In May 2017, the U.S. Supreme Court issued an opinion in Howell v. Howell, 137 S. Ct. 1400 (2017), reversing and remanding the judgment of the Arizona Supreme Court. In effect, the decision places important limitations on a trial court’s ability to ensure that a military retirement pay award to a former spouse is protected in the event that the military veteran accepts a disability benefit that diminishes his or her retirement pay and consequently that of the former spouse.
The case involved John Howell (Husband) and Sandra Howell (Wife), who divorced in 1991, while Husband was completing military service. The divorce decree treated Husband’s future military retirement pay (MRP) as community property and awarded Wife fifty percent of Husband’s MRP upon its commencement. Husband retired in 1992 and Wife began receiving fifty percent of the MRP. About thirteen years later, the V.A. deemed Husband to be twenty percent disabled because of service-related injuries. Husband elected to receive corresponding disability benefits and thus had to waive a portion of his MRP. This waiver reduced Wife’s award of the MRP.
DEVELOPMENTS IN STATE COURT
Wife asked the Pima County Superior Court to enforce the original divorce decree and restore her value of her share of Husband’s total MRP. The trial court found that Wife had a vested interest in Husband’s pre-waiver amount of the MRP and that Husband was required to ensure that Wife received her full fifty-percent award. Husband appealed. Ultimately, the Arizona Supreme agreed with the trial court. See 238 Ariz. 407. Specifically, the Arizona Supreme Court held that the trial court had merely ordered Husband to “reimburse” Wife for her reduced share of the MRP.
U.S. SUPREME COURT DECISION
The case eventually made its way to the U.S. Supreme Court. There, the Court reversed the decision of the Arizona Supreme Court and sent the case back to state court for further orders consistent with the decision. Importantly, the Court noted that state courts cannot order a military veteran to indemnify or reimburse a divorced spouse’s lost portion of retirement pay due to the veteran’s waiver of retirement pay to receive disability benefits. Further, the Court held that the timing of a veteran’s waiver is immaterial. Specifically, the Court held that a conflict existed between the federal government’s interest in attracting and retaining military personnel and various states’ conferred community-property rights. The Court noted that Congress had enacted a law that a state court may treat as community property a veteran’s disposable retirement pay—but the state court may not include the portion of the retirement pay that was deducted as a result of “waiver” that the veteran made in order to receive disability benefits. See 10 U.S.C. § 1408(a)(4)(B). Additionally, the Court found that a state court could not vest that which it lacked authority to give. Finally, the Court held that a state court is free to account for the contingency of possible waiver or to account for reductions in value when determining or recalculating the need for spousal maintenance.
THE LAW BEFORE HOWELL
In 1989, the U.S. Supreme Court held in Mansell that MRP waived by a veteran for receipt of disability benefits is not community property divisible upon divorce. 109 U.S. 2023 (1989). Additionally, Congress enacted the Uniformed Services Former Spouses Protection Act (USFSPA), under 10 U.S.C. § 1408, which defined “disposable retired pay” as community property but also excluded any amounts of MRP waived for receipt of disability benefits under § 1408(a)(4)(B).
Soon thereafter, Congress enacted the Concurrent Retirement and Disability Pay Act (CRDP), under 10 U.S.C. § 1414, directing a ten-year phase-out of the reduction in the spouse’s share of the retirement pay. Therefore, the CRDP enables the veteran (with at least twenty years of military service) to receive MRP and disability pay without a benefit reduction. The phase-out requires a veteran to have a disability rating of fifty percent or greater. As of 2014, the CRDP provides that a veteran with a disability rating of fifty percent or higher is permitted to receive both MRP and disability pay simultaneously without any diminished MRP. However, a veteran with a disability rating of less than fifty percent can still cause a reduction in his or her spouse’s share of the MRP by waiving a portion of the MRP for receipt of disability benefits.
It was within this federal framework that Arizona law developed to address the issues affecting spouses and former spouses of military veterans. In 2001, the Arizona Court of Appeals held in Danielson v. Evans that a spouse of a veteran receives an unconditional vested interest in the veteran’s MRP when the decree is entered. 201 Ariz. 401 (App. 2001). The Court of Appeals also held that requiring a veteran to compensate a spouse for any reduction in MRP resulting from a waiver was consistent with the Mansell decision because the veteran is able to pay from any source. Id.
In 2010, the Arizona Legislature enacted A.R.S. § 25-318.01 which expressly prohibits courts from “making up” for reduction in MRP because of disability benefits—including indemnification of a veteran’s spouse or former spouse for any waiver or reduction in MRP related to the receipt of disability benefits. Further, the statute prevents courts from awarding “any other income or property” of a veteran to the veteran’s spouse or former spouse for any such waiver or reduction when making a disposition of property under § 25-318 (general disposition of property) or § 25-327 (modification and termination of spousal maintenance, child support, and property disposition). In response, two years later, the Arizona Court of Appeals held that an indemnification clause was not required to allow a former spouse to claim a community interest in a veteran’s disability pay. See Merrill v. Merrill, 230 Ariz. 369 (Ct. App. 2012). The Court of Appeals further held in Merrill—in an effort to take equitable action to compensate former spouses when their shares were reduced—that A.R.S. § 25-318.01 only applied to veterans’ waivers made pre-decree and not post-decree. Therefore, the inclusion of indemnification language in a decree ensured that a veteran’s spouse or former spouse was secure in his or her receipt of MRP in the event that the veteran waived a portion of MRP in order to receive disability benefits—excepting the narrow circumstance where a veteran had a disability rating of less than fifty percent and made a waiver pre-decree.
PRACTICAL EFFECTS OF HOWELL
The U.S. Supreme Court’s decision in Howell alters much of this preexisting legal framework in Arizona. The Court reaffirmed Mansell’s holding that an MRP waiver amount is not community property. Next, the Court held that state courts could not indemnify or reimburse a spouse or former spouse due to a reduction caused by a veteran’s waiver of MRP. Further, the Court determined that the timing of a veteran’s waiver (i.e. pre- or post-decree) to be immaterial. Finally, the Court held that state courts could account for the contingency of a waiver or of reductions in value when determining or recalculating spousal maintenance.
Additionally, all clarity provided by Merrill is in flux as a direct result of Howell. After rendering its decision in Howell on May 15, 2017, just one week later, the U.S. Supreme Court vacated the Arizona Supreme Court’s judgment in Merrill and remanded the case for further consideration in light of Howell. The Arizona Supreme Court held in Merrill that A.R.S. § 25-318.01 could not prohibit indemnification of a spouse/former spouse when that spouse’s/former spouse’s share awarded in the decree pre-dated the statute’s effective date. Because Howell prohibits any indemnification, Merrill is problematic. Because A.R.S. § 25-318.01 is protective of a veteran’s receipt of pay, it appears that the statute remains constitutional under Howell.
Given the CRDP, a spouse/former spouse of a veteran with a disability rating of fifty percent or greater is not affected by Howell. However, the CRDP does not pertain to veterans with disability ratings below fifty percent. This means that under Howell, a spouse/former spouse of such a veteran cannot be reimbursed for a reduction in his or her share of the MRP resulting from a veteran’s waiver for receipt of disability benefits. And although the Court in Howell noted that state courts could still account for the contingency or reduction, Arizona courts are limited by A.R.S. § 25-318.01.
In summary, the CRDP makes Howell a non-issue in cases where a veteran has a disability rating of fifty percent or greater because the veteran will not experience a reduction in MRP when receiving a disability benefit. However, if a veteran has a disability rating below fifty percent, Howell prohibits any reimbursement to the spouse/former spouse for any resulting reduction in MRP due to receipt of disability benefits. And although the Court stated in Howell that state courts could still consider the possibility of a waiver or a reduction when calculating/recalculating spousal support, A.R.S. § 25-318.01 restricts that consideration. And because the U.S. Supreme Court has vacated the Arizona Supreme Court’s decision in Merrill, it can safely be assumed at this point (with several relevant issues still pending in state court) that A.R.S. § 25-318.01 protects veteran pay/benefits whether a veteran waives MRP pre- or post-decree. That said, in the aftermath of the decision, some practitioners have recommended calculating and awarding a present cash value of the reduction in MRP in order to compensate the spouse/former spouse. Alternatively, some practitioners are including the compensation for any resulting reduction in MRP as non-merged indemnification clauses in marital settlement agreements in an effort to address the issue. But because the courts have not had sufficient opportunity to evaluate these approaches, their enforceability remains unclear.
Article Written By: Dan Huff