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.
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.
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
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.
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.
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.