Appellate Court of Maryland Offers Cautionary Tale for Management of Federal Retirement Benefits

The Appellate Court of Maryland sharply limited the power of state courts to effect federal retirement benefits when it recently ruled in In the Matter of Brenda Batchelor that a divorce decree and related settlement agreement were preempted by the contrary mandate of a federal statute. The decision will substantially protect federal retirement funds against any interference from state court action, whether in the form of judgments, attachments, or orders for injunctive relief. 

Batchelor involved the distribution of the proceeds of a Thrift Savings Plan (“TSP”).  A TSP is a retirement plan for federal employees and is governed by the Federal Employees’ Retirement System Act of 1986 (“FERSA”).  In Batchelor, the federal employee designated her husband as the sole beneficiary of her TSP. The couple eventually entered into a marital settlement agreement (the “Agreement”) and later divorced. In the Agreement, the husband largely waived his rights to the proceeds of the TSP and promised to pay the proceeds to the employee’s estate if he received them. The Agreement was incorporated, but not merged, into the Circuit Court divorce judgment. 

After the employee died in 2019, FRTIB followed FERSA and distributed the TSP proceeds to her properly designated beneficiary, her (then ex-) husband. The employee’s estate sued her ex-husband in Circuit Court, claiming that the terms of the Agreement required him to remit the TSP proceeds to the Estate. Her ex-husband moved to dismiss, arguing that FERSA preempted the Agreement and the divorce decree. The ex-husband relied on, among other things, (1) FERSA’s exclusive beneficiary selection provisions, (2) FERSA’s extensive prohibitions against attaching or alienating TSP funds, (3) FERSA’s clear procedure for giving effect to a state-court divorce decree (which the employee admittedly never followed), and (4) Evans v. Diamond, a case decided by the Tenth Circuit Court of Appeals that confirmed preemption on identical facts. The Estate opposed the motion to dismiss and moved for summary judgment. The Circuit Court denied the ex-husband’s motion to dismiss and granted the Estate’s motion for summary judgment.

Differences Between FERSA and ERISA Made The Difference In This Case

In Batchelor, the Appellate Court of Maryland reversed the Circuit Court and rejected its substantial reliance on the Fourth Circuit Court of Appeals decision in Andochick v. Byrd. In Andochick, the Fourth Circuit decided that a different federal statute, the Employee Retirement Income Security Act of 1974 (“ERISA”), did not preempt a post-distribution lawsuit to recover funds distributed to a beneficiary who had previously waived rights to those funds in a marital settlement agreement.

In its opinion, the Batchelor Court noted significant distinctions between ERISA and FERSA and held that Andochick was neither controlling of nor instructive to a FERSA preemption analysis because of those substantial differences. The Appellate Court was also particularly swayed by the direct conflict between the Estate’s lawsuit and FERSA’s mandates: 

“FERSA provides a strict and unmistakable process by which an individual can change a beneficiary, either directly or by court order, and [the employee] failed to abide by that process, choosing instead, for whatever reason, to retain [her ex-husband] as the sole beneficiary of her TSP account. Were we to permit the estate to proceed with its post-distribution claim to the TSP proceeds under the facts presented here, we would be interfering with [the employee’s] wishes, as objectively expressed in her beneficiary designation, and [with] Congress’s clear mandate, as set forth in FERSA.”

The Appellate Court concluded that the Estate’s lawsuit impermissibly interfered with both the employee’s wishes and the clear Congressional mandate set forth in FERSA.  Accordingly, it led its opinion with a forceful statement in favor of preemption that aptly summarizes its holding: “where, as here, a state action clearly conflicts with a federal statute, the state action ‘must give way[.]’”

The Batchelor decision confirms the supremacy of federal law over state court orders and actions when federal retirement benefits are at issue. Although Batchelor concerned a divorce decree, the outcome would likely have been similar had the order in question been a child support order or any other state court judgment. State court litigants who ignore the mandates of federal statutes do so at their peril. 

As of this writing, the estate has asked the Maryland Supreme Court to review the decision. We will provide any updates accordingly. If you have questions about the Batchelor decision or its implications, please contact either Michael Lentz or Brianna Pickhardt, the Tydings attorneys who successfully represented the ex-husband.