A legal note from Marshal Willick about a recent decision in which Nevada joined with Alaska, Michigan, Washington, and Virginia in protecting the contractual rights of military spouses for indemnification for loss of retirement benefits when the military spouse promises to make up for any loss of retirement benefits caused by his choices but then refuses to do so.

Nevada has a long history of protecting the reasonable expectations of parties with respect to transactions concerning their property rights. I was counsel for Raina Martin in the district court, and on appeal, and this decision is a good one. It continues that tradition and does not reward those who would lie to, cheat, and try to steal from their ex-spouses.

I. BACKGROUND: THE CONUNDRUM OF POST-DIVORCE DISABILITY ELECTIONS

Issues concerning disability benefits are often contentious. Retirement benefits are essentially a form of deferred reward for service, and so are generally divisible upon divorce, while disability benefits are conceptualized as compensation for future lost wages and opportunities because of disabilities suffered, and are thus typically not divisible or attachable. When accepting a disability award requires relinquishing a retirement benefit, the interests of the parties as to the proper characterization of the benefits become instantly polarized.

Nevada has long been in the mainstream of national law on the subject; while our community property statutes are pretty vague on the matter, case law establishes that here, as in most places, payments labeled “disability benefits” are divisible property to the extent they include divisible retirement benefits. See, e.g., Powers v. Powers, 105 Nev. 514, 779 P.2d 91 (1989); see also In re Marriage of Saslow, 710 P.2d 346 (Cal. 1985) (disability benefits may be part replacement of earnings and part retirement).

On June 26, 1981, the United States Supreme Court issued its opinion in McCarty v. McCarty, 453 U.S. 210, 101 S. Ct. 2728 (1981). The Court determined that state community property laws conflicted with the federal military retirement scheme, and thus were impliedly pre-empted by federal law. The majority held that the apparent congressional intent was to make military retirement benefits a “personal entitlement” and thus the sole property of individual service members, so the benefits could not be considered as community property in a California divorce. The Court invited Congress to change the statutory scheme if divisibility of retired pay was desired.

It was, and Congress reacted by enacting the Uniformed Services Former Spouses Protection Act (“USFSPA”) on September 8, 1982, as 10 U.S.C. § 1408. The declared goal of the USFSPA at the time of its passage was to “reverse McCarty by returning the retired pay issue to the states.”

But the USFSPA was written to permit state courts to only address “disposable retired pay,” and disability benefits fall outside that term.

At any time, a military retiree can apply to the Veteran’s Administration to be evaluated for a “service-connected disability.” If the evaluation shows such a disability, a rating is given between 10% and 100%, and “compensation” is paid monthly from the VA in accordance with a schedule giving a dollar sum corresponding to each 10% increase, plus certain additional awards for certain serious disabilities. Still further waivers of retired pay for VA disability pay can be given if the retiree has dependents (a spouse or children, or even dependent parents). It makes sense for a retiree to obtain a disability award, even with a dollar-for-dollar reduction in retired pay, because the disability awards are received tax-free.

The USFSPA set up a federal mechanism for recognizing and enforcing State-court divisions of military retired pay, including definitions. One of these was of “disposable retired pay” (the sum that the military pay center could divide between spouses), which definition has changed over time. For further details, see Marshal Willick, Divorcing the Military: How to Attack, How to Defend.

In Mansell v. Mansell, 490 U.S. 581, 109 S. Ct. 2023 (1989), the United States Supreme Court addressed disability pay for the first time. When the parties had divorced, the 1981 McCarty decision had not yet been issued. The member had retired, and applied for and received disability benefits. The divorce decree included the stipulation that the parties would divide the gross sum of retirement benefits (including both retired pay and disability pay).

After Congress enacted the USFSPA, the member returned to court seeking to modify the judgment to exclude the disability portion of the retired pay from division with his ex-spouse. The State court denied his request, holding the division of the disability portion of the military retired pay was proper. The member appealed.

The U.S. Supreme Court majority reversed, holding that the USFSPA did not constitute a total repudiation of the pre-emption it had declared in McCarty. Since the statute defined “disposable pay” as what was divisible, and excluded disability pay from that definition, the Court concluded that State courts could divide only non-disability military retired pay. The dissent echoed the conclusions reached earlier by the California Supreme Court in Casas v. Thompson, 720 P.2d 921 (Cal. 1986), cert. denied, 479 U.S. 1012 (1987) – that the gross sum of retirement benefits was available to the State divorce court for division.

Ultimately, the matter was remanded to State court. Ironically, that court ruled that the previously-ordered flow of payments from the member to the spouse, put into place prior to the appellate Mansell decision, was res judicata and could not be terminated. In re Marriage of Mansell, 265 Cal. Rptr. 227 (Ct. App. 1989), on remand from 490 U.S. 581, 109 S. Ct. 2023 (1989). In other words, the United States Supreme Court opinion had no effect on the order to divide the entirety of retirement and disability payments in the final, un-appealed divorce decree in the Mansell case itself.

When Congress next amended the Act in 1990, it did nothing to address the Mansell holding. Thus, Mansell is often read to stand for the proposition that the subject matter jurisdiction of the State divorce courts is limited to division of “disposable retired pay.” This may be less important than was thought at the time, however, since courts have widely expressed a willingness to consider the impact of disability or other benefits not included in the definition of “disposable retired pay” when dividing assets or making alimony orders between spouses.

For many years, most courts throughout the U.S. did exactly what the California trial court did on remand in that case, issuing opinions that detailed why they would not allow the inequity of allowing post-divorce status changes by members to partially or completely divest their former spouses, where the original divorce decree had been issued prior to the Mansell decision, or in which the disability was taken by the member after the divorce, thus retroactively dispossessing the spouse.

From 1989 to 2017, with virtual uniformity, courts throughout the United States went to considerable lengths to protect former spouses from the effects of members’ post-divorce waivers of retired pay for disability pay when such waivers partially or completely divested the spouses of sums that had already been awarded to them.

The theory often applied was phrased differently from one court to another, but was essentially that of resulting or constructive trust. In other words, once a divorce was entered dividing the “gross” or “total” or “all” military retirement benefits, the money awarded to the former spouse was no longer considered the member’s property to convert. If the member subsequently applied for and received disability benefits, or took any other action to redirect money already ordered paid to the former spouse back to himself, he violated the divorce decree.

The decision in the cases largely held that to whatever degree direct enforcement of a divorce decree might be prevented by application of federal law, the member would receive any sums that had been awarded to the spouse as a resulting trustee of her funds, and must pay them over to her. The language quoted was the principle espoused earlier by the California Supreme Court in Gillmore, 629 P.2d 1 (Cal. 1981) – that one party should not be allowed to defeat the other’s interest in retirement benefits “by invoking a condition wholly within his or her control.” Other courts have echoed the same thought, in similar language.

II. HOWELL CHANGES EVERYTHING

In 2017, however, the United States Supreme Court decided Howell, 581 U.S. __, 137 S. Ct. 1400 (2017) and in an instant swept away decades of that nearly universal consensus regarding indemnification of spousal interests when a member waives retired pay for disability pay.

The divorce decree of John and Sandra Howell awarded Sandra 50% of John’s future Air Force retirement pay, which she began to receive when John retired the following year.

About 13 years later, John applied for, and the Department of Veterans Affairs awarded, a “service-connected disability” award qualifying him for VA disability pay; the VA found John 20% disabled. To receive disability pay, John was required to give up an equivalent amount of retirement pay.

By his election, John waived about $250 of his retirement pay, half of which was taken from Sandra’s 50% share and paid to him instead. Sandra petitioned the Arizona family court to enforce the original divorce decree and restore the value of her share of John’s total retirement pay. The court held that the original divorce decree had given Sandra a vested interest in the pre-waiver amount of John’s retirement pay and ordered John to ensure that she receive her full 50% without regard for the disability waiver. The Arizona Supreme Court affirmed, holding that federal law did not pre-empt the family court’s order.

The United States Supreme Court reversed, holding that a state court may not order a veteran to indemnify a divorced spouse for the loss in the divorced spouse’s portion of the veteran’s retirement pay caused by the veteran’s waiver of retirement pay to receive service-related disability benefits.

Resurrecting the McCarty holding from 1981 that federal law had “completely pre-empted” State community property law, and the Mansell holding from 1989 that the USFSPA only overcame that pre-emption to a “limited extent,” a unanimous Court found that Mansell “determines the outcome here.” The Court held that it makes no difference whether the disability occurs before or after a divorce; either way, the waived pay was beyond the power of a State court to address as a matter of federal pre-emption.

Dismissing decades of holdings of the great majority of State courts and the arguments of the Solicitor General (who filed an amicus brief in favor of the indemnified spouse), the Court sided with the minority of States that had found some preemption in similar circumstances and held that:

the temporal difference [between disability claims made before or after divorce] highlights only that John’s military retirement pay at the time it came to Sandra was subject to later reduction (should John exercise a waiver to receive disability benefits to which he is entitled). The state court did not extinguish (and most likely would not have had the legal power to extinguish) that future contingency. The existence of that contingency meant that the value of Sandra’s share of military retirement pay was possibly worth less—perhaps less than Sandra and others thought—at the time of the divorce.

The Court analogized military retired pay to a “defeasible property interest” subject to a condition subsequent.

Similarly, the Court dismissed any concern that the spouse’s property share had vested upon divorce, holding that “State courts cannot ‘vest’ that which (under governing federal law) they lack the authority to give.”

The Court found that any orders requiring the member to indemnify or reimburse the spouse dollar for dollar so as to restore the portion of the retired pay lost due the member’s post-divorce waiver are pre-empted, “regardless of their form” because they would “displace the federal rule and stand as an obstacle to the accomplishment and execution of the purposes and objectives of Congress.”

The Court threw a bone to spouses by “recognizing”:

as we recognized in Mansell, the hardship that congressional pre-emption can sometimes work on divorcing spouses. See 490 U.S., at 594. But we note that a family court, when it first determines the value of a family’s assets, remains free to take account of the contingency that some military retirement pay might be waived, or, as the petitioner himself recognizes, take account of reductions in value when it calculates or recalculates the need for spousal support.

[Emphasis added.]

For that proposition, the Court cited its own holding allowing contempt sanctions to issue against a member for non-payment of child support even if his only income was disability pay, Rose v. Rose, 481 U.S. 619, 630–634, and n. 6 (1987), and the “savings clause” of the USFSPA making state court judgments not payable under the USFSPA collectible by way of other State court proceedings – 10 U.S.C. § 1408(e)(6) – which their own holding in this case prohibited, as it reversed the Arizona order for indemnification.

The savings clause states that no part of the USFSPA “shall be construed to relieve a member of liability for the payment of alimony, child support, or other payments required by a court order on the grounds that payments made out of disposable retired pay under this section have been made in the maximum amount permitted” and that any benefits awarded but not payable by DFAS “may be enforced by any means available under law other than the means provided under this section.”

III. CHAOS AND RESOLUTION IN THE STATE COURTS

Cases began popping up all over the country of members who had elected disability after divorce trying to prevent their former spouses from collecting indemnification payments that they had promised to make in long-final divorce decrees.

The first four State Supreme Court cases to address the issue were in Alaska, Michigan, Nevada, and Virginia. A court of appeals decision in Washington state came out the same way.

In the Alaska case, Jones, 505 P.3d 224 (Alaska 2022), the parties had expressly agreed to an indemnification provision in the Property Settlement Agreement of their divorce decree. The Alaska Supreme Court distinguished Howell on that basis, explaining that “[a]lthough Howell makes clear that state courts cannot simply order a military spouse who elects disability pay to reimburse or indemnify the other on a dollar for dollar basis, Howell does not preclude one spouse from agreeing to indemnify the other as part of a negotiated property settlement.” The Alaska court embraced the observation by one expert commentator: “[i]t’s one thing to argue about a judge’s power to require … a duty to indemnify, but another matter entirely to require a litigant to perform what he has promised in a contract.” See 2 Mark E. Sullivan, THE MILITARY DIVORCE HANDBOOK: A PRACTICAL GUIDE TO REPRESENTING MILITARY PERSONNEL AND THEIR FAMILIES 691 (3d ed. 2019) (explaining that the Howell decision “magnifies the importance of using an indemnification provision in the property settlement” for parties negotiating division of marital property). The contractual indemnification provision was approved and enforced.

In the Michigan case, Foster, No. 161892, 2022 WL 1020390 (Mich. Apr. 5, 2022), the court found that the contractual indemnification did violate federal law, “impermissibly” dividing military disability pay in violation of federal law, but the court further found, as the California court had on remand in Mansell many years earlier, that “the doctrine of res judicata applies even if the prior judgment rested on an invalid legal principle,” and “a divorce decree which has become final may not have its property settlement provisions modified except for fraud or for other such causes as any other final decree may be modified.” Again, the contractual indemnification provision was enforced.

The Nevada case involved a couple, Erich and Raina, who married in 2002 while Erich was serving in the military. Erich filed a complaint for divorce, and the district court ordered mediation, resulting in a signed marital settlement agreement.

The decree allotted to Raina half of Erich’s military retirement benefits and provided that Erich was to reimburse Raina for any reduction in that amount if he elected to receive disability pay instead of retirement pay. A year later, the court entered an OID dividing the military benefits, also including a provision under which Erich was to pay Raina directly to make up any deficit created if he applied for disability pay.

The language used is part of the standard form used by QDRO Masters to divide military retirement benefits which I created in 1995 and has been in use throughout the country since that time. See, e.g., Janovic v. Janovic, 814 So. 2d 1096 (Fla. Ct. App. 2002) (noting as “standard language” the form paragraphs created for courts to use in decrees entered after Mansell to eliminate any ambiguity of the intent to contractually indemnify, first published by the ABA as a guide for drafting attorneys in the form of “Military Retirement Benefit Standard Clauses” in 18 Family Advocate No. 1 (Summer, 1995) (Family Law Clauses: The Financial Case) at 30).

Erich retired from the military in 2019, and Raina began receiving her agreed-upon share of Erich’s retirement benefits from DFAS. In 2020, DFAS informed Raina that she would no longer be receiving benefit payments from DFAS because Erich opted for full disability pay, waiving all retirement pay. Erich informed Raina that he would not pay her as agreed, claiming he was not required to do so under federal law.

In the subsequent motion for enforcement, the district court issued an order enforcing the divorce decree, finding that federal law did not “divest the parties of their right to contract” to the terms in the divorce decree requiring Erich to reimburse or indemnify Raina for any waiver of military retirement benefits resulting in a reduction of her payments. The district court also concluded that the decree was binding on the parties as res judicata, and ordered Erich to pay Raina as he promised.

Erich appealed. The Court of Appeals reversed the order enforcing the divorce decree, largely based on its decision the year before in Byrd v. Byrd, 137 Nev. ___, ___ P.3d ___ (COA Adv. Opn. No. 60, Sept. 30, 2021). The Nevada Supreme Court granted Raina’s petition for review, and the American Academy of Matrimonial Lawyers (AAML) filed an amicus brief in support of Raina, in which the Family Law Section of the State Bar of Nevada joined.

The majority of the Nevada Supreme Court adopted the reasoning of both the Alaska court in Jones, and the Michigan court in Foster. It found that federal law did not bar the parties from contracting for any kind of payments, noting the mention in Howell that parties and courts were directed to “take into account” the contingency of possible waiver and do something about it if they wished, and that the provision was also enforceable as a matter of res judicata.

The Court found Howell and Mansell distinguishable, finding that neither case bars parties themselves from taking into account the possibility that one divorcing spouse may elect to receive disability compensation in the future and structuring the divorce decree accordingly.

The majority found no federal preemption to enforcement of such an agreement, since nothing in 10 U.S.C. § 1408 addresses what contractual commitments a veteran may make to his or her spouse in a negotiated property settlement incident to divorce, but only what divisions a state court may impose based on community property laws, noting the history recounted above of the Mansell case after remand.

The Court reaffirmed its prior enforcement of such agreements on the basis of res judicata, see Shelton v. Shelton, 119 Nev. 492, 78 P.3d 507 (2003), noting that its prior holdings “aligns with the majority practice in state courts following Mansell,” and that “divorce decrees that incorporate settlement agreements are interpreted under contract principles.”

Two justices concurred, finding (as the Michigan court had) that the indemnification provision did run afoul of the prohibition of division of disability benefits, but since it was contained in a long-since-final, unappealed divorce decree, it could not be collaterally attacked as a matter of res judicata (claim preclusion).

Erich filed a motion for rehearing, which was denied after further briefing. He then filed a petition for certiorari in the United States Supreme Court, which as of this writing is still pending in Martin.

Since Martin, there has been one additional State Supreme Court decision in this subject area, in Virginia, in Yourko v. Yourko, Va Case No. No. 220039. That decision, like that of the Alaska court, focused on the parties’ ability to contract and found that it violated no federal law:

For these reasons, we expressly adopt the holding of the Court of Appeals in Owen that, with regard to the division of military retirement benefits, “federal law does not prevent a husband and wife from entering into an agreement to provide a set level of payments, the amount of which is determined by considering disability benefits as well as retirement benefits.” 14 Va. App. at 628. Along these same lines, federal law does not bar courts from upholding such agreements or from enforcing indemnification provisions that may be included to ensure that payments are maintained as intended by the parties.

The above paragraph included a footnote directly citing the other decisions discussed above and a Washington state court:

In reaching this conclusion, we join a growing number of states holding that “Howell does not preclude one spouse from agreeing to indemnify the other as part of a negotiated property settlement.” Jones v. Jones, 505 P.3d 224, 230 (Alaska 2022). See also Martin v. Martin, 520 P.3d 813, 819 (Nev. 2022); In re Marriage of Weiser, 475 P.3d 237, 249 (Wash. Ct. App. 2020).

As of this writing, the member filed a petition for rehearing in that case which was denied.

IV. CONCLUSION

The bottom line—for now—is that a final, unappealed divorce decree containing a provision for contractual indemnification as set out in the “standard form” I created will be enforced in multiple states. As with several issues, further United States Supreme Court cases could alter the reality of what can be done to actually enforce equal division of community property and hold people to the agreements that they make. In any just world, that will continue to be the result.

V. QUOTES OF THE ISSUE

“The worst thing you can possibly do in a deal is seem desperate to make it. That makes the other guy smell blood, and then you’re dead.”
– Donald Trump, The Art of the Deal

“If you make a deal with a fool, don’t be surprised when they act foolishly.”
– Jeffrey Archer, Only Time Will Tell

“I have a loyalty that runs in my bloodstream, when I lock into someone or something, you can’t get me away from it because I commit that thoroughly. That’s in friendship, that’s a deal, that’s a commitment. Don’t give me paper – I can get the same lawyer who drew it up to break it. But if you shake my hand, that’s for life.”
– Jerry Lewis

“If a deal looks too good to be true, it probably is.”
– Michael Douglas

“A verbal contract ain’t worth the paper it’s printed on.”
– Samuel Goldwyn

“Deal faithfully and truly with your own soul.”
– Ellen G. White

Marshal S. Willick
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