United States v. Mary E. Taylor

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
Nos. 01-2874/3872
___________
United States of America, *
*
Appellee, *
* Appeals from the United States
v. * District Court for the
* District of Minnesota.
Francis Taylor, *
*
Defendant, *
*
Mary E. Taylor, *
*
Appellant. *
___________
Submitted: January 14, 2003
Filed: July 31, 2003
___________
Before LOKEN, BYE, and RILEY, Circuit Judges.
___________
RILEY, Circuit Judge.
This case arises out of an April 1996 Northwest Airlines (Northwest)
interpleader of the United States and Mary Taylor (Mary) to determine whether the
Internal Revenue Service (IRS) or Mary has priority and is entitled to the benefits of
three Northwest sponsored employee benefits plans. On cross motions for summary
judgment, the district court ruled generally for the IRS and against Mary, finding
Mary’s right to the plans under a Texas domestic relations order (DRO) was subject
to a prior federal tax lien. We disagree and reverse.
I. BACKGROUND
As is often the case, the sequence of events is critical. Francis Taylor (Francis)
worked as a pilot for Northwest from 1966 to 1994. During his employment, Francis
participated in a retirement plan, a stock plan, and a savings plan administered by
Northwest under ERISA.1 Francis retired from Northwest in September 1994, at
which time he filed in a Texas state court for divorce from Mary, his wife of more
than thirty years. The following month, in October 1994, a tax court concluded that
Francis had not filed tax returns from 1981 through 1985. On May 1, 1995, the IRS
assessed deficiencies totaling approximately $984,310 (including penalties and
interest) for those tax years. On July 28, 1995, the Texas court entered a divorce
decree and approved a marital settlement agreement. The agreement provided that
“to settle all obligations of the marriage,” Mary would receive a 90 percent interest
in Francis’s Northwest employee benefits proceeds (plan proceeds). Also in July, the
court entered a purported qualified domestic relations order (QDRO), directing the
plan administrator to distribute Mary’s interest in the plan proceeds directly to her.
The Texas court, in the July order, retained jurisdiction to amend or reform the order
as necessary to conform with plan requirements and qualify as a QDRO.
In October 1995, Northwest informed Mary and Francis that the July DRO did
not qualify as a QDRO. In December 1995, the IRS filed a lien against the plan
proceeds in Texas, where Francis claimed he resided at the time of the divorce, and
where the DRO issued. In October 1996, the IRS filed another lien in Minnesota,
where the plans were administered. Meanwhile, Mary and Francis attempted to
1
Employee Retirement Income Security Act of 1974 (ERISA), as amended, 29
U.S.C. §§ 1001-1461 (2000).
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correct the DRO’s identified deficiencies. Among other things, the order: (1) did
not specify the period to which it applied; (2) did not address how to treat amounts
accrued, but had not yet been credited to the account; and (3) would have required
Northwest to make an extra payment. Twice the Texas court, at Mary’s request,
reformed the DRO to address Northwest’s concerns. Northwest finally pronounced
the DRO a QDRO in January 1997.
The district court dismissed Northwest from the interpleader action, and the
IRS and Mary were left to determine who was entitled to the plan proceeds. The IRS
claimed its interest in the plan proceeds was first in time, while Mary argued her
interest had priority because she was both a “judgment lien creditor” and a
“purchaser” under 26 U.S.C. § 6323(a),2 a statute that in certain situations requires
the IRS to file notice of its lien to obtain priority.
The district court concluded Mary was neither a purchaser nor a judgment lien
creditor under section 6323(a). Specifically, the court determined Mary was not a
purchaser because her consideration was not “adequate and full,” as defined in 26
C.F.R. § 301.6323(h)-1(f)(3) (2001) (consideration must have reasonable relationship
to true value of interest in acquired property). Further, the district court found Mary
was not a judgment lien creditor because there was no evidence she had perfected her
lien by executing the judgment as required under Texas law. Because Mary was not
entitled to the protections of section 6323, the district court held the IRS tax liens
assessed on May 1, 1995, became effective against Mary as of that date and were
first in time and entitled to priority.
2
26 U.S.C. § 6323(a) states: “Purchasers, holders of security interests,
mechanic’s lienors, and judgment lien creditors. The lien imposed by section 6321
shall not be valid as against any purchaser, holder of a security interest, mechanic’s
lienor, or judgment lien creditor until notice thereof which meets the requirements of
subsection (f) has been filed by the Secretary [of the Treasury].”
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On appeal, Mary argues: (1) the Texas divorce court had exclusive jurisdiction
over this dispute; thus, there was no federal question and the interpleader action was
not proper; (2) under Texas community property law, Mary had substantial property
rights in the plan proceeds even before the divorce; (3) she was a purchaser under
section 6323(a); and (4) she was a judgment lien creditor under section 6323(a).
II. DISCUSSION
This court reviews de novo the district court’s grant of summary judgment.
Mayberry v. United States, 151 F.3d 855, 858 (8th Cir. 1998). Initially, we reject
Mary’s first two arguments: (1) federal jurisdiction does exist, see 29 U.S.C.
§ 1132(a)(3) (civil action may be brought by fiduciary to enjoin violations of ERISA
plan, or to obtain appropriate equitable relief); and (2) Texas community property law
does not vest her with an interest in the plan proceeds. See 29 U.S.C. § 1144(a)
(ERISA supersedes state law insofar as such law relates to ERISA-governed plans);
Boggs v. Boggs, 520 U.S. 833, 850 (1997) (QDRO provisions define scope of
nonparticipant spouse’s community property interest in pension plans).
We turn next to whether Mary became a judgment lien creditor under section
6323(a) within sufficient time to have priority over the IRS.3 An IRS lien attaches
automatically on the date a penalty is assessed, 26 U.S.C. § 6322 (lien arises at time
of assessment), and is enforceable as of that date against creditors except any
“purchaser,” “holder of security interest,” “mechanic’s lienor,” or “judgment lien
creditor,” within the meaning of section 6323(a). If the creditor falls into one of these
3
The IRS has authority to proceed against Francis’s interest in any ERISA plan
benefits and “is not constrained by ERISA’s anti-alienation provision.” United States
v. McIntyre, 222 F.3d 655, 660 (9th Cir. 2000). After the DRO, Francis effectively
no longer has any ownership interest in Mary’s 90 percent share of the Northwest
ERISA plans.
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categories, then the IRS must provide adequate notice to establish the priority of its
lien. See 26 U.S.C. § 6323(a); Rodeck v. United States, 697 F. Supp. 1508, 1511 (D.
Minn. 1988) (as to § 6323(a) creditors, tax lien will have priority only if notice has
been filed in accordance with § 6323(f)).
A Treasury Regulation defines “judgment lien creditor” as follows:
. . . a person who has obtained a valid judgment, in a court of record and
of competent jurisdiction, for the recovery of specifically designated
property or for a certain sum of money. In the case of a judgment for the
recovery of a certain sum of money, a judgment lien creditor is a person
who has perfected a lien under the judgment on the property involved.
A judgment lien is not perfected until the identity of the lienor, the
property subject to the lien, and the amount of the lien are established.
Accordingly, a judgment lien does not include an attachment or
garnishment lien until the lien has ripened into judgment, even though
under local law the lien of the judgment relates back to an earlier date.
...
If under local law levy or seizure is necessary before a judgment lien
becomes effective against third parties acquiring liens on personal
property, then a judgment lien under such local law is not perfected until
levy or seizure of the personal property involved.
26 C.F.R. § 301.6323(h)-1(g).
A state law created lien’s priority depends on when it attaches and becomes
choate, and federal law will determine when the lien has acquired sufficient substance
and becomes so perfected as to defeat a later federal tax lien. United States v. Pioneer
Am. Ins. Co., 374 U.S. 84, 88 (1963). Liens are perfected, under the federal rule,
when there is nothing more to be done to have a choate lien, that is, “when the
identity of the lienowner, the property subject to the lien, and the amount of the lien
are established.” Id. at 89 (citations omitted). Here, Mary obtained a valid judgment
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from a Texas divorce court for 90 percent of Francis’s plan proceeds creating an
exclusive property interest in the plan proceeds for Mary. On the date the Texas court
granted the DRO, Mary’s identity was clear, the subject property was identified, and
the amount (90 percent) was fixed.
Mary was not required to comply with any state law requirements for purposes
of establishing lien priority over the IRS’s interest in the plan proceeds. ERISA
provides a mechanism for enforcing QDROs, and this mechanism supersedes any
contrary state law. See U.S. Constitution art. VI, cl. 2, Heart of Am. Grain
Inspection Serv., Inc. v. Mo. Dep’t of Agric., 123 F.3d 1098, 1103 (8th Cir. 1997)
(under Supremacy Clause, federal laws are supreme law of land and may preempt
state law); cf. Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,
843-44 (1984) (agencies may elucidate, through regulations, specific provisions of
statutes that agencies administer). Specifically, 29 U.S.C. § 1056(d) provides for
alienation of pension plan benefits in accordance with a QDRO, and gives plan
administrators or courts eighteen months to determine whether a DRO qualifies as a
QDRO, directing the plan administrator to segregate the amounts in question during
that period. See 29 U.S.C. § 1056(d)(3)(H).4
In this case, Northwest determined, within eighteen months of the date the first
payment would have been made under the DRO, that the DRO, as modified, was a
QDRO. Thus, Mary satisfied ERISA’s requirements for alienating pension plan
proceeds. Requiring Mary to satisfy state law perfection requirements would conflict
with ERISA’s policy of ensuring that plan sponsors are subject to a uniform body of
law. See Egelhoff v. Egelhoff, 532 U.S. 141, 148 (2001) (principal goal of ERISA
4
Pension benefit plans are distinguishable from welfare benefit plans, which
do not provide an enforcement mechanism. See Mackey v. Lanier Collection Agency
& Serv., Inc., 486 U.S. 825, 831-33 (1988); Cooper Indus., Inc. v. Compagnoni, 162
F. Supp. 2d 702, 709-10 (S.D. Tex. 2001).
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is to establish uniform scheme with standard procedures; uniformity is impossible if
plans are subject to different legal obligations in different states); Minnesota Chapter
of Associated Builders & Contractors, Inc. v. Minn. Dep’t of Pub. Safety, 267 F.3d
807, 810-11 (8th Cir. 2001) (ERISA’s goal is to minimize administrative and
financial burden of complying with conflicting state directives, and to prevent
potential for conflicts in substantive law requiring tailoring of plans to peculiarities
of multiple local laws), cert. denied, 122 S. Ct. 2292 (2002); Compagnoni, 162 F.
Supp. 2d at 710 (imposing state law perfection requirements would create choice-of-
law difficulties, frustrating objective of ensuring uniformity of ERISA
administration).
We further conclude that Mary’s interest in the plan proceeds relates back to
the date of the initial DRO. See Nelson v. Ramette, 322 F.3d 541, 544 (8th Cir. 2003)
(“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 DRO to
determine whether it constitutes a QDRO.”); Gendreau v. Gendreau, 122 F.3d 815,
818 (9th Cir. 1997) (wife’s interest in pension plans was established at time of
divorce decree; husband’s interest was concomitantly limited at that time, or subject
to being limited at any time wife obtained QDRO, much like property owner’s rights
may be subject to divestment by contingent interest); Compagnoni, 162 F. Supp. 2d
at 711-12 (wife had possessory interest in benefits once first DRO had been entered
although interest was unenforceable until QDRO was obtained); cf. 29 U.S.C.
§ 1056(d)(3)(H) (any determination made within eighteen months of the order, or
modification of the order, will be applied prospectively). Mary had eighteen months
pursuant to section 1056(d)(3)(H)(ii) to qualify her DRO, and “[i]f within the 18-
month period . . . the order (or modification thereof) is determined to be a qualified
domestic relations order, the plan administrator shall pay the segregated amounts . . .
to the person . . . .” (Emphasis added). The plan administrator, by plan procedures,
cannot shorten this eighteen month qualification period.
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Because the DRO preceded the IRS’s notice of tax lien, and Northwest
determined within the requisite eighteen months that the DRO qualified as a QDRO,
see 29 U.S.C. § 1056(d)(3)(H)(v) (computation of time), Mary was a judgment lien
creditor with priority as of July 1995, when the DRO was entered. She is thus
entitled to the plan proceeds free of the IRS lien.
One other related issue should be addressed regarding the finality of the July
1995 Texas DRO. The Texas judge signed an order prepared and approved by the
parties which stated:
The Court retains jurisdiction to amend this Order so that it will
constitute a qualified domestic relations order under the Plan even
though all other matters incident to this action or proceeding have been
fully and finally adjudicated. If the Plan determines at any time that
changes in the law, the administration of the Plan, or any other
circumstances make it impossible to calculate the portion of a
distribution awarded to Alternative Payee by this Order and so notifies
the parties, either or both parties shall immediately petition the Court for
reformation of this Order.
The intent of the July 1995 DRO, to qualify under the applicable Northwest plans, is
clear. The parties and the court recognized the order may need changes to qualify.
Northwest did require certain changes to qualify. Mary asked the Texas court twice
to reform the DRO before Northwest accepted the DRO as a QDRO. This process is
anticipated by the law, which provides for segregation of the funds by the plan
administrator for up to eighteen months to qualify the DRO as a QDRO. See 29
U.S.C. § 1056(d)(3)(H). Our holdings in Nelson and here, recognizing the DRO
establishes a “direct interest in plan funds,” and upon qualification, the interest relates
back to the initial DRO date, further the statutory scheme to protect employee
retirement benefits for beneficiaries of the plans, including divorced spouses.
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As a legal matter, when the DRO issued, Francis was no longer the owner of
90 percent of the Northwest ERISA plans. Mary was awarded this share as part of
the divorce. Mary, the property, and the amount were identified clearly, only the
details of qualification remained to transform the DRO into a QDRO.
III. CONCLUSION
Since we conclude Mary was a judgment lien creditor, we do not address
whether she was also a purchaser under section 6323(a). Accordingly, we reverse the
summary judgment with regard to Mary Taylor, and remand with instructions to enter
judgment in conformity with this opinion.
LOKEN, Circuit Judge, dissenting.
The lien priority issue in this case involves the interplay of two federal
statutory regimes, ERISA and the Internal Revenue Code. The Code provides that
a judgment lien, when perfected, has priority over an existing federal tax lien unless
notice of the tax lien has been filed in accordance with state law. See 26 U.S.C.
§ 6323(a), (f). ERISA provides that a former spouse may acquire an enforceable right
to a participant’s pension plan benefits pursuant to the provisions of a “qualified
domestic relations order” (QDRO).5 Here, the IRS more or less concedes that the
Texas divorce court’s domestic relations order granted Mary Taylor a judgment lien
on Francis Taylor’s ERISA plan benefits. The issue, then, is whether her lien on
those plan benefits is entitled to priority over the IRS’s tax liens under § 6323(a).
5
Significantly, the QDRO provisions of ERISA appear in both the Internal
Revenue Code and the Title 29 labor laws. See 29 U.S.C. § 1056(d); 26 U.S.C.
§ 414(p). I will cite to the Code provisions in this dissent.
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Federal law governs whether a judgment lien created by state law is perfected
for purposes of § 6323(a). The federal rule is that a lien is perfected, or choate,
“when the identity of the lienor, the property subject to the lien, and the amount of the
lien are established.” United States v. Pioneer Am. Ins. Co., 374 U.S. 84, 89 (1963)
(quotation omitted). A Treasury Regulation now codifies this principle. 26 C.F.R.
§ 301.6323(h)-1(g). Though Mary Taylor’s judgment lien was created by state law,
ERISA provides that, to be perfected -- that is, enforceable against Francis Taylor’s
plan benefits -- the state court order must be a QDRO. And Congress’s definition of
a QDRO incorporates the substance of the federal law definition of a perfected lien:
a domestic relations order qualifies as a QDRO if it clearly specifies the plan
participant, the alternative payee (the lienholder), each plan to which the order
applies, the amount or percentage of the benefits to be paid to the alternate payee, and
the number of payments or period to which the order applies. 26 U.S.C. § 414(p)(2).
Given this overlap between the judicially developed federal rule of perfection,
and the statutory elements of a QDRO, I agree with the court that a QDRO is a
perfected judgment lien for purposes of the priority rules of § 6323(a). Like the court,
I reject the IRS’s argument that, to be perfected under § 6323(a), the judgment lien
created by a QDRO must also satisfy any levy or seizure requirements generally
applicable to liens created by the laws of that State. Congress codified the perfection
requirements for a QDRO in another section of the Internal Revenue Code, and
ERISA would preempt any local law that interfered with its anti-alienation
provisions. In the absence of a Treasury Regulation specifically addressing the
relationship between Code §§ 6323(a) and 414(p)(2), I decline to apply a general
reference to local law in a pre-existing Treasury Regulation, 26 C.F.R. § 301.6323(h)-
1(g), in a manner inconsistent with the QDRO perfection provisions of ERISA.
There remains the question whether Mary’s judgment lien was perfected
(acquired QDRO status) prior to the IRS filing notice of its tax liens in Dallas County,
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Texas, in late December 1995. Mary’s judgment lien arose on July 28, 1995, when
the Texas divorce court entered a domestic relations order awarding her a 90%
interest in Francis Taylor’s ERISA plan benefits. Northwest Airlines as plan
administrator determined that amended versions of that order qualified as QDROs,
long after the tax liens were filed in December 1995. The court nonetheless
concludes that Mary’s QDRO-perfected lien has priority because “Mary’s interest in
the plan proceeds relates back to the date of the initial [divorce court order].” Ante
at 7. I disagree.
ERISA provides that, when a domestic relations order is submitted for a QDRO
determination, the plan administrator must make the determination “within a
reasonable period after receipt of such order,” 26 U.S.C. § 414(p)(6)(A)(ii), and must
segregate plan benefits that would be payable to the alternate payee (here, Mary
Taylor) for up to eighteen months while it makes that determination, § 414(p)(7). See
Hogan v. Raytheon, Co., 302 F.3d 854, 857 (8th Cir. 2002). If the administrator
determines within the eighteen-month approval period that the submitted order or a
“modification” of that order is a QDRO, it must pay the segregated amounts to the
alternate payee. 26 U.S.C. § 414(p)(7)(B); see Trustees of the Dirs. Guild of Am.-
Producer Pension Benefits Plans v. Tise, 255 F.3d 661, 2000 U.S. App. LEXIS
38507, at **16 (9th Cir. 2000). In that situation, although the issue is not free from
doubt, I do not take issue with the court’s conclusion that QDRO status should “relate
back” to the entry of the initial domestic relations order for purposes of § 6323(a) lien
priority because ERISA has conferred a direct interest in the segregated plan funds
at that earlier date.6 Cf. Nelson v. Ramette, 322 F.3d 541, 544 (8th Cir. 2003) (for
6
My doubt stems from the fact that the initial domestic relations order, if
seriously deficient, may not satisfy the QDRO requirements in § 414(p)(2) that
correspond to the elements that make a judgment lien choate under federal common
law. Here, for example, the July 28, 1995, order did not identify to which of the three
Northwest Airlines plans it applied and thus did not clearly define the 90% interest
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bankruptcy purposes, alternative payee acquires QDRO interest in plan funds on the
date the domestic relations order is first entered); Gendreau v. Gendreau, 122 F.3d
815, 818 (9th Cir. 1997) (same), cert. denied, 523 U.S. 1005 (1998).
But assuming the court has adopted a correct relation-back principle, it has
misapplied that principle to the facts of this case. Unlike the plan administrator in
Cooper Indus., Inc. v. Compagnoni, 162 F. Supp. 2d 702 (S.D. Tex. 2001), Northwest
Airlines did not invite Mary and Francis Taylor to submit a modified domestic
relations order to cure defects in the July 28, 1995, order. Rather, Northwest Airlines
as plan administrator issued three letters between October 16 and November 3, 1995,
initially determining that the July 28, 1995, domestic relations order did not qualify
as a QDRO with respect to any of the three plans, and advising the Taylors that these
initial determinations would become final at the conclusion of the sixty-day appeal
period provided for in the three plans. When the Taylors did not appeal, Northwest
Airlines issued three final negative determinations. At that point, ERISA expressly
provides that Mary as alternate payee had no further interest in any segregated plan
benefits. 26 U.S.C. § 414(p)(7)(C). Consistent with the statute, Northwest Airlines
then paid the segregated benefits for the months from July 1995 to January 1996 to
Francis Taylor. At that point, though the eighteen-month period had not expired,
Mary’s claim to a perfected judgment lien as of July 28, 1995, was finally rejected.7
that Mary was awarded. In such a case, for purposes of priority against a federal tax
lien, I am not sure whether QDRO status should only relate back to the date the
deficient domestic relations order was modified, or all the way back to the entry of
the initial, non-choate domestic relations order. I need not resolve that question here.
7
The court has no support for its assertion that “[t]he plan administrator, by
plan procedures, cannot shorten [the] eighteen month qualification period.” Ante at
7. The assertion is contrary to the plain language of the statute, which requires a
QDRO determination “within a reasonable period,” provides that affected benefits
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As the court notes, the Texas court entered a modified domestic relations order
on January 8, 1996, after the plan administrator’s final negative determinations. The
Taylors submitted that order to Northwest Airlines as plan administrator. Northwest
Airlines again issued three notices that it had received a domestic relations order (one
notice for each plan), which is the first step in the QDRO-determination process. See
26 U.S.C. § 414(p)(6)(A)(i). In June 1996, Northwest Airlines finally determined that
the January 8, 1996, order qualified as a QDRO with respect to Francis Taylor’s
savings plan and stock plan benefits. However, on April 15, 1996, Northwest
Airlines initially determined that the January 8 order did not qualify as a QDRO with
respect to Francis Taylor’s retirement plan benefits. Again, the Taylors failed to
appeal within the plan’s sixty-day appeal period, and that determination became final.
Again, after the appeal period expired, the Taylors submitted another modified
domestic relations order, entered by the Texas court on August 29, 1996, which
Northwest Airlines finally determined to be a QDRO on January 7, 1997.
On this undisputed record, I conclude that the plan administrator’s QDRO
determinations did not grant Mary Taylor a perfected judgment lien interest in Francis
Taylor’s plan benefits prior to January 8, 1996. As the IRS properly filed notice of
its liens in late December 1995, the federal tax liens have priority over Mary’s
judgment lien under § 6323(a). Accordingly, I respectfully dissent.
must be segregated while the determination is made, but places an eighteen-month
limit on the plan administrator’s duty to segregate. The assertion is also contrary to
the Department of Labor’s interpretation of the QDRO provisions: “the ‘18-month
period’ during which a plan administrator must preserve the ‘segregated’ amounts
. . . is not the measure of the reasonable period for determining the qualified status of
an order and in most cases would be an unreasonably long period of time to take to
review an order.” U.S. Dep’t of Labor, Employee Benefits Sec. Admin., QDROs --
The Division of Pensions Through Qualified Domestic Relations Orders, Question
2-12 at p.19, available online at .
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A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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