Behrens v. Milliken , 1990 S.D. LEXIS 145 ( 1990 )

SABERS, Justice (On reassignment).

Ray and Betty entered into a divorce stipulation and agreement which was approved by the court. This agreement required Ray to provide $10,000 in life insurance to Betty. Ray breached the terms of the agreement. Although Betty has no remedy against the federal government, we hold that federal law does not prevent her claim against Ray or his estate.

Facts

Betty J. Behrens Milliken (Betty) was divorced from Ray E. Milliken, Jr. (Ray) in Davison County, South Dakota on January 14, 1976. The divorce decree incorporated a Property Settlement Agreement (Agreement) which was entered into between the parties and approved by the circuit court. The portion of the Agreement involved in this appeal concerns a policy of life insurance which was acquired by Ray during his duty in the Armed Forces. In the Agreement, Ray agreed to maintain Betty as the primary beneficiary of his National Service Life Insurance (NSLI) policy which had a face value of $10,000.00 so long as she survived him.¹

Ray later remarried. In early 1985 Ray consulted with a service officer at a Veteran’s Administration (VA) Center about the insurance policy and the possibility of changing the beneficiary as this had been on his mind for some time. Apparently Ray was hesitant to make any changes because of the court order. After the inquiry, Ray received this handwritten response on a VA form:

MR. MILLIKEN:

YOU MAY NAME ANYONE YOU WISH AS BENEFICIARY ON YOUR POLICY. COURT REQUIREMENTS DO NOT APPLY TO YOUR GOVERNMENT LIFE INS.

MANY JUDGES SIMPLY ARE NOT AWARE OF THIS FACT.

A NEW FORM IS ENCLOSED; PLEASE COMPLETE & RETURN IT TO US. YOUR CHOICE OF BENEFICIARY IS TOTALLY UP TO YOU.

Thank you, R.R. McDaniel.

(emphasis in original).

In March, 1985 Ray changed the beneficiary designation oh the NSLI policy from Betty to Lynette Milliken, Ray Jefferis Mil-liken, LeAnn Milliken, and Stephen Ray Milliken, the children of Ray. Betty had no knowledge of the change.²

Ray died on November 26, 1987. Subsequently, Betty contacted the VA about the proceeds from the NSLI policy. She was informed that Ray had changed the designated beneficiary and that the proceeds would be paid to the new beneficiaries regardless of the Agreement or divorce decree. Betty then filed a claim against Ray’s estate which claim was rejected. Betty then sued the estate alleging she had a vested right in the insurance proceeds. The estate responded by stating that the claim was not timely and, even if it was, federal law required distribution of the assets to the named beneficiaries.

Betty and the executrix both moved for summary judgment. Before the hearing she moved to amend alleging fraud, constructive fraud and deceit. After the hearing Betty moved to amend again for breach of contract. The trial court found for the estate ruling that federal law governed the distribution of the proceeds. Betty appeals. We affirm in part and reverse in part.

1. Federal Law

The matter concerning the distribution of the insurance proceeds from the NSLI policy is governed by federal law and South Dakota law which conflicts with the applicable federal law is preempted. 38 U.S.C. § 717(a) (formerly, 38 U.S.C. § 802(g)) provides:

The insured [herein Ray] shall have the right to designate the beneficiary or beneficiaries of insurance maturing on or after August 1, 1946, and shall, subject to regulations, at all times have the right to change the beneficiary or beneficiaries of such insurance withput the consent of such beneficiary or beneficiaries.

In Wissner v. Wissner, 338 U.S. 655, 70 S.Ct. 398, 94 L.Ed. 424 (1950), a widow of a serviceman sued the serviceman’s parents who were designated as beneficiaries on his NSLI policy. The widow was originally the beneficiary, but after some time in the military, the serviceman, who had become estranged from the wife, named his parents as his beneficiaries without his wife’s knowledge. When the proceeds of the policy were paid to his parents, the widow sued claiming that under California law the insurance proceeds were community property (as both were California residents) and that she was entitled to one-half of its value. The Supreme Court reversed the ruling of the California Court which had awarded the widow a right to a portion of the proceeds and, in doing so, wrote:

And since the statute which made the insurance proceeds possible was explicit in announcing that the insured shall have the right to desígnate the recipient of the insurance, and that “No person shall have a vested right” to those proceeds, 38 U.S.C. § 802(i), 38 U.S.C.A. § 802(i), appellee could not, in law, contemplate their capture. The federal statute establishes the fund in issue, and forestalls the existence of any “vested” right in the proceeds of federal insurance. Hence no constitutional question is presented. However “vested” her right to the proceeds of nongovernmental insurance under California law, that rule cannot apply to this insurance.

338 U.S. at 661, 70 S.Ct. at 401, 94 L.Ed. at 430.

A like result was reached in Ridgway v. Ridgway, 454 U.S. 46, 102 S.Ct. 49, 70 L.Ed.2d 39 (1981), a case involving an army sergeant and his wife who were divorced by a Maine court. The decree ordered the sergeant to keep his Servicemen’s Group Life Insurance policy in force for the benefit of their three children. He remarried and changed the beneficiary to his second wife. After his death, both women made claims against the proceeds, one for the benefit of the children, the other for her own benefit. The Maine Supreme Court ruled that the second wife held the proceeds as a constructive trustee for the benefit of the children. In reversing the state court decision, the Supreme Court held:

1. State law, even in domestic relation matters, is governed by conflicting federal law. As the federal law gave the service member the right to freely change the beneficiary, his right to do so displaces any inconsistent state law.

2. The insurance proceeds are also protected from any indirect state legislative or court action such as a state court ruling in placing a constructive trust upon the proceeds or any law attempting to subject the proceeds to creditor claims, attachments, seizures and the like regardless of the nature of the process employed.³

In Ridgway the Supreme Court also ruled that the serviceman’s conduct did not amount to a breach of trust or conversion of another’s property. Also, his conduct could not be fraudulent because he had the authority to change the beneficiary, and a person cannot commit a fraud by exercising a given statutory power. The federal cases in accord are found at 70 L.Ed.2d 895, Federal Pre-emption of State Authority Over Domestic Relations-Federal Cases, §§ 4(a) and 4(b), and 94 L.Ed. 432, State Law As Affecting Rights Under National Service Life Insurance-Federal Cases.

Since federal law preempts conflicting state law, we hold that our courts may not prohibit the owner of a NSLI policy from changing the beneficiary as he or she desires. Any such order is a nullity under federal law and an aggrieved party has no cause of action for fraud, deceit, conversion, or under most circumstances, for breach of trust.⁴

2. State Law obligation arising from contract, operation of law, or court-approved agreement

Betty claims she has a viable cause of action against the estate for Ray’s breach of contract. The Ridgway and Wissner decisions do not specifically deal with this issue because the lawsuits were each aimed at retrieving the actual insurance proceeds. However, in Ridgway the court stated that the record (from the trial court) “indicat[ed] nothing more than a breach of contract on the part of the deceased service member.” Ridgway v. Ridgway, supra, 454 U.S. at 59, 102 S.Ct. at 57, 70 L.Ed.2d at 50. The court also wrote:

As the trial court intimated, respondents may have a claim against the insured’s estate for that breach; the record does not disclose whether a claim of that kind would be collectible.

Id.

The Ridgway decision stated that the Maine trial court had opined that the divorce decree would give her a cause of action against the estate of her former husband citing the case of Stratton v. Servicemen’s Group Life Ins. Co., 422 F.Supp. 1119 (S.D.Iowa, 1976). In Stratton the court held:

If there is legal redress for the violation of the agreement within the divorce decree, precedent suggests that it lay only in an action against Richard Paul Strat-ton’s Estate for breach of that agreement.

422 F.Supp. at 1122. The Stratton court relied upon an earlier federal district court case of Weymann v. Wilson, 320 F.Supp. 980 (N.D., Fla.1970).

At least one state court, in circumstances remarkably on point with the present case, found the estate of a deceased NSLI insured liable to the decedent’s ex-wife in the amount of the NSLI policy which the decedent had been required to maintain for his ex-wife’s benefit as a stipulation of their separation agreement. The court in Will of Hilton, 88 Misc.2d 760, 388 N.Y.S.2d 985 (N.Y.Sur.Ct.1976), acknowledged that this separation agreement had not, as a matter of federal law, barred the insured from later substituting his new wife as the beneficiary of the NSLI policy. The court also conceded that, upon the insured’s death, his ex-wife had no cause of action against either the federal government or the new beneficiary. Nevertheless, the estate of the decedent was contractually obligated to the decedent’s ex-wife, as a matter of state law, in the amount of the NSLI policy because the policy had furnished consideration for their separation agreement.

It is reasonable to conclude that it was the sum of $10,000, payable upon the death of the decedent, which was the consideration, not the National Service Life Insurance policy per se. The National Service Life Insurance policy was merely the conduit. The intent of the parties is clearly visible ... The obligation which the decedent freely assumed in his lifetime and which was reduced to judgment, will be satisfied — but only to the extent that there are assets sufficient to pay claims against decedent’s estate....

Hilton, 388 N.Y.S.2d at 988, 989.

Clearly Congress intended by 38 U.S.C. § 717(a) to give covered service veterans the freedom to name and to change beneficiaries at will. The New York court, however, was unwilling to read into Congress’ act the further intent to provide these veterans a means of avoiding legitimate obligations against which their creditors would have no recourse.

It is difficult to conceive that the intent of Congress was to provide a vehicle by which a husband could ... leave the wife without recourse to enforcing the support obligation of the husband ... If Congress intended to infringe upon a common law right to seek recovery from the assets of a decedent’s estate for satisfaction of an obligation which one incurred during his lifetime, the statute so declaring the Congressional intent should explicitly state the intended prohibition.

Id. at 988, 989.

Other state courts have come to different conclusions. See, e.g., Matter of Pechman, 532 P.2d 385 (Colo.Ct.App.1974). While the Colorado court chose to find a blanket federal preemption foreclosing even a cause of action against the estate of an NSLI insured, such a result is by no means compelled by the federal statute itself or by the relevant federal case law. South Dakota may choose to permit the enforcement of valid contracts and valid state court decrees obligating NSLI insureds without running afoul of preemptive federal law.

In this case, the trial court rejected Betty’s motion to amend the complaint holding that any claim, even a breach of contract claim, is preempted by federal law. However, this is not consistent with the federal decisions cited above. Thus, in this regard, the trial court erred and we reverse and remand.

At the minimum, Ray has an obligation to Betty arising from 1) the contract of the parties under SDCL 20-1-2(1), 2) operation of law under SDCL 20-1-2(2), or 3) the court-approved agreement under Hanks v. Hanks, 334 N.W.2d 856 (S.D. 1983). Ray’s breach of the terms of the court-approved agreement gives rise to an independent right or cause of action. Upon Ray’s death, this obligation is binding against his estate, just as a decedent’s estate would be liable in quantum meruit for money loaned or services provided. The amount of the obligation is clearly controlled by the agreement at $10,000, plus interest from the date of death.

Reversed and remanded.

MILLER, C.J., and TAPKEN, Circuit Judge, concur. KEAN, Circuit Judge, concurs in part and concurs in result in part. HENDERSON, J., dissents. TAPKEN, Circuit Judge, sitting for WUEST, J., disqualified. KEAN, Circuit Judge, sitting for MORGAN, J., disqualified.

1 . The Stipulation and Agreement read:

10. That the Defendant shall continue to maintain the National Service Life Insurance Policy No. RS 1815-04-96, which is in the face amount of Ten Thousand Dollars ($10,-000.00) with the Plaintiff designated as beneficiary thereof during her lifetime and that any other life insurance policies on his life may be changed to such beneficiaries as he shall from time to time designate. In 1982 an amended decree of divorce was approved by the circuit court, but the insurance policy provision about the beneficiaries remained the same.

2 . The parties stipulated at hearing that Ray had full knowledge of the terms of the divorce decree.

3 . The slight differences in the federal laws applicable to Wissner and Ridgway were found to be insignificant. Wissner involved the National Service Life Insurance Act (NSLIA); Ridgway involved Servicemen’s Group Life Insurance Act (SGLIA). The former is found at 38 U.S.C. § 717(a) et seq.\ the latter at 38 U.S.C. § 765 et seq.

4 . A cause of action for breach of trust might exist if the named beneficiary has secured that status by promising the NSLI policy owner that he or she would be a beneficiary for the future benefit of some third party and later, after the owner’s death, breaches this trust by retaining the proceeds. See, 70 A.L.R.2d 1358, Trust Or Contract to Hold for Benefit of Another, With Respect to Proceeds of National Service Life Insurance.