In its decision, the U.S. Ninth Circuit Court of Appeals affirmed the strength and reach of Arizona’s revocation-on-divorce statute.

Lazar v. Kroncke. Read the Opinion | Read a Summary | View T.J. Ryan’s Oral Argument

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.

On June 18, 2018, the U.S. Supreme Court denied certiorari in the appeal of the Ninth Circuit’s decision, following their ruling in Sveen v. Melin, which overturned a conflicting ruling from the Eighth Circuit, conforming the law to the rulings of the Ninth Circuit in Lazar v. Kroncke and of the Tenth Circuit in a similar case. (More below about the Supreme Court’s ruling.)

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.

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 T.J. 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.

U.S. Supreme Court

On June 11, 2018, in an 8-1 decision (J. Gorsuch dissenting), the Supreme Court reversed the 8th Circuit’s decision in Sveen v. Melin, thereby upholding the retroactive application of ROD statutes against Contracts Clause scrutiny.

Previously, both the 9th Circuit (in Lazar v. Kroncke) and 10th Circuit (in Stillman v. Teachers Ins. & Annuity Assn. College Retirement Equities Fund) had ruled that ROD statutes do not violate the Contracts Clause when applied to governing instruments created before the enactment of the statute. However, the 8th Circuit – the first to have decided the issue, in 1991 (Whirlpool Corp. v. Ritter) – found that such application violated the Clause.

In Sveen, the Court was asked to resolve the circuit split, and did so, siding with the 9th Circuit and 10th Circuit decisions and reasoning.

We are pleased that the Supreme Court has ruled upholding ROD statutes and, in doing so, granting us victory in Lazar in the form of denial of a pending Petition for Certiorari.

The Contracts Clause of the U.S. Constitution (“Clause”) restricts the states’ power to disrupt contractual arrangements through legislative acts. The Clause originated after the Revolutionary War, when states legislatively attempted to relieve certain debtors of their debts. The Clause applies to all contractual activity, but not all laws affecting contracts violate the Clause. To test whether legislation violates the Clause, the court first examines whether the law operates “a substantial impairment” of a contractual relationship. Examining whether a law substantially impairs a contract, the Court has considered the extent to which the law undermines the contractual bargain, interferes with a party’s reasonable expectations, and prevents the party from safeguarding or reinstating his rights. If substantial impairment is found, then the examination focuses on the means and ends of the legislation, whether the law provides an “appropriate” and “reasonable” way to advance “a significant and legitimate public purpose.” If it does not, the law violates the Clause and is contrary to the Constitution, and is struck down.

ROD statutes operate to modify dispositive provisions in governing instruments (wills, trusts, life insurance, annuities, certain retirement accounts) to revoke or extinguish the beneficial interests of ex-spouses and their relatives after divorce. In Sveen, the decedent purchased life insurance naming his then-wife (Melin) as the primary beneficiary, and his children from a prior marriage (the Sveens) as the contingent beneficiaries. After Melin and the decedent divorced, he failed to modify or update the beneficiary designation. After his death, the Sveens asserted Minnesota’s ROD statute, arguing that the statute revoked Melin’s interest in the policy upon her divorce from decedent, and they, as contingent beneficiaries, must receive the policy proceeds. The District Court sided with the Sveens, applying the ROD statute. The 8th Circuit reversed, citing the 8th Circuit 1991 decision in Whirlpool as precedent binding on the Circuit.

The Court (J. Kagan writing for the majority) found that the Minnesota statute (modeled upon Uniform Probate Code section 2-804 and substantially similar to A.R.S. Section 14-2804) did not “substantially impair” the contract the decedent had with the insurance company.

Justice Kagan explained, “[f]irst, the statute is designed to reflect a policyholder’s intent—and so to support, rather than impair, the contractual scheme. Second, the law is unlikely to disturb any policyholder’s expectations because it does no more than a divorce court could always have done. And third, the statute supplies a mere default rule, which the policyholder can undo in a moment.”

Further, the majority decision cited a long lineage of cases in which statutes which imposed minimal paperwork burdens withstood Contracts Clause scrutiny. In fact, in those cases, the contractual interests could be extinguished if the paperwork requirement was not followed, contrasted against the ROD statutes which merely alter the recipient beneficiary of the policy proceeds, account assets, or retirement benefits.