Lead Opinion
This case arises out of an April 1996 Northwest Airlines (Northwest) inter-pleader of the United States and Mary Taylor (Mary) to determine whether the Internal Revenue Service (IRS) or Mary has priority and is entitled to the benefits of three Northwest sponsored employee benefits plans. On cross motions for summary judgment, the district court ruled generally for the IRS and against Mary, finding Mary’s right to the plans under a
I. BACKGROUND
As is often the case, the sequence of events is critical. Francis Taylor (Francis) worked as a pilot for Northwest from 1966 to 1994. During his employment, Francis participated in a retirement plan, a stock plan, and a savings plan administered by Northwest under ERISA.
In October 1995, Northwest informed Mary and Francis that the July DRO did not qualify as a QDRO. In December 1995, the IRS filed a hen against the plan proceeds in Texas, where Francis claimed he resided at the time of the divorce, and where the DRO issued. In October 1996, the IRS filed another lien in Minnesota, where the plans were administered. Meanwhile, Mary and Francis attempted to correct the DRO’s identified deficiencies. Among other things, the order: (1) did not specify the period to which it applied; (2) did not address how to treat amounts accrued, but had not yet been credited to the account; and (3) would have required Northwest to make an extra payment. Twice the Texas court, at Mary’s request, reformed the DRO to address Northwest’s concerns. Northwest finally pronounced the DRO a QDRO in January 1997.
The district court dismissed Northwest from the interpleader action, and the IRS and Mary were left to determine who was entitled to the plan proceeds. The IRS claimed its interest in the plan proceeds was first in time, whilе Mary argued her interest had priority because she was both a “judgment hen creditor” and a “purchaser” under 26 U.S.C. § 6323(a),
The district court concluded Mary was neither a purchaser nor a judgment hen creditor under section 6323(a). Specifically, the court determined Mary was not a purchaser because her consideration was not “adequate and full,” as defined in 26 C.F.R. § 301.6323(h)-l(f)(3) (2001) (consideration must have reasonable relationship
On appeal, Mary argues: (1) the Texas divorce court had exclusive jurisdiction over this dispute; thus, there was no federal question and the interpleader action was not proper; (2) under Texas community property law, Mary had substantial property rights in the plan proceeds even before the divorce; (3) she was a purchaser under section 6323(a); and (4) she was a judgment hen creditor under section 6323(a).
II. DISCUSSION
This court reviews de novo the district court’s grant of summary judgment. Mayberry v. United States,
We turn next to whether Mary became a judgment lien creditor under section 6323(a) within sufficient time to have priority over the IRS.
A Treasury Regulation defines “judgment lien creditor” as follows:
... a person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money. In the case of a judgment for the recovery of a certain sum of money, a judgment lien creditor is a person who has perfected a lien under the judgment on the property involved. A judgment lien is not perfected until the identity of the lienor, the property subject to the lien, and the amount of the lien are establishеd. Accordingly, a judgment lien does not include an attachment or garnishment hen until the hen has ripened into judgment, even though under local law the hen ofthe judgment relates back to an earlier date.
If under local law levy or seizure is necessary before a judgment lien becomes effective against third parties acquiring liens on personal property, then a judgment hen under such local law is not perfected until levy or seizure of the personal property involved.
26 C.F.R. § 301.6323(h)-l(g).
A state law created hen’s priority depends on when it attaches and becomes choate, and federal law will determine when the hen has acquired sufficient substance and becomes so perfected as to defeat a later federal tax hen. United States v. Pioneer Am. Ins. Co.,
Mary was not required to comply with any state law requirements fоr purposes of estabhshing hen priority over the IRS’s interest in the plan proceeds. ERISA provides a mechanism for enforcing QDROs, and this mechanism supersedes any contrary state law. See U.S. Constitution art. VI, cl. 2, Heart of Am. Grain Inspection Serv., Inc. v. Mo. Dep’t of Agrie.,
In this case, Northwest determined, within eighteen months of the date the first payment would have been made under the DRO, that the DRO, as modified, was a QDRO. Thus, Mary satisfied ERISA’s requirements for alienating pension plan proceeds. Requiring Mary to satisfy state law perfection requirements would conflict with ERISA’s policy of ensuring that plan sponsors are subject to a uniform body of law. See Egelhoff v. Egelhoff
We further conclude that Mary’s interest in the plan proceeds relates back to the date of the initial DRO. See Nelson v. Rametter,
Because the DRO preceded the IRS’s notice of tax lien, and Northwest determined within the requisite eighteen months that the DRO qualified as a QDRO, see 29 U.S.C. § 1056(d)(3)(H)(v) (computation of time), Mary was a judgment lien creditor with priority as of July 1995, when the DRO was entered. She is thus entitled to the plan proceeds free of the IRS lien.
One other related issue should be addressed regarding the finality of the July 1995 Texas DRO. The Texas judge signеd an order prepared and approved by the parties which stated:
The Court retains jurisdiction to amend this Order so that it will constitute a qualified domestic relations order under the Plan even though all other matters incident to this action or proceeding have been fully and finally adjudicated. If the Plan determines at any time that changes in the law, the administration of the Plan, or any other circumstances make it impossible to calculate the portion of a distribution awarded to Alternative Payee by this Order and so notifies the parties, either or both parties shall immediately petition the Court for reformation of this Order.
The intent of the July 1995 DRO, to qualify under the applicable Northwest plans, is clear. The parties and the court recognized the order may need changes to qualify. Northwest did require certain changes to qualify. Mary asked the Texas court twice to reform the DRO before Nоrthwest accepted the DRO as a QDRO. This process is anticipated by the law, which provides for segregation of the funds by the plan administrator for up to eighteen months to qualify the DRO as a QDRO. See 29 U.S.C. § 1056(d)(3)(H). Our holdings in Nelson and here, recognizing the DRO establishes a “direct interest in plan
As a legal matter, when the DRO issued, Francis was no longer the owner of 90 percent of the Northwest ERISA plans. Mary was awarded this share as part of the divorce. Mary, the property, and the amount were identified clearly, only the details of qualification remained to transform the DRO into a QDRO.
III. CONCLUSION
Since we conclude Mary was a judgment lien creditor, we do not address whether she was also a purchaser under section 6323(a). Accordingly, wе reverse the summary judgment with regard to Mary Taylor, and remand with instructions to enter judgment in conformity with this opinion.
Notes
. Employee Retirement Income Security Act of 1974 (ERISA), as amended, 29 U.S.C. §§ 1001-1461 (2000).
. 26 U.S.C. § 6323(a) states: "Purchasers, holders of security interests, mechanic’s lien-ors, and judgment lien creditors. The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary [of the Treasury].”
. The IRS has authority to proceed against Francis’s interest in any ERISA plan benefits and "is not constrained by ERISA's anti-alienation provision." In re McIntyre,
. pension benefit plans are distinguishable from welfare benefit plans, which do not provide an enforcement mechanism. See Mackey v. Lanier Collection Agency & Serv., Inc.,
Dissenting Opinion
dissenting.
The Hen priоrity issue in this case involves the interplay of two federal statutory regimes, ERISA and the Internal Revenue Code. The Code provides that a judgment lien, when perfected, has priority over an existing federal tax lien unless notice of the tax lien has been filed in accordance with state law. See 26 U.S.C. § 6323(a), (f). ERISA provides that a former spouse may acquire an enforceable fight to a participant’s pension plan benefits pursuant to the provisions of a “qualified domestiс relations order” (QDRO).
Federal law governs whether a judgment lien created by state law is perfected for purposes of § 6323(a). The federal rule is that a Hen is perfected, or сhoate, “when the identity of the lienor, the property subject to the Hen, and the amount of the Hen are estabHshed.” United States v. Pioneer Am. Ins. Co.,
Given this overlap between the judicially developed federal rule of perfection, and the statutory elements of a QDRO, I agree with the court that a QDRO is a perfected judgment Hen for purposes of the priority rules of § 6323(a). Like the court, I reject the IRS’s argument that, to be perfected under § 6323(a), the judgment Hen created by a QDRO must also satisfy any levy or seizure requirements generally applicable to Hens created by the laws of that State. Congress codified the perfection require
There remains the question whether Mary’s judgment lien was perfected (acquired QDRO status) prior to the IRS filing notice of its tax liens in Dallas County, Texas, in late December 1995. Mary’s judgment lien arose on July 28,1995, when the Texas divorce court entered a domestic relations order awarding her a 90% interest in Francis Taylor’s ERISA plan benefits. Northwest Airlines as plan administrator determined that amended versions of that order qualified as QDROs, long after the tax liens were filed in December 1995. The court nonetheless concludes that Mary’s QDRO-perfected lien has priority because “Mary’s interest in the plan proceeds relates back to the date of the initial [divorce court order].” Ante at 952. I disagree.
ERISA provides that, when a domestic relations order is submitted for a QDRO determination, the plan administrator must make the determination “within a reasonable period after receipt of such order,” 26 U.S.C. § 414(p)(6)(A)(ii), and must segregate plаn benefits that would be payable to the alternate payee (here, Mary Taylor) for up to eighteen months while it makes that determination, § 414(p)(7). See Hogan v. Raytheon, Co.,
But assuming the court has adopted a correct relation-back principle, it has misapplied that principle to the facts of this case. Unlike the plan administrator in Cooper Indus., Inc. v. Compagnoni,
As the court notes, the Texas court entered a modified domestic relations order on January 8,1996, after the plan administrator’s final negative determinations. The Taylors submitted that order to Northwest Airlines as plan administrator. Northwest Airlines again issued three notices that it had received a domestic relations order (one notice for each plan), which is the first step in the QDRO-deter-mination process. See 26 U.S.C. § 414(p)(6)(A)(i). In June 1996, Northwest Airlines finally determined that the January 8, 1996, order qualified as a QDRO with respect to Francis Taylor’s savings plan and stock plan benefits. However, on April 15, 1996, Northwest Airlines initially determined that the January 8 order did not qualify as a QDRO with respect to Francis Taylor’s retirement plan benefits. Again, the Taylors failed to appeal within the plan’s sixty-day appeal period, and that determination became final. Again, after the appeal period expired, the Taylors submitted another modified domestic relations order, entered by the Texas court on August 29, 1996, which Northwest Airlines- finally determined to be a QDRO on January 7, 1997.
On this undisputed record, I conclude that the plan administrator’s QDRO determinations did not grant Mary Taylor a perfected judgment lien interest in Francis Taylor’s plan benefits prior to January 8, . 1996. As the IRS properly filed notice of its liens in late December 1995, the federal tax liens have priority over Mary’s judgment hen under § 6323(a). Accordingly, I respectfully dissent.
. Significantly, the QDRO provisions of ERISA appear in both the Internal Revenue Code and the Title 29 labor laws. See 29 U.S.C. § 1056(d); 26 U.S.C. § 414(p). I will cite to the Code provisions in this dissent.
. My doubt stems from the fact that the initial domestic relations order, if seriously deficient, may not satisfy the QDRO requirements in § 414(p)(2) that correspond to the elements that make a judgment lien choate under federal common law. Here, for example, the July 28, 1995, order did not identify to which of the three Northwest Airlines plans it applied and thus did not clearly define the 90% interest that Mary was awarded. In such a case, for purposes of priority against a federal tax lien, I am not sure whether QDRO status should only relate back to the date the deficient domestic relations order was modified, or all the way back to the entry of the initial, non-choate domestic relations order. I need not resolve that question here.
. The court has no support for its assertion that "[t]he plan administrator, by plan procedures, cannot shorten [the] eighteen month qualification period.” Ante at 952. The assertion is contrary to the plain language of the statute, which requires a QDRO determination "within a reasonable period,” provides that affected benefits must be sеgregated while the determination is made, but places an eighteen-month limit on the plan administrator’s duty to segregate. The assertion is also contrary to the Department of Labor’s interpretation of the QDRO provisions: "the '18-month period’ during which a plan administrator must preserve the ‘segregated’amounts ... is not the measure of the reasonable period for determining the qualified status of an order and in most cases would be an unreasonably long period of time to take to review an order.” U.S. Dep't of Labor, Employee Benefits Sec. Admin., ODROs — The Division of Pensions Through Qualified Domestic Relations Orders, Question 2-12 at p. 19, available online at <http://www.dol.gov /ebsa/Publications/qdros.html>.