In McCarthy v. Estate of McCarthy, 2015 U.S. Dist. LEXIS 153107 (SDNY, November 10, 2015), a federal judge imposed a constructive trust on the proceeds of a life insurance policy in favor of the decedent’s ex-wife and children over his girlfriend. Equity required the constructive trust due to the decedent’s breach of his divorce agreement, regardless of who was actually the designated beneficiary.
Pursuant to the terms of a 2012 divorce settlement, the decedent agreed to a number of conditions regarding spousal and child support, including maintaining a $4 million life insurance policy with his ex-wife and children designated as beneficiaries. Charmingly, the decedent failed to live up to any of his obligations, and only procured $50,000 in life insurance. Meanwhile, the decedent had made over $350,000 in credit card payments on behalf of his girlfriend, who he started dating while married.
It turns out that the decedent had a second $500,000 life insurance policy through his employer. According to his employer, the decedent designated his ex-wife as the beneficiary. The insurer listed the girlfriend as beneficiary.
The court determined that even assuming the girlfriend was designated as the beneficiary, principles of equity required the creation of a constructive trust on the policy proceeds for the benefit of the decedent’s ex-wife and children. The divorce decree required the decedent procure $4 million in life insurance for the benefit of his ex-wife and kids. Since he otherwise failed to do so, equity allowed the enforcement of that obligation (or whatever portion of that obligation the policy could satisfy) via the existing policy. The court also held that the divorce decree was consideration for an equitable right in the policy proceeds, which was superior to the girlfriend’s rights as a gratuitous beneficiary.
Notably, the court held that the creation of the constructive trust was not preempted by ERISA, citing Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. 285 (2009). ERISA’s objectives of “(1) simple administration; (2) avoiding double liability for plan administrators; and (3) ensuring that beneficiaries ‘get what’s coming quickly’” were met because the insurer was able to pay simply the proceeds into the court, and therefore was not subject to double liability. Further, ERISA’s goal that beneficiaries “get what’s coming quickly,” refers to distribution from the plan administrators.
Take away for insurers: Although the court crafted a relatively rare resolution for this case, it emphasizes the virtue of interpleaders. The insurance company wisely deposited the benefits owed under the policy with the court and was able to walk away.