation-upon-divorce statute—a state law that automatically revokes the beneficiary status of a policyholder’s former spouse after a divorce—to a contract signed prior to the enactment of the statute violates the Contracts Clause. The Contracts Clause of the U.S. Constitution states that “[n]o State shall . . . pass any . . . Law impairing the Obligation of Contracts.” Petitioners Ashley Sveen and Antone Sveen (“the Sveens”) argue that the application of Minnesota’s revocation-upon-divorce statute to a life insurance policy that the decedent, Mark Sveen, purchased before the enactment of the statute is a valid exercise of the State’s authority to regulate divorce. The Sveens claim that the Minnesota statute does not violate the Contracts Clause because it serves a legitimate public interest and does not substantially impair contractual obligations. Respondent Kaye Melin counters that the original purpose of the Contracts Clause was to prevent legislative interference with private contracts and that modern courts should interpret it as such. Melin argues that the retroactive application of the Minnesota statute would not survive under the original meaning of the Contracts Clause and that the application also violates the Contracts Clause as it is currently understood. This case will provide clarity regarding courts’ disagreement as to the appropriate interpretation of the Contracts Clause and will affect the way in which estates are settled.
Questions as Framed for the Court by the Parties
Does the application of a revocation-upon-divorce statute to a contract signed before the statute’s enactment violate the Contracts Clause?
The decedent, Mark Sveen, purchased a life insurance policy in 1997. Later that year, Mark Sveen married Kaye Melin, and in 1998, he designated Melin as the primary beneficiary of his insurance policy. Mark Sveen designated his two adult children, Ashley Sveen and Antone Sveen, as contingent beneficiaries.
In 2002, Minnesota amended its state probate code, applying its revocation-upon-divorce statute to life insurance beneficiary designations. The amended statute provided that a divorce automatically revokes any revocable beneficiary designation to a former spouse. In 2007, Sveen and Melin divorced, but Sveen never changed the beneficiary designation in his life insurance policy. In 2011, Sveen died, leaving Melin as the primary beneficiary.
Upon Sveen’s death, the insurance company filed an interpleader to determine whether it was bound to apply the revocation-upon-divorce statute to life insurance designations made prior to enactment of the 2002 amendment, which would cause Melin to lose the life insurance benefits. The district court granted summary judgment in favor of Sveen’s adult children in their cross-claim for the proceeds of the life insurance payout, meaning Sveen’s adult children would receive the entirety of the policy proceeds. On appeal, the Eighth Circuit reversed, holding that retroactively applying the revocation-upon-divorce statute would disrupt Sveen’s expectations, rendering the application unconstitutional under the Contracts Clause. The Sveens then filed a petition for a writ of certiorari, and the Court granted the writ in December 2017.
STATE AUTHORITY TO REGULATE DIVORCE
The Sveens argue that Minnesota’s revocation-upon-divorce statute (“the Statute”) is an exercise of the State’s police power to regulate divorce. The Sveens claim that the Statute establishes a default rule for the interpretation of all divorce decrees to avoid excessive litigation regarding the designation of beneficiaries. The Sveens note that the Supreme Court has held that states have the power to regulate state functions, including divorce laws, even if those regulations infringe on private contracts. Moreover, the Sveens maintain that the state issuance of divorce decrees does not implicate the Contracts Clause. The Sveens also contend that the Supreme Court has held that a person cannot reasonably expect a regulation to remain unchanged if it is a part of a heavily regulated field of law, such as divorce.
The Sveens contend that even if the Statute impaired the contractual obligations of insurance companies, the impairment would be insufficiently substantial to implicate the Contracts Clause because the Statute merely creates a default rule. To illustrate, the Sveens argue that where a policyholder wishes a former spouse to remain the policy beneficiary, the Statute would simply require that the policyholder file a form with the insurer to restore the former spouse as the beneficiary. Supreme Court precedent, according to the Sveens, establishes that such a burden is not sufficient to implicate the Contracts Clause. The Sveens also claim that, even if the Statute does substantially impair contractual obligations, state revocation-upon-divorce laws serve the legitimate public purpose of protecting the intent of contracting parties, noting that spouses do not typically wish to transfer property upon death to those from whom they sought divorce.
Kaye Melin (“Melin”) counters that laws regarding divorce implicate the Contracts Clause, and therefore, states do not have the authority to impair such contracts. Melin also argues that revocation-upon-divorce statutes do not merely provide a default rule for the interpretation of divorce decrees, but rather rewrite the decrees and establish the consequences of a divorce. If the Supreme Court finds that the effects of revocation-upon-divorce statutes are meant only to facilitate the interpretation of divorce decrees, Melin claims, such an interpretation may also have unintended effects on the “Full Faith and Credit” requirement in that states might interpret the judgments of other states to mean something they do not say.
Melin counters Sveen’s argument that default rules do not sufficiently Contracts Clause by noting that such an argument implies that statutes could impact irrevocable beneficiary designations by repeatedly requiring the policyholders to file documents restating their chosen beneficiary and revoking beneficiary status if policyholders do not do so without implicating the Contracts Clause. Melin contends that such a result is absurd and contradicts existing precedent. Melin also maintains that there are more moderate ways to advance the State’s purposes of protecting contracting parties. Melin claims that the Statute does not protect the interests of contracting parties, but rather, that the State goes too far in suggesting that it is absolute that divorcées do not wish their former spouses to remain their beneficiaries. For these reasons, Melin emphasizes that retroactively imposing such a rule impairs contractual obligations.
INTERPRETING THE CONTRACTS CLAUSE
The Sveens argue that even if the Statute substantially impairs contractual obligations, it is still constitutional because it provides a reasonable means of advancing a legitimate public end, which is sufficient to satisfy the Court’s current test. For example, the Sveens contend, automatic revocation serves the legitimate public ends of effecting the intent of policyholders and saving time on paperwork. According to the Sveens, the Statute is also reasonable because it does not apply in cases where there is an express agreement to the contrary between the spouses or in the insurance policy. The Sveens note that it is customary for courts to defer to the judgment of state legislatures when considering the necessity and reasonableness of statutes, unless the state itself is a contracting party which, in this case, it is not.
The Sveens contend that life insurance policies should be interpreted as comprising two components: the first, a contractual component, which ensures payment of the policy, and the second, a donative transfer component, which identifies the policy’s recipient. The Sveens maintain that because the obligation of an insurance company to compensate the beneficiary is not impaired by the revocation-upon-divorce statute, none of the insurer’s contractual obligations are impaired, and thus the Statute raises no Contracts Clause issue. The Sveens also argue that this distinction is necessary to allow states to alter other succession laws, such as slayer statutes.
Melin contends that the Supreme Court should interpret the Contracts Clause in accordance with its original meaning, which Melin reads literally to proscribe absolutely any impairment of contracts. Melin argues that the original purposes of the Contracts Clause were served by its straightforward interpretation, and that those same purposes are equally important today. The Supreme Court’s modern tendency to review public contracts with greater scrutiny than private contracts, Melin maintains, is improper. Rather, Melin suggests that private contracts merit greater protection than public contracts, as the Framers drafted the Contracts Clause because they feared legislative interference with private contracts in particular. Melin also argues that the application of the Statute to contracts formed prior to the Statute’s enactment does not further a significant and legitimate purpose, because there is no evidence that the impairment of such contracts was necessary to meet a broad, societal problem.
Melin maintains that the Contracts Clause does not recognize a distinction between contracts and donative transfers and that both of a life insurance policy’s requirements, the requirement to pay and the requirement to pay the appropriate beneficiary, are equally contractual components. Melin argues further that such a distinction would ignore the terms of the contract as well as the intent of the contracting party, because a person does not intend to purchase insurance for a state’s chosen beneficiary but rather for their own chosen beneficiary. Melin also suggests that such a distinction would do nothing to prevent the alteration of succession laws like slayer statutes, adoption statutes, and statutory share laws, which serve legitimate public interests and could still survive a Contracts Clause analysis.
EFFICIENT SETTLEMENT OF ESTATES VERSUS SUPPORTING DIVORCEES
The American College of Trust and Estate Counsel (“ACTEC”), in support of the Sveens, argues that rules of construction establishing the likely intent of a decedent, including revocation-upon-divorce statutes, are necessary to quickly and efficiently settle estates and distribute assets. ACTEC contends that effectuating a policyholder’s intent would be difficult without rules of construction, such as revocation-upon-divorce laws, and emphasizes the historical significance of such statutes at common law.According to ACTEC, former spouses could receive unintentional windfalls of trillions of dollars if revocation-upon-divorce laws are not applied to existing life insurance beneficiary designations. Further, the Sveens note that federalism provides additional support for upholding the application of the Statute. To that end, the Sveens claim that Melin’s position would greatly limit the ability of states to amend their divorce laws and would endanger state regulations regarding beneficiary designations.
Professor James Ely, in support of Melin, contends that many policyholders would want an ex-spouse to remain the beneficiary of a policy in order to provide financial security to their family in cases where a breadwinner suddenly passes away. The Women’s Law Project, et al., adds that even facially gender-neutral revocation-upon-divorce statutes disproportionately harm women. According to the Women’s Law Project, revocation-upon-divorce statutes like that of Minnesota more often take away beneficiary designations of women than men and deprive women of greater benefits in comparison to men. The Women’s Law Project asserts that in 2010, 57% of women and 61% of men had life insurance, but that by 2016, only 56% of women had life insurance compared to 62% of men, demonstrating that the disparity is increasing. The Women’s Law Project asserts that divorce often has a substantially negative impact on women’s household assets and income, which can be financially devastating. Given such circumstances, the Women’s Law Project argues that revocation-upon-divorce statutes may take the financial benefits women are expecting precisely when they are most vulnerable, multiplying their financial hardships.
- Lisa Soronen, Supreme Court to Hear Case Involving Revocation-Upon-Divorce Statute, The Council of State Governments (Dec. 18, 2017)