The Death of Indemnification?

Introduction: SILENT PARTNER is a lawyer-to-lawyer resource for military legal assistance attorneys and civilian lawyers, published by the Military Committee of the American Bar Association’s Family Law Section and the North Carolina State Bar’s military committee. Please send any comments, corrections and suggestions to the address at the end of this Silent Partner. There are many SILENT PARTNER infoletters on military pension division, and other aspects of military divorce. Just go to americanbar.org > Family Law Section > Military Committee (the website of the above ABA committee) or The LAMP website (the website of the military committee, NC State Bar).

On May 15, 2017 the U.S. Supreme Court announced its unanimous decision in Howell v. Howell, a case that arrived at the Court on certiorari from the Arizona Supreme Court. The Court decided that a trial judge may not order a military retiree to reimburse his or her former spouse for moneys lost when the retiree elects to receive disability compensation from the Department of Veterans Affairs (VA), an action which can result in a dollar-for-dollar decrease in retired pay. Here is a summary of what happened and its impact on the military retiree and the former spouse (FS).

Q. What did the court decide and how did it arrive at the outcome?

A. To understand what the decision says and does, we need to take a look at the facts. In this case the parties divorced in Arizona in 1991, and the court ordered that Mrs. Howell was to receive 50% of the military retired pay. Mr. Howell retired from the Air Force in 1992.

Thirteen years later – in about 2005 – Mr. Howell was told by the VA that he had a shoulder injury which was service-connected. This meant that he could apply for VA disability compensation for the injury. His VA rating was 20%, and that meant that he would receive about $250/mo. from the VA.

But that also meant that Mr. Howell, in making the election for VA payments, chose to forfeit the same amount of his pension to get those tax-free VA funds. The waiver is stated clearly on the application for VA disability compensation; it is, in fact, called the “VA waiver.” It requires a forfeiture of an equal amount of retired pay for retirees whose rating is less than 50% and for those who are receiving Combat-Related Special Compensation.

Q. What did Mr. Howell do?

A. He decided to go ahead with the VA waiver. He did so without the permission of the court, and without his ex-wife’s consent.

That resulted in Mrs. Howell’s receiving about $125 a month less of the pension. The full pension of Mr. Howell was about $1500 per month.

Mrs. Howell petitioned the trial court in Arizona to order enforcement of the original order for pension division, and to require the ex-husband to make up the payments which were lost due to his VA waiver. The trial court approved and ordered pay-back by Mr. Howell, and this was upheld by the Supreme Court of Arizona. Mr. Howell petitioned for review by the U.S. Supreme Court.

Q. What did the Supreme Court decide about the decision of the Arizona Supreme Court?

A. The U.S. Supreme Court reversed the Arizona decision and held that, under the Uniformed Services Former Spouses’ Protection Act, the judge may not order pay-back to a former spouse of funds which she or he loses because the military retiree has elected to receive VA disability compensation and to forfeit an equal amount of his retired pay. In effect, it sounded the death knell for courts requiring reimbursement for former spouses whose share or amount of military retired pay has been decreased due to election of a “VA waiver.”

Q. So what’s the big deal – was this a surprise?

A. It was indeed. Of the state courts which have ruled on this, all but a handful have held that it is unfair and inequitable for retirees – after the property settlement is done – to make a VA election which causes a reduction of the share or amount of retired pay that the former spouse receives. Even the United States Solicitor General viewed the issue, upon oral argument before the Supreme Court, as one which was properly decided by the Arizona Supreme Court.

It is also surprising since it allows parties to litigation to make unilateral decisions, without the approval of the judge or the consent of the former spouse, which essentially defeat the right of a former spouse to receive the amount of retired pay awarded by the court, and which overrule the judge’s considered and sometimes delicate balancing of the interests of the parties in the distribution of property. By making a VA election for disability compensation, the retiree effectively circumvents the ruling by the trial court in setting what the former spouse will receive. And all of this is after the court has either approved the parties’ settlement or else held a trial to make a fair, just and equitable division of marital or community property, taking into account all of the facts and factors then present.

Q. Does this decision mean that the former spouse – the one who has been injured – can now go back into court and demand a rehearing and a new division of property? After all, what he/she was awarded is now reduced in value or – in extreme cases – worth nothing at all!

A. The answers, when they arrive, will vary from state to state. In virtually all states, the rule is that property division is fixed and final, not subject to revisions and changes “down the road.” Will the nation’s divorce court judges be able to go back and amend the property division judgments which were rendered months or years ago to set the scales at a fair division once again? Or will res judicata bar the litigation of issues which could have been raised on appeal, when no appeal was taken?

Q. What remedies might be available to a spouse who gets a reduced share of the pension due to a VA waiver?

A. Compensatory spousal support is possible remedial measure which could be used, and it was reviewed and approved in In re Marriage of Jennings,[1] a Washington Supreme Court decision. There the wife was awarded $813 in the property division decree as her share of the husband’s military retirement. The husband’s subsequent VA waiver brought her payments down to only $136 per month. When this occurred, she filed a motion asking the court to vacate the decree, modify it to provide her with spousal support payments equal to half of husband’s disability payments, or clarify the decree to require the husband to pay her no less than $813 per month.[2] Based on the “extraordinary circumstances” presented, the court entered an order providing the wife with compensatory spousal support to make up for the loss caused by the VA waiver. The Supreme Court approved the use of “compensatory spousal maintenance” that would not end if the ex-wife remarried.[3]

Compensatory spousal support also was considered in a Missouri case, Strassner v. Strassner,[4] which pointed out that the record on appeal did not clearly demonstrate that the pension division and maintenance terms were interdependent; therefore, the issue needed to be remanded to determine what amount of adjusted maintenance was appropriate if these two terms were indeed interdependent. In Longo v. Longo, a Nebraska case, the trial court granted the wife alimony of $1 per year, modifiable only upon a potential reduction to the husband’s future military pension because of a future disability offset.[5]

Another remedial approach is to have the court revisit the property distribution in light of the SM’s VA election to redetermine what property is allocated to whom. This was approved in McMahan v. McMahan,[6] a Florida case in which the trial judge awarded the wife a share of the husband’s disability benefits. The Florida Court of Appeals determined that this violated the Mansell rule but held that, because the husband and wife anticipated when they executed their agreement that it would be honored by the courts, the case would be remanded for reconsideration of the entire equitable distribution scheme.[7]

Q. Where can I find some answers to how to protect the former spouse?

A. The clearest answers involve the issues of contractual indemnification and res judicata (“the law of the case”); they are in a 2004 article by Brett R. Turner of the National Legal Research Group, State Court Treatment of Military and Veteran's Disability Benefits: A 2004 Update, which can be found at Appendix 8-F to Chapter 8 of Sullivan, The Military Divorce Handbook (American Bar Association, 2^nd Ed. 2011). Turner is also the author of the 3-volume series, Equitable Distribution of Property, which is the nationwide gold standard when it comes to issues of property division.[8]

Q. How will this decision impact retirees and servicemembers from here on?

A. The decision in the Howell case means that retirees may elect VA disability compensation “without a price tag,” that is, without fear that a judge may later order a pay-back of moneys lost by the former spouse because of a VA waiver.

Q. Will retirees be flooding the courts with applications for relief and requests to re-open prior indemnification orders which are years or decades old? Are the courts going to be inundated with such requests?

A. That remains to be seen. In general, the “law of the case” is one way in which courts deal with issues that are newly decided but which could be seen as overturning prior principles of law. The doctrine of res judicata generally bars a later attack on the previous order if there was no appeal taken which resulted in reversal of the trial court’s decision. Thus even those decisions which are wrong on the law – if not appealed – can result in valid and binding decisions which are subject to the contempt power of the court.

That is exactly what happened to Major Gerald Mansell in the famous Mansell v. Mansell decision[9] cited by Justice Stephen Breyer in the Howell decision. The U.S. Supreme Court held that his pension could not be divided upon divorce because of the language of the Uniformed Services Former Spouses’ Protection Act regarding VA waivers. Upon remand to the California courts, however, the original order was upheld, since the state appellate courts found that the decision against Major Mansell was based on res judicata, not upon a division of the pension 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.[10] Thus the doctrine of res judicata (sometimes called “judicial estoppel” or “claim preclusion”) may be an avenue of relief for the injured former spouse.

Q. What impact will the Howell decision have on former spouses whose pension shares or amounts are reduced by a VA waiver?

A. There are several “take-away” lessons for former spouses and their attorneys.

First of all, the Howell decision magnifies the importance of a reimbursement clause in the property settlement. About 95% of cases involving the division of marital or community property are settled. The Howell case was decided based on an order by the trial court in the absence of a contractual reimbursement clause. It’s one thing to argue about a judge’s power to require, under principles of fairness and equity, a duty to indemnify. It’s another matter entirely to require a litigant to perform what he has promised in a contract. Unless and until the Court makes a different ruling, the indemnification clause in a settlement or a separation agreement ought to provide some protection. It is always a good practice for the former spouse’s attorney to include language for an indemnification clause in the property settlement, language which requires the retiree to pay back or reimburse the former spouse for any reduction in the share or amount of retired pay that is divided.

This indemnification phrasing can be done with a straightforward pay-back requirement, such as: “If there is any reduction in the plaintiff’s share or amount of retired pay, the defendant will immediately reimburse and indemnify her for any loss which she suffers due to such reduction.”

In some cases reimbursement requirements might involve a clause specifying alimony, spousal support or maintenance to make up the difference. Such a clause could then be enforced through a garnishment from the retired pay center. But the judge may not order a dollar-for-dollar make-up with alimony; that is too transparent. It would not be upheld on appeal, since it would clearly be going through the back door when the front door is barred.

In many cases, the attorney may want to hold open or “reserve” the issue of alimony to allow for a possible future VA waiver, and to make sure that the former spouse is protected.

Attorneys who represent the former spouse may also decide to forego sharing the pension in favor of a “present value set-off,” that is, the valuation of the retiree’s pension, the award to him or her of the present value of the marital or community share of the pension, and the award to the former spouse of other property acquired during the marriage – if any exists – of equal value.

Q. Where do we go from here? Is it possible to change this outcome?

A. That doesn’t lie in the hands of the courts. Now that the Supreme Court has spoken, the only course for lower courts is to uphold the ruling. Rather, the future lies in the hands of Congress. Since Congress passed the Uniformed Services Former Spouses’ Protection Act in 1982, which is the statute interpreted by the Supreme Court, only an amendment to the Act by Congress can reverse this outcome.

(Rev. 8/6/2021)

* * *

This SILENT PARTNER was prepared by COL Mark E. Sullivan (USA-Ret.). For revisions, comments or corrections, contact him at Law Offices of Mark E. Sullivan, P.A. in Raleigh, N.C. - 919-832-8507.