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Saturday, April 27, 2013

Practical Tips And Pitfalls In Handling Conversions Of Military Retirement Pay To VA Disability In The Divorce Context

John Fischer, Esq. and I recently had the honor of being asked to draft an article for the American Bar Association’s Family Law Section, Military Committee on the interplay between military pension division and Veteran’s Administration Disability benefits when parties divorce.  Below is a draft of the article that will appear in a special edition of the Committee’s award winning publication, Rollcall in the Spring of 2013. 

Imagine this all-too-common scenario:  Colonel and Mrs. Smith are divorcing after 25 years of marriage.  Colonel is in the process of retiring after 25 years of active duty in the Air Force concurrent with the marriage.  As part of the retirement process, Colonel was counseled to apply for VA Disability benefits, which he does, retiring January 1, 2012.  The court issues the final Judgment and Decree of Divorce on February 1, 2012, granting Wife the following:

“Wife shall be entitled to receive a percentage of the Member’s disposable monthly retirement pay.  Wife’s share of the Member’s retired pay shall be determined under the following formula: The total years and months of the Member’s participation that occurred during the parties’ marriage (the parties were married on April 1, 1987, and the Member’s date of separation occurred January 1, 2012), shall be divided by the total years and months by the Member’s participation in said Plan. The percentage arrived at by the above fraction shall be divided by 2 and this percentage shall determine the amount of the Member’s gross military retirement pay which the Wife shall receive.  Wife shall not be entitled to any VA Disability benefits.”

 

A Military Qualifying Court Order issues, and Wife begins to receive her portion of Colonel’s military retired pay (50%) directly on April 1, 2012.  In September, 2012, the Veteran’s Administration sends Colonel an award letter, informing him that he is 25% disabled due to service-related injuries, and that he will begin receiving VA disability benefits in the amount of $500 per month.  In order to receive these benefits, the law required Colonel to waive an equal amount of his retirement benefits, which he does. Now, from the Air Force, the gross monthly retirement pay is reduced $500 because the remainder has been waived for Colonel to receive a like sum of $500 in veterans’ benefits which are not divisible and not subject to attachment. This means that the Air Force now sends Mrs. Smith $250 less in military retirement.   Mrs. Smith wants the $250 back.  Will she get it?  Well, despite a federal law that has preempted state law in this particular area, the answer ultimately depends on the jurisdiction in which the parties divorced.

A split in authority, and a trap for the unwary, has existed for two decades in the area of spousal division of military retirement pay.  Despite repeated appeals to Congress and the United States Supreme Court to provide a unifying solution to the problem, the states remain divided, frustrating practitioner’s who thought they had received a final binding judgment of divorce or dissolution.

I.          Neither Congress Nor the Supreme Court Has Provided Guidance on this Issue Since the 1980s

A.        The Supreme Court Initially Prohibited any Division of Retirement Pay upon Divorce

The issue now confronting, and confounding, the state courts – how to account in a divorce for that portion of a military member’s retirement that is waived to receive disability pay – has its genesis in the 1981 United States Supreme Court case of McCarty v. McCarty.[1]  In McCarty, a state domestic relations court ordered the military member, over his objections, to pay half of his military retirement pay to his ex-wife as part of the property division in a community property state.[2]  The Supreme Court reversed.

According to the Court, federal law prohibited a state court from dividing any and all military retirement pay under state community property laws.[3]  The main factor in reaching this decision was the authority of Congress to enact laws governing military matters.  Specifically, Congress had permitted the division of Civil Service retirement benefits and Foreign Service retirement benefits in a divorce, but had “neither authorized nor required the community property division of military retired pay.”[4]

The court also recognized that, “[h]istorically, military retired pay has been a personal entitlement payable to the retired member himself as long as he lives.”[5]  Further, Congress enacted a military retirement system both to provide for the retired service member and to meet the personnel management of the armed forces; permitting the division of retirement pay in a divorce could frustrate these objectives.[6]

As a result, the Court decided that it was up to Congress alone to provide for the division of military retirement pay in a divorce or dissolution, despite the hardship that this might inflict on the former spouse:

“We recognize that the plight of an ex-spouse of a retired service member is often a serious one. . . . Congress may well decide, as it has in the Civil Service and Foreign Service contexts, that more protection should be afforded a former spouse of a retired service member.  This decision, however, is for Congress alone.  We very recently have re-emphasized that in no area has the Court accorded Congress greater deference than in the conduct and control of military affairs. . . . Congress has weighed the matter, and ‘[i]t is not the province of state courts to strike a balance different from the one Congress has struck.’”[7]

In deciding as it did, this Court specifically called upon Congress to act, and Congress did.

B.        Congress Responded to McCarty by Permitting Division of Military Retirement Pay

In response to McCarty, Congress acted the Uniformed Services Former Spouses’ Protection Act (“USFSPA”).  Relevant to this discussion, Congress specifically permitted the division of military retirement pay in a divorce or dissolution:

“Subject to the limitations of this section, a court may treat disposable retired pay payable to a member for pay periods beginning after June 25, 1981, either as property solely of the member or as property of the member and his spouse in accordance with the law of the jurisdiction of such court.” [8]

The problems that are confronting the state courts today stem from the definition of “disposable retired pay,” which the USFSPA defines as:

“the total monthly retired pay to which a member is entitled less amounts which . . . are deducted from the retired pay of such member as a result of forfeitures of retired pay ordered by a court-marital or as a result of a waiver of retired pay required by law in order to receive compensation under title 5 or title 38[.]”[9]

In sum, in enacting the USFSPA, Congress permitted the division of retirement pay in a divorce or dissolution, but specifically exempted from division that portion of retirement pay waived to receive disability benefits.

C.        The Supreme Court Interpreted and Applied the USFSPA in a Narrow (and Easy) Case

Despite the (admittedly unclear) language of the USFSPA, one state domestic relations court blatantly acted contrary to that law when it ordered in a divorce action the division of both the retirement pay and disability benefits of a veteran.  In Mansell v. Mansell,[10] the Supreme Court confronted the USFSPA when it addressed whether state courts could treat as property divisible upon divorce military retirement pay waived to receive veterans’ disability benefits.   This Court held that the state courts may not do so.

In Mansell, the military member and his spouse divorced in California at a time when he was receiving both military retirement pay and disability pay.[11]  The parties entered into a property settlement which provided, in part, that the military member would pay his wife 50% of his total military retirement pay, including that portion of retirement pay waived so that he could receive disability benefits.[12]  In 1983, the military member asked the trial court to modify the divorce decree by removing the provision that required him to share his total retirement pay with his former spouse.[13]  When the lower court denied this request without opinion, the military member appealed and, eventually, petitioned the Supreme Court for certiorari, which the Court granted.

The factual situation facing the Court in this case was not difficult; indeed, the state court had explicitly divided both military retirement pay and the disability pay that the military member was already receiving.  Therefore, noting that the language of the USFSPA was “plain and precise,” the Supreme Court held that “state courts have been granted the authority to treat disposable retired pay as community property; they have not been granted the authority to treat total retired pay [including disability pay] as community property.”[14]  The Court prohibited the lower court from making this explicit division.

Rejecting the former spouse’s arguments to the contrary, the Court concluded that the USFSPA’s legislative history, “read as a whole, indicates that Congress intended both to create new benefits for former spouses and to place limits on state courts designed to protect military retirees. Our task is to interpret the statute as best we can, not to second-guess the wisdom of the congressional policy choice.”[15]  Expanding on that notion, the Court held that its job was not “to misread the statute in order to reach a sympathetic result when such a reading requires us to do violence to the plain language of the statute and to ignore much of the legislative history.”[16]  The Court ended with yet another call to Congress to correct this holding.[17]

Two justices dissented in Mansell.  The dissent noted that the “harsh reality” of the majority opinion was “that former spouses . . . can, without their consent, be denied a fair share of their ex-spouse’s military retirement pay simply because [the veteran] elects to increase his after-tax income by converting a portion of that pay into disability benefits.”[18]  In discussing the majority opinion, the dissent noted:

“Today, despite overwhelming evidence that Congress intended to overrule McCarty completely, to alter preexisting federal military retirement law so as to eliminate the preemptive effect discovered in McCarty, and to restore to the States authority to issue divorce decrees affecting military retirement pay consistent with state law, the Court assumes that Congress only partially rejected McCarty, and that the States can apply their community property laws to military retirement pay only to the extent that the Former Spouses’ Protection Act affirmatively grants them authority to do so. * * *  The McCarty decision, however, did not address retirement pay waived to receive disability benefits; nor did it identify any explicit statutory provision precluding the States from characterizing such waived retirement pay as community property. Thus, I reject the Court’s central premise that the States are precluded by McCarty from characterizing as community property any retirement pay waived to receive disability benefits absent an affirmative grant of authority in the Former Spouses’ Protection Act.”[19]

The dissent stated that “Congress intended, by enacting the Former Spouses’ Protection Act, to eliminate the effect of McCarty’s preemption holding altogether, and to return to the States their authority ‘to treat military pensions in the same manner as they treat other retirement benefits.’”[20]

After Mansell, and as it still stands today, a state domestic relations court may not divide any part of a military member’s disability pay received prior to a divorce.  The state courts uniformly apply Mansell in such circumstances.  The courts differ, however, in those cases where the military member divorces before receiving disability pay.  The courts are struggling to decide how (or if) that portion of the retirement pay waived to receive disability benefits after a divorce can (or should) be divided.

II.         A Comparison of State Court Decisions and Their Rationale

A.        The Restrictive View – No Award to the Former Spouse

Some state courts have simply applied the holding of Mansell and its interpretation of the USFSPA, ruling that such any attempt to divide or otherwise account for retirement pay waived to received disability pay is not permissible.[21]   Most recently, the Vermont Supreme Court, in Youngbluth v. Youngbluth,[22] held that, when the original property division order states an exact percentage and contains no indemnity clause, a former spouse cannot use an enforcement proceeding to receive an increased percentage to offset the military service member’s subsequent application and receipt of disability benefits.

In Youngbluth, Husband was forced to retire from the military during divorce proceedings with his wife.  The final judgment and decree of divorce granted the wife “35% of the marital portion of the retirement plan,” which equated to 19.81% of the Husband’s retirement. Following the filing of the final judgment and decree of divorce, Husband applied for and was granted a 30% disability rating from the Veterans Administration.  As a result, wife’s percentage of Husband’s retirement was reduced.  Wife filed a motion to modify or amend the original order, and the trial court agreed that she should receive 22.4% of Husband’s disposable retired pay to equalize the roughly $700 per month she would have received under the original order of 19.81%.

Husband appealed and the Vermont Supreme Court reversed, finding that the original decree could not be “modified” under Vermont law because the division of retirement is a property settlement and final.  Furthermore, the court found that the plain language of the USFSPA as well as the legislative history prohibited a court from granting a larger percentage of a service member’s disposable retirement benefits when a portion of disposable retirement is waived to receive disability benefits. Therefore, the court held that “when the original property division order states an exact percentage and contains no indemnity provision – a former spouse cannot use an enforcement proceeding to receive an increased percentage to offset the military service member’s subsequent application and receipt of disability benefits.”

The Vermont Supreme Court suggested that, had an indemnification clause been included in the decree, or had Wife attempted another procedural avenue to an enforcement proceeding, the result may have been different.  In restrictive states, such as Vermont, an indemnification clause, as well as a reservation of jurisdiction for the court to effectuate the intent of the parties in dividing the retirement, may provide some support for an award for an aggrieved spouse.[23]

B.        The Middle Ground – Permit Award in Other Ways

Other courts preclude a post-judgment division of disability benefits, but in dicta, would allow courts to consider the economic impact on the other spouse and grant another form of relief, such as an increased alimony award.[24]   While Clauson prohibited a dollar for dollar compensation of amounts waived to receive disability benefits, the court noted that federal law did not  preclude courts from considering the  economic impact that a waiver of military retirement pay and corresponding receipt of disability pay has on the parties to a divorce.  The court reasoned that the USFSPA speaks to a state court’s power to “treat” this type of military benefit “either as property solely of the [armed forces] member or as property of the member and his spouse.”[25]  The court further found the Supreme Court’s decision in Rose v. Rose[26] persuasive in deciding the case.  In Rose, the Court held that anti-attachment provisions and similar restrictions in federal laws governing veterans’ disability benefits did not conflict with the enforcement of state child support orders even where disability benefits represented a disabled veteran-obligor’s only source of income and would necessarily be used to pay child support.[27]  The Court specifically noted that such “benefits are intended to support not only the veteran, but the veteran’s family as well.”[28]

Unlike the contract-law theory, the logic employed in Clauson by the Alaska Supreme Court is useful to courts not only when the waiver of retirement pay postdates the divorce decree (if the court has retained jurisdiction over the matter), but also when the waiver predates the divorce decree and the court is making an initial property distribution or alimony award.  In jurisdictions employing this reasoning, reservation of jurisdiction over spousal support is crucial so that a spousal support award can be used as compensation for the aggrieved spouse.  For example, even if spousal support is not awarded in the decree, the attorney for the non-member should work to include a clause that reserves the court’s jurisdiction; in the event the former member waives portions of his military retirement, the court retains jurisdiction to determine whether equity requires a spousal support award.

C.        The Permissive View – USFSPA Presents No Obstacle to Former Spouses

Other state courts have simply declared Mansell and the USFSPA inapplicable, and instead rely on a contract theory to retain the authority to enforce marital settlement agreements.[29]  These courts hold, generally, that when a property-settlement agreement in a divorce proceeding divides military-retirement benefits, the non-military spouse has a vested interest in his or her portion of those benefits as of the date of the court’s decree and that the vested interest cannot thereafter be unilaterally diminished by an act of the military spouse.

Recently, the Ohio Court of Appeals for the Second District adopted this philosophy in ruling in Bagley v. Bagley.[30]  On September 13, 1995, a Decree of Dissolution ended the Bagleys’ 24-year marriage.[31]  In the Separation Agreement incorporated into the decree, the parties waived spousal support and divided property.[32]   At the time of the Decree of Dissolution, Husband had just retired from the United States Air Force and was receiving military retirement pay, had applied for disability benefits, but was not yet receiving them.[33]  The Separation Agreement noted that Wife was entitled to “the marital portion” of Husband’s retirement pay, “one-half (1/2) of the amount available to the Husband under the 20/20/20 Rule of Former Spouse benefits.   . .” The Separation Agreement contained a clause prohibiting Husband from reducing Wife’s share of retirement pay by taking civil service employment, but did not address waiver of disposable pay to receive VA disability.

Husband began receiving VA Disability benefits in January 1996, with a disability rating of 30%.   An amended Military Qualifying Court Order was submitted in 2009, which granted Wife an amount equal to the reduction of her portion of the retirement caused by his election to receive partial veteran’s disability benefits and the corresponding waiver of a portion of his retirement.

 

Husband appealed and the Second District Court of Appeals affirmed, reasoning that the trial court, in approving the Amended MQCO, merely interpreted and effectuated the intent of the separation agreement. There, Husband agreed that it was his intent to provide Wife with an amount that fairly represented her marital share of his retired pay.  Further, the court found the indemnification clause relating to a reduction of her portion due to civil service employment evidence of his intent to compensate Wife with a full portion of his retired pay, even those portions waived to receive VA disability benefits.  The court also reasoned that the MQCO did not violate the USFSPA, finding that the Amended MCQO was not a division of the waived retirement pay, “but rather an award of damages equal to the value of the property not conveyed–the amount of retirement benefits lost.”[34]  The court noted the conflicting opinions among the states, but concluded that the better reasoning would maintain “the original intent of the property division distribution[, which] does not violate the FSPA as long as the military retiree would be able to satisfy the obligation from other than disability retirement assets.”[35]

 

III.        Solutions:  Legislative and Judicial

Practitioners confronting the morass of conflicting state court decisions have attempted to address them through calls for legislative reformation and petitions to the United States Supreme Court.  Neither solution has ameliorated the problem.

 

A.        Congressional Action

 

In 2001, the American Academy of Matrimonial Lawyers (“AAML”) responded to a Request for Comments by Congress for review of the USFSPA.  Marshal S. Willick, on behalf of the AAML noted that “there is a lack of predictability and uniformity to the results, and similarly-situated people are treated differently because of trivial differences between their divorce decrees, or on the perceptions of individual judges. The current confusion is benefitting no one, and causing much litigation that should have been avoidable, often between spouses that have been divorced for decades.”[36]  The AAML recommended that VA disability awards “should be in addition to, not require a waiver of, longevity retired pay.”  If fiscally impossible, the USFSPA should be amended to “include a provision prohibiting the conversion to disability pay of any portion of disposable retired pay that has already been awarded to a former spouse as the separate property of that former spouse.”[37]

Effective January 1, 2004, Congress passed legislation to allow concurrent receipt of military pay for those former service members who have a VA disability rating of at least 50 percent, known as Concurrent Retirement and Disability Pay (“CRDP”), that would be phased in over the course of ten years.[38]  As noted by Mark E. Sullivan, the “CDRP will go a long way toward ameliorating the unfairness of unilateral changes in military pension division orders by retirees who, after the fact, obtain VA disability compensation and thus reduce the share of the former spouse,”[39] at least for those former service members receiving a disability rating of 50 percent or more.

 

B.        Supreme Court Review

Since Mansell v. Mansell,[40] the Supreme Court has declined to hear cases that present this confounding and divisive issue among the states, including the California court’s decision in Mansell after remand.  On remand, the state appellate court ruled against the veteran on the ground that state law precluded the reopening of the settlement agreement that had divided his VA disability as well as his military retired pay.[41]  The Supreme Court denied certiorari.[42]  Since Mansell, petitions have been filed in at least three separate cases, requesting that the Court confront the more difficult post-decree waiver of retirement.[43]  Given the Court’s repeated denial of petitions on this issue, it is unlikely that a petition for certiorari would be granted in the near future.

III.        Avoiding the Pitfalls of Waivers of Retired Pay After the Decree

 

Given the complexity and expense of bringing an action subsequent to the filing of a decree that divides military retirement, the best offense seems to be a good defense of drafting the decree to meet the needs of your clients.

A.        Representing the Service Member

 

For practitioners representing the service member in a divorce or dissolution, the following practice points may be useful.

 

  1. Retirement clauses should include a provision that divides only the “disposable retired pay” as defined by 10 U.S.C 1408.
  2. VA disability benefits should be specifically excluded from division, whether elected prior to or after the filing of the final decree.
  3. Any indemnity for a waiver of military retired pay should be clearly excluded.
  4. Use percentages of disposable retired pay rather than specific dollar amounts.

B.        Representing the Spouse

For practitioners representing the spouse in a divorce or dissolution, the following practice points may be useful.

  1. Insure that a clause is included for the court to retain jurisdiction over the retirement so as to effectuate the intentions of the parties in dividing the pension.
  2. Include an indemnity clause that protects the former spouse should military retired pay be waived to receive VA disability benefits.
  3. Specifically reserve the court’s jurisdiction regarding an award of spousal support should the former spouse be deprived of military retirement benefit through a future waiver.
  4. Define the portion of military retirement to be divided as “gross” rather than “disposable.”[44]

IV.       Conclusion

Despite the uniformity that a federal statute should bring in its application, the state courts have rendered an assortment of rulings in their interpretations of the USFSPA.  Practitioners handling a divorce or dissolution involving a member of the armed forces should fully understand the relevant decisions in the jurisdictions in which they practice, to address these issues early in the proceedings and to prepare adequately to assist their clients when circumstances surrounding the division of military retirement pay change.

 

 



[1] 453 U.S. 210, 101 S.Ct. 2728 (1981).

[2] Id. at 210, 101 S.Ct. at 2730.

[3] Id. at 232, 101 S.Ct. at 2741.

[4] Id. at 231-232, 101 S.Ct. at 2740-41.

[5] Id. at 224, 101 S.Ct. at 2737 (emphasis in original).

[6] Id. at 233, 101 S.Ct. at 2741.

[7] Id. at 235-36, 101 S.Ct. at 2742-2743.

[8] 10 U.S.C. § 1408(c).

[9] 10 U.S.C. § 1408(a)(4)(B).

[10] 490 U.S. 581, 109 S.Ct. 2023 (1989).

[11] Id. at 585, 109 S.Ct. at 2027.

[12] Id. at 585-586, 109 S.Ct. at 2027.

[13] Id. at 586, 109 S.Ct. at 2027.

[14] Id. at 590, 592, 109 S.Ct. at 2029, 2030.

[15] Id. at 594, 109 S.Ct. at 2031.

[16] Id. at 594, 109 S.Ct. at 2032.

[17] Id.

[18] Id. at 595, 109 S.Ct. at 2032 (O’Connor, J., dissenting).

[19] Id. at 595-596, 109 S.Ct. at 2032.

[20] Id. at 596, 109 S.Ct. at 2032.

[21] Chart A at the end of this article provides a list of these cases.

[22] 6 A.3d 677, 2010 VT 40 (2010).

[23] See Youngbluth, 2010 VT 40, ¶ 28; Ex Parte Billeck, 777 So.2d 105 (Ala. 2000).

[24] See Clauson v. Clauson, 831 P.2d 1257 (Alas. 1992).  Chart B at the end of this article provides a list of these cases.

[25]  10 U.S.C. 1408(c)(1).

[26]  481 U.S. 619

[27] Id. at 636.

[28] Id. at 634.

[29] Chart C at the end of this article provides a list of these cases.

[30] 2011-Ohio-1272 (2nd Dist.).

[31] Bagley v. Bagley, 2011-Ohio-1272, ¶ 1.

[32] Id. 

[33] Id.

[34] Bagley, citing  2 Turner, Equitable Distribution of Property (3 Ed.) Section 6:10.

[35] Id.  ¶ 26.

[36]  AAML Response to Request for Comments as to P.L. 105-85 Review of the USFSPA, September 5, 2001.

[37] Id.

[38] P.L. 108-136, Sections 641 and 642. 10 U.S.C. 1414.   See The Military Divorce Handbook, Mark E. Sullivan, Second Edition, Section 8.10 for a discussion of these provisions.

[39] Id.

[40] 490 U.S. 581, 109 S.Ct. 2023 (1989).

[41] In re Marriage of Mansell, 265 Cal. Rptr. 227 (Ct. App. 1989),

[42] 498 U.S. 806 (1990).

[43] Seddio v. Michaels, 529 U.S. 1068 (2000); Padot v. Padot, 548 U.S. 902 (2006); Bagley v. Bagley, U.S. Supreme Court Case No. 11-650, (2012).

[44] Although this is a controversial clause, courts have been inclined to approve such division if the parties reach this language through agreement.

 





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