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T.J. Ryan Prevails in an Appeal Before the Ninth Circuit

In a case successfully argued by T.J. Ryan, the U.S. Ninth Circuit Court of Appeals affirmed the strength and reach of Arizona’s revocation-on-divorce statute.

On July 14, 2017, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit ruled, in Lazar v. Kroncke (Case No. 15-15078), that:

  • federal law does not preempt Arizona’s revocation-on-divorce (ROD) statute;

  • Arizona's ROD statute is superior to choice-of-law provisions that state otherwise; and

  • Arizona's ROD statute’s effect does not violate the Contracts Clause of the United States Constitution.

The case was successfully argued by Frazer Ryan attorney T.J. Ryan, who prevailed in Arizona district court and again before the Ninth Circuit.

Background

A married couple divorced while living in Arizona. During the marriage, Husband designated Wife as the beneficiary of his IRA account; after the divorce, he failed to revoke or update his prior designation. When he died, his estate asked the investment firm holding the account to pay its proceeds to the estate pursuant to Arizona’s ROD statute (A.R.S. § 14-2804).

Arizona’s ROD statute provides that, upon divorce, any revocable disposition of property made by a divorced person to that person’s former spouse is revoked, unless expressly set forth in a relevant instrument’s express terms.

Ex-Wife filed a lawsuit in federal court, claiming that she (the named beneficiary), and not ex-Husband’s estate, was entitled to the IRA funds. She argued that federal IRA regulations and ERISA preempted Arizona’s ROD statute and that Arizona’s ROD statute violated the Contracts Clause of the United States Constitution by interfering with the decedent’s contractual expectations that she be the beneficiary. She also argued that a choice-of-law provision in the IRA documents required the application of California law, under which divorce establishes only a rebuttable presumption of intent to revoke — a much looser rule than that embodied in Arizona’s ROD statute.

At TJ Ryan’s urging, the federal district court dismissed ex-Wife’s lawsuit. She appealed to the Ninth Circuit.

Appellate Decision

On July 14, 2017, the Ninth Circuit panel rejected ex-Wife’s arguments and ruled in favor of ex-Husband’s estate, as advocated by T.J. Ryan.

In its ruling, the panel affirmed that federal IRA distribution rules govern only how distributions will be treated for tax purposes, not who is entitled to such distributions. Therefore, federal regulations do not preempt Arizona’s ROD statute from revoking a distribution because of a divorce.

The panel also found that, under conflict-of-law principles, Arizona courts will not follow a choice-of-law provision if applying the law of the chosen state (in this case California) would run contrary to a fundamental policy of Arizona law. The panel concluded that Arizona’s ROD statute reflects a fundamental policy of favoring the donor’s probable intent, providing clarity, and avoiding litigation.

Significantly, the panel ruled that the ROD’s modification of the dispositive aspect of the IRA – designation of beneficiary – did not violate the Contracts Clause. Specifically, the panel held that ex-Wife possessed no vested contractual right, because the designation of beneficiary was freely modifiable by ex-Husband and never vested.

Legal Takeaway

For the practitioner, Lazar v. Kroncke illustrates the power and the reach of Arizona’s ROD statute. Under A.R.S. § 14-2804, absent “express terms” in a post-divorce governing instrument, court order, or property settlement agreement, an Arizona divorce will revoke the designation of an ex-spouse as beneficiary of IRA funds.