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Military Pensions and VA Disability Benefits in CA Military Divorce!

Family Law Three-Card Monte – Limitations to Remedies Concerning Military Pension Benefits Being Shifted to VA Disability Benefits Under Cassinelli and Howell

By: Michael C. Peterson, CFLS

A November, 2016 appellate decision in California (Cassinelli), coupled with a May, 2017 United States Supreme Court decision (Howell), seemingly forecloses all meaningful enforcement avenues in California for aggrieved spouses of former military members whose divided share of community military pension benefits has been diluted or eliminated by the latter party’s unilateral, extra-judicial election to receive VA disability benefits (thereby waiving all or part of their military pension). These developments require all Family Law attorneys and bench officers to use caution and to be aware of the current state-of-the-law in cases involving military pensions, and also to get creative on how to constitutionally safe-guard parties’ expectancies.

The Cassinelli Decision

California’s Marriage of Cassinelli (2016) 4 CA5th 1285, 210 CR3d 311, a decision reached by our own Fourth Appellate District, Division Two in Riverside, is now published and citable per California’s Judicial Council (but note that a Petition for Certiorari is presently docketed with the United States Supreme Court). Cassinelli places significant limits on the remedies available in California for the aggrieved non-military spousal whose community interest in the veteran-spouse’s military pension has been reduced or eliminated due to a shifting of payments from pension to disability benefits, and also makes an announcement of what that remedy is solely to be: Money damages (and of a non-fraudulent nature under the facts of that case).

In Cassinelli, the parties entered into a stipulated judgment whereby they equally divided the community interest in the husband/military-member’s pension, and reserved jurisdiction on spousal support. The wife’s share of that pension was to be 43%, or $541 per month, and the husband’s share was 57% for $791 per month. After 26 years or so receiving the pension, the husband was determined to have a combat-related disability, and he began receiving $1,743 in VA disability benefits and $1,389 per month in combat-related special compensation (likely related to his exposure to Agent Orange in Viet Nam). In doing so, the husband was required to waive a dollar-for-dollar portion of the pension under federal law. With the waiver of the pension, the wife began receiving nothing from DFAS. The wife moved for an increase in spousal support equal to the amount of her share of the waived pension. The trial court awarded the wife $541 per month in increased spousal support (apparently increased from zero).

On appeal, among the various issues raised by the husband, the Cassinelli Appellate Court held that the trial court erred in awarding the wife’s lost portion of the military pension as spousal support. In so concluding, it provided an analysis of the problem of pension-shifting in the context of then-federal-case-law-and-statute, and state court responses to this problem. It provided an in-depth discussion of California’s leading case on military pension shifting, In re Marriage of Krempin (1999) 70 CA4th 1008, and its dissection of the majority rule (22 states, including California, allowing for some equitable remedy to the non-military spouse in the form of support reassessment or redistribution of martial property) and minority rule (5 states allowing for no remedy) nationwide. The reasons for the majority rule boils down to: (1) The non-military spouse has a vested property right which should not be unilaterally reduced/eliminated by the action of/waiver by the former military member spouse, and (2) There are other potential assets of the former military member spouse to reimburse the non-member spouse.

The Appellate Court in Cassinelli went on to discuss the intention of the parties as manifested in the MSA/judgment. In so doing, it held that an express indemnification agreement protecting the non-member spouse in a MSA/judgment dividing a military pension is not required to allow a court to equitably redistribute, and that the language of the Cassinelli’s MSA/judgment led to the conclusion that the parties did not intend to allow the military member to defeat the retirement pay division terms by the husband’s unilateral waiver. It discussed the need for uniformity, the fact of a great number of self-represented litigants in family law created a significant policy concern about losing vested property rights without express indemnification provisions, and the Krempin statement that the lack of express indemnification language was not fatal. As to the specific terms of the Cassinelli’s MSA/judgment, it noted that: (1) Language in the document dealt with pension benefits, but that no express waiver of disability benefits was present, and (2) A presumption existed that the non-member’s right to retirement pay was “indefeasible.”

In terms of the remedy used by the trial court, the Cassinelli Appellate Court made dollar-for-dollar spousal support increase to effectively indemnify the wife for her lost pension benefit expectancy an unavailable remedy in California. It noted that, of the majority rule states, only a minority allowed for modified spousal support to be the remedy. Moreover, it stated that California courts could not do so because they were bound by Fam. C. § 4320’s factor analysis, and the fact that the trial court increased spousal support dollar-for-dollar in the amount lost by the wife as a result of the husband’s waiver of pension belied any credible position that a 4320 analysis had been, in fact, used by the trial court. In part, it reasoned that “a civilian spouse” should be entitled to recover the amount lost, regardless of earning capacity, other assets and obligations, remarriage, the former martial standard of living, or other 4320 factors.

The Cassinelli Appellate Court then went on to renounce constructive /resulting trust as to other assets held by the (former) service member spouse as available remedies as well, reasoning that would violate federal law and the holding of Mansell v. Mansell (1989) 490 U.S. 581, particularly its prohibition against community property states treating disability benefits as divisible property.

The Cassinelli Appellate Court went on to state that “[w]e believe it is better to hold that the military member has caused the loss or destruction of property right belonging to the civilian spouse and therefore be required to pay the civilian spouse money damages.” It continued “we do not mean to characterize this action as fraudulent, a breach of an implied covenant of good faith and fair dealing, contempt of court, or otherwise blameworthy. But the action (merely) upset the division of property as adjudicated in the judgment.”

Perhaps in the most unsatisfying portion of the Cassinelli opinion, the Appellate Court gave no substantive direction to enforcement of its pronounced money damages remedy for the aggrieved civilian spouse. It said there was little to distinguish the special combat pay from the disability pay in terms of enforcement. It simply pointed to the husband’s other assets as potential sources of recovery: His house and his car. Cynically, it stated “[i]t is possible that Janice will end up with a paper judgment that she can never enforce. Or Robert will choose to pay her out of his exempt assets to protect his nonexempt assets from seizure. Or Janice will settle her claim for a significantly reduced amount in exchange for immediate payout of Roberts’s exempt assets. Or Robert will win the lottery. But even if he is judgment-proof, she is entitled to a judgment.”

Key Takeaways from Cassinelli

The remedies available to non-military member spouses aggrieved by the other spouse converting his/her military pension benefits to disability benefits shrank considerably in California under Cassinelli, and now the likelihood of the former ever collecting is equally dubious: No in-kind spousal support increases, no reallocation of already-divided property, and no constructive trusts on property of the veteran-spouse. Without a doubt, many current and former military members will be ‘judgment-proof’ in terms of the existence of non-exempt assets in the traditional money judgment- enforcement context.

Moreover, particularly with the non-fault language of the Cassinelli decision concerning pension waiver under the facts (there was no evidence the husband’s purpose was to cut off the wife’s share of his pension, but simply that his purpose was to convert it to larger monthly disability benefits, which are tax-free by the way), essentially making it akin to a breach of contract, this could mean the sole remedy of money damages as allowed by the decision would be fully dischargeable in a bankruptcy proceeding by the military spouse. Under the Bankruptcy Code as amended in 2005, only domestic support obligations based on need (11 USC § 523(a)(5)), and a debt to a spouse, former spouse or child that is not a “domestic support obligation” but that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other court order, or a determination made by a governmental unit in accordance with state or territorial law (11 USC § 523(a)(15)) are non-dischargeable debts in bankruptcy’s interaction with family law. A money judgment for damages as a result of the pension waiver, without the fault/ fraud color, arguably would not fall within either of these exemptions from discharge, as it is not need-based and temporally not rendered in the course of divorce or (especially absent an express indemnification clause concerning pension-waiver-for-disability-benefits).

Another area of concern is the fact that many MSA/judgments involving military pensions occur, unlike the facts of Cassinelli, while the member spouse is still in the military and earning credit towards the 20-year vesting period. As such, many cases necessarily involve division orders that do not specify a dollar amount, but rather a set of contingency language about the anticipated future retirement becoming vested with the percentage determined by arithmetically dividing the number of months of CP pension gains by the number of total creditable military service months. Does this mean that, there being no set dollar amount for pension payments to the civilian spouse in those kinds of MSAs, it is more likely to be dischargeable in bankruptcy? Probably, yes. Is it more likely that the lack of express indemnification provision will allow for no equitable remedy at all? Probably also yes.

Conversely, does it mean that a modification of spousal support, if not dollar-for-dollar reimbursement of the out-spouse’s lost pension payment but rather under a 4320 analysis, as an end-around of Cassinelli would be more viable? Likely yes, but because most MSAs do not include judgment-time marital standard of living and other 4320 factors as recited facts, some (perhaps years) after-the-fact determination of what the marital standard of living was at the time of separation will often need to be litigated so that a change can occur. Moreover, what if the non-member’s spouse’s lot in life has improved dramatically through career development, inheritance, or upwardly-mobile remarriage? Those spouses might not receive any form of compensation for their lost pension benefits under a 4320 analysis. And what about all those spouses who agreed to waive spousal support and terminate the trial court’s jurisdiction over the issue? And what about cases that were not settled but instead went to trial, and resulted in a bench decision where the trial court did not consider the pension-waiver-for-disability-benefit possibility and did not include some contingency provision should such a scenario occur in the future? As discussed below regarding the USSC’s decision in Howell, it is possible that aggrieved spouses in such circumstances are likely without any kind of legally-cognizable remedy.

The Howell Decision

In the wake of California’s Cassinelli comes the USSC’s decision in Howell v. Howell (2017) 581 U.S. ____ (a copy of the opinion can be ‘googled’ by entering “USSC Howell,” and otherwise located at https://www.supremecourt.gov/opinions/16pdf/15-1031_hejm.pdf). It was published six months after Cassinelli, in May, 2017.

Howell’s holding is a sweeping bright-line rule effectively gutting equitable remedies as developed over the past 40 years in California: 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. In other (and this author’s) words, any remedy sounding in indemnification or reimbursement is a violation of the U.S. Constitution.

An excellent article on Howell entitled “The Death of Indemnification” was published by ACFLS in the Summer, 2017 Journal edition, and was authored by Mark E. Sullivan, Esq. of Sullivan & Tanner in Raleigh, North Carolina (author of the Military Divorce Handbook, a must-own for any family law practitioner who deal with service member divorces). While Mr. Sullivan’s article discusses Howell as a USSC precedent under federal case law, the instant article attempts to deal with Howell in the context of California law, and particularly Cassinelli.

The pertinent, substantive facts of Howell are near-identical to those of Cassinelli: The wife was awarded 50% of the service-member husband’s military retirement pay; the divorce took place in a community property state (Arizona); 13 years after the parties had been receiving military pension pay (50% each), the husband was determined to have a 20% disability, the husband unilaterally and extra-judicially elected to receive VA disability benefits of $250 per month causing a corresponding decrease by waiver of $250 per month to his military pension income; this waiver caused the wife’s one-half of the military pension pay to be reduced by $125 per month.

The Howell opinion began by reasoning that many former military service members elect to waive a portion of their pension income, which is taxable, to receive non-taxable VA disability benefits, this being a logical, economic-maximizing choice allowed by law. It then went on to discuss the legal history of military pension division, and waiver of pension benefits, in community property states, starting with McCarty v. McCarty (1981) 453 U.S. 210 [holding that military pensions were not community property subject to division], Congress’s 1982 response to McCarty with the enactment of the Uniformed Services Former Spouses’ Protection Act [expressly allowing military pensions to be divisible community property, except as to portions thereof waived], and the USFSPA’s interpretation by the USSC in Mansell v. Mansell (1989) 490 U.S. 581 [holding that the pre-judgment waived portion of military pension pay, and any other portion of a military service member’s total retired pay, could not be divided by a California court despite those parties’ express agreement in their judgment to the contrary because Congress only gave a “precise and limited” exception expressly and only to military pensions as being divisible under the USFSPA].

Backtracking to the procedural history of the case, the Howell wife requested the Arizona Family Law trial court to enforce the original decree. It did so. The case made its way to the Arizona Supreme Court, which framed the issue as one of indemnification by reimbursement from the veteran-husband to the wife for pension income the latter lost on account of the former’s choice to waive a portion of the pension for disability income benefits, and upheld the trial court’s decision that such indemnification and reimbursement was lawful.

According to the USSC, the Arizona Supreme Court’s analysis and resulting decision incorrectly turned on the timing of the waiver: Because the veteran-spouse waived/elected disability benefits after (rather than before) the judgment, federal law under the ruling of Mansell did not control or preempt reimbursement and indemnification. Not true according to the USSC which came back with a harsh analysis of the temporal-reasoning supporting the Arizona Supreme Court’s decision (and expressly noted “like several other states” perhaps forewarning California), countering that such “temporal difference” merely meant the Howell wife and the Arizona trial court should have recognized her portion of the pension could be worth less than she thought or expected, because it was based on a contingency such as a veteran-spouse’s subsequent waiver. In other words, the Howell wife’s right to a dollar-amount-certain from the military pension was not truly ‘vested’ in any cognizable sense of the word, despite the Arizona Supreme Court’s characterization to the contrary, because state courts cannot give that which they do not have: Only Congress can mandate what is includible and excludable from the USFSPA in terms of divisible property interests related

to military retirement benefits, and while Congress included military pensions for community property states as dividable, it excluded waived portions thereof.

The USSC went on to rule that state courts should not use nomenclature tricks like “reimburse” and “indemnify” rather than “divide” as to military retirement benefits that are not specifically a military pension because “the difference is semantic and nothing more.” State court attempts to compensate and make whole aggrieved military spouses improperly “displace the federal rule and stand as an obstacle to the accomplishment of purposes and objectives of Congress. All such orders are thus pre-empted.”

The Howell decision effectively holds that there is no valid and direct form of indemnification, such as a state court ordering the former military service member to pay the other spouse a monthly amount to make the other spouse whole (as the wife had requested). Nor can a state court order DFAS to re-apportion the remaining military pension benefits among the spouses, available to such an aggrieved spouse.

The USSC concluded its opinion in Howell by recognizing the “hardship congressional pre-emption can sometimes work on divorcing spouses.” It offered that state family courts can discount the value of military pensions as subject to contingency in the form of waiver. Moreover, they can take account of such potentially reduced value “when it calculates or recalculates the need for spousal support.” But in any event, the Arizona Supreme Court’s decision upholding reimbursement and indemnification was reversed.

Key Takeaways From Howell

First, it seems very dubious that Cassinelli, its decision, and its holding, if reviewed and an opinion becomes published by the USSC, will stand. There is nothing really to distinguish compensation in the form of “money damages” as the sole remedy in California from reimbursement and indemnification in Arizona as it relates to monies lost by aggrieved spouses whose exes have converted military pensions to VA disability and other benefits. California case law on this subject, and its notion of “vested” and indefeasible” rights must be totally scrapped for they are misplaced and the conclusions they have led to are unconstitutional.

Second, all those court orders in California and the other 21 states in this nation sounding in indemnification going back to 1982’s enactment of the USFSPA, except those that increased spousal support predicated on an increased need and/or increased ability to pay, are probably null and void. Oh, what a headache. It is ironic that the trial (but not appellate) court in Cassinelli apparently got it right, at least to the form of remedy (spousal support modification) which does not offend the U.S. Constitution (but may offend 4320 and other statutes such as remarriage terminating spousal support).

This author has racked his brain for viable and effective solutions to the problems for out-spouses facing situations similar to Cassinelli and Howell. One option for the bar’s best practices might be to include express indemnification clauses in every judgment involving military pensions, whether retirement age and eligibility has been reached or not by the parties in a particular case. However, such certainly runs afoul of Mansell, and would result in unenforceable terms for want of constitutionality. Another option would be for bench and bar to have present value calculations of military pensions, and in-kind divide or otherwise equalize that value with awarding other property to, or creating a money judgment in favor of, the non-military spouse. But that runs afoul of Howell and its clear indication that pension rights are not vested other than for past payments and for the month the check is sent out in the mail by the DFAS to the non-military spouse. It probably also runs afoul of California law concerning division of contingent, future benefits. A third possible option is for attorneys representing non-military spouses to bargain-for and include clear recitals of 4320 factors in MSAs that include expectancies of non-vested pension benefits as part of the analysis; perhaps more protective would be contingent language that should such benefits be waived that spousal support shall be increased dollar-for-dollar to the amount lost by the non-veteran spouse (thus creating a contract right and not necessarily requiring a reevaluation of 4320 factors).

Really, a legislative response is required to fix this state of affairs. The 97th Congress did so in 1982 (under a Republican President and Senate, and a Democratic House), and it could do so again today by allowing family courts in community property states to divide military retirements benefits other than pensions. Perhaps the California Legislature might also help the situation by making an exception from full 4320 analysis cases that present military pensions waived in favor of disability benefits. But as things stand, need-based 4320 spousal support modification appears to be the only viable, constitutionally-sound method for practitioners and bench officers working under Cassinelli and Howell, and as a result many military member’s spouses have seen their share of a military pension shrink or disappear, such as those who have remarried, have waived spousal support, or have otherwise improved their circumstances since divorce will have no remedy through the courts of California to recapture the benefits of the bargain they made, and for others the remedy might not result in a satisfying dollar-for-dollar reimbursement (and have high litigation costs barriers to boot – pun intended).

Author: Michael C. Peterson, CFLS

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