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Qualified Domestic Relations Order (QDRO)

Bankruptcy is a hot button for practitioners and courts alike. Historically, the use of bankruptcy to avoid liability in a marital action is widespread; how it affects QDROS and the underlying Federal laws under ERISA regarding pensions is important to consider.

For example, the Eighth Circuit held that an alternate payee’s interest in his former wife’s ERISA-governed retirement plan is not part of his bankruptcy estate, and therefore not subject to distribution to his creditors.[1] The court held that the former husband as an alternate payee under a QDRO had beneficiary status under the plain language of ERISA. In so finding, the court rejected the former husband’s attorney’s argument that ERISA’s anti-alienation provision did not apply because the former husband obtained his interest through a QDRO rather than directly from the plan. The court noted that “[a] person who acquires an interest in an ERISA plan via a QDRO can exclude that interest from a bankruptcy estate in the same way that the plan participant herself could have excluded it.”

Facts. The couple obtained a divorce in September 2000. The divorce decree awarded the husband $71,089 from Denise’s retirement plan to be made in a lump-sum payment pursuant to a qualified domestic relations order. In February 2001, while the retirement plan was determining if the document submitted to it was a QDRO, and before it had distributed any funds to the husband, he filed for bankruptcy. The husband claimed the pending distribution should be excluded from his bankruptcy estate because it was subject to ERISA’s anti-alienation provision, which states that benefits provided under an ERISA-governed pension plan may not be assigned or alienated.

The husband’s former attorney, who, according to the court, was still owed fees from the husband’s divorce, objected to the husband’s claim, arguing that the pending distribution should be included in the bankruptcy estate and distributed to the husband’s creditors.

Holding. The court found that the husband’s interest in the retirement plan was not part of his bankruptcy estate. It is well established that a debtor may exclude from the bankruptcy estate any interest in a plan that contains a transfer restriction enforceable under nonbankruptcy law, the court said. ERISA’s anti-alienation provision contains such a transfer restriction.

The court noted that when the husband filed for bankruptcy, his lump-sum distribution was still being held in trust by an ERISA plan. The court wrote that “a person awarded a lump-sum distribution from an ERISA plan pursuant to a divorce decree has a direct interest in plan funds while the plan reviews the [domestic relations order] to determine whether it constitutes a QDRO.”

In concluding that the distribution was not part of the bankruptcy estate, the court said, “Congress intended that all persons conferred beneficiary status via a QDRO be given the same protection ERISA affords to plan participants.”

By Adam Hunt

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