Maryland Courts Ponder Preemption with Puzzling Results

By: Chris Mincher

Bonnie Campbell and her husband, Michael Campbell, got a divorce. As part of that, they executed an agreement in which Mr. Campbell expressly waived any right that he had to the proceeds of a “Federal Thrift Savings” retirement plan that was held by Ms. Campbell. The agreement further provided that if, for any reason, Ms. Campbell failed to change the plan’s beneficiary from Mr. Campbell to someone else, Mr. Campbell would either “disclaim … any entitlement to any benefits” from the Plan, “assign all rights” to receive Plan benefits to the Ms. Campbell’s estate, or directly pay the benefits to Ms. Campbell’s estate.

Ms. Campbell ultimately failed to change the beneficiary from Mr. Campbell to someone else. When she died, Mr. Campbell — rather than disclaiming entitlement to the proceeds, or assigning the rights to or directly paying the proceeds to the estate — applied for and received, without disclosing his previous agreement to the contrary, approximately $717,000 in proceeds from the plan.

Does that sound right? Might it be the correct result anyway?

That’s the big question in In the Matter of Brenda Batchelor (the personal representative of Ms. Campbell’s estate), a case from earlier this year that split a panel of the Appellate Court on whether to follow a federal appellate circuit court’s analysis or take another path. The opinion is a good opportunity to check in on principles of federal preemption, so let’s dig in.

Precise FERSA Distribution Procedures

The statute that controls the distribution of the plan proceeds here is the Federal Employees’ Retirement System Act of 1986, which carries the appropriately federal-law-sounding acronym “FERSA” and has a bunch of seemingly locktight language protecting plan funds. For example, there’s an “order of preference” that lays out who can receive the proceeds and “bars recovery by any other individual.”

FERSA also establishes, in a so-called “anti-attachment provision,” that “sums in the Thrift Savings Plan may not be assigned or alienated and are not subject to execution, levy, attachment, garnishment, or other legal process.” The beneficiary can’t be changed by the operation of a will. However, payment is nonetheless expressly subject to “a court decree of divorce, annulment, or legal separation … or any court order or court-approved property settlement agreement incident to such decree” if it expressly relates to the balance of the employee’s plan account and if notice is provided to the agency “before the date on which payment is made.”

The whole analysis of Batchelor turns on whether FERSA preempts the lawsuit filed by Ms. Campbell’s estate to get the Plan proceeds back — that is, whether the U.S. Congress intended that no one else could lay claim to the benefit funds after they’ve been paid out. For guidance, the majority and Judge Nazarian in dissent looked at an on-point decision from the Tenth Circuit and its reliance on a line of three prior U.S. Supreme Court cases regarding federal insurance plans. Also in play is a 4th Circuit opinion regarding ERISA proceeds, a topic that is kind of similar and kind of not.

The Tenth Circuit’s Take On It

The directly analogous Tenth Circuit case, Evans v. Diamond, 957 F.3d 1098, was decided in 2020 and provided a pretty clear blueprint for the majority to follow. There, similar to Batchelor, the former spouse had agreed in a divorce settlement that she would waive any right to the plan funds, but when her ex-husband died she refused to abide by the deal. The estate brought state-law claims against her to get the funds, but the Tenth Circuit held that FERSA preempted the lawsuit. To reach this conclusion, the Tenth Circuit analogized FERSA preemption to two other contexts the U.S. Supreme Court had previously addressed: Servicemembers’ Group Life Insurance Act preemption, as discussed in Ridgway v. Ridgway, 454 U.S. 46 (1981), and Federal Employees’ Group Life Insurance Act preemption, as discussed in Hillman v. Maretta, 569 U.S. 483 (2013).

Ridgway involved a guy who made a divorce agreement with his wife to keep a federal Servicemembers’ life insurance policy for the benefit of his children, but after he remarried he instead made his second wife the beneficiary. The first wife sued for the plan proceeds to go to their children, but the U.S. Supreme Court (looking to Wissner v. Wissner, 338 U.S. 655 (1950), another case discussed in Batchelor) found the claims preempted. As in FERSA, there was a provision prohibiting attachment, levy, or seizure of plan proceeds through “any legal or equitable process whatsoever,” which the Court found to be “strong language” with no exception for divorce property settlement agreements.

Hillman involved a Virginia statute that purported to make a former spouse who receives federal life insurance benefits liable to a current spouse for the same amount. Pursuant to this law, a second wife sued the first wife for the amount of the Federal Employees’ life insurance benefits she got as the beneficiary, but again the U.S. Supreme Court held this was preempted. As with FERSA, that statute had a provision allowing payment pursuant to court decree of divorce, annulment, or legal separation — but only if the agency gets notice before the employee dies. That didn’t occur, so the first wife got the benefits.

Mr. Campbell Collects His Cash

See a pattern here? The Tenth Circuit did. Each of the federal benefits schemes examined previously by the U.S. Supreme Court had materially corresponding provisions with FERSA about paying out federal benefits — FERSA actually goes even further by expressly barring recovery by “any other individual” that’s not the beneficiary — and in each case there was preemption of claims by others who were entitled to the proceeds by state law. The Tenth Circuit applied the same logic in Evans to toss the former spouse’s lawsuit.

The majority in Batchelor did the same thing, noting that, as in Ridgway, there is a “strict” anti-attachment provision in FERSA. Like the Federal Employees’ insurance benefits at issue in Hillman, the statute does have an exception for payment of benefits pursuant to a divorce decree — as long as the agency is properly notified. Ms. Campbell didn’t provide that timely notification, so tough luck.

The majority did take a look at Andochick v. Byrd, 709 F.3d 296, an ERISA benefits case from 2013. There, the Fourth Circuit declined to preempt a lawsuit to get funds that were distributed to an ERISA beneficiary who had waived any entitlement to them in a prior divorce settlement agreement. But the majority found that FERSA’s payout provisions were more similar to those in the federal life insurance statutes; further, while ERISA only disallows funds from being “assigned or alienated,” FERSA goes further to also prohibit execution, levy, attachment, garnishment, or other legal process.

In the end, the majority concluded that, even though Mr. Campbell agreed to waive and disclaim the funds from Ms. Campbell’s plan, he could get them through FERSA anyway and there was no avenue through state law for Ms. Campbell to recover. Ouch.

A Boon for Beneficiaries

Harsh result, right? Let’s take a minute just to acknowledge how unjust this all seems. There are kids getting left in the lurch in Ridgway when their dad breaks his agreement to provide for them. There’s an ex-wife getting a payout in Hillman instead of the current wife. In both Evans and Batchelor a divorcing spouse contractually agrees to give up any right to the benefits, but then goes and takes it anyway; in Batchelor, that’s $717,000 the heirs to the estate won’t be getting. Does anything about this seem wrong?

It did to Judge Nazarian. His analysis began not with federal case law, but with Maryland jurisprudence about preemption — both that Maryland courts presume the U.S. Congress doesn’t intend to preempt state law, and that (citing his own prior opinion in Hurt v. Jones-Hurt, 233 Md. App. 610, 619 (2017)) divorce and division of marital property “are quintessentially matters of state law, and pension or retirement benefits normally are considered marital property.” In deciding whether preemption applied, his overall concern was trying to figure out why the U.S. government would care about overriding state law here.

The Federal Interest in the Funds

Judge Nazarian viewed FERSA as being about how the proceeds are distributed, not about who may eventually have proper legal entitlement to them after they are distributed. He didn’t see any federal interest in what state-law claims people may make at that point, and especially not in this case when Mr. Campbell had agreed not to take the money but applied for and received it anyway.

For this, Judge Nazarian made an interesting statutory interpretation argument. FERSA’s strict anti-attachment provision — a significant factor in the majority’s analysis — states, “sums in the Thrift Savings Plan may not be assigned or alienated and are not subject to execution, levy, attachment, garnishment, or other legal process” (emphasis added). He reads this as prohibiting attachment when the money is “in” the plan, but having no effect after the money has already been distributed out of the plan.

This makes sense, he argues, because it would be absurd if money couldn’t be subject to execution, levy, attachment, or garnishment after it had been distributed. Money is fungible, he points out, and it certainly can’t be the case that distributed funds are protected from general creditors just because they may have originated from a Thrift Savings Plan. He would follow Andochick and hold federal preemption ends once the funds are paid out.

Problematic Precedent

The difficulty with Judge Nazarian’s approach is that it seems like the U.S. Supreme Court has already rejected it, at least by implication. Judge Nazarian’s explanation of how the statute’s anti-attachment provision only applies to funds “in” the Plan makes sense, but it’s hard to square with Ridgway. There, the anti-attachment provision in the Servicemembers’ life insurance statute (at least as it is written now, see 38 U.S.C. § 1970(g)) applies to payments “due or to become due,” which wouldn’t apply after they’ve been paid.

Yet the U.S. Supreme Court held the Servicemember’s insurance statute preempted a state-law claim to impose a constructive trust on the funds (which actually had been paid into the court in the interim, 454 U.S. at 50) — and a constructive trust would dictate what happened to the money after distribution. Then the U.S. Supreme Court applied Ridgway in Hillman to preempt a state statute allowing another party to sue the beneficiary after-the-fact for an amount equal to the distributed funds. (I’m admittedly a bit confused here by Judge Nazarian’s statement that Hillman “stayed silent on the question on whether a second wife would have a state law claim to those proceeds against the first.” As I understand it, Hillman expressly preempted a state statute that would have allowed the second wife to pursue the proceeds obtained by the first wife.)

Going through the cases cited by Evans and the majority, it seems pretty clear that the pre-distribution or post-distribution timing of the state law claims didn’t mean much to the U.S. Supreme Court; rather, the high court seems much more concerned that beneficiaries of federal plans actually get their money free and clear of other claims to it. Judge Nazarian presents a very persuasive analysis of why this shouldn’t be — heck, I’m convinced. Problem is, much of his argument is equally applicable to the cases that the U.S. Supreme Court decided the other way, and the Appellate Court of Maryland can’t tell the Supreme Court that it is wrong.

Considering the equities involved, I want to agree with Judge Nazarian, but after reading the relevant authorities the precedent just seems a lot lighter on his side of the ledger. Now, it may simply be that, absent some directly controlling U.S. Supreme Court authority about FERSA (which doesn’t exist yet), Judge Nazarian thinks state courts should stick with what he believes is the right outcome — and if that is eventually overturned, so be it. In the meantime, absent a specific pronouncement from the U.S. Supreme Court, judges will have to struggle with the continued discomfort of awarding substantial windfalls to undeserving contract-breachers.