Holman v. Holman, 1999-SC-0525-DG.

• Decision Date: 13 June 2002
• Docket Number: No. 1999-SC-0525-DG.,1999-SC-0525-DG.
• Citation: 84 S.W.3d 903
• Parties: James Lee HOLMAN, Appellant, v. Sue Rodes HOLMAN, Appellee.
• Court: United States State Supreme Court — District of Kentucky

Page 903

84 S.W.3d 903

James Lee HOLMAN, Appellant, v. Sue Rodes HOLMAN, Appellee.

No. 1999-SC-0525-DG.

Supreme Court of Kentucky.

June 13, 2002.

Rehearing Denied October 17, 2002.

Catesby Woodford, Miller, Griffin and Marks, Lexington, Kentucky, Michael J. Cox, Miller, Griffin and Marks, Lexington, Kentucky, Susan Y.W. Chun, Miller, Griffin and Marks, Lexington, Kentucky, for appellant.

Martha A. Rosenberg, Lexington, Kentucky, for appellee.

KELLER, Justice.

I. ISSUE

This appeal presents an issue of first impression in Kentucky. After thirteen (13) years of service as a firefighter, but before his pension vested, Appellant became totally and permanently occupationally disabled. Appellant retired and began receiving monthly disability retirement benefits. When his marriage to the Appellee was dissolved several years later, the trial court classified Appellant's future entitlement to disability retirement benefits as marital property and awarded Appellee a portion of those benefits. Were Appellant's disability retirement benefits properly classified as marital property? We hold that disability retirement benefits are properly classified as marital or nonmarital property according to the character of the property they replace. Accordingly, Appellant's future, post-dissolution disability retirement benefits, which replace his future nonmarital earnings as a firefighter, constitute Appellant's separate nonmarital property.

II. BACKGROUND

The material facts regarding Appellant's pension were stipulated to by the parties and are therefore undisputed. In 1974, the Appellant went to work as a firefighter with the Lexington-Fayette Urban County Government (LFUCG). The parties married seven (7) years later in 1981. Six (6) years later, in 1987, Appellant retired from his firefighter position due to total and permanent occupational disability¹ and began receiving monthly benefit payments that will continue throughout his lifetime so long as his disability continues.² The parties' marriage was dissolved in 1997.

At the time of his marriage, Appellant had contributed $6,859.00 towards his pension with LFUCG, and he contributed an additional $11,206.40 during his marriage for a total contribution of $18,065.40. At the time of his retirement, his pension had not vested³ because he had not "completed at least twenty (20) years of total service."⁴ Accordingly, if Appellant had terminated his employment with LFUCG in 1987 without being found occupationally disabled, he would have been entitled to receive only his $18,065.40 contribution.⁵

The parties disagreed as to whether Appellant's future entitlement to retirement disability benefits from LFUCG constituted marital property. The trial court recognized the issue as one of first impression and characterized Appellant's retirement disability payments as marital property subject to equitable division because Appellant was able to work in another capacity despite his disability:

It appears to the Court that a determination must be made whether or not this disability retirement fund should be viewed differently than other retirement funds. This Court also believes that a determination must be made on a case-by-case basis.

. . .

Case law indicates that disability payments are different in that it is compensation for the inability to earn wages from that occupation in the future. In many cases, this may be true in that the party receiving the disability payments may not be able to work in his chosen field and often can not work in any field in which he could earn approximately the same income. The case under submission is distinguished in that [Appellant] has been able to earn a living by owning and operating his own business.

This Court holds that the retirement account is marital property, subject to division and distribution by the Court, even though it is based on a disability. It was serving as income since the retirement and can not be viewed only as compensation for the [Appellant] not being able to work or as payment for pain and suffering due to an occupational disability.

Therefore, the [Appellee] is entitled to one-half of the marital contribution, which is 31% of the monthly payments.

On appeal, the Court of Appeals held that "[a]bsent a specific statutory exemption, disability payments must be deemed marital" and affirmed the trial court. We disagree and reverse.

III. STANDARD OF REVIEW

Appellee argues that this Court may review the trial court's determination that Appellant's disability benefits were marital property only for clear error. We disagree. Whether a disability retirement is classified as marital or nonmarital property involves an application of the statutory framework for equitable distribution of property upon divorce and therefore constitutes a question of law subject to this Court's independent determination.⁶

IV. CLASSIFICATION OF DISABILITY BENEFITS

While the classification of disability pension benefits is an issue of first impression for Kentucky appellate courts, other jurisdictions have resolved similar issues using widely different approaches. The Tennessee Supreme Court recently outlined the various approaches that courts have utilized in determining the character of disability payments:

Like Tennessee, no other state has a statute that either specifically designates disability benefits as marital property or specifically excludes such benefits from the definition of marital property. Although this lack of explicit statutory guidance has produced a substantial body of case law on the subject, given the differing purposes of disability benefits, courts are split on the proper classification.

Those courts which hold that disability benefits constitute marital property have advanced several rationales for this conclusion. Under one approach, which has been referred to as the "mechanistic approach," courts consider whether disability benefits have been specifically excepted from the definition of marital property by statute. Disability benefits will be considered marital property unless there is a statutory provision specifically excluding disability benefits from the marital estate.

Another rationale given in support of the mechanistic approach is that disability benefits should be considered marital property because the policy premiums were paid with marital funds or the marital estate acquired the benefits as a form of compensation for spousal labor during the marriage, much like a pension.

However, the majority of courts considering the proper classification of disability benefits have adopted the analytical approach which focuses on the nature and purpose of the specific disability benefits at issue. Under this approach, benefits which actually compensate for disability are not classified as marital property because such benefits are personal to the spouse who receives them and compensate for loss of good health and replace lost earning capacity. However, where the facts warrant, courts utilizing the analytical approach will separate the benefits into a retirement component and a true disability component, with the retirement component being classified as marital property and the disability component being classified as separate property. This approach has been applied both to disability benefits paid in connection with insurance coverage maintained by the disabled spouse's employer and to disability benefits paid in connection with a private policy of disability insurance acquired with marital funds during the marriage.⁷

In addition to the approaches noted by the Tennessee Supreme Court is an approach recommended by the American Law Institute which, similar to the "analytical approach" or "purpose analysis,"⁸ classifies such benefits according to the nature of the property they replace rather than by the source of the funds used to acquire the benefit: "Disability pay and workers' compensation benefits are marital property to the extent they replace income or benefits the recipient would have earned during the marriage but for the qualifying disability or injury."⁹ Such benefits are therefore classified "as marital property to the extent they replace earnings during the marriage, and as separate property to the extent they replace earnings before or after the marriage, without regard to how or when the benefit was acquired."¹⁰

Under Kentucky's statutory scheme for the distribution of property at dissolution, the trial court must first categorize each item of property as either marital or nonmarital under the framework embodied in KRS 403.190:

"[M]arital property" means all property acquired by either spouse subsequent to the marriage except:

(a) Property acquired by gift, bequest, devise, or descent during the marriage and the income derived therefrom unless there are significant activities of either spouse which contributed to the increase in value of said property and the income earned therefrom;

(b) Property acquired in exchange for property acquired before the marriage or in exchange for property acquired by gift, bequest, devise, or descent;

(c) Property acquired by a spouse after a decree of legal separation;

(d) Property excluded by valid agreement of the parties; and

(e) The increase in value of property acquired before the marriage to the extent that such increase did not result from the efforts of the parties during marriage.¹¹

Kentucky permits division as marital property of both vested and nonvested retirement benefits earned during the marriage.¹² Retirement benefits are classified as marital property not because the General Assembly failed to include them within the exclusions, but rather because they are a form of deferred compensation or savings earned during the marriage¹³ similar to income earned or savings accumulated during the marriage.¹⁴ In contrast, disability benefits are not a form of deferred compensation or savings. Post-dissolution disability benefits replace wages or income loss...