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In Devlin, the pension plan and the trustee of the plan, Joan Lewis, filed a declaratory judgment action in federal court against David Lewis, seeking a declaratory judgment that an order entered in a state court divorce and equitable distribution proceeding between Mr. and Mrs. Lewis did not constitute a QDRO within the meaning of ERISA. The plaintiffs also sought an injunction prohibiting the enforcement of the state court order.
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No. 00 Civ. 6665 (LTS)(MHD)
March 30, 2001
SCOTT M. RIEMER, ESQ., Attorney at Law, New York, NY, Attorney for Plaintiffs.
JERRY KUGELMAS, ESQ., Attorney at Law, New York, NY, Attorney for Defendant.
OPINION AND PRELIMINARY INJUNCTION
The issues in this case, which arises from a bitter divorce and equitable distribution proceeding in New York State court, focus on the interrelationship between the federal Employee Retirement Income Security Act of 1974, as amended ("ERISA") and state domestic relations law. Plaintiffs are the Devlin Graphic Industries, Inc. Pension Plan (the "Plan") and Joan D. Lewis ("Mrs. Lewis") as a trustee of the Plan. The defendant is David Lewis ("Mr. Lewis"), the former spouse of plaintiff Lewis. Mrs. Lewis, in her individual capacity, was the plaintiff in the parties' state court proceeding. Plaintiffs' complaint, filed in this Court on September 6, 2000, seeks a declaration that an order entered by the New York State Supreme Court, Westchester County, on June 30, 1998 in the parties' divorce and equitable distribution action (the "State Court Order") fails to constitute a "Qualified Domestic Relations Order" (a "QDRO") within the meaning of relevant provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and is therefore preempted by that statute. Plaintiffs also seek an injunction prohibiting enforcement of the State Court Order.
The Court has jurisdiction of this action pursuant to 29 U.S.C.A. § 1132(e) (West 1999) and 28 U.S.C.A. §§ 1331 (West 1993), 2201 and 2283 (West 1994). Venue is proper in that the Plan is administered in this District. See. 28 U.S.C.A. § 1132(e)(2).
By Order to Show Cause entered by this Court on November 24, 2000 (the "OSC"), plaintiffs initiated an application for a preliminary injunction and temporary restraining order preventing the enforcement of the State Court Order. Plaintiffs' application was prompted by a contempt proceeding brought on in state court by Mr. Lewis. The Order to Show Cause initiating the state court contempt proceeding required Mrs. Lewis to show cause as to why an order should not be entered directing her, inter alia "to comply with the [State Court Order] and agreement with respect to the provisions therein including (i) distribution from [Mrs. Lewis'] pension; (ii) transfers of certain stocks and otherwise." Order to Show Cause, October 25, 200 (annexed to OSC as Exhibit C).
Following briefing and a hearing on November 30, 2000, this Court entered a Temporary Restraining Order ("TRO"), setting forth the basis of its decision at length on the record. The TRO was subsequently continued through March 26, 2001. The Court having had an opportunity to consider the parties' further submissions and arguments, plaintiffs' application for a preliminary injunction is hereby granted, to the extent and for the reasons set forth below. This opinion sets forth the Court's findings of fact and conclusions of law in accordance with Rule 52 of the Federal Rules of Civil Procedure.
BACKGROUND
The Court makes the following findings of fact. The material facts are largely undisputed. The Plan, first adopted in 1990 and subsequently amended, is sponsored by Devlin Graphic Industries, Inc. ("Devlin"), a closely-held corporation of which Mrs. Lewis is a 51% shareholder and her daughter, Stacy Semel, is the only other shareholder. Mrs. Lewis is a trustee of the Plan. Devlin is the "Plan Administrator" for ERISA purposes; Mrs. Lewis is authorized to act on behalf of the company in that connection. The Plan document in its current version consists of the Datair Mass-Submitter Prototype Defined Benefit Pension Plan and Trust ("Plan Document" or "Plan Doc.") and an Adoption Agreement in connection therewith. The Adoption Agreement, dated December 10, 1993 ("Adoption Agreement"), is signed by Mrs. Lewis as President of Devlin and as a trustee of the Plan, and by Mr. Lewis and Ms. Semel as Plan trustees. The Plan Document was submitted to the Court as an exhibit to the March 15, 2001 Affirmation of Scott Riemer. The Adoption Agreement was submitted to the Court as Exhibit F to the OSC. There are currently three Plan participants — Mrs. Lewis, Ms. Semel and Dorothy Dabelstein.
The Plan Document submitted to the Court by plaintiffs' counsel is dated March 1995, post-dating the Adoption Agreement. The Court notes that section 3.10.8 of the Plan Document authorizes the mass-submitter plan sponsor to amend the main plan document to comply with legal requirements. In that the material cross-references from the 1993 Adoption Agreement to the 1995 Plan Document appear consistent and the parties have not provided evidence of significant amendment of any of the relevant Plan provisions between 1993 and 1995, the Court has considered the version of the Plan Document provided to the Court as the operative one.
The Plan is a tax qualified defined benefit plan covered by ERISA. It provides for retirement benefits in specified dollar amounts, calculated pursuant to accrual formulae set forth in the Adoption Agreement and underlying Plan Document. The Plan does not provide for the allocation of assets or benefits to the accounts of specific participants. Rather, it provides for payment of the formula benefit at or after "normal retirement age," in annuity or lump sum form. (Adoption Agreement at 11-21; Plan Doc. at 19-21.) Section 3.5.1 of the Plan Document provides in pertinent part that:
All assets held by the Trustee, whether in the Trust Fund or Segregated Funds, shall be owned exclusively by the Trustee and no Participant or Beneficiary shall have any individual ownership thereof.
(Plan Doc. at 76.) Although the Adoption Agreement includes language mandating the allocation of "residual assets" among "Participants in proportion to their Accrued Benefits" following "satisfaction of all liabilities to Participants," that language relates only to the operation of the Plan provision governing termination of the Plan. Under the termination provisions of the Plan, any distribution of residual assets would occur only after formal termination of the Plan, liquidation of its assets, and distribution of assets to participants entitled to benefits in accordance with priority categories set forth in the Plan Document. (Adoption Agreement at 25; Plan Doc. at 49-50.) The Plan has not been terminated.
Plan Doc. § 2.5.15.
In or about September of 1996, Mrs. Lewis commenced an action against Mr. Lewis in New York State Supreme Court, Westchester County, for divorce and equitable distribution of marital property. At a hearing held in that action on April 23, 1998, Mr. Lewis' counsel recited into the record a stipulation of settlement. The transcript of the settlement stipulation reads in pertinent part as follows:
MR. KUGELMAS: Mr. Lewis, it is agreed that he is entitled to 50 percent of the wife's interest in her pension and those stocks in the said pension account will be divided by quadro [sic], by division, in kind and I will prepare — MRS. LEWIS: The Judge said to leave the in kind off, right there in the office. MR. KUGELMAS: Mr. Lewis' percentage of the interest in the pension will be distributed to Mr. Lewis and I will prepare a quadro to be signed by the Court which I will submit together with the judgment and findings. MRS. LEWIS: We want written notice of settlement.
(Transcript of April 23, 1998 hearing at 12-13.) Mrs. Lewis held herself out as appearing prose at the hearing but was accompanied by a lawyer, one Joel Mayer, who participated to some degree in the settlement colloquy and who appeared as Mrs. Lewis' counsel in connection with later state court proceedings arising from the settlement stipulation. There is no indication in the caption of the state court action or in the transcript of the April 23, 1998 proceeding that Mrs. Lewis was appearing in any capacity other than as an individual.
Mr. Kugelmas' reference in the colloquy to "quadro" was to a qualified domestic relations order ("QDRO") within the meaning of section 414(p) of the Internal Revenue Code of 1986, as amended (the "Code") and section 206(d) of ERISA ( 29 U.S.C.A § 1056(d) (West 1999)). The relevant portions of section 206(d) of ERISA are set forth in the margin.
(1) Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated
(3)(A) Paragraph (1) shall apply to the creation, assignment or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order, except that . . . [such provision] shall not apply if the order is determined to be a qualified domestic relations order. Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order.
(B) For purposes of this paragraph —
(i) the term "qualified domestic relations order" means a domestic relations order —
(I) which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and
(II) with respect to which the requirements of subparagraphs (C) and (D) are met, and
(ii) the term "domestic relations order" means any judgment, decree, or order (including approval of a property settlement agreement) which —
(I) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and
(II) is made pursuant to a State domestic relations law (including a community property law).
(C) A domestic relations order meets the requirements of this subparagraph only if such order clearly specifies —
(i) the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order,
(ii) the amount or percentage of the participant's benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined,
(iii) the number of payments or period to which such order applies, and
(iv) each plan to which such order applies.
(D) A domestic relations order meets the requirements of this subparagraph only if such order —
(i) does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan,
(ii) does not require the plan to provide increased benefits (determined on the basis of actuarial value), and
(iii) does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order.
(E)(i) A domestic relations order shall not be treated as failing to meet the requirements of clause (i) of subparagraph (D) solely because such order requires that payment of benefits be made to an alternate payee —
(I) in the case of any payment before a participant has separated from service, on or after the date on which the participant attains (or would have attained) the earliest retirement age,
(II) as if the participant had retired on the date on which such payment is to begin under such order (but taking into account only the present value of benefits actually accrued and not taking into account the present value of any employer subsidy for early retirement), and
(III) in any form in which such benefits may be paid under the plan to the participant (other than in the form of a joint and survivor annuity with respect to the alternate payee and his or her subsequent spouse). For purposes of subclause (II), the interest rate assumption used in determining the present value shall be the interest rate specified in the plan or, if no rate is specified, 5 percent.
(ii) For purposes of this subparagraph, the term "earliest retirement age" means the earlier of —
(I) the date on which the participant is entitled to a distribution under the plan, or
(II) the later of the date of the participant [FN1 notes "So in original. Probably should be `date the participant'."] attains age 50 or the earliest date on which the participant could begin receiving benefits under the plan if the participant separated from service.
(G)(i) In the case of any domestic relations order received by a plan —
(I) the plan administrator shall promptly notify the participant and each alternate payee of the receipt of such order and the plan's procedures for determining the qualified status of domestic relations orders, and
(II) within a reasonable period after receipt of such order, the plan administrator shall determine whether such order is a qualified domestic relations order and notify the participant and each alternate payee of such determination.
(ii) Each plan shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. Such procedures —
(I) shall be in writing,
(II) shall provide for the notification of each person specified in a domestic relations order as entitled to payment of benefits under the plan (at the address included in the domestic relations order) of such procedures promptly upon receipt by the plan of the domestic relations order, and
(III) shall permit an alternate payee to designate a representative for receipt of copies of notices that are sent to the alternate payee with respect to a domestic relations order.
(H)(i) During any period in which the issue of whether a domestic relations order is a qualified domestic relations order is being determined (by the plan administrator, by a court of competent jurisdiction, or otherwise), the plan administrator shall separately account for the amounts (hereinafter in this subparagraph referred to as the "segregated amounts") which would have been payable to the alternate payee during such period if the order had been determined to be a qualified domestic relations order.
(ii) If within the 18-month period described in clause (v) the order (or modification thereof) is determined to be a qualified domestic relations order, the plan administrator shall pay the segregated amounts (including any interest thereon) to the person or persons entitled thereto.
(iii) If within the 18-month period described in clause (v) —
(I) it is determined that the order is not a qualified domestic relations order, or
(II) the issue as to whether such order is a qualified domestic relations order is not resolved, then the plan administrator shall pay the segregated amounts (including any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order.
(iv) Any determination that an order is a qualified domestic relations order which is made after the close of the 18-month period described in clause (v) shall be applied prospectively only.
(v) For purposes of this subparagraph, the 18-month period described in this clause is the 18-month period beginning with the date on which the first payment would be required to be made under the domestic relations order.
(I) If a plan fiduciary acts in accordance with part 4 of this subtitle in — (i) treating a domestic relations order as being (or not being) a qualified domestic relations order, or (ii) taking action under subparagraph (H), then the plan's obligation to the participant and each alternate payee shall be discharged to the extent of any payment made pursuant to such Act.
(J) A person who is an alternate payee under a qualified domestic relations order shall be considered for purposes of any provision of this chapter a beneficiary under the plan. . . .
(K) The term "alternate payee" means any spouse, former spouse, child, or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to such participant.29 U.S.C.A. § 1056(d) (West 1999).
Mr. Lewis' attorney thereafter settled on Mrs. Lewis a proposed order, labeled "Qualified Domestic Relations Order", which recited that it was intended to be a QDRO and directed the distribution to Mr. Lewis of 46.15% of the underlying assets of the Plan, including specific stockholdings or proceeds thereof and other specified Plan assets. The percentage was calculated based on an actuarial calculation of the then-lump sum value of Mrs. Lewis' accrued Plan benefit and a review of the assets of the Plan. Mr. Lewis, through his counsel, had determined that the lump-sum value calculated by the actuary constituted 92.3% of the assets of the Plan and determined further that Mr. Lewis' 50% of Mrs. Lewis' "interest" in the Plan benefit thus constituted 46.15% of the Plan's assets. Mrs. Lewis was 59 years old at the time the State Court Order was entered. She was not yet eligible to receive any distribution under the Plan, which provides for distributions only after attainment of age 60 and the satisfaction of certain length of service requirements. (Adoption Agreement at §§ II.B.1, II.B.2, II.G.1, II.I.4; Plan Doc. at § 2.5.1.) Mrs. Lewis did not object to the proposed order and it was entered, along with a divorce judgment, on June 30, 1998. The State Court Order is annexed to the OSC as Exhibit D.
Shortly after the State Court Order was entered, Mrs. Lewis appeared by counsel in the state court proceedings, asserting that the "QDRO" was not in fact a QDRO because it failed to comply with certain ERISA and Code provisions and that it should therefore be modified. Specifically, Mrs. Lewis argued that the order was inconsistent with ERISA and Code, with the terms of the Plan, and with the in-court stipulation insofar as it measured benefits payable to Mr. Lewis by the value of plan assets rather than the plan's benefit formula, directed distribution of specific Plan assets in kind, and directed an immediate distribution to Mr. Lewis. Mrs. Lewis also argued that the State Court Order was inconsistent with the parties' stipulation of settlement and that there had been an error regarding the distribution of certain of the couple's collectibles. The state court denied Mrs. Lewis' application for modification of the order, issuing an order reading in its entirety as follows:
Upon the foregoing papers it is ORDERED that this motion and cross-motion are denied. The Defined Benefit Plan in which the defendant is to receive 50% of the assets can be amended, if necessary, to provide for the distribution to defendant. Additionally, there is no showing of a mistake with respect to the figurines. Nevertheless, the motion was made in good faith and is not frivolous. Therefore, attorney fees are denied.
(Order, Sept. 23, 1998, annexed to OSC as Ex. E.)
Mrs. Lewis, still appearing in her individual capacity in the divorce action, thereafter appealed the order to the Appellate Division, First Department, arguing again that the State Court Order failed to comply with the terms of the Plan and the requirements of ERISA and the Code. The Appellate Division, affirming, held in February 2000 that there was no reason to grant relief from the order below. It did not address specifically Mrs. Lewis' ERISA and Code-based arguments. (Decision Order, Feb. 14, 2000, annexed to OSC as Ex. E.) The Appellate Division thereafter denied Mrs. Lewis' motion for reargument. (Decision Order on Motion, May 2, 2000, annexed to OSC as Ex. E.) None of the arguments in the parties' state court briefs addressed the question of the state courts' jurisdiction to determine whether the State Court Order is a QDRO within the meaning of ERISA or the Code and, as explained infra, none of the state court decisions holds that the State Court Order is such a QDRO.
The State Court Order required service on the Plan Administrator of a certified copy of the order. Defendant takes the position that the original settlement of the order on Mrs. Lewis in connection with the divorce proceeding constituted such service. The State Court Order was apparently served formally on Devlin, as Plan Administrator, sometime after the final Appellate Division decision. It is undisputed that no steps have been taken to comply with the distribution requirements of the State Court Order. It is also undisputed that the Plan Administrator did not respond to the order by taking the steps outlined in section 206 of ERISA and related Code provisions, including informing Mr. Lewis of the Plan's procedures for determining the qualified status of domestic relations orders, making such determination and notifying Mr. Lewis within a reasonable time of such determination, and accounting separately for amounts that would have been payable to Mr. Lewis during the period of its deliberations if the order had been determined to be a QDRO. See 29 U.S.C.A. § 1056(d)(3)(G), (H) (West 1999). Instead, Mrs. Lewis (in her capacity as a trustee of the Plan) and the Plan commenced this litigation.
ERISA'S PREEMPTION AND CIVIL ACTION PROVISIONS
ERISA's provisions generally "supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan" that is governed by ERISA. 29 U.S.C.A. § 1144(a) (West 1999). The Plan is such an employee benefit plan. Civil actions to enforce ERISA and/or the terms of employee benefit plans are authorized by section 502 of the statute, which also delineates the extent to which federal and state courts have jurisdiction of such actions. See 29 U.S.C.A. § 1132 (West 1999). Section 502 provides in pertinent part that a plan participant or beneficiary may bring an action "to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan," 29 U.S.C.A. § 1132(a)(1)(B); and that a plan participant, beneficiary or fiduciary may bring such an action "(A) to enjoin any act or practice which violates any provision of [Title I of ERISA or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan," 29 U.S.C. § 1132 (a)(3). The statute grants federal and state courts concurrent jurisdiction of actions brought under subsection (a)(1)(B) and actions to enforce certain child support orders, but the federal district courts have exclusive jurisdiction of all other civil actions under ERISA. See 29 U.S.C.A. § 1132(e)(1).
Title I of ERISA includes the anti-alienation, preemption, QDRO, and fiduciary responsibility provisions of ERISA. See 29 U.S.C. § 1101-1191c (West 1999 Supp. 2000).
ANTI-ALIENATION PROVISIONS: ODROS
As noted above, ERISA and parallel provisions of the Code define a particular type of state court domestic relations order as a QDRO. QDROs, which are state judgments or orders relating, among other things, to marital property rights and meeting specific ERISA requirements, enjoy special status under these statutes. They are exempted from ERISA's general ban on the alienation of plan benefits, while state court domestic relations orders that are not QDROs do not enjoy such an exemption. Employee benefit plans are required to provide for the payment of benefits in accordance with the applicable requirements of any QDRO. See 29 U.S.C.A. § 1056(d)(3)(A). ERISA also exempts QDROs (but not non-qualified state domestic relations orders) from its sweeping general preemption provision. See 29 U.S.C.A. § 1144(b)(7).
ERISA section 206(d)(1) requires that "[e]ach pension plan shall provide that benefits provided under the plan may not be assigned or alienated." 29 U.S.C.A. § 1056(d)(1) (West 1999). See also 26 U.S.C.A. § 401(a)(13) (West 1988 Supp. 2000). ERISA section 206(d)(3) provides that the bar on assignment and alienation of benefits "shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order, except that [the bar] shall not apply if the order is determined to be a qualified domestic relations order." 29 U.S.C.A. § 1056(d)(3)(A).
Thus, if the State Court Order is indeed a QDRO, it can be enforced against the Plan. If it is not a QDRO, it cannot be so enforced and the Plan has no authority to make payments pursuant to it. The central ERISA issues for purposes of resolution of the instant application for injunction relief are: whether there has been a determination that the State Court Order is a QDRO; if so, whether that determination was made by an authority with jurisdiction of the issue; and, if no such valid determination has yet been made, whether the State Court Order is a QDRO. These issues go to the likelihood of ultimate success on the merits of this action. As with any application for injunctive relief, the Court must also examine whether the other predicates for such relief — including irreparable harm — are present.
PREDICATES FOR INJUNCTIVE RELIEF
In this Circuit, a grant of preliminary injunctive relief is generally appropriate only upon the movant's showing: (a) that it will suffer irreparable harm in the absence of an injunction and (b) either (i) a likelihood of success on the merits or (ii) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in the movant's favor. See Brenntag Int'l Chemicals v. Bank of India, 175 F.3d 245, 249 (2d Cir. 1999); Jackson Dairy v. H.P. Hood, 596 F.2d 70, 72 (2d Cir. 1979).
The Court will first examine the issue of irreparable harm for, if no such harm can be made out, injunctive relief will be inappropriate and there will be no need for the Court to engage at this stage of these proceedings in the delicate exercise of divining the impact of the State Court Order and determining whether that order is enforceable against the Plan.
The Court, having examined thoroughly the parties' factual proffers and considered carefully their arguments and the basic economic structure of defined benefit pension plans, finds that, if the State Court Order is not a QDRO, the Plan and its fiduciaries making distributions pursuant to the order would suffer irreparable harm in the absence of a preliminary injunction. If the order is not a QDRO, neither ERISA nor the Code provides authority for compliance with it. Compliance would thus violate the statutory prohibition on the alienation of pension plan benefits, and would violate the basic ERISA fiduciary rule that plan assets are to be held in trust for the exclusive benefit of plan participants and beneficiaries.
See 29 U.S.C.A. § 1103 (West 1999 Supp. 2000).
Defendant argues that "plaintiff is the monied spouse in [the] divorce," asserting that Mrs. Lewis' personal net worth exceeds $2 million while his own is less than $250,000, suggesting that defendant's inability thus far to receive the substantial Plan distribution called for by the State Court Order has had an adverse impact on defendant's financial well-being. Defendant has also pointed out that he is some ten years older than Mrs. Lewis. (Deft's Memo of Law in Opp. to Pls' Motion and On Submission of Jurisdictional Issues at 4.) Plaintiffs here are, however, the Plan and Mrs. Lewis in her capacity as a Plan fiduciary only. Mrs. Lewis' personal financial status is irrelevant to the irreparable harm analysis, while Mr. Lewis's is, because it suggests that Plan assets improperly distributed to defendant — an individual admittedly in need of cash who intends to apply the money to his personal expenses — would be difficult, if not impossible, for the Plan to recover.
The Plan, as an entity that relies on employer contributions and investment return for augmentation of its assets, has no independent means of generating replacement assets in respect of any that may wrongly be disbursed. While Mrs. Lewis, in her individual capacity, appears to be the principal beneficiary of the Plan in terms of the value of her accrued benefits thereunder, she is not the only person with an accrued benefit under the Plan. An improper depletion of the Plan's assets would undermine the benefits of all participants, who look to the common fund for payment of their benefits. Fiduciaries effecting improper distributions face potential personal liability for breach of duty. Furthermore, a violation of the Code's requirement that a tax-qualified pension plan preclude the alienation of benefits could jeopardize the Plan's tax-qualified status, resulting in adverse financial ramifications for the company and all of the Plan's participants. Thus, a sufficient prospect of irreparable harm exists to warrant consideration of plaintiffs' likelihood of success on the merits. To the extent such prospect might not clearly rise to the level of irreparable harm, it surely suffices, when compared to the resources admittedly available to defendant, to weight the balance of hardships in plaintiffs' favor. As shown below in the Court's analysis of the likelihood of success on the merits, plaintiffs have also clearly raised issues going to the merits that are sufficiently serious to make them a fair ground for litigation.
Cf. Brenntag Int'l, 175 F.3d at 249-50 (noting that while monetary injury generally does not constitute irreparable harm because it can be estimated and compensated, where circumstances are such that "but for the grant of equitable relief, there is a substantial chance that upon final resolution of the action the parties cannot be returned to the positions they previously occupied," irreparable harm exists).
See Plan § 3.5.1 (Plan Doc. at 76).
See ERISA sections 403, 404, 409, codified at 29 U.S.C.A. §§ 1103, 1104 and 1109 (West 1999 Supp. 2000).
See 26 U.S.C.A. § 401(a)(13) (West 1988 Supp. 2000).
The first prong of the test for entitlement to injunctive relief having been met, the Court turns to the question of whether plaintiffs have shown a likelihood of success on the merits. The Court approaches with caution plaintiffs' efforts to thwart full enforcement of an order entered, after extensive litigation, in New York State court and affirmed on appeal after extensive motion practice and briefing. Section 1738 of title 28 of the United States Code requires federal courts to give "the same full faith and credit" to the judicial proceedings of states courts "as they have by law or usage in the courts of such State." The "Rooker-Feldman" doctrine, derived from District of Columbia Court of Appeals v. Feldman and Rooker v. Fidelity Trust Co. and their progeny, holds generally that the lower federal courts lack jurisdiction to entertain collateral attacks on state court judgments.
460 U.S. 462 (1983).
263 U.S. 413 (1923).
Before examining the validity of the State Court Order or its consistency with QDRO requirements, it is thus prudent to determine whether the state courts have already reached the issue that is at the heart of the instant litigation — is the State Court Order a QDRO with which ERISA and the Code require the Plan to comply? If the state court litigation has not addressed that issue, the litigation of the question in this Court does not constitute a collateral attack on that decision.
Careful review of the State Court Order and the state court litigation that followed its entry reveals that the issue of its QDRO status was never resolved by the state courts. The order, which was prepared by Mr. Lewis' counsel in the matrimonial action, is labeled a "Qualified Domestic Relations Order" and recites that "it is the intent of this Court that the provisions of this Domestic Relations Order operate as an effective assignment for the Alternate Payee's defendant's [sic] interest in the [Plan] for all purposes, and constitute a Qualified Domestic Relations Order in compliance with Section 414(p) of the [Code] and Section 206(d)(3) of [ERISA]." (State Court Order at 1-2.) Nowhere in the body of the order is there any analysis of the ERISA and Code criteria for QDRO status nor of whether the order meets those criteria. This Court cannot presume, on the basis of a caption and precatory language in an order prepared by counsel for an individual in an action to which the Plan was not a party, that the state court was purporting to adjudicate the Plan's obligations with respect to the distributions called for by the State Court Order.
Nor is the State Supreme Court's decision on Mrs. Lewis' subsequent motion to "resettle" the order any more suggestive of adjudication of the QDRO status issue. The state court's September 23, 1998 order reads in pertinent part: "it is ORDERED that this motion and cross-motion are denied. The Defined Benefit Plan in which defendant is to receive 50% of the assets can be amended, if necessary, to provide for the distribution to defendant." (OSC, Ex. E.) This language suggests that, far from having determined under federal law that the order meets QDRO requirements (which include a requirement that such an order "not require a plan to provide any type or form of benefit . . . not otherwise provided under the plan", the state court was of the view that further steps might be necessary to make the order enforceable against the Plan in its current form. The February 14, 2000 decision of the Appellate Division, Second Judicial Department, dismissing Mrs. Lewis' appeal and affirming the decision below, similarly alludes to inconsistency between the requirements of the order and the terms of the Plan. The appellate court observed that Mrs. Lewis' motion for "resettlement" was "seeking to have the terms of the stipulation amended to comply with the provisions of the Plan." Holding that the underlying stipulation of settlement in the divorce action was "neither unfair nor unreasonable" and that the State Court Order had been entered upon Mrs. Lewis' consent, the appellate court affirmed the lower court's denial of Mrs. Lewis' motion. (OSC, Ex. E.)
29 U.S.C. § 1056 (d)(3)(D) (West 1999).
Plaintiffs' efforts to litigate the question of the State Court Order's QDRO status here thus are not inconsistent with the scope of the proceedings in the state court or with the order itself. Accordingly, it is unnecessary for this Court to determine whether, for instance, the state court would have had jurisdiction under section 502(a)(1)(B) of ERISA (granting concurrent state and federal court jurisdiction of actions "to recover benefits due . . ., under the terms of [a] plan") to make an advance determination, in an action to which the Plan was not a party, that an order constituted a QDRO with which Plan fiduciaries could be compelled to comply.
29 U.S.C. § 1132 (a)(1)(B) (West 1999).
The Court now turns to the question of likelihood of success on the merits. Plaintiffs argue that the State Court Order is not a QDRO and that they are therefore entitled to preliminary injunctive relief precluding its enforcement pending this Court's ultimate determinations on their requests for declaratory and permanent injunctive relief. Defendant argues that this Court lacks jurisdiction to grant the declaratory relief sought by plaintiffs and that, to the extent this Court has jurisdiction of the issues raised it should defer to the state court because this is in essence a two-party domestic relations matter, relating to the Plan only incidentally, because Mrs. Lewis, as a shareholder of the sponsoring company, ultimately has the power to amend the Plan to comply with any agreements she may have made in her personal capacity. Defendant further asserts that the state court contempt proceedings should alternatively be considered as actions for benefits due under ERISA and therefore within the scope of concurrent state jurisdiction under ERISA section 502(a)(1)(B).
The Court clearly has jurisdiction to entertain this action. Section 502(a)(3) of ERISA grants the federal courts exclusive jurisdiction of civil actions brought on by fiduciaries for injunctions and equitable relief in respect of acts or practices that violate Title I of ERISA (the title that includes ERISA's anti-alienation provisions) or the terms of a covered plan. There is no dispute that Mrs. Lewis, in her trustee capacity, is a Plan fiduciary. To the extent defendant's state court activities constitute an effort to compel the Plan to make distributions inconsistent with its terms and/or the provisions of ERISA, this Court has exclusive jurisdiction under ERISA to entertain an action for appropriate injunctive or other equitable relief, including the grant of an appropriate declaratory judgment. The Declaratory Judgment Act, 28 U.S.C. § 2201 (a), further empowers this Court, "[i]n a case of actual controversy within its jurisdiction, . . . [to] declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." 28 U.S.C.A. § 2201(a) (West 1994).
See, e.g, Board of Trustees of the CWA/ITU Negotiated Pension Plan v. Weinstein, 107 F.3d 139, 141-42 (2d Cir. 1997); Heimann v. Nat'l Elevator Industry Pension Fund, 187 F.3d 493, 504 (5th Cir. 1999).
Having said that, the Court intends to focus squarely, and exclusively, on the question of whether this particular State Court Order is a QDRO and therefore enforceable in its current form against the Plan. Defendant is correct in contending that the statutory scheme contemplates that determinations of the individual parties' rights with respect to marital assets, including the allocation of accrued employee plan benefits, is a state court matter. The federal issue is whether the state court's determination has been embodied in a domestic relations order that survives ERISA preemption and the ban on alienation of benefits by meeting the specific federal statutory requirements for "QDRO" status.
Defendant argues that the Plan Administrator's admitted failure to comply with ERISA's procedural requirements for the processing and review of domestic relations orders somehow forecloses plaintiffs' instant effort to bring the question of the QDRO status of the State Court Order before this Court. There is nothing in section 206 or section 502 of ERISA that suggests that an administrator's compliance with the letter of the procedure is a jurisdictional prerequisite to a civil action addressing the issue. It is, of course, clearly preferable for plan fiduciaries to take seriously their statutory duties, and the Court expresses no opinion as other potential ramifications of the Plan Administrator's apparent failure thus far to comply with the procedural requirements in this matter.
The question thus comes down to whether plaintiffs are likely to succeed on their claim that the State Court Order is not a QDRO. Arguing that the order is not a QDRO, plaintiffs have focused on its method of defining Mrs. Lewis' "interest" in the Plan, its mandate of an in-kind distribution of benefits, and its mandate that such distribution be immediate, at a time when Mrs. Lewis herself had not reached the minimum age requirement for Plan distributions. The elements of the requirements for QDRO status set forth in section 206(d)(3)(D) of ERISA are conjunctive. Thus, plaintiffs will have met their burden if they have shown that the State Court Order fails to meet any of the three criteria set forth in that subsection.
"A domestic relations order meets the requirements of [a QDRO] only if such order — (i) does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan, (ii) does not require the plan to provide increased benefits (determined on the basis of actuarial value), and (iii) does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a domestic relations order." 29 U.S.C.A. § 1056(d)(3)(D) (West 1999) (emphasis supplied).
ERISA section 206(d)(3)(D) provides, among other things, that a domestic relations order is a QDRO only if it "does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan." 29 U.S.C. § 1056 (d)(3)(D). The State Court Order defines Mrs. Lewis' "interest" in the Plan as "Ninety-Two 3/10 (92.3%) percent of the total assets of said Plan." (OSC, Ex. D at 5.) It requires payment "directly to the Alternate Payee/defendant, DAVID LEWIS, [of] Fifty (50%) percent of plaintiffs interest in the Plan (46.15% of the assets in the Plan) by transferring such assets to the Alternate Payee/Defendant's Charles Schwab retirement account in the name of David Lewis," and further specifies particular stockholdings to be transferred in the distribution. Id. The State Court Order requires the calculation of the amount to be transferred by applying the specified percentage "as of the date of such distribution/transfer." Id.
The Plan, by contrast, defines a participant's Normal Retirement Benefit as "30% of the Participant's Average Monthly Compensation reduced by 1/28 for each year of Credited Service less than 28 years." (Adoption Agreement at 11.) Benefit accrual under the Plan is based on years of service. Id. at 15. No early retirement benefits are provided for; benefits payable after the normal retirement date (age 60 if certain service requirements are met) are based on the normal retirement and accrued benefit formulae. See id. at 18. Formulae for the date as of which a benefit is determined and the application of the accrual principles in connection therewith are provided in the Adoption Agreement and the Plan Document. See Adoption Agreement at 11-21; Plan Document at 19-32, 36-52. None of the benefit calculation formulae set forth in the Adoption Agreement or the Plan document provides for the calculation of a benefit by reference to a percentage of the value of Plan assets. A provision relating to the allocation to participants of residual assets applies only following termination of the Plan. See supra n. 2 and accompanying text.
The State Court Order is thus clearly inconsistent with the terms of the Plan in relying on a benefit calculation formula not provided for under the Plan. It fails to satisfy the ERISA section 206(d)(3)(D)(i) requirement that a QDRO "not require a plan to provide any type or form of benefit . . ., not otherwise provided under the Plan." 29 U.S.C.A. § 1056(d)(3)(D)(i). It thus appears likely that plaintiffs will succeed in establishing their entitlement to relief on Count II of their Amended Complaint.
Plaintiffs' Amended Complaint consistently cites section 206(d)(3)(D)(ii) as the legal basis for their claims regarding the order's QDRO status. It seems that plaintiffs mean, however, to rely on section 206(d)(3)(D)(i). Paragraph 22 of the Amended Complaint, which purports to quote subsection (ii), in fact quotes the latter provision.
In Count I of their Amended Complaint, plaintiffs take issue with the immediate and in-kind distribution requirements of the order. There appears to be no dispute that, at the time the State Court Order was entered, Mrs. Lewis had not reached the age at which she would have been eligible for an immediate distribution of benefits. Although ERISA permits a QDRO to require payments to an alternate payee to commence before a participant has separated from service, such payments can only be required to commence on or after "the date on which the participant attains . . . the earliest retirement age." 29 U.S.C. § 1056 (d)(3)(E)(i)(I). In that Mrs. Lewis had not yet reached the Plan's earliest retirement age at the time the State Court Order was entered, plaintiffs are likely to succeed on their claim that the order is also inconsistent with the Plan and QDRO requirements in this respect.
In Count III of their Amended Complaint, plaintiffs further argue that the State Court Order's requirement of the distribution of the benefit in the form of specific items of property is impermissible under the terms of the Plan and ERISA. Their likelihood of success on this element of the claim is less clear. The Plan provides that "distribution of a Participant's benefit shall consist of cash, property, an annuity policy or any combination thereof." Plan Document at 46. Plaintiffs have pointed to no statutory or Plan provision precluding distributions of stocks or other property in respect of defined benefit plan benefits. Plaintiffs' failure to make out a likelihood of success on this particular issue is not fatal to their effort to obtain injunctive relief because, as explained above, both the benefit calculation and distribution timing requirements of the State Court order appear likely to preclude a finding of QDRO status.
The Court having found that plaintiffs will likely suffer irreparable harm in the absence of a grant of preliminary injunctive relief and that plaintiffs have demonstrated a likelihood of success on the merits of two of their claims, the Court hereby grants a preliminary injunction as follows.
PRELIMINARY INJUNCTION
Defendant, his agents, servants, employees, attorneys, and those persons in active concert or participation with him who receive actual notice of this Preliminary Injunction by personal service or otherwise, are hereby enjoined, pending resolution of this action, from taking any action to enforce the "Qualified Domestic Relations Order" dated June 30, 1998 and entered by the Supreme Court of the State of New York, County of Westchester, in the action captioned Joan D. Lewis v. David Lewis, Index No. 14120/96 (the "State Court Order"), or to sanction noncompliance therewith, to the extent the State Court Order requires benefit calculations under or distributions from the plaintiff Plan. Plaintiffs are hereby enjoined preliminary from making any benefit calculations or distributions of Plan assets pursuant to the State Court 1998 Order. No bond is required to be posted.
The parties shall appear before the Court for a pre-trial conference on April 26, 2001 at 10:00 a.m.
IT IS SO ORDERED.