The Lawletter Vol 36 No 8

Jim Witt, Senior Attorney, National Legal Research Group

After the enactment of the Employee Retirement Income Security Act of 1974 ("ERISA"), a conflict developed among the U.S. Circuit Courts of Appeal as to whether the antialienation provision, 29 U.S.C. § 1056(d)(1) (benefits under an ERISA plan may not be assigned or alienated), applied to void an ex-spouse's waiver of ERISA plan benefits under a divorce decree.  The theory was that the waiver would result in a prohibited alienation of the benefits to the decedent's estate.  The Fourth Circuit Court of Appeals in Altobelli v. IBM Corp., 77 F.3d 78 (4th Cir. 1996), found no conflict between common-law waiver and the antialienation rule.  The Third Circuit Court of Appeals in McGowan v. NJR Serv. Corp., 423 F.3d 241 (3d Cir. 2005), held that common-law waiver in a divorce decree was barred by the antialienation rule.

In Egelhoff v. Egelhoff ex rel. Breiner, 532 U.S. 141 (2001), the U.S. Supreme Court, although not dealing with a spousal waiver of ERISA benefits or the antialienation rule, set the stage for the resolution of the conflict as to common-law waiver.  In reversing the Supreme Court of Washington, the U.S. Supreme Court ruled that ERISA preempted a Washington statute, Wash. Rev. Code § 11.07.010(2)(a), providing for automatic revocation upon divorce of any designation of a spouse as the beneficiary of a nonprobate asset.  The decedent, David A. Egelhoff, while married to the petitioner, had designated her as the beneficiary of a life insurance policy and pension plan, with both plans subject to ERISA.  The petitioner and Egelhoff divorced, and Egelhoff died intestate without having removed the petitioner as the beneficiary of the insurance policy and pension plan.  The respondents, Egelhoff's children by a previous marriage, claimed the proceeds of both the insurance policy and pension plan as Egelhoff's heirs at law.  In holding that the Washington statute was preempted by ERISA, the Court ruled that the statute ran counter to ERISA's command that a plan fiduciary shall administer the plan "in accordance with the documents and instruments governing the plan."  29 U.S.C. § 1104(a)(1)(D).  The Supreme Court stated:

One of the principal goals of ERISA is to enable employers "to establish a uniform administrative scheme, which provides a set of standard procedures to guide processing of claims and disbursement of benefits."  Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 9, 107 S.Ct. 2211, 96 L.Ed.2d 1 (1987).  Uniformity is impossible, however, if plans are subject to different legal obligations in different States.

The Washington statute at issue here poses precisely that threat.  Plan administrators cannot make payments simply by identifying the beneficiary specified by the plan documents.  Instead they must familiarize themselves with state statutes so that they can determine whether the named beneficiary's status has been "revoked" by operation of law.  And in this context the burden is exacerbated by the choice‑of‑law problems that may confront an administrator when the employer is located in one State, the plan participant lives in another, and the participant's former spouse lives in a third. In such a situation, administrators might find that plan payments are subject to conflicting legal obligations.

The Lawletter Vol 36 No 8

Brett Turner, Senior Attorney, National Legal Research Group

Steven Walsh and Janet Schaberg were divorced in New York in 2006.  They had a substantial marital estate, which they divided in a property settlement agreement.  Given the size of her property award, Schaberg agreed to waive maintenance.

Several years after divorce, a federal investigation revealed that Walsh had been engaged in a long-standing scheme to defraud investors in various funds he managed.  In fact, much of the parties' marital estate was a product of Walsh's fraud.

Two federal agencies, the Commodity Futures Trading Commission and the Securities and Exchange Commission (hereinafter "the agencies"), filed suit in federal court, seeking to recover the proceeds of Walsh's fraud not only from Walsh, but also from Schaberg.  The Second Circuit held that the agencies could recover the proceeds from Schaberg if she "lacks a legitimate claim" to the funds.  Commodity Futures Trading Comm'n v. Walsh, 618 F.3d 218, 225 (2d Cir. 2010).

Schaberg, who had been entirely unaware of Walsh's wrongdoing, argued that she had such a legitimate claim under New York state marital property law.  Because state law was involved, the Second Circuit certified two questions to the New York Court of Appeals:  (1) whether "marital property" can ever include the proceeds of fraud, and (2) if so, whether the wife nevertheless had an obligation to return the funds because she had not paid fair consideration for them in good faith.

In a 2011 opinion, the New York court answered both questions.  Commodity Futures Trading Comm'n v. Walsh, 951 N.E.2d 369 (N.Y. 2011).  It answered the first question with a yes, holding that the proceeds of fraud can constitute marital property.  They are certainly property acquired during the marriage through the active, if dishonest, efforts of the guilty spouse.  They belong to the guilty spouse unless and until the victims take legal action to recover them.  If a postdivorce attempt to recover the proceeds of fraud retroactively erases those funds from the marital estate, property-division judgments will never be final, and the policy of finality of judgments is very strong.  The court therefore held that the proceeds of fraud can constitute marital property.

The second question defied a simple and easy answer.  The agencies argued that the wife had acquired her share of the proceeds of fraud in exchange for waiving her interest in the husband's share of the proceeds of fraud.  The New York court agreed that fair "consideration cannot be predicated on a spouse's relinquishment of a claim to a greater share of the proceeds of fraud."  Id. at 377.  In other words, fair consideration must be something beyond an interest in the proceeds of fraud themselves.

January 3, 2012

John Stone, Senior Attorney, National Legal Research Group

By federal statute, anyone seeking to board a commercial airline flight must be screened by the Transportation Security Administration ("TSA") in order to ensure that he or she is not "carrying unlawfully a dangerous weapon, explosive, or other destructive substance." 49 U.S.C. §§ 44901(a), 44902(a)(1). The details of the screening process have largely been left to the discretion of the agency.

In response to a 2004 congressional directive, but also to address the inadequacies of the older magnetometers through which passengers were required to pass, the TSA began contracting with private vendors to develop advanced imaging technology ("AIT") for use at airports. One of the AIT scanners subsequently procured by the TSA uses millimeter wave technology, which relies upon radio frequency energy, and the other uses backscatter technology, which employs low‑intensity X‑ray beams. Each technology produces a crude image of an unclothed person, who must stand in the scanner for several seconds while it generates the image. That image enables the operator of the machine to detect a nonmetallic object, such as a liquid or powder—which a magnetometer cannot detect—without touching the passengers coming through the checkpoint.

February 7, 2012

Steve Friedman, Senior Attorney, National Legal Research Group

The Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1692–1692p, is a federal consumer protection statute intended "to promote consumers' 'informed use of credit' by requiring 'meaningful disclosure of credit terms[.]'"  Chase Bank USA v. McCoy, 131 S. Ct. 871, 874 (2011) (quoting 15 U.S.C. § 1601(a)).  Pursuant to its authority under TILA, the Board of Governors of the Federal Reserve System has promulgated Regulation Z, codified as 12 C.F.R. part 226, "which requires credit card issuers to disclose certain information to consumers."  Id.  Among other things, TILA and its implementing Regulation Z give the consumer-borrower a remorse period in which to rescind a transaction.

Significantly, when the TILA notice is provided in writing, as opposed to electronically, Regulation Z requires that lenders "deliver two copies of the notice" and that such notice include "[t]he date the rescission period expires."  12 C.F.R. § 226.23(b)(1).  Ordinarily, the rescission period is three business days, see 15 U.S.C. § 1635(a), but that period is extended to three years if the requisite notice of the right to cancel is not delivered to the borrower, see 12 C.F.R. § 226.23(a); see also 15 U.S.C. § 1635(f).  This distinction proved critical in a recent case from the U.S. Court of Appeals for the Ninth Circuit.

In Balderas v. Countrywide Bank, No. 10-55064, 2011 WL 6824977 (9th Cir. filed Dec. 29, 2011), a Spanish-speaking couple alleged that they had been pressured by a bank and its representatives to enter into a mortgage loan that the bank knew they could not afford and on terms they did not agree to.  Among other theories, the plaintiffs sought to rescind the entire transaction, alleging that they had been given defective copies of TILA's notice of right to cancel in that the notice did not include the date on which their right to rescind expired.  However, the district court granted the bank's Rule 12(b)(6) motion to dismiss, because the court determined that the plaintiffs had been entitled under TILA to only a three-day rescission period, which had elapsed prior to the filing of their lawsuit.  The court's decision was based upon a copy of a nondefective notice-of-right-to-cancel letter bearing the plaintiffs' signatures, attached as Exhibit 14 to the complaint, that included an acknowledgment that the plaintiffs had received two copies of said notice.  Upon the plaintiffs' appeal, the Ninth Circuit reversed and remanded.

Initially, the appellate court recognized that the plaintiffs' signatures on the disclosure statement did not conclusively prove that it had been delivered to them as required by TILA. "[P]roviding someone a document long enough to sign it does not comply with 12 C.F.R. § 226.23(b)(1), which requires the lender to 'deliver' copies of the Notice of the Right to Rescind to the consumer." Id. at *3.  By using the word "deliver," Regulation Z undoubtedly commands that the consumer be allowed to keep the notice.  See also 12 C.F.R. § 226.17(a)(1) (the requisite written disclosures must be provided "in a form that the consumer may keep").  The court drove this point home by relating a couple of common-sense analogies:  "When you have pizza delivered, you don't sign for it and let the deliveryman take it back to the restaurant.  And when a newspaper boy delivers a paper, he doesn't show you the headlines and then return it to the printer."  2011 WL 6824977, at *3.