Merrill v. Merrill

• Decision Date: 09 August 2012
• Docket Number: No. 1 CA–CV 11–0103.,1 CA–CV 11–0103.
• Citation: 640 Ariz. Adv. Rep. 11,284 P.3d 880,230 Ariz. 369
• Parties: In re the Marriage of Diane MERRILL, Petitioner/Appellant, v. Robert Kenneth MERRILL, Respondent/Appellee.
• Court: Arizona Court of Appeals

230 Ariz. 369
284 P.3d 880
640 Ariz. Adv. Rep. 11

In re the Marriage of Diane MERRILL, Petitioner/Appellant,
v.
Robert Kenneth MERRILL, Respondent/Appellee.

No. 1 CA–CV 11–0103.

Court of Appeals of Arizona,
Division 1, Department E.

Aug. 9, 2012.

[284 P.3d 882]

Popp Law Firm PLC By James S. Osborn Popp, Tempe, Attorneys for Petitioner/Appellant.

Law Offices of John R. Zarzynski By Georgia A. Wilder, Phoenix, Attorneys for Respondent/Appellee.

OPINION
JOHNSEN, Judge.

¶ 1 In this case we revisit the post-decree right of a former spouse to a share of the other spouse's military retirement benefits when the retiree has waived retirement pay in favor of a tax benefit afforded to him as a disabled veteran. We hold the military retiree must make his former spouse whole to the extent his unilateral decision to receive the tax benefit has reduced her share of his retirement benefits.

FACTS AND PROCEDURAL HISTORY

¶ 2 Diane and Robert Merrill (“Wife” and “Husband,” respectively) married in 1963. Husband is a West Point graduate who was injured during a mortar attack in Vietnam. He retired in 1983, then went to work as a test pilot for a defense contractor. When the couple divorced 10 years later, Husband had a disability rating of 18.62 percent from the Veterans Administration.

¶ 3 The dissolution decree acknowledged Husband's ongoing receipt of monthly military disability payments but did not treat those payments as community property subject to division. The decree, however, equally divided Husband's military retirement benefits by providing for a qualified domestic relations order awarding 50 percent of his “military retirement pay” to Wife as her sole and separate property.

¶ 4 At the time of the 1993 dissolution, Husband was 52 years old and Wife, 50. In 2004, the Veterans Administration approved Husband's application for a 100 percent disability rating and found him eligible to receive Combat–Related Special Compensation benefits. This program, referred to as CRSC, allows veterans injured in combat to choose to receive tax-free benefits in exchange for a dollar-for-dollar reduction in their retirement pay. See10 U.S.C. § 1413a (2006 & Supp.2008); see also26 U.S.C. § 104(a)(4), (b)(2)(C) (2002); Mark E. Sullivan & Charles R. Raphun, Dividing Military Retired Pay: Disability Payments and the Puzzle of the Parachute Pension, 24 J. Am. Acad. Matrim. Law 147, 162 (2001). The result of Husband's decision to elect to receive CRSC was that Wife's share of his retirement pay was all but eliminated.

¶ 5 In 2010, arguing Husband improperly had reduced her sole-and-separate share of his military retirement benefits by waiving those benefits in favor of CRSC, Wife filed a petition seeking $63,796 plus interest in arrearages and a “modified retirement award.” At trial, the superior court heard evidence that Husband was entitled to receive gross military retirement pay of $3,262 a month, but that he had waived all but about $400 of that to receive monthly tax-free CRSC benefits of $2,823. Accounting for various disbursements, the result of Husband's waiver was that Wife's share of his monthly retirement was reduced to $133 from $1,116.

¶ 6 The superior court denied Wife's petition. We have jurisdiction of Wife's appeal pursuant to Article 6, Section 9, of the Arizona Constitution, and

[284 P.3d 883]

Arizona Revised Statutes (“A.R.S.”) section 12–2101(A)(2) (West 2012).¹

DISCUSSION A. General Principles.

¶ 7 The facts are undisputed. We review de novo questions of law, including interpretation of statutes and dissolution decrees. Danielson v. Evans, 201 Ariz. 401, 406, ¶ 13, 36 P.3d 749, 754 (App.2001). Under Arizona law, when community property is divided at dissolution, “each spouse receives an immediate, present, and vested separate property interest in the property awarded to him or her by the trial court.” Koelsch v. Koelsch, 148 Ariz. 176, 181, 713 P.2d 1234, 1239 (1986). After entry of the decree, a spouse may not exercise control over separate property awarded to the other. Id.

¶ 8 Retirement benefits “are generally viewed as a form of deferred compensation for services rendered by employees.” Johnson v. Johnson, 131 Ariz. 38, 41, 638 P.2d 705, 708 (1981). Accordingly, such benefits constitute community property to the extent they are earned during a marriage. Id. Consistent with that principle, federal law permits states to treat the “disposable retired pay” of a retired military member as community property in dissolution proceedings. See10 U.S.C. § 1408(c) (2006); see also In re Marriage of Gaddis, 191 Ariz. 467, 468, 957 P.2d 1010, 1011 (App.1997). The rule is different, however, for disability payments the Veterans Administration pays to a military member. “[D]isability pay is an entitlement that is generated when the recipient becomes disabled during the recipient's employment and, to the extent of his disability, cannot work.” Perez v. Perez, 107 Hawai‘i 85, 110 P.3d 409, 413 (App.2005). Federal law precludes division of those benefits as community property. See10 U.S.C. § 1408(a)(4)(C); Mansell v. Mansell, 490 U.S. 581, 594–95, 109 S.Ct. 2023, 104 L.Ed.2d 675 (1989).

¶ 9 As this case demonstrates, federal law allows some disabled military retirees to choose to receive benefits only to the extent they waive retirement pay. The evidence here established, for example, that Husband could receive the $2,823 to which he was entitled in monthly CRSC payments only by forgoing a like amount in retirement pay. And because retirement benefits are taxed but CRCS payments are not, given the choice, military retirees commonly opt to receive CRSC payments over retirement. See Mansell, 490 U.S. at 583–84, 109 S.Ct. 2023 (military retirees who elect to receive tax-free disability benefits may increase after-tax income by waiving retirement). An unfortunate consequence of the government's decision to condition the CRSC tax benefit on waiver of retirement pay is that in community-property states such as Arizona, former spouses of retirees who elect CRSC see their sole-and-separate shares of military retirement benefits decline or disappear altogether.

¶ 10 We have held, however, that “Arizona law does not permit” a former spouse's interest in military retirement pay to be reduced in such a manner. Gaddis, 191 Ariz. at 469, 957 P.2d at 1012. At issue in Gaddis was a retiree's waiver of military retirement benefits in favor of receipt of civil service pay. The court held the military retiree's unilateral decision to “frustrate[ ] the decree” by waiving retirement payments was impermissible and upheld the superior court's order requiring the retiree to make his former spouse whole by paying arrearages and a monthly sum equal to the amount by which his waiver had reduced her share of his retirement pay. Id. at 468, 470–71, 957 P.2d at 1011, 1013–14.

¶ 11 Likewise, in Danielson v. Evans, 201 Ariz. at 407–08, ¶¶ 19–24, 36 P.3d at 755–56, we affirmed a superior court order requiring a disabled retiree to make “payments-in-kind” to his former spouse to reimburse her the amount by which his waiver of retirement in favor of disability reduced her monthly share of the retirement benefits awarded to her in their dissolution. Citing Gaddis, we rejected the military retiree's argument that

[284 P.3d 884]

the decree entitled his former wife only to a share of whatever retirement pay remained after his waiver. Id. at 408, ¶¶ 23–24, 36 P.3d at 756;see also Harris v. Harris, 195 Ariz. 559, 562, ¶ 13, 991 P.2d 262, 265 (App.1999) (federal law did not bar former spouse from seeking reimbursement from military retiree who waived retirement benefits to receive disability pay); In re Marriage of Crawford, 180 Ariz. 324, 327, 884 P.2d 210, 213 (App.1994) (“An employee spouse cannot defeat the nonemployee spouse's interest in retirement benefits by invoking a condition wholly within his or her control.”); McNeel v. McNeel, 169 Ariz. 213, 215, 818 P.2d 198, 200 (App.1991) (former husband was not permitted “to transform retirement benefits constituting community property to disability benefits constituting separate property”).²

B. Husband Must Indemnify Wife Against Loss She Has Suffered Because of His Decision to Waive His Retirement Benefits.

¶ 12 The decree in this case provided that Husband and Wife each would receive “as their sole and separate property one-half of [Husband's] military retirement pay”; the qualified domestic relations order granted each of them 50 percent of Husband's “retired pay.” Husband argues the cases cited above do not apply because the decree did not expressly grant Wife a share in any retirement benefit he might waive in favor of CRSC payments.

¶ 13 We cannot accept Husband's contention that a former spouse's interest in military retirement benefits may be undermined by the retiree's unilateral waiver so long as the decree does not specifically forbid it. We hold that, to the contrary, a former spouse who has been awarded an interest in the other's “military retirement pay” or “military retirement” may be entitled to relief even though the decree contains no express reference to a disability waiver. See Gaddis, 191 Ariz. at 470, 957 P.2d at 1013 (division of “military retirement benefits” not subject to reduction by retiree's decision to waive retirement pay for civil service compensation).

¶ 14 Husband argues the decree was drafted by Wife's counsel and contends that

[284 P.3d 885]

as a result, she must bear the consequence of its omission of express protection against the risk that he might waive retirement pay in favor of a disability benefit. But the decree is a judgment of the court, which we interpret as a matter of law without parol evidence. In re Marriage of Zale, 193 Ariz. 246, 248–50, ¶¶ 9–15, 972 P.2d 230, 232–34 (1999). ³

¶ 15 The qualified domestic relations order granted Wife “fifty percent (50%) of the amount paid to [Husband] as retired pay effective January 31, 1993.” On its face, the language of the decree is...