Indemnity and Military and Veteran’s Disability Benefits
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The most substantial exception to Mansell is the large and growing body of state court case law granting relief on a theory of indemnity. These cases reason that when a spouse elects to receive military or veteranís disability benefits after the divorce, that spouse has taken a voluntary action to prevent the other spouse from receiving retirement benefits under a decree and/or separation agreement. The remedy for that violation cannot be a division of disability benefits, for that remedy is barred by Mansell. But Mansell did not consider another potential remedy a money judgment under the law of judgments or contracts, equal to the amount of damage inflicted upon the other spouse. The clear trend in state court cases is to hold that an award of indemnity is permitted.

Express Indemnity Provisions. The clearest indemnity cases are those in which the original decree or agreement states that the owning spouse will take no action to reduce the nonowning spouseís benefits, and will compensate the nonowning spouse for any such actions taken. For cases enforcing this type of provision, see Owen v. Owen, 14 Va. App. 623, 419 S.E.2d 267 (1992) (the leading case nationwide); Janovic v. Janovic, 814 So. 2d 1096 (Fla. 1st Dist. Ct. App. 2002); In re Strassner, 895 S.W.2d 614, 618 (Mo. Ct. App. 1995) ("[T]he trial court did not prospectively divide disability benefits, but instead provided a manner of enforcing the property division contained in the original decree"); and Scheidel v. Scheidel, 129 N.M. 223, 4 P.3d 670 (Ct. App. 2000).

For an additional case holding that the indemnity theory does not violate Mansell, without actually holding that an indemnity provision was present on the facts, see Harris v. Harris, 195 Ariz. 559, 991 P.2d 262 (Ct. App. 1999) (review denied). Cf. In re Marriage of Krempin, 70 Cal. App. 4th 1008, 83 Cal. Rptr. 2d 134 (1999) (review denied) (excellent discussion).

It is worth noting that the question of whether an express indemnity provision violates Mansell can be raised only in an appeal from the decree containing or approving the provision. Assuming for sake of argument that such a provision does violate Mansell, its validity is res judicata once a decree approving the provision becomes final, and res judicata is clearly a valid theory for dividing any preempted benefit.

Sum-Certain Provisions. A similar fact situation occurs when the decree or agreement awards the nonowning spouse a set monthly amount of retirement benefits. The owning spouse is required to pay this amount, even if he makes a future election to receive disability benefits.

For example, in McHugh v. McHugh, 124 Idaho 543, 861 P.2d 113 (Ct. App. 1993), a contract provided that the husband would pay the wife a certain sum out of his military retirement pay, plus cost-of-living increases. The husbandís disability pay subsequently increased, reducing his retirement pay, and he argued that Mansell prevented the wife from continuing to receive her award. The court rejected the husbandís argument emphatically, even going so far as to sanction him for making a frivolous argument. See also Troxell v. Troxell, 28 P.3d 1169 (Okla. Civ. App. 2001) (likewise holding that an order to pay a set amount out of military retirement pay remains binding, even if the husband waives military retirement pay for disability benefits, so long as the order is enforced against other assets and not disability benefits).

A sum-certain provision can be tied to rank instead of dollars. In Jones v. Jones, 900 S.W.2d 786 (Tex. App. 1995), the contract awarded the wife a percentage of the amount of retirement pay a major with 20 years of service would receive upon retirement, plus cost-of-living adjustments. When the husband elected to receive disability benefits, the court refused to reduce the amount of the wifeís benefits, reasoning that any inconsistency between the contract/final decree and Mansell should have been raised on direct appeal from the decree itself.

Construction Questions. Whether a given contract actually contains one of the various provisions set forth above is a question of state law. The question normally turns on whether the parties intended that the wifeís benefits would drop if the husband received disability payments. Like any question of intent, this is fundamentally a question of fact. The clearest evidence of this point is the line of state court decisions remanding the issue back to the trial court for further factual findings. See Harris v. Harris, 195 Ariz. 559, 991 P.2d 262 (Ct. App. 1999) (review denied); In re Marriage of Krempin, 70 Cal. App. 4th 1008, 83 Cal. Rptr. 2d 134 (1999).

Implied Indemnity Provisions. Where no express indemnity provision is present, can the court find an implied indemnity provision, based on evidence that the parties did not intend for one spouseís benefits to be reduced if the other elected disability benefits? In Hisgen v. Hisgen, 1996 SD 122, 554 N.W.2d 494 (S.D. 1996), the contract merely stated that the husband "will instruct" the military to pay the wife directly her share of his retirement benefits. 554 N.W.2d at 495. The husband then waived retirement benefits to get disability benefits. Analogizing to Owen, the court held that the husband had a duty to indemnify the wife for her lost benefits. The court focused particularly on the fact that both parties knew that the husband was applying for disability benefits, reasoning that the parties would not have intended to give the wife an award which would be almost immediately unenforceable.

In Krapf v. Krapf, 55 Mass. App. Ct. 485, 490, 771 N.E.2d 819, 823 (2002), where the division of military retirement benefits was accomplished by contract, the court held that the future election of disability benefits was a breach of the contractís implied obligation of good faith and fair dealing:

By waiving his military retirement pay in order to receive veteransí disability payments subsequent to the execution of the separation agreement, the defendant in effect deprived the plaintiff of her entitlement to fifty per cent of his military retirement benefits, and the result was a violation of the covenant of good faith and fair dealing.

For additional cases finding an implied indemnity provision, see Dexter v. Dexter, 105 Md. App. 678, 661 A.2d 171 (1995) (husbandís election of disability benefits deemed to be a breach of agreement dividing retirement benefits, entitling the wife to an award of damages), and Johnson v. Johnson, 37 S.W.3d 892 (Tenn. 2001) (accepting indemnity theory, even though contract dividing retirement benefits contained no express indemnity provision).

Other courts have refused to recognize implied indemnity provisions. In In re Marriage of Pierce, 26 Kan. App. 2d 236, 982 P.2d 995 (1999), the court refused to grant relief to the wife when the husbandís retirement benefits dropped to zero upon receipt of disability benefits. The court stressed that there was no evidence that the husband had taken any action to apply for the disability benefits, and held that the problem was the wifeís own fault because she had failed to obtain an express indemnity provision (there was no evidence suggesting that she had tried to obtain one, and the husband had refused to agree). A dissenting opinion would have relied upon an implied indemnity provision.

A contrary result was also reached in Ashley v. Ashley, 337 Ark. 362, 990 S.W.2d 507 (1999). There, the wifeís military retirement benefits were reduced to zero when the husband elected to receive military disability. The court held that it was error to order that the husband continue to pay the former amount. The court did not cite any of the above cases accepting an indemnity argument; indeed, there is no evidence that the wife ever made such an argument. Moreover, the court expressly noted that the loss of benefits was a changed circumstance for purposes of alimony.

Case law from South Carolina is divided. In Price v. Price, 325 S.C. 379, 480 S.E.2d 92 (Ct. App. 1996), a separation agreement awarded the wife 34% of the husbandís gross military retirement pay. It contained no express indemnity provision. The husband then elected to receive military disability pay. The court held that the husband must compensate the wife for the resulting loss of her share of his retirement pay.

The same court reached the opposite result in Tirado v. Tirado, 339 S.C. 649, 530 S.E.2d 128 (Ct. App. 2000), refusing to find an implied indemnity agreement. The court noted that the agreement in Price had divided gross military retirement pay, including amounts waived to receive disability benefits, while the agreement in Tirado was silent as to whether gross or net was divided. It further noted that the agreement in Price required payment by the husband, while the agreement in Tirado required payment from the military. Finally, the husband in Tirado was receiving disability benefits at the time of the divorce, while the husband in Price was not. None of these three distinguishing factors has ever been relied on by any other case. Either the court in Tirado was simply unconvinced that the parties actually intended to grant a right of indemnity, or Tirado fundamentally disagreed with Priceís willingness to recognize an implied indemnity clause.

Divorce Decrees. The above cases all involve express or implied indemnity provisions in separation agreements. Can the court place an indemnity provision into a divorce decree? In In re Marriage of Strassner, 895 S.W.2d 614 (Mo. Ct. App. 1995), the court directly ordered the husband not to take any action which would reduce the amount of the wifeís share of his military retirement pay. The court effectively reasoned that Mansell deals only with the consequences of an election to receive disability pay, and that it does not prevent state courts from ordering service members not to elect disability pay in the first instance. See also In re Marriage of Gaddis, 191 Ariz. 467, 957 P.2d 1010 (Ct. App. 1997) (where husband waived military retirement pay for civil service salary, husband was ordered to continue paying wife her share of his former military retirement pay, on a theory of indemnity); Hillyer v. Hillyer, 59 S.W.3d 118 (Tenn. Ct. App. 2001) (accepting indemnity theory despite absence of a contract; relying partly on Gaddis, and extending the contract-based holding in Johnson). But see Collins v. Collins, 144 Md. App. 395, 798 A.2d 1155 (2002) (where husbandís application for disability benefits was pending and likely to be granted, error to consider wifeís share of retirement benefits as a sum certain; provision should be stated as a percentage); Limbaugh v. Limbaugh, 71 S.W.3d 1 (Tex. App. 2002) (trial court erred by including express indemnity provision in decree).

Of course, if an indemnity provision is actually inserted in the decree, and the issue is not appealed at the time of divorce, the provision is enforceable on a theory of res judicata. See Danielson v. Evans, 201 Ariz. 401, 36 P.3d 749 (Ct. App. 2001) (where a Colorado court expressly reserved jurisdiction to compensate wife if husband diminished the amount of wifeís award, provision was enforceable on theory of res judicata); Collins v. Collins, 139 Ohio App. 3d 900, 746 N.E.2d 201 (2d Dist. 2000).

Policy Concerns. As a matter of state law, all of the indemnity cases are well-reasoned. It is basic contract law that when a party agrees to perform a promise, that party also implicitly agrees not to take any action which would make performance impossible. When a spouse voluntarily elects to reduce his or her retirement benefits, there has been a clear breach of a contractual provision dividing retirement pay. It is hard to see how a spouse could have any greater right to violate an order dividing military retirement pay than a contract dividing military retirement pay. The issue is much closer if the owning spouse did not request disability benefits, as the Pierce court noted, and the nonowning spouse in this situation should always try to show that the receipt of disability benefits was voluntary. Nevertheless, given the clearly negative effect of a waiver of retirement benefits upon the nonowning spouseís retirement security, state law should be construed to prevent any reduction of benefits arising from an election of disability benefits after divorce.

The much harder question is whether the indemnity cases are consistent with federal law. For reasons set forth earlier in this article, the author submits that Mansell does not apply to separation agreements to begin with. Thus, federal law permits the enforcement of express and implied contractual indemnity provisions.

Some of the state court cases rejecting the indemnity theory express concern that that theory allows state courts to do indirectly what Mansell prevents them from doing directly. E.g., Pierce. But indemnity is clearly not a division of disability benefits. For example, if the husband waives $1,000 per month in retirement benefits to receive $1,300 per month in disability benefits, an indemnity theory reaches only the $1,000, not the $1,300. Disability benefits are not being divided. The court is only ordering the husband, under the common law of contracts, to compensate the wife for harm he has inflicted on her.

It is also essential that state courts understand, on any issue involving the division of disability benefits, that when the Mansell litigation ended, the husband clearly lost. He won the reported Supreme Court decision, but he lost on remand on a theory of res judicata, and the Supreme Court refused to hear the case a second time. Thus, the Supreme Court in Mansell actually allowed the California courts to do indirectly what they could not do directly. This fact suggests that the published decision in Mansell is fundamentally a very narrow holding.

The federal law question is closest when there is no agreement at all, as in Strassner, where the court on its own initiative inserted an indemnity provision into its order. If the owning spouse fails to object to such a provision when the decree is entered, the issue becomes res judicata, and the post-Supreme Court history of Mansell establishes clearly that res judicata is a defense to federal preemption. When the issue is raised in the divorce case, an indemnity provision comes close to a division of disability benefits. This is not exactly the fact situation presented in Mansell, however, for the state court order there was clearly a division of disability benefits and not an award of damages for breaching a court order. It remains to be seen whether the Supreme Court will deem the distinction sufficient to make a difference.

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