• Military Disability Pay: It’s not marital property but it is income

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    In an opinion issued yesterday, the NC Court of Appeals reaffirmed that while military disability pay cannot be distributed by a court in equitable distribution, it is income that can be considered when the trial court is looking for a source of payment for a distributive award. Lesh v. Lesh, NC App (Jan. 16, 2018). In reaching this decision, the court rejected the argument that this rule was changed by the recent decision by the US Supreme Court in Howell v. Howell, 137 S. Ct. 1400 (2017), wherein the Court reiterated that federal law prohibits the distribution of  military disability in equitable distribution.

    Lesh and Howell present a good opportunity to review the law regarding military disability pay in domestic relations cases.

    Military Disability Pay Cannot be Distributed in ED

    The federal Uniformed Services Former Spouses’ Protection Act authorizes states to treat veterans’ “disposable retired pay” as property divisible upon divorce, 10 U. S. C. §1408, but the definition of disposable retired pay does not include disability benefits. Therefore, federal law prohibits the distribution of military disability benefits in equitable distribution proceedings. Mansell v. Mansell, 490 US 581 (1989). Military disability pay is the separate property of the veteran. Lesh; Hillard v. Hillard, 223 N.C. App. 20 (2012); Halstead v. Holstead, 164 NC App 543 (2004); Bishop v. Bishop, 113 NC App 725 (1994).

    Retirement Can Be Converted to Disability and There’s Not Much A Trial Court Can Do About It

    Unless a retired service member qualifies for concurrent pay pursuant to 10 U.S.C. § 1414(a)(1)(most retirees with at least 20 years qualifying service and a service-related disability of at least 50%), a service member cannot receive both disability pay and retirement pay. This means that many service members must waive retirement pay in order to receive disability pay. Many disabled service members decide to “convert” their retirement pay to disability pay when they become eligible to do so because disability pay is not taxed and cannot be distributed in divorce proceedings.

    A service member can waive retirement for disability at any point in time after a service member becomes entitled to receive disability pay. If the conversion occurs before a court enters an order for equitable distribution, the court can consider the disability payments as a distributional factor but cannot give dollar-for-dollar “credit” in distribution to make up for any retirement pay lost due to conversion to disability. Halstead v. Halstead, 164 N.C. App. 543(2004).

    A service member retains the right to convert retirement to disability even after a state court has awarded a portion of the member’s retirement pay to the member’s former spouse in an equitable distribution judgment. When this conversion occurs, the amount of retirement pay received by the former spouse of the service member generally is reduced. A trial court may not prohibit a service member from converting retirement pay to disability in the future. Cunningham v. Cunningham, 171 N.C. App. 550, 558 (2005).

    However, North Carolina appellate courts as well as appellate courts in other states have held that federal law does not restrict the ability of a state court to enforce a judgment dividing military retirement pay entered before a service member converted the retirement pay to disability pay. Therefore, amendments to retirement distribution orders made by trial courts to “effectuate” the terms of the original court order have been upheld. In White v. White, 152 N.C. App. 588 (2002), the court of appeals held that the trial court had authority to hear wife’s motion to amend a qualified domestic relations order (QDRO) to seek an increase in her share of husband’s remaining retired pay to offset the amount of retirement waived by the serviceman. And, in Hillard v. Hillard, 223 N.C. App. 20, 24 (2012), the court of appeals affirmed the trial court’s decision to amend the ED order after the service member waived retired pay to receive disability pay to require the  service member to pay wife “the portion of his retirement required by the previous order.” According to the court of appeals, this order did not impermissibly distrib­ute disability pay, as the service member could fund payments from source of his choice.

    The recent decision by the US Supreme Court in Howell v. Howell rejected this reasoning by state courts and effectively overruled both White and Hillard.

    Howell v. Howell

    An Arizona trial court awarded Sandra Howell 50% of John Howell’s future Air Force retirement pay, which she began to receive when John retired the following year. About 13 years later, John elected to waive about $250 of his retirement pay per month in order to receive that amount in disability pay. This election resulted in a reduction in the value of Sandra’s 50% share of his retirement pay. Sandra petitioned the Arizona court to enforce the original divorce decree and restore the value of her share of John’s total retirement pay. The state court held that the original divorce decree gave 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 Supreme Court reversed and held that a state court may not order a veteran to indemnify a divorced spouse for the reduction in the value of the divorced spouse’s portion of the veteran’s retirement pay caused by the veteran’s waiver of retirement pay to receive disability benefits. The Court held that federal law completely prohibits states courts from treating waived military retirement pay as divisible property because the waived retirement becomes disability pay. The fact that the waiver occurred after entry of the division order and the state court was attempting to “indemnify” or “reimburse” Sandra for the “vested right” she received when the division order was entered did not change the basic nature of the trial court order. According to the Court, a state court cannot “vest [a right in a party] which [that court] lack(s) the authority to give.”

    The Court explained that since there is nothing a state court can do to prohibit the conversion or to compensate the non-military spouse after a conversion, the contingency of a conversion is something a state court should consider when valuing the retirement account in the property distribution proceeding. In addition, the court suggested that the loss to the non-military spouse resulting from a conversion may be the basis for a reconsideration of alimony.

    But Disability Pay is Income

    In Lesh, the trial court classified husband’s military disability pay as separate property but considered the disability pay as a source of income available to husband to pay a distributive award. Husband argued on appeal that this judgment violated Howell because it effectively required him to “reimburse” or “indemnify” wife for the retirement she lost when he accepted the disability pay.

    The court of appeals disagreed, pointing to another decision by the US Supreme Court. In Rose v. Rose, 481 US 619 (1987), the Court explained that the fact that disability pay must be classified as separate property does not mean that it is not income to the receiving party and held that a veteran’s disability income could be considered as a source of income from which he could pay his child support obligation. According to the Court, there is nothing in federal law indicating “that a veteran’s disability benefits are provided solely for that veteran’s support.” See also Comstock v. Comstock, 240 NC App 304 (2015)(U.S. Trust IRA was separate property due to federal law but was a liquid asset the court could consider as a source of payment of a distributive award); and Halstead v. Halstead, 164 N.C. App. 543(2004)(military disability pay is separate property that can be considered as a distribution factor in ED proceeding).

     

     

     

    Cheryl Howell is a Professor of Public Law and Government at the School of Government specializing in family law.

    One thought on “Military Disability Pay: It’s not marital property but it is income”

    • Mark Sullivan says:

      Kudos to Cheryl Howell of the School of Government for her recent “On the Civil Side” blogpost submission, Military Disability Pay: It’s not marital property but it is income. The article describes the Court of Appeals decision in Lesh v. Lesh, 2018 N.C. App. LEXIS 63, decided January 16, and the treatment by the Court of military disability payments to the ex-husband, Mr. Lesh. All attorneys who have seen, or expect to see, a military divorce case ought to read the posting. North Carolina has the 3rd or 4th largest military population of all the states, and we have a huge military retiree population as well.
      The purpose of this response is to add some necessary clarifications to the blogpost. There are four areas that deserve attention. As a matter of full disclosure, I was involved for a period of time in 2015 in the early stages of the case before the trial; I had the privilege of working with Mr. Lesh’s attorney at that time, Darlene Chambers.
      I. Breadth of language issues – types of disability pay
      The language in the article is too broad, speaking at times of military disability, military disability benefits and disability pay. There are three distinct forms of disability payments in military cases, and only one – military disability retired pay – was involved in the Lesh case.
      Military disability retired pay under Chapter 61 of Title 10, U.S. Code is indeed “retired pay.” It is not taken in lieu of retired pay. It’s not a “conversion.” And it is not a voluntary retirement; it’s forced upon the servicemember when the military finds that he is unfit to perform his duties. MDRP is taxable unless the disability is combat-related.
      A second form of payments due to disability is VA disability compensation. Payments are made by the Department of Veterans Affairs to eligible veterans, whether retired or not, under Title 38, U.S. Code. Retirees who elect to receive VA disability compensation for service-connected wounds, injuries, illnesses or conditions must waive an equivalent amount of retired pay; this is a dollar-for-dollar reduction of retired pay.
      Combat-Related Special Compensation is the third type of disability payments to retirees. Pursuant to 10 U.S.C. § 1413a, the pay is provided by the Defense Department (or Department of Homeland Security for Coast Guard retirees) for disabilities which are combat-related or due to instrumentalities of war. CRSC is tax-free.
      The courts cannot divide CRSC as property. Courts may not divide as property the VA disability compensation an individual receives, nor may the courts divide the military retired pay that is waived to receive VA disability compensation, pursuant to the Mansell and Howell cases cited in the blogpost. Courts cannot divide MDRP as property if the amount paid is based on the percentage of the servicemember’s disability; payments to disability retirees must be made on the higher of two calculations – percentage of disability or years of creditable service. If, however, the higher amount which is paid is based on years of creditable service, then the courts may divide the difference between the two. This is usually a small amount.
      The article may leave some readers confused about “military disability pay,” which may – in theory – be one or more of three separate payments. In the Lesh case, the issue at stake – which the Court of Appeals did not make clear either – was Mr. Lesh’s receipt of MDRP (military disability retired pay) based on the percentage of his disability.
      II. Breadth of language issues – “Conversion”
      At numerous points in the article the terms “convert” or “conversion” appear. If you want to confuse the judge, make sure that you say that “Mr. Jones discovered that his retired pay was converted into VA disability compensation” or words to that effect.
      Title 38, covering payments made by the Department of Veterans Affairs, contains no provisions for a retiree’s choosing to convert his/her retired pay to VA disability compensation. There are no forms allowing for “conversion.” The VA disability compensation election form executed by the retiree states that he or she acknowledges that there will be an amount equal to the VA disability compensation that is waived from the retired pay. Thus it is an active and knowing waiver of retired pay, not a passive or magical conversion, that’s at stake in VA waiver cases.
      The issue of whether VA disability compensation is based on the active and knowing election by the retiree was addressed in the trial court’s statement cited in a Louisiana Court of Appeals case, Ast v. Ast, 2015 La. App. LEXIS 638. The trial judge noted in a footnote in his written reasons that:
      Mr. Ast describes, in the subjective voice, that his military retirement benefits were converted to disability benefits, suggesting it was by unilateral action by the government. The law concerning waiver of military retired pay in exchange for Department of Veterans Affairs (VA) disability compensation allows a retiree to elect an amount of tax-free disability compensation only if he gives up the same amount of retired pay. 38 U.S.C. 5304-5305. As the U.S. Code defines this as waiver, it is an election expressly chosen by the veteran.
      III. The Death of Indemnification?
      The blogpost argues that the Howell decision in effect overrules the N.C. App. White and Hillard cases, since a court may not order indemnification of the former spouse for the reduction in her share of a military pension due to the retiree’s election of VA disability compensation. As with some statements, this is only half true. Or, to be more mathematically precise… one-third true.
      It is clear that – in the context of a property division hearing – a judge may not order indemnification, may not divide VA disability compensation and may not divide the amount of military retired pay that the retiree waives. That’s the Halstead case cited in the article. It’s also what Mansell stated (although the underlying facts were not as the Supreme Court assumed).
      It is also clear that a judge may not enter an initial enforcement order for indemnification (and cannot readjust the spouse’s share of the pension) if the spouse or former spouse discovers that the waiver reduces the military retired pay awarded to him or her. That’s the Howell case. And that’s the situation which was involved in White v. White, the 2002 Court of Appeals case in which the Court approved the reconfiguration of the ex-wife’s share of the pension to make up for the VA waiver shortfall. If the White case were heard today, the court would properly refuse to grant any relief to the ex-wife. Its facts are substantially similar to those in Howell.
      There is nothing in either Mansell or Howell to bar parties from agreeing to indemnification in a separation agreement, consent order or marital settlement. As footnote 6 in the Mansell decision indicates, the issue of an agreement regarding assignment of VA benefits was not at stake in the Supreme Court’s decision. There are many appellate decisions among the states which uphold the power of the parties to agree on indemnification and which hold that this is not a violation of the Supremacy Clause
      Nor did either Howell or Mansell rule on the issue of res judicata. When there is a prior unappealed order for indemnification, the judge may order enforcement without fear of a constitutional challenge.
      This was made clear in footnote 5 in the Mansell decision. Footnote 5 states: “Whether the doctrine of res judicata, as applied in California, should have barred the reopening of pre-McCarty settlements is a matter of state law over which we have no jurisdiction.” When the US Supreme Court remanded the Mansell case to the California courts, the original order for indemnification was upheld, since the state appellate courts found that the decision against Major Gerald Mansell was based on res judicata, not upon a division of community property at trial in violation of the USFSPA. When Major Mansell took the case back up to the U.S. Supreme Court, the certiorari petition was denied. Thus the doctrine of res judicata (sometimes called “the law of the case”) remains an avenue of relief for the injured former spouse. For an explanation of the Mansell case, contractual indemnification and res judicata, see Selitsch v. Selitsch, 492 S.W.3d 677 (Tenn. App. 2015).
      This is the reason why the Hillard case, mentioned in the blogpost, was not effectively overruled by Howell. In Hillard, there was a prior order for indemnification which was not appealed. Thus a judge today, after proper briefing and argument, would uphold the requirement that the ex-husband reimburse the former wife for the money she lost from her share of the military pension when his election of CRSC triggered a massive VA waiver against his retired pay.
      In fact, contract law would also be a reason to uphold the decision in Hillard. In 2010 the parties signed a consent order in which the ex-husband agreed to terms for reimbursement. Thus express contractual indemnification as well as res judicata are the foundation for upholding the Hillard decision, even in the face of arguments that the Howell decision has outlawed indemnification and overruled cases like Hillard.
      IV. MDRP and Family Support
      The last point of clarification is actually a point of expansion. The blogpost notes that the Court of Appeals held that the non-divisible military disability retired pay that Tim Lesh received was income which could be used to pay the purge for contempt. But can it be used for anything else?
      There is a wide misconception that entire areas of disability pay – CRSC, VA disability compensation, MDRP and even Social Security Disability – are “off limits” for the issue of support. This is absolutely bogus. All of the above payments may be considered by the court as “income” (whether taxable or not) to the recipient for a determination of alimony and/or child support.
      What might be even more surprising to readers is that these same sources of payment are all legitimate subjects for garnishment and for income-withholding orders. The statute governing garnishment of federal government payments for family support, 42 U.S.C. §659, states that VA disability compensation may be garnished for family support when the retiree has waived military retired pay to receive VA payments. The regulations published by DFAS (the Defense Finance and Accounting Service) as to military disability retired pay and Combat-Related Special Compensation states that both may be garnished for alimony and child support. The same is true as to Social Security Disability. All are fair game for income-withholding orders and garnishments for family support!
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