Carol A. Doyle, United States Bankruptcy Judge.
Deborah Ebner, the trustee in the chapter 7 bankruptcy case of Jacqueline Beatty, filed an adversary proceeding against Jacqueline's daughters, Elizabeth Beatty and Emily Beatty. The trustee seeks to avoid and recover an allegedly fraudulent transfer of a death benefit that Elizabeth and Emily received from the retirement plan of their father, Judge Joseph Beatty. The trustee filed a motion for summary judgment; Elizabeth and Emily filed a cross-motion for summary judgment. The parties agree that no material facts are disputed. They ask the court to resolve the controlling legal question: whether Jacqueline held an interest in a benefit payable from the Judges' Retirement System of Illinois based on the judgment entered in their divorce proceeding when no Qualified Illinois Domestic Relations Order ("QILDRO") was entered, no written consent was signed by Judge Beatty, and no QILDRO or consent form was served on the retirement system. Under a provision of the Illinois Constitution and the Illinois QILDRO statute, no enforceable interest in the benefit was transferred to Jacqueline so the trustee has no valid claim for a fraudulent transfer of that interest. The court will therefore grant Elizabeth and Emily's motion for summary judgment and deny the trustee's motion for summary judgment.
The facts are straightforward and uncontested. Jacqueline was married for many years to Judge Joseph Beatty, who became an Illinois state court judge in 1983. They divorced in 2009. In May 2009, the Circuit Court of Rock Island County, Illinois entered a Judgment of Dissolution of Marriage that dissolved the marriage. In July 2009, a Supplemental Judgment of Dissolution was entered providing for the division of the parties' assets. The Supplemental Divorce Judgment states that Jacqueline "is awarded the widow's annuity to the petitioner's judicial pension, which petitioner has been advised is approximately $63,000." No other order regarding Jacqueline's rights in Judge Beatty's retirement assets was ever entered by the state court.
A number of years before the divorce, Judge Beatty designated Elizabeth and Emily as the beneficiaries of a death benefit payable under his retirement plan. He never changed this beneficiary designation.
Jacqueline testified in a deposition in this case that she was not represented by an attorney during her divorce proceeding and that she did not participate in any discussion about how the marital assets would be divided. The Judgments of Dissolution confirm that she did not participate in the divorce proceedings. Jacqueline acknowledged that the two judgments were mailed to her. She also testified that she called the Illinois Judges' Retirement System after Judge Beatty's death. She was told that she was not entitled to the benefit because the proper documentation had not been filed and that the proceeds would be paid to her daughters. She testified that she took no further action.
Jacqueline was insolvent when the Judges' Retirement System issued the checks to Elizabeth and Emily. She filed this chapter 7 bankruptcy case in October 2013, approximately six months after Judge Beatty's death.
The trustee filed this adversary proceeding against Elizabeth and Emily alleging that the payments they received from the Judges' Retirement System were fraudulent transfers under 11 U.S.C. §§ 544, 548(a)(1)(B) and 550. The trustee now seeks summary judgment on her claim under § 548(a)(1)(B), which allows a trustee to avoid a transfer of a debtor's interest in property made within two years of the bankruptcy petition date if the debtor received less than a reasonably equivalent value in exchange for the transfer and was insolvent on that date. A plaintiff seeking avoidance of a fraudulent transfer under § 548(a)(1)(B) must prove the following: (1) a transfer of the debtor's property or interest; (2) made within two years before the bankruptcy petition was filed; (3) for which the debtor received less than a reasonably equivalent value in return; and (4) the debtor was insolvent on the date of the transfer or became insolvent as a result. See In re Kimball Hill, Inc., 2012 WL 5880657, at *5 (Bankr.N.D.Ill. Nov. 19, 2012); In re Grube, 2012 WL 3263905 (Bankr.C.D.Ill. Aug. 9, 2012); In re Randy, 189 B.R. 425, 440 (Bankr. N.D.Ill.1995).
The parties do not dispute that Jacqueline was insolvent when the Judges' Retirement System paid Elizabeth and Emily the death benefit. Elizabeth and Emily also do not appear to dispute that the payment could potentially fall within the definition of "transfer," even though Elizabeth and Emily did not receive any assets directly from Jacqueline. A "transfer" for purposes of § 548(b) includes the "direct or indirect, absolute or conditional, voluntary or involuntary, ... disposing of or parting with ... an interest in property." 11 U.S.C. § 101(54).
The parties do dispute, however, whether Jacqueline ever held any interest
Judge Beatty served as a state court judge beginning in 1983 and participated in the Judges' Retirement System of Illinois, which was created by state statute. 40 ILCS 5/18-101 et seq. A "member" who participates in the Judges' Retirement System has rights created by statute and the Illinois Constitution.
Article XIII, Section 5 of the Illinois Constitution protects state pension rights from creditors. It provides that "[m]embership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired." The Illinois QILDRO statute, which became effective in 1999, governs the distribution of rights under state retirement systems in divorce proceedings and contains a provision specifically addressing this constitutional provision. 40 ILCS 5/18-101 et seq.
The QILDRO statute gives Illinois domestic relations courts the authority to direct payment of state retirement benefits to a person other than the regular payee — an "alternate payee." 40 ILCS 5/1-119 (West 2006); see Rafferty-Plunkett v. Plunkett, 392 Ill.App.3d 100, 103, 331 Ill.Dec. 261, 910 N.E.2d 670, 673 (3rd Dist. 2009), appeal den., 233 Ill.2d 599, 335 Ill.Dec. 646, 919 N.E.2d 365 (2009). Section 119(b)(1) of the statute provides that an Illinois court "may order" that all or any part of a member's benefit, including a death benefit, that would otherwise be payable to the member's designated death benefit beneficiaries or estate be paid instead by the retirement system to an alternate payee. 40 ILCS 5/1-119(b)(1). These orders must take the form of a "Qualified Illinois Domestic Relations Order" or "QILDRO," which is defined as an "Illinois court order that creates or recognizes the existence of an alternate payee's right to receive all or a portion of the member's accrued benefits in a retirement system ... and meets the requirements of this Section." 40 ILCS 5/1-119(a)(6).
The statute provides that a QILDRO "must contain the name, mailing address, and social security number of the member and of the alternate payee and must identify the retirement system to which it is directed and the court issuing the order." 40 ILCS 5/1-119(c)(1). The QILDRO "must specify each benefit to which it applies, and it must specify the amount of the benefit to be paid to the alternate payee," 40 ILCS 5/1-119(c)(2). It must also state when the order will take effect. 40 ILCS 5/1-119(c)(2). Under section 119(d)(1), any QILDRO issued under section 119 "shall not be implemented" unless a certified copy of the QILDRO has been filed with the retirement system. 40 ILCS 5/1-119(d)(1) (emphasis added).
Section 119(m) contains additional protections for members who began participating in the retirement system before the effective date of the QILDRO statute to comply with the constitutional provision discussed above. It requires the written consent of the member before an alternate payee is entitled to payment under a QILDRO. Section 119(m)(1) provides:
40 ILCS 5/1-119(m)(1) (emphasis added). The statute then provides a detailed form for the member's consent. Section 119(n) similarly provides that a QILDRO issued under this statute "shall be in substantially the following form," after which a detailed QILDRO form is provided for disclosing all the information required in sections 119(a)-(d) discussed above.
Thus, an order for the payment of a death benefit available under the Judges' Retirement System to an alternate payee is not effective unless all of the following occurs:
In this case, none of these essential requirements has been met. First, no order that even resembles a QILDRO was ever entered. The Supplemental Judgment is the only document that attempts to give Jacqueline an interest in the death benefit. It falls far short of the requirements of a QILDRO. Paragraph 6 of the Supplemental Judgment provides as follows:
The Supplemental Judgment does not contain the social security number or address of either the member (Judge Beatty) or the alternate payee (Jacqueline). It also does not specifically identify the benefit in question. Instead, it refers to a "widow's annuity." There is no benefit entitled a "widow's annuity" under the Judges' Retirement System. See 40 ILCS
Second, Judge Beatty never signed a written consent of any type, let alone in substantially the form required by section 119(n). To the contrary, Judge Beatty's failure to designate Jacqueline as the beneficiary for this benefit suggests a lack of consent. Third, no certified copy of a valid QILDRO or written consent form was ever served on the Judges' Retirement System.
Thus, under section 119(m)(1), no transfer to Jacqueline of the right to the death benefit was effective because no written consent was ever signed by Judge Beatty. In addition, under Section 119(d)(1), no transfer to Jacqueline could be "implemented" because there was no valid QILDRO, and thus no certified copy of a valid QILDRO was served on the Judges' Retirement System. Therefore, under the plain language of the Illinois Constitution and the QILDRO statute, Jacqueline never held an enforceable interest in the death benefit. That benefit was properly paid to the designated beneficiaries at the time of Judge Beatty's death: Elizabeth and Emily. Since Jacqueline had no interest in this benefit, the trustee has no viable claim for a fraudulent transfer of it.
The trustee makes a number of arguments to avoid the requirements of the Illinois Constitution and the QILDRO statute, none of which is persuasive.
First, the trustee contends that Jacqueline's right to the death benefit "vested" when the Supplemental Judgment was entered. The trustee cites two cases for this proposition: In re Marriage of Hackett, 113 Ill.2d 286, 100 Ill.Dec. 790, 497 N.E.2d 1152 (1986), and Bigelow v. Brown (In re Brown), 168 B.R. 331 (Bankr.N.D.Ill.1994). Neither case is controlling here. Hackett did not address when state pension assets vest in connection with a divorce judgment. Instead, it held that pension rights that accrued during a marriage are marital property that can be divided by a divorce court. Hackett was decided more than a decade before the QILDRO statute was enacted, so it provides no guidance relevant to the issue in this case.
In Brown, a bankruptcy court held that pension rights are marital property under Illinois law, and that ownership vests in the spouse to whom the property was distributed upon entry of the divorce judgment, even if a Qualified Domestic Relations Order ("QDRO") required under federal law for private pensions was not entered until after the bankruptcy petition was filed. Brown, too, was decided long
The court also notes that to the extent the Brown court held that the right of a nonmember spouse to a portion of the member spouse's pension "vests" under Illinois law when a divorce judgment is entered, so the pension rights are then owned only by the non-member spouse, it is not persuasive. The Brown court cited In re Marriage of Roehn, 216 Ill.App.3d 891, 894, 159 Ill.Dec. 891, 576 N.E.2d 560, 562 (2nd Dist.1991) for this proposition, but Roehn held that a trial court could not order a public pension system to pay an alternate payee directly. In fact, as noted in In re Marriage of Menken, 334 Ill.App.3d 531, 534, 268 Ill.Dec. 295, 778 N.E.2d 281, 297 (2nd Dist.2002), the QILDRO statute was enacted after Roehn to permit issuance of orders naming an alternate payee for pension benefits but only if the member signs a written consent. The Menken court recognized that the QILDRO statute was enacted to protect the constitutional rights of a pensioner, and that any attempt to diminish its effect "should not be taken lightly." Id. It therefore held that a trial court did not have authority to force a member of a retirement system to sign a consent form to effectuate a division of retirement assets in a divorce judgment. Thus, the Roehn decision relied upon in Brown does not provide a basis for concluding that a nonmember spouse acquires a right to payment under an Illinois retirement system merely by entry of a divorce judgment.
Another court also rejected the Brown court's conclusion on this issue as not well-grounded in Illinois law. In Steele v. Heard (In re Heard), 487 B.R. 302 (S.D.Ala.2013), the court concluded that, under Illinois law, a non-employee spouse who was awarded a portion of her husband's pension was not "vested" with a right to payment of the benefit upon entry of the judgment of dissolution when no QILDRO order was entered and her ex-husband refused to consent to entry of such an order. Instead, the husband, not the pension fund, owed his wife the money so the pension payments were part of the husband's bankruptcy estate. 487 B.R. at 315. In reaching its conclusion, the Heard court found that Brown was not persuasive authority regarding Illinois law on the effect of divorce judgments.
The trustee points out that the Heard court cited Illinois decisions stating that a nonmember spouse becomes a "co-owner" of expected future pension benefits upon dissolution of the marriage. Heard, 487 B.R. at 311-12, n. 15; citing In re Marriage of Richardson, 381 Ill.App.3d 47, 319 Ill.Dec. 1, 884 N.E.2d 1246 (1st Dist.2008); In re Marriage of Roehn, 216 Ill.App.3d at 894, 159 Ill.Dec. 891, 576 N.E.2d at 563. As the Heard court explained, however, these cases stand for the "unremarkable proposition" that pension benefits are marital property that can be divided just like any other property, even when the benefits will accrue in the future. 487 B.R. at 312. Also, the benefits described as "co-owned" in Richardson and Roehn were ongoing monthly pension payments payable to the member during his lifetime. In this case, the death benefit at issue could not possibly have been "co-owned" by Jacqueline and Judge Beatty because Judge Beatty never had a right to be paid the benefit during his lifetime, so he never "owned" the benefit in the first place. Thus, Richardson and Roehn do not control on the issue in this case — whether entry of a divorce judgment can transfer a death benefit to an alternate payee without compliance with the QILDRO statute.
The trustee cites no case decided after the enactment of the QILDRO statute holding that a divorce judgment awarding to a non-member spouse a benefit payable to a designated beneficiary upon the death of a member was "vested" and enforceable by the non-member spouse simply upon entry of the divorce judgment without substantial compliance with the requirements of the QILDRO statute. One Illinois court concluded that the necessary consent under section 119(m)(1) could be provided by the member's consent to entry of an order effectuating a marital settlement agreement. See Rafferty-Plunkett v. Plunkett, 392 Ill.App.3d 100, 331 Ill.Dec. 261, 910 N.E.2d 670 (3rd Dist.2009). In this case, however, there was no such settlement agreement. Jacqueline did not participate in her divorce proceeding so there was no marital settlement agreement to implement, and thus no argument that Judge Beatty provided the required consent even under the less strict standard applied in Rafferty (which is inconsistent with the provisions of section 119). Under the plain language of the QILDRO statute and the Illinois Constitution, without entry of a valid QILDRO and service on the retirement system of the QILDRO and a written consent from Judge Beatty, no transfer of the right to the death benefit was made to Jacqueline merely by the entry of the Supplemental Judgment.
The court notes that even assuming, as the trustee argues, that a right to obtain the death benefit "vested" in some way in Jacqueline when the Supplemental Judgment was entered, any right to obtain payment of the death benefit expired at the time of Judge Beatty's death. Under the Illinois Constitution and the QILDRO statute, the most Jacqueline could have obtained upon entry of the Supplemental Judgment was a right to seek a QILDRO and written consent. As discussed above, the Judges' Retirement System was required to pay the designated beneficiaries at the time of his death because no alternate payee was designated under a valid QILDRO and written consent. Thus, once Judge Beatty died, whatever right in the death benefit that Jacqueline could potentially have acquired through the Supplemental Judgment expired because of her failure to comply with Illinois law for replacing a designated beneficiary. See In re Marriage of Norfleet, 243 Ill.App.3d 925, 184 Ill.Dec. 63, 612 N.E.2d 939 (4th Dist.1993) (ex-wife was not entitled to 401(k) benefit under Illinois law regarding effect of divorce judgments when no
A trustee may not use a fraudulent transfer action to revive a right that expired before the petition date. As the Seventh Circuit held in Sullivan v. Willock (In re Wey), 854 F.2d 196 (7th Cir.1988), "[p]ossession of expired rights is the equivalent of the possession of no rights." The Wey court held that the extinguishment of a right is not a transfer for purposes of § 548. See also In re LiTenda Mortgage Corp., 246 B.R. 185, 191 (Bankr.D.N.J. 2000) aff'd, 276 F.3d 578 (3d Cir.2001) (pre-petition termination of a contract pursuant to its terms and the consequent cessation of a debtor's rights under a contract does not constitute a transfer within the meaning of § 548). Thus, in this case, even if Jacqueline acquired a right to take steps to obtain the death benefit when the Supplemental Judgment was entered, any right that she held expired when Judge Beatty died. At that point, no consent could be obtained and the designated beneficiaries were legally entitled to the benefit. Thus, even accepting the trustee's premise that Jacqueline acquired some type of interest in the death benefit when the Supplemental Judgment was entered, the trustee still may not recover the benefit from Elizabeth and Emily.
The trustee also argues that it is "questionable" whether the QILDRO requirement even applies in this case to the "widow's annuity lump sum benefit." She suggests that this benefit may be a "survivor's benefit" to which the QILDRO requirements do not apply under section 119(b)(4). This argument also fails.
As noted above, there is no "widow's annuity" or "widow's annuity lump sum benefit" available under the Judges' Retirement System. A "survivor's annuity" is available only to a surviving spouse, which is defined as a person married to a member at the time of the member's death or a child of a member young enough or otherwise entitled to receive an annuity. 40 ILCS 5/18-128. Jacqueline was not married to Judge Beatty when he died, and Elizabeth and Emily were not eligible to receive a survivor's annuity as his children, presumably because they were over 22 years of age and not disabled at the time of his death. Therefore, no survivor's annuity was payable under the retirement system. Instead, upon the death of a member, the designated beneficiary is entitled to a refund of the amounts paid by the member to fund a survivor's annuity. 40 ILCS 5/18-129(c).
Section 119(b)(4) provides that "a QILDRO does not apply to or affect the payment of any survivor's benefit," but that term is defined as "any periodic benefit payable to a surviving spouse, child, parent, or other survivor...." 40 ILCS 5/1-119(a)(11) (emphasis added). The benefit at issue in this case is a lump sum, not a periodic payment, so it does not fit within the exception to the QILDRO requirements for "survivor's benefit." Instead, it falls squarely within the definition of a "death benefit," which is defined as a nonperiodic benefit payable upon the death of a member to a survivor of the member, the
The trustee could prevail in this case only if the Illinois Constitution and almost every requirement of the QILDRO statute for conveying an interest in a benefit provided under an Illinois pension system is ignored. Jacqueline did nothing to comply with the requirements of the QILDRO statute, and Judge Beatty never gave the required consent. Jacqueline therefore never acquired an interest in the lump sum benefit that ultimately was paid to her daughters. The trustee is not entitled to recover the money for the bankruptcy estate. Summary judgment will be granted in favor of Elizabeth and Emily and against the trustee.
