Estate of Kensinger v. URL Pharma, Inc.

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

____________

No. 10-4525

_____________

ESTATE OF WILLIAM E. KENSINGER, JR.,

Appellant,

v.

URL PHARMA, INC.; ADELE KENSINGER

______________

APPEAL FROM THE UNITED STATES DISTRICT

COURT FOR THE DISTRICT OF NEW JERSEY

(D.C. Civil No. 09-cv-06510)

District Judge: Honorable Robert B. Kugler

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Argued: December 8, 2011

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Before: HARDIMAN, BARRY, Circuit Judges and RUFE, *

District Judge

(Opinion Filed: March 20, 2012 )

____________

Lori M. McNeely, Esq. (Argued)

McNeely McGuigan & Biody

Suite 103

505 South Lenola Road

Moorestown, NJ 08057

Counsel for Appellant

*

Honorable Cynthia M. Rufe, United States District Judge for

the Eastern District of Pennsylvania, sitting by designation.

Michael S. Rothmel, Esq. (Argued)

33 Grant Street

Mount Holly, NJ 08060

-and-

Daniel J. Bitonti, Esq.

Cozen O’Connor

457 Haddonfield Road

Liberty View, Suite 300

Cherry Hill, NJ 08002-0000

Counsel for Appellees

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OPINION OF THE COURT

____________

BARRY, Circuit Judge

This is a dispute over the disposition of proceeds from

a decedent’s ERISA-governed 401(k) plan. The decedent,

William Kensinger (“William”) was married to Adele

Kensinger (“Adele”) until their divorce in 2008. As part of

their divorce decree, Adele waived her right to the proceeds

of William’s 401(k) plan. William, however, neglected to

replace Adele as the designated beneficiary of his 401(k) plan

prior to his death a few months after the divorce. His estate

(“the Estate”) and Adele both claimed a right to the plan

proceeds, leading to this litigation. In light of a recent

Supreme Court case, there is no dispute that, notwithstanding

Adele’s waiver, the plan administrator is obligated to pay the

401(k) proceeds to her in accordance with the plan

documents. The question before us, which is one of first

impression in this circuit, is this: after the plan administrator

distributes the funds to Adele, can the Estate attempt to

recover the funds by bringing suit directly against Adele to

enforce her waiver? For the reasons that follow, we hold that

the Estate can sue Adele to enforce her waiver and recover the

disputed plan proceeds. The District Court, however, held to

the contrary. Accordingly, although we affirm in part, we will

2

also reverse in part.

I. Background

A. Factual Background

The material facts in this case are straightforward and

undisputed. In 2000, William enrolled in an employee-

sponsored deferred savings plan (“401(k) plan”) through his

employer, URL Pharma, Inc. (“URL”). The 401(k) plan was

governed by the Employee Retirement Income Security Act

(“ERISA”), 29 U.S.C. §§ 1001-1461. At the time of his

enrollment, William was married to Adele, whom he

designated as the plan’s primary beneficiary. Their marriage

did not last, however, and divorce proceedings commenced in

2008. On April 20, 2008, William and Adele entered into a

Property Settlement Agreement (“PSA”), which, in relevant

part, provided:

[T]he parties mutually agree to waive, release,

and relinquish any and all right, title and interest

either may have in and to the other’s IRA

account(s), or any other such retirement benefit

and deferred savings plan of like kind and

character, and neither shall make any claim to

possession of such property as it is presently

titled.

The divorce was then finalized in New Jersey state court, with

a final divorce decree incorporating the PSA entered on July

10, 2008.

Nine months after the divorce, William died intestate

without having changed the designated beneficiary of his

401(k) plan. Following his death, a dispute arose regarding

distribution of the plan proceeds. Although Adele was still

the named beneficiary of the 401(k) plan, the Estate argued

that, given her waiver, it was entitled to the proceeds of the

plan. Adele countered that ERISA, which requires that the

proceeds be paid to the beneficiary named in the plan

documents, trumped her common law waiver. On November

3

9, 2009, the Estate filed an action against Adele and URL in

the Superior Court of New Jersey seeking a declaration that

the Estate was entitled to the funds in the 401(k) account. 1

URL removed the matter to the District Court.

B. The Supreme Court’s Decision in Kennedy

The leading case in this area is Kennedy v. Plan

Administrator for DuPont Savings & Investment Plan, 555

U.S. 285 (2009). The facts in Kennedy are virtually identical

to those in this case. In Kennedy, an employee participated in

an ERISA employee pension benefit plan and designated his

wife as the sole beneficiary. The couple subsequently

divorced, and as part of the divorce decree the wife agreed to

waive her interest in her husband’s pension plan. However,

the husband died without amending the pension plan

documents to replace his ex-wife as the designated

beneficiary. The husband’s estate claimed a right to the plan

proceeds, citing the ex-wife’s waiver. The plan administrator,

however, relied on the husband’s designation form and paid

the funds to the ex-wife. The husband’s estate then sued the

plan administrator to recover the benefits.

The district court granted summary judgment to the

estate and ordered the plan administrator to pay the estate.

The Fifth Circuit reversed, holding that the ex-wife’s waiver

was rendered void by ERISA’s anti-alienation provision,

which states that “benefits provided under the plan may not be

assigned or alienated.” 2 29 U.S.C. § 1056(d)(1). The

1

As of March 31, 2011, the balance of the 401(k) account

was $76,242.41. On October 5, 2011, the District Court

entered an order memorializing the parties’ agreement that

URL would deposit the plan proceeds with the Court and

would thereafter be dismissed from the action.

2

By statute, this anti-alienation provision does not apply to a

certain class of orders known as “qualified domestic relations

orders” (“QDROs”). 29 U.S.C. § 1056(d)(3). To qualify as a

QDRO, an order must satisfy certain statutory requirements,

such as clearly specifying an alternate payee, the amount of

benefits to be paid to the alternate payee, the period to which

4

Supreme Court affirmed, albeit on different grounds.

Contrary to the Fifth Circuit, the Court held that the ex-wife’s

waiver “did not constitute an assignment or alienation

rendered void [by ERISA’s anti-alienation provision]” and

therefore was not invalidated by ERISA. Kennedy, 555 U.S.

at 297 (emphasis added). Nonetheless, the Court declared

that a plan administrator is “obliged to act ‘in accordance with

the documents and instruments governing the plan,’” and that

“ERISA provides no exemption from this duty when it comes

time to pay benefits.” Id. at 300 (quoting 29 U.S.C. §

1104(a)(1)(D)). Thus, although the ex-wife had waived her

right to the pension, the Court concluded that the plan

administrator “did its statutory ERISA duty by paying the

benefits to [the ex-wife] in conformity with the plan

documents.” Id. at 299-300. In adopting this so-called “plan

documents rule,” the Court emphasized the desirability of a

“straightforward rule of hewing to the directives of the plan

documents.” Id. at 300.

Significantly, although the Supreme Court held that a

plan administrator must distribute benefits in accordance with

plan documents, it noted the open question of whether another

avenue of recovery might be available to the estate. In a

footnote, the Court made clear that its holding did not address

the question of whether the estate could have sued the ex-wife

to recover the benefits after she received them from the plan

administrator. Id. at 299 n.10 (“Nor do we express any view

as to whether the Estate could have brought an action in state

or federal court against [the ex-wife] to obtain the benefits

after they were distributed.”). In light of this footnote, lower

courts interpreting Kennedy have observed that “the Supreme

Court may have closed one door to litigation against plan

administrators but it may well have opened another to

litigation between family or former family members.”

Staelens v. Staelens, 677 F. Supp. 2d 499, 507 (D. Mass.

2010).

the order applies, and the specific plan impacted by the order.

§ 1056(d)(3)(B). It is undisputed that the PSA which contains

Adele’s waiver is not a QDRO.

5

C. The District Court’s Decision

Adele moved for summary judgment on the ground

that she was entitled to the 401(k) proceeds as the named

beneficiary. The Estate opposed the motion and cross-moved

for summary judgment, arguing that the PSA was a valid

contractual waiver and that the proceeds, therefore, belonged

to the Estate. Properly relying on Kennedy, the District Court

had little trouble concluding that, despite Adele’s waiver,

ERISA required URL to distribute the 401(k) funds to her, as

the named beneficiary, in accordance with the plan

documents. This conclusion is not challenged on appeal.

The District Court then turned to the question left open

in Kennedy: whether, once the plan proceeds are distributed to

Adele, the Estate may pursue a claim directly against her to

enforce her waiver and recover the benefits. 3 Concluding that

allowing the Estate to sue Adele would undermine one of

ERISA’s “principal objectives”—namely, that “named

beneficiaries actually receive the benefits of ERISA-governed

plans”—the District Court held that “the Estate may not assert

a claim against [Adele] regarding the 401(k) proceeds.”

(App. at 7-8.) This appeal followed.

II. Jurisdiction and Standard of Review

The 401(k) plan at issue in this dispute is an “employee

welfare benefit plan” within the meaning of ERISA, 29

U.S.C. § 1002(1). As such, the District Court had jurisdiction

pursuant to 28 U.S.C. § 1331. We have jurisdiction pursuant

to 28 U.S.C. § 1291, and exercise plenary review over this

appeal from the grant of summary judgment. McGowan v.

3

Although the 401(k) proceeds have yet to be distributed by

URL to Adele, this question is ripe for review because, under

Kennedy and in accordance with the District Court’s

unchallenged holding, URL is obligated by law to distribute

the funds to Adele pursuant to the plan documents. As such,

Adele has a presently enforceable right to the plan proceeds,

and the Estate has standing to challenge that right by seeking

to enforce Adele’s waiver.

6

NJR Serv. Corp., 423 F.3d 241, 244 (3d Cir. 2005), abrogated

on other grounds, Kennedy, 55 U.S. at 291 n.4.

III. Discussion

Enacted in 1974, ERISA remains a comprehensive and

complex scheme for regulating employee benefits plans.

“The statute, however, does not address many of the issues

which arise in the normal course of the administration of such

plans.” Teamsters Pension Trust Fund v. Littlejohn, 155 F.3d

206, 208 (3d Cir. 1998). In such cases, “it is well settled that

Congress intended that the federal courts would fill in the

gaps by developing, in light of reason, experience, and

common sense, a federal common law of rights and

obligations imposed by the statute.” Einhorn v. M.L.

Ruberton Constr. Co., 632 F.3d 89, 96-97 (3d Cir. 2011)

(citation and internal quotations omitted). Relevant to this

case, ERISA does not address whether a waiver of benefits

can be enforced through a direct suit against a named

beneficiary once the benefits have been paid to that

beneficiary. We, therefore, look to federal common law in

answering that question and, as stated above, answer it in the

affirmative.

A. ERISA’s Policy Rationale

Kennedy produced what appears to be a somewhat odd

result given that the Supreme Court held that a plan

administrator must adhere to the plan documents and

distribute plan proceeds to the named beneficiary even though

that beneficiary had affirmatively waived any claim to those

funds. The Court emphasized two important policy

considerations in explaining its holding. First, it stated that

ERISA’s well-established policy favoring uniform and

efficient plan administration would be undermined if

employers had to consider benefits claims from sources

extrinsic to the plan documents, and it stressed the desirability

of a “straightforward rule . . . that lets employers ‘establish a

uniform administrative scheme, with a set of standard

procedures to guide processing of claims and disbursement of

benefits.’” 555 U.S. at 300 (quoting Egelhoff v. Egelhoff, 532

7

U.S. 141, 148 (2001)). Without such a simple rule, the Court

explained, plan administrators would have to bear “the cost of

less certain rules”:

Plan administrators would be forced to examine

a multitude of external documents that might

purport to affect the dispensation of benefits

and be drawn into litigation like this over the

meaning and enforceability of purported

waivers. . . . [I]t would destroy a plan

administrator’s ability to look at the plan

documents and records conforming to them to

get clear distribution instructions, without going

into court.

Id. at 301 (citation and internal quotation omitted); see also

Egelhoff, 532 U.S. at 149-50 (discussing “the congressional

goal of minimizing the administrative and financial burdens

on plan administrators”).

Second, the Supreme Court explained that its holding

was necessary in order to avoid subjecting plan administrators

to potential double liability. As the Court noted, ERISA

makes clear that plan administrators must pay benefits “in

accordance with the documents and instruments governing the

plan.” 29 U.S.C. § 1104(a)(1)(D). As such, allowing the

estate in Kennedy to sue the plan administrator for disbursing

plan proceeds to the named beneficiary would have placed the

administrator in a hopeless bind: if it honored the waiver, it

could be sued by the named beneficiary for disregarding the

mandate of ERISA; if it honored the plan documents, it could

be sued by the estate for disregarding a federal common law

waiver.

These two concerns—the need for the straightforward

administration of plans and the avoidance of potential double

liability—while central to the Supreme Court’s decision in

Kennedy, are not implicated here. An action brought directly

against Adele after the benefits have been distributed would

in no way complicate URL’s administration of the plan.

Unlike in Kennedy, a post-distribution suit against Adele

8

would neither “destroy a plan administrator’s ability . . . to get

clear distribution instructions, without going to court” nor

subject URL to “litigation-fomenting ambiguities.” 555 U.S.

at 301, 302 (citation and internal quotations omitted). Rather,

a suit against Adele would simply require a court to determine

the rightful recipient of the plan proceeds as a matter of

contract law. 4

Although the District Court understood that the

concerns underlying Kennedy did not apply under the

circumstances of this case, it stated that in addition to “tidy

and cost-effective plan administration,” ERISA’s statutory

scheme also aims to “provid[e] certainty regarding the final

distribution of ERISA benefits” to beneficiaries. (App. at 8,

10.) Accordingly, the Court concluded that the possibility of

a post-distribution action against a beneficiary would be

inimical to ERISA’s purposes as it would undermine this

“core objective[]” of the statute. (Id. at 8-10.) Although the

Court’s conclusion was not unreasonable, we believe that its

assumption about ERISA’s continuing solicitude for

beneficiaries after the distribution of benefits was based on an

overreading of Kennedy.

The District Court relied heavily on Kennedy’s

4

Allowing a post-distribution suit to be brought directly

against a named beneficiary would also make sense as a

practical matter. First, it would permit the two interested

parties to litigate against each other directly, without the plan

administrator being caught in the middle. See Boyd v. Metro.

Life Ins. Co., 636 F.3d 138, 144 (4th Cir. 2011) (discussing

the undesirability of plan administrators having to “throw[]

themselves squarely into the center of contentious family

disputes”). Second, it would avoid the anomalous scenario in

which a valid waiver is rendered worthless because it cannot

be enforced against anyone; indeed, the District Court

acknowledged the argument that “it does not make sense that

the Supreme Court would uphold the validity of common law

waivers, but nevertheless hold that ERISA bars a claim to

enforce common law waivers.” (App. at 12)(conceding that

the argument “has merit”).

9

statement that the plan documents rule promotes “simple

administration, avoid[s] double liability, and ensur[es] that

beneficiaries get what’s coming quickly, without the folderol

essential under less-certain rules.” 555 U.S. at 301 (quoting

Fox Valley & Vicinity Constr. Workers Pension Fund v.

Brown, 897 F.2d 275, 283 (7th Cir. 1990) (Easterbrook, J.,

dissenting) (emphasis added)). The emphasized portion of

this statement should not, however, be read in a vacuum or

divorced from the context in which it arose. Both Kennedy

and Fox Valley involved suits against plan administrators who

had yet to distribute benefits. When read with that in mind,

the goal of ensuring that beneficiaries “get what’s coming

quickly” refers to the expeditious distribution of funds from

plan administrators, not to some sort of rule providing

continued shelter from contractual liability to beneficiaries

who have already received plan proceeds. In this case, when

URL pays the benefits to Adele, as it must, she will “get

what’s coming” under the plan. If, after distribution, her right

to these funds is challenged because of her common law

waiver, that challenge will be litigated as an ordinary contract

dispute. Accordingly, to the extent that ERISA is concerned

with the expeditious payment of plan proceeds to

beneficiaries, permitting suits against beneficiaries after

benefits have been paid does not implicate any concern of

expeditious payment or undermine any core objective of

ERISA. 5

5

In support of its conclusion that ERISA continues to protect

beneficiaries post-distribution, the District Court also relied

on the following introductory language from ERISA’s

opening section: “It is hereby declared to be the policy of this

Act to protect interstate commerce and the interest of

participants in employee benefit plans and their

beneficiaries.” 29 U.S.C. § 1001(b) (emphasis added); see

also Boggs v. Boggs, 520 U.S. 833, 845 (1997) (“The

principal object of the statute is to protect plan participants

and beneficiaries.”). The mere mention of “beneficiaries” in

the statute’s introductory language, however, hardly leads to

the conclusion that a contractual waiver of benefits cannot be

enforced after a beneficiary has been paid the plan proceeds.

10

B. Analogous Case Law

Our conclusion finds further support in the decisions of

state appellate courts and in analogous federal cases. The

state appellate courts to have considered the question

presented here—the Michigan Supreme Court, the Oklahoma

Court of Civil Appeals, and the Court of Appeals of

Georgia—have all held that an estate may enforce a common

law waiver against a designated beneficiary once pension

funds have been distributed. See Sweebe v. Sweebe, 712

N.W.2d 708 (Mich. 2006); Pardee v. Pardee, 112 P.3d 308

(Okla. Civ. App. 2004); Alcorn v. Appleton, 708 S.E.2d 390

(Ga. Ct. App. 2011). In Sweebe, the Michigan Supreme Court

not only anticipated the holding of Kennedy, but answered the

question left open in Kennedy:

[W]hile a plan administrator must pay benefits

to the named beneficiary as required by ERISA,

this does not mean that the named beneficiary

cannot waive her interest in retaining these

proceeds. Once the proceeds are distributed, the

consensual terms of a prior contractual

agreement may prevent the named beneficiary

from retaining those proceeds.

712 N.W.2d at 156. Similarly, in Pardee, the Oklahoma court

held that a waiver could be enforced via a suit against a

named beneficiary because the “pension plan funds were no

longer entitled to ERISA protection once the plan funds were

distributed.” 112 P.3d at 315-16. And in Alcorn, the Court of

Appeals of Georgia relied on both Sweebe and Pardee to hold

that a decedent’s estate could bring suit against the decedent’s

ex-wife to enforce her waiver since she had already received

the plan benefits from the plan administrator. 708 S.E.2d at

392.

That the Estate should be able to bring a post-

distribution suit against Adele finds further support in a line

of federal cases holding that creditors can sue named

beneficiaries to recover plan benefits once those benefits have

been distributed. A number of circuits, including our own,

11

have held that even though ERISA prevents a creditor from

encumbering pension funds held by a plan administrator, the

funds are no longer entitled to ERISA’s protections against

the creditor’s claims once they are paid to the beneficiary.

See Trucking Emps. of N. Jersey Welfare Fund v. Colville, 16

F.3d 52, 55 (3d Cir. 1994) (“We have recognized . . . a

difference between funds remaining in the possession of an

ERISA plan trustee and funds that have been distributed to

the beneficiary.”); see also Kickham Hanley P.C. v. Kodak

Ret. Income Plan, 558 F.3d 204, 211 (2d Cir. 2009) (“Only

once the proceeds of the pension plan have been released to

the beneficiary’s hands, can creditors and others pursue

claims against the funds and the funds’ owner(s).”);

DaimlerChrysler Corp. v. Cox, 447 F.3d 967, 974 (6th Cir.

2006) (“This circuit, along with a majority of the other

circuits, has held that once benefit payments have been

disbursed to a beneficiary, creditors may encumber the

proceeds.”); Hoult v. Hoult, 373 F.3d 47, 54-55 (1st Cir.

2004) (same); United States v. Jackson, 229 F.3d 1223, 1225

(9th Cir. 2000) (same), overruled in part by United States v.

Novak, 476 F.3d 1041 (9th Cir. 2007); Guidry v. Sheet Metal

Workers Int’l Ass’n, Local No. 9, 10 F.3d 700, 716 (10th Cir.

1993) (same). In each of these cases, the court held that once

the benefits were distributed to the designated beneficiary in

accordance with the plan documents, ERISA was no longer

implicated. The same principle is equally applicable here.

More specifically, if a creditor can enforce its rights against a

beneficiary once pension funds have been distributed, we see

no reason why the Estate should not be able to enforce its

contractual rights against Adele once URL disburses the

funds.

Despite this caselaw, Adele argues that the District

Court should be affirmed in light of Boggs v. Boggs, 520 U.S.

833 (1997), and Staelens v. Staelens, cited earlier. We find

neither case to be persuasive under the circumstances of this

case. In Boggs, the Supreme Court held that ERISA

preempted a state community property law, and stated that

“the diversion of retirement benefits will occur regardless of

whether the interest in the pension plan is enforced against the

plan or the recipient of the pension benefit.” 520 U.S. at 853.

12

The “interest” at issue in Boggs, however, was an “interest in

undistributed pension plan benefits.” Id. at 836 (emphasis

added). Here, of course, the question is whether the Estate

can sue Adele after the funds have been distributed to her. 6

Staelens is similarly inapposite. There, the District

Court of Massachusetts held that a decedent’s estate could not

sue the decedent’s ex-wife to enforce her purported waiver,

but based its decision on the fact that the language of the

divorce decree “lack[ed] the specificity” required for a valid

common law waiver. 677 F. Supp. 2d at 510. Prior to

reaching this conclusion, the court did state that allowing a

decedent’s estate to sue a named beneficiary to enforce a

waiver “would appear to go against the various interests

6

Other courts considering the question before us have held

that Boggs is distinguishable for the same reason. See

Pardee, 112 P.3d at 313-14 (“As Boggs involved pre-

distribution funds as opposed to distributed funds, as in the

present case, this Court finds Boggs distinguishable and, here,

inapplicable.”); see also Sweebe, 712 N.W.2d at 713

(distinguishing Boggs on the ground that it involved

“proceeds from an undistributed pension plan”); Alcorn, 708

S.E.2d at 392 (finding Boggs unpersuasive because it

“involved pre-distribution funds still in control of the plan

administrator”). Boggs is further distinguishable because it

involved an attempted testamentary transfer of an interest in

pension benefits that constituted “a prohibited ‘assignment or

alienation’” under 29 U.S.C. § 1056(d)(1). 520 U.S. at 851.

The Boggs Court explained that Congress prohibited such

assignments out of a concern that “retirees could find their

retirement benefits reduced by substantial sums because they

have been diverted to testamentary recipients.” Id. at 852. In

this case, however, Adele’s waiver is a simple relinquishment

of benefits and not an attempt to assign benefits to another

party or to “divert” funds away from plan participants or

beneficiaries. Thus, the concern of Boggs—“that retirement

funds are there when a plan’s participants and beneficiaries

expect them”—is not implicated by a waiver that is no more

than “a mechanism for simply renouncing a claim to

benefits.” Kennedy, 555 U.S. at 296.

13

which the Supreme Court [in Kennedy] deemed served by a

uniform administrative scheme.” Id. at 508. The court,

however, then “acknowledge[d] that the First Circuit itself . . .

appears to have treated distributed funds differently, albeit in

a somewhat different context.” Id. (citing Hoult, 373 F.3d at

54). Recognizing what appeared to be the law of the circuit in

which it sat, the court avoided the question of whether the

estate could sue the ex-wife directly and instead based its

decision on narrow grounds related to the specificity of the

contract language.

C. Adele’s State Law Argument

Finally, Adele contends that even if we determine that

the Estate can bring suit against her to enforce her waiver, we

should nonetheless affirm the District Court because, despite

the fact that she waived her right to the 401(k) proceeds, 7

William, who died intestate, “chose to give his 401K to [her]

after he died.” (Appellees’ Br. at 5.) This argument was

neither raised in the District Court nor mentioned in the

Court’s opinion, and we do not address it further.

IV. Conclusion

For the foregoing reasons, we will affirm in part and

reverse in part the order of the District Court. The cause will

be remanded to the District Court with instructions to assess

the necessity of a further remand to state court to address the

merits of any remaining state law issue.

7

Although the District Court did not address whether the

waiver contained in the PSA was valid as a matter of federal

common law, Adele concedes its validity. (See Appellees’

Br. at 5 [“Ms. Kensinger did indeed give up her right to Mr.

Kensinger’s 401K.”].) Moreover, the language of Adele’s

waiver is similar to waiver language that has been deemed

valid in other cases, see, e.g., Altobelli v. Int’l Bus. Machs.

Corp., 77 F.3d 78, 80-81 (4th Cir. 1996), overruled on other

grounds by Kennedy, 555 U.S. 285, and there is no suggestion

that Adele’s waiver was not knowing, not voluntary, or not

made in good faith.

14