McDermott v. McDermott

119 A.D.2d 370, 507 N.Y.S.2d 390, 1986 N.Y. App. Div. LEXIS 58992

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: October 14, 1986
• Status: Published

Opinions

OPINION OF THE COURT

Lazer, J. P.

In her seemingly classic though recent study of the economic and social consequences of modern divorce laws, Professor Weitzman observes concerning pensions: "A divorced person who has been awarded a share of his or her spouse’s pension may still face problems in collecting the benefit. One problem occurs if the worker elects to forego survivor’s coverage. Under most pension plans, a worker can opt for a reduced pension to provide a survivor’s benefit for his widow, or can opt for full monthly checks during his lifetime. Many workers elect to 'opt out’ or waive survivor’s coverage, and the choice has typically been theirs alone” (Weitzman, The Divorce Resolution, at 119).

At principal issue here is the power of the judicial system to limit the selection of payment options by a public employee whose pension rights are protected by particular constitutional and statutory provisions. The dispute also furnishes a further opportunity to examine how fundamentally the traditional nature of property rights have been altered for the marital relationship by the Legislature’s creation of the "marital property” concept.

I

When their divorce action began, Fergus and Isabel McDermott had been married for 33 years, during almost all of which he held a position with the New York City Fire Department and she was a housewife. At the time of trial, he was 62 years old and Deputy Chief of the fire department with a salary of over $55,000 per year; she was 58, and apart from interest on a very small inheritance, her income was what he provided. Her rather severe health problems and lack of work experience made it highly unlikely that she could develop any meaningful earning potential in the future. His retirement was mandated at age 65.

In its divorce judgment, Special Term granted the wife a divorce on the ground of abandonment (see, Domestic Relations Law § 170 [2]); awarded her maintenance of $225 per week to continue until the death of either party, her remarriage or the husband’s retirement; directed the husband to maintain his existing medical coverage, or its equivalent, for her benefit; and awarded her counsel fees. Distribution of the marital property was sharply complicated, however, by the disproportion between the $317,269 value attributed to the husband’s pension rights and the $136,191 value of the rest of the assets. The nonpension assets consisted of two jointly owned homes on Staten Island worth $59,000 and $27,500, three joint bank accounts containing approximately $5,565, three automobiles with a total worth of $2,600, and a stock portfolio and annuity worth $33,565 and $9,461, respectively, both in the husband’s name. What was vigorously debated at Special Term and currently, of course, was the court’s power to limit the husband’s right to untrammeled selection of available pension payment options.

Under the fire department pension plan, pensioners may select from among a number of payment options. Under the "maximum allowance” option the husband was entitled to receive $35,193 per annum for life with $4,000 to be paid to his designated beneficiary at his death. Other options decreased the amounts payable per year but increased benefits to the designated survivors. "Option I” would provide $26,668 annually until death, with the designated beneficiary to receive a lump-sum payment of whatever was left in the reserve fund at the time of the pensioner’s death. "Option II” would pay $23,484 annually until death, with the designated beneficiary to receive the same amount until his or her death. Designation of the Option II beneficiary would become irrevocable upon the pensioner’s retirement and prior death of the beneficiary would extinguish the residuary benefits. "Option III” would provide a slightly higher annual allowance than Option II — $25,888—but would reduce the beneficiary’s annual allowance to one half of what the husband would receive, $12,944. "Option IV” would allow the husband to convert a portion of the maximum allowance into life insurance, at a cost of $64.84 per $1,000 of insurance; the balance of the maximum allowance left after payment of these premiums would be paid to him.

Special Term (123 Mise 2d 355) awarded the wife the more valuable house plus a one-half interest in the joint bank accounts and the annuity; the husband got the other house, the stock portfolio, the three automobiles and retained the other half of the bank accounts and the annuity. In distribuíing the pension rights, the court awarded the wife a one-half interest worth $158,634, and, to insure her ability to receive that interest, the husband’s choice among the payment options was limited to Option II, Option III, or, under certain conditions, Option IV. Barred from selection by the husband were the maximum allowance option because of its minimal survivorship benefits and "Option I” because pension payments would cease if he outlived his life expectancy and no survivorship benefits would be available. He was also directed to designate the wife irrevocably as the beneficiary to the extent of her interest under whatever option he did choose. The judgment required that a copy of it be served on the pension plan administrators and enjoined them from accepting any election of a payment option or designation of a beneficiary which did not comply with the judgment.

After Special Term’s decision but before the entry of judgment, the Fire Department Article 1-B Pension Fund of the City of New York (the fund) sought leave to intervene as a matter of right (CPLR 1012 [a] [2]), or, in the alternative, in the exercise of discretion (CPLR 1013), for the purpose of rearguing the pension distribution determination on constitutional and statutory grounds. The husband had not attacked the determinations on those grounds and even on appeal merely argues that the court abused its discretion and that Domestic Relations Law § 236 (B) does not authorize judicial limitation of pension options. In an order signed on the same day as the divorce judgment, Special Term denied the fund’s applications and it has appealed from that order, arguing not only for intervention, but on the merits of the judgment as well.

Special Term was correct in denying the fund leave to intervene as of right, since the standards of CPLR 1012 (a) (2) were not met. Nevertheless, it was error to refuse permission to intervene under CPLR 1013. The fund had a "real and substantial interest” in these proceedings (see, Plantech Hous. v Conlan, 74 AD2d 920, 921, appeal dismissed 51 NY2d 862; Matter of Petroleum Research Fund, 3 AD2d 1) and all it sought was reargument of the portion of the judgment applicable to it — a matter of law. The error is curable without a remittitur, however, since, by exercising our discretion to permit intervention on this appeal (see, Auerbach v Bennett, 47 NY2d 619), we now entertain the same argument that would have been made at Special Term.

Before reaching the merits of that argument, we pause to dispose of a number of lesser issues raised by the defendant. The plaintiffs testimony was sufficient to establish the unjustified and nonconsensual departure which constitutes abandonment (see, Domestic Relations Law § 170 [2]; Schine v Schine, 31 NY2d 113). Further, in a marriage of the duration of the instant one, it was not improper to divide the pension fund equally (see, Antis v Antis, 108 AD2d 889). The maintenance award was not excessive and the argument that it should not have been permitted to continue indefinitely is meritless because the payments were to terminate upon the defendant’s retirement, a matter of three years. Since the court is empowered to require that one party provide medical insurance for the other (Domestic Relations Law § 236 [B] [8]), it was not an abuse of discretion for the trial court to require the defendant to maintain the existing coverage or its equivalent for the plaintiffs benefit, and, under the circumstances, we see no reason to insert a termination date for that obligation. Finally, the award of attorney’s fees reflected no abuse of discretion (see, Silver v Silver, 63 AD2d 1017) but it did fail to credit the defendant with a payment of $500 made to the plaintiffs counsel pursuant to a pendente lite order, so the judgment must be modified in that respect. What requires extended discussion in this case is the propriety of the court’s determination relative to pension options.

II

Pensions represent a form of deferred compensation paid after retirement in lieu of the receipt of greater compensation during the period of employment (Majauskas v Majauskas, 61 NY2d 481, 491-492; see also, D’Amato v D’Amato, 96 AD2d 849). Deferral of that compensation obviously affects the spouse of the pension plan member, not only in the sense that it diminishes current income, but also because it slows the buildup of marital assets. An interest in the contractual right to a pension plan is marital property to the extent that the interest was acquired during the marriage and prior to commencement of a matrimonial action (see, Majauskas v Majauskas, supra). No one contests anymore that an equitable distribution court may recognize the interest of the nonmember spouse in the pension contract and award a portion of the contractual rights to that spouse by directing payment of portions of the pension benefits as they are made or by awarding cash or other property equivalent to the value of the interest in the contract (see, Majauskas v Majauskas, supra, at p 493). Because the value of the McDermott pension exceeded the rest of the marital assets by far, Special Term awarded the wife an interest in the pension contract that permits her to share in the payments as made and in any further distribution after her husband’s death. In our view, these determinations were a sound exercise of discretion and accordant with the court’s power.

In Damiano v Damiano (94 AD2d 132, 139), and later in Rodgers v Rodgers (98 AD2d 386, 392, appeal dismissed 62 NY2d 646), we declared that while lump-sum distributive awards of the value of pensions (see, Domestic Relations Law § 236 [B] [5] [e]) are preferable because they permit immediate settlement of the distribution issues and avoid future enforcement problems, it is not improper to award a share of the benefits as they are received, especially where the remaining assets are not substantial enough to allow a current distributive award of all the assets. The method of distribution is discretionary and "must be contoured to suit the particular circumstances, needs and means of the parties in the case” (Damiano v Damiano, supra, at p 140). Inherent in the mandate of equitable distribution is the command that the property distribution be made by a means which is both fair and effective, calculated to protect the rights of the parties in the property and avoid wherever possible future litigation for the purpose of enforcement. If Majauskas did not specifically indorse all of the other reasoning in which we had indulged, it certainly agreed with our result (see, Majauskas v Majauskas, supra, at p 492, n 6).

Special Term’s care in fashioning a solution to fit the circumstances and protect the wife’s share of the pension is quite apparent. To prevent the husband from enhancing his current pension payments at the risk of forfeiting the reserve fund remaining at his death, selection of the maximum allowance option was prohibited. By rejecting Option I, the court obviated the possibility that the wife would receive nothing upon the husband’s death. By limiting the amount of life insurance that could be purchased under Option IV and requiring that the wife be designated the beneficiary of the policy, the court ensured that current income would not be unduly constricted and that the wife would ultimately receive her share of the pension fund. Limiting the choice to Options II, III and IV provided current income to the wife, and requiring that she be named beneficiary of the pension to the extent of her interest under whatever option was selected shielded her right to receive something akin to the value of her ownership interest in the pension.

Ill

The fund’s argument that Special Term lacked the power to make these directions is that the husband’s right to select payment options is impenetrably shielded by provisions of the Administrative Code of the City of New York and the State Constitution. The code provision declares that pension benefits "shall not be subject to execution, garnishment, attachment, or any other process whatsoever, and shall be unassignable except as in this article specifically provided” (Administrative Code § B19-7.941). NY Constitution, article V, § 7 declares that membership in a public pension system creates "a contractual relationship, the benefits of which shall not be diminished or impaired”.

Laws like the Administrative Code provision (see, Education Law § 524; Retirement and Social Security Law §§ 110, 410; Administrative Code §§ B18-52.0, B19-7.941) are not of recent vintage (see, L 1920, chs 503, 741). Their purpose is to protect public employee pensions against improvidence and misfortune that might permit creditors or assignees to upset the public policy considerations underlying the pension scheme (see, Caravaggio v Retirement Bd. of Teachers’ Retirement Sys., 36 NY2d 348, 353). While such laws did not prevent pensions from being reached for support of dependents (see, e.g., Zwingmann v Zwingmann, 150 App Div 358), prior to equitable distribution they did prevent enforcement of separation agreements that required designation of a spouse as irrevocable beneficiary of a public employee’s pension (Zwingmann v Zwingmann, supra) or limited the right of the employee spouse to select among the various payment options provided by a public employee’s pension plan (Leavitt v Leavitt, 54 AD2d 707). Relying on these preequitable distribution precedents — particularly Caravaggio — our dissenting colleagues would have us hold that there is no judicial power to direct designation of a beneficiary or limit the choice of pension payment options by a public employee. Such a holding would ignore the fundamental changes the equitable distribution statute has wrought in traditional common-law property concepts and the necessity to adjust judicial power to effectuate the new vision of marital property rights.

The 1980 Equitable Distribution Law (L 1980, ch 281) ereated the concept of marital property, a property interest previously unknown in this State (see, O’Brien v O’Brien, 66 NY2d 576, 583). "Marital property” is the most crucial term in that statute (Scheinkman, 1964 Practice Commentary, McKinney’s Cons Laws of NY, Domestic Relations Law C236B:4, 1986 Supp Pamph, p 203), for the power it gives the court is the centerpiece of the equitable distribution revolution the reformers sought (see, Foster and Freed, Marital Property Reform in New York: Partnership of Co-Equals? 8 Fam LQ 169). No longer is the matrimonial court circumscribed in its adjustment of the economic incidents of the dissolution of a marriage by the technical trappings of ownership. Instead, it may disregard the form in which legal title has been held (see, Domestic Relations Law § 236 [B] [1] [c]) and distribute the marital property on the basis of listed equitable factors, something that could not have been done directly under prior law (see, Szabo v Szabo, 71 AD2d 32; Taylor v Taylor, 62 AD2d 944; McGuigan v McGuigan, 46 AD2d 665) and could not be done effectively by the employment of other traditional legal concepts such as constructive trusts (see, Foster and Freed, Marital Property and the Chancellor’s Foot, 10 Fam LQ 55; Recent Developments, Equitable Distribution in New York, 45 Albany L Rev 483, 487, n 16). The "Legislature deliberately went beyond traditional property concepts when it formulated the Equitable Distribution Law” (O’Brien v O’Brien, 66 NY2d 576, 583, supra) and both Majauskas and O’Brien (supra) are unmistakable signals from the Court of Appeals that mindsets attuned to older doctrines must be abandoned if the judiciary is to recognize the sea change created by equitable distribution.

While the centerpiece of the equitable distribution revolution is indeed the concept of marital property and the judicial power to distribute it, what underlies everything doctrinally is the economic partnership that marriage constitutes in which the contribution of each spouse, in whatever form is recognized as furthering the partnership interest (see, O’Brien v O’Brien, 66 NY2d 576, 585, supra; Assembly mem, 1980 NY Legis Ann, at 130; Governor’s mem approving L 1980, ch 281, 1980 McKinney’s Session Laws of NY, at 1863). The economic partnership principle far exceeds in significance the merely rhetorical role it sometimes seems to assume. If marital property " 'arises full-grown, like Athena, upon the signing of a separation agreement or the commencement of a matrimonial action’ ” (see, O’Brien v O’Brien, supra, at p 583, quoting Florescue, "Market Value”, Professional Licenses and Marital Property: A Dilemma in Search of a Horn, Dec. 1982 NY St B Assn Fam L Rev 13), it does so because the economic partnership has nurtured it until the fateful moment of process service has permitted its revelation. While the legal effects of the partnership principle may not be visible to the naked eye until an action has begun, there can be little doubt that the principle affects much more than the psychology of the marital parties.

The McDermott pension grew and appreciated for the benefit of the economic partnership by virtue of the equitable distribution statute, a constitutional law (see, Tucker v Tucker, 80 AD2d 244, mod on other grounds 55 NY2d 378) that created property interests wholly unknown at common law. While the fund quite obviously views such a doctrine with abhorrence as it affects pensions, under the doctrine Mrs. McDermott began acquiring an interest in the pension from the moment her husband joined the plan. That interest, unenforceable and unallocated as it may have been prior to the divorce action, constituted the seed from which an inchoate interest in the pension emerged as a marital asset when the divorce action began (see, United States v Davis, 370 US 65) and matured into a true ownership interest when the equitable distribution judgment terminated the action. Behind the shield of the State Constitution and the Administrative Code was a pension contract whose ownership was being transformed — first potentially and then actually — through the workings of a constitutional statute that altered traditional property-right concepts.

During the marital property phase, when a spouse’s interest is still inchoate, there can be no doubt that it is protectable against unwarranted dissipation, for the "power of restraint is vital to meaningful enforcement of the equitable distribution statute” (Leibowits v Leibowits, 93 AD2d 535, 537; see also, Colin v Colin, 113 AD2d 817; Chachkes v Chachkes, 107 AD2d 786; Carella v Carella, 106 AD2d 601). When inchoate rights become actual ownership interests by virtue of equitable distribution judgments, they are susceptible to even greater protection because their enhanced status eliminates some of the inhibitions inherent in the exercise of injunctive power prior to distribution. The court that awarded the wife a one-half ownership in the pension contract originally entered into between the husband and the fund possessed the power to take appropriate measures to prevent the award from becoming an illusion.

The judicial power to protect the award of an interest in a pension contract by restricting the plan member’s option choices does not implicate the "execution, garnishment, attachment, or any other process” proscribed by Administrative Code § B19-7.941 and the State legislation (see, Education Law § 524; Retirement and Social Security Law §§ 110, 410) in order to defeat creditors and assignees. As has already been noted, even in an earlier era, pension-protective laws like the Administrative Code provision did not prevent pension contracts from being reached by the courts to furnish support to dependents (see, Zwingmann v Zwingmann, 150 App Div 358, supra; see also, Fox v Fox, 276 App Div 859; Monck v Monck, 184 App Div 656). The classic statement of the rule concerning such laws when the pensioner’s familial obligations are the issue is that "[t]he whole purpose of the statute is served when the fund is preserved for the use of the pensioner and those legally dependent upon him for support and maintenance; when it is held intact for the care of the woman who is, in law, but a part of himself and entitled, with him, to share in the pension” (Zwingmann v Zwingmann, supra, at p 360). This relatively ancient recognition of the wife’s right to "share” in the husband’s pension, although based upon a now-discarded concept of marital unity, has current application. These days the wife’s right to "share” in the pension is effectuated as the grant of a property right, not alimony. The Majauskas court’s broad reading of Zwingmann and Monck as applying generally to "the rights accorded [a spouse] upon dissolution of the marriage by a decree of divorce” (Majauskas v Majauskas, 61 NY2d 481, 493, supra) recognizes this fact. All these factors constitute and comprehend a broad and powerful public policy that inparts quite strongly to the judiciary the direction that must be taken. That direction cannot be pursued by reading restrictive terminology created to protect pensions against judicial process invoked by creditors and assignees as prohibiting the use of judicial power to protect an award of pension rights to a spouse.

Although this case may be the first that decides the issue directly, our colleagues in the Fourth Department certainly have indicated that pension awards can be protected against option selections that would render the awards illusory. In Farsace v Farsace (97 AD2d 951) — a case that preceded the Majauskas holding — the Fourth Department considered the provisions of an equitable distribution decree which limited the husband’s options with respect to his State employees’ pension to those which would not impair the wife’s rights to receive her share of the fund. Although the court fashioned another remedy by requiring the husband to carry insurance sufficient to satisfy the wife’s claim, it specifically noted that it perceived "no authority that such provisions are not within the broad discretion accorded to the court” (Farsace v Farsace, supra, at p 952).

Our conclusion is apparent — nothing in laws intended to prevent the depletion of pension funds by creditors and assignees of pension plan members prevents the court that awards a portion of a pension contract to a spouse from taking further steps to help assure that the interest awarded will be received.

IV

The fund argues further, however, that even apart from the Administrative Code provision, the Equitable Distribution Law cannot overcome the protection afforded to pension contracts by the provision of the State Constitution that declares the connection between a member of a pension plan and the pension system to be a "contractual relationship, the benefits of which shall not be diminished or impaired” (NY Const, art V, § 7). The section was introduced in the 1938 Constitution to overcome Roddy v Valentine (268 NY 228), which had held that a public employee’s pension could be altered or even revoked by the Legislature prior to satisfaction of the requirements for retirement (see, Public Employees Fed. v Cuomo, 62 NY2d 450, 459; Birnbaum v New York State Teachers Retirement Sys., 5 NY2d 1). The Constitutional Convention debate over the proposed provision centered upon the fiscal consequences to municipalities of transforming a legislative grant into a contractual relationship, especially since some retirement funds, notably those in New York City, were at the time actuarially unsound (see, Record of Proceedings of 1938 Constitutional Convention, at 1404-1423, 2548-2562, 2982-2993). In adopting the provision, the Convention obviously subordinated these fears to a policy of ensuring civil servants that the pension benefits they had been promised would be available when they retired.

Since its adoption, the constitutional provision has been applied primarily to prohibit the Legislature from altering the formula by which the amount of retirement benefits is determined. Held unconstitutional have been efforts to limit the increased compensation which is figured into the average salary of the final years of employment (see, Kleinfeldt v New York City Employees’ Retirement Sys., 36 NY2d 95); to eliminate the inclusion of cash payments for accumulated vacation credit in the final average salary (Kranker v Levitt, 30 NY2d 574); to adopt a mortality table which would have had the effect of reducing payments (Birnbaum v New York State Teachers Retirement Sys., 5 NY2d 1, supra); to change the period used to compute final average salary (Matter of McCaffrey v Board of Educ., 48 AD2d 853); and to eliminate vacation credit payments from the final average salary (Matter of Weber v Levitt, 41 AD2d 452). More recently, the provision has been held to affect other incidents of membership in the retirement system, such as the right upon discontinuance of service to withdraw funds contributed to the system (Public Employees Fedn. v Cuomo, 62 NY2d 450, supra) or the right to reenter the system upon renewed public employment (Matter of Donner v New York City Employees’ Retirement Sys., 33 NY2d 413). Nevertheless, the provision does not impair the right of the public employer to alter retirement benefits other than pension contracts (see, Matter of Lippman v Board of Educ., 66 NY2d 313) or the incidents of employment itself by diminishing disability benefits (see, Cook v City of Binghamton, 48 NY2d 323) or salary (Hoar v City of Yonkers, 295 NY 274, rearg denied 295 NY 981); by changing the requirements for mandatory retirement (Gorman v City of New York, 280 App Div 39), or the management of the retirement system (see, Brown v New York State Teachers Retirement Sys., 25 AD2d 344, affd 19 NY2d 779).

What the Constitution prevents, then, is reduction by the public employer of the financial benefits promised in the pension contract. But the Majauskas holding has made it clear that an equitable distribution court’s award of an interest in a pension contract to a nonmember spouse does not unconstitutionally diminish or impair the plan member’s pension or the contractual rights to it. Responding in Majauskas to the husband’s contention that to "distribute his pension is to diminish or impair it contrary to the State Constitution (art V, § 7)”, the court found that "the pension of the employee spouse is not diminished in the sense that the pension fund will pay any lesser amount” (Majauskas v Majauskas, 61 NY2d 481, 493, supra).

To the same effect, judicial restriction of option or beneficiary choices does not diminish a pension in the sense that a lesser amount will be paid. The fund will continue to pay benefits in accordance with the terms of the contract, as it would have done had the judgment not intervened. The payment options are defined in the law which creates them as being actuarially equivalent (see, Administrative Code § B197.91; see also, Education Law § 513; Retirement and Social Security Law §§90, 390; Administrative Code § B18-49.0), so regardless of the option choice made and the difference in the amount of current payments reflected in that choice, the ultimate payment will be equivalent if the employee and beneficiary live out their normal life expectancies and no more.

In sum, Special Term has merely redirected payment of the pension benefits to fit the ownership pattern decreed by the court in conformity with the factors listed in the Equitable Distribution Law which is itself constitutional. It is from that vantage point that the legal issues on this appeal must be viewed. The contract that the fund perceives through vision imparted by traditional common-law precepts is a contract whose ownership became dual through enforcement of a constitutional law that in marital dissolution proceedings can compel the parties to share property rights on the basis of various factors listed in the law. The contract that may not be "diminished or impaired” (NY Const, art V, § 7) is now a co-owned contract; the declaration of co-ownership merely recognized the fact that Mr. and Mrs. McDermott were economic partners in the pension contract who, by virtue of their marital breakup, became co-owners. The limitation of the husband’s choices merely protects the wife’s co-ownership rights without reducing the benefits which will be paid pursuant to the contract. The judiciary may constitutionally and legally determine and decree that there are two owners of the pension contract and it has the discretion to constitutionally and legally adopt appropriate measures to protect the ownership interests of both.

Accordingly, the order denying the fund leave to intervene should be reversed, and the amount of counsel fees modified, but the provisions of the judgment of divorce dealing with the husband’s pension should be affirmed.