Classification of Lawsuit Proceeds as Marital Property and Valuation of Unvested Pension in Tennessee Divorce: Lane v. Lane

Facts: Shortly after marrying in 2006, Husband was injured at work. When Husband was injured and unable to work, Wife cared for him. He filed a workers’ compensation claim and a products liability lawsuit and received financial settlements from both. Wife was also named as a co-plaintiff in the products liability lawsuit. Husband claimed that he and Wife never discussed how to use the settlement proceeds. Husband proceeded to use those funds to pay some of his separate, non-marital debts. Wife claimed the parties had agreed to use the products liability settlement to pay off the debts on each of their vehicles. After the divorce was filed in 2009, the trial court found the products liability settlement was marital property that Husband applied to his separate debt without Wife’s knowledge or consent. To equalize the division of property, the trial court awarded Wife a judgment of approximately $27,500. Husband appealed.

On Appeal: The Court of Appeals affirmed the trial court.

Classification of lawsuit proceeds. Husband argued the court improperly classified the products liability settlement as marital property. He contended that Wife failed to show the settlement proceeds were meant to compensate them for his lost wages, medical bills, or damage to marital property. Wife responded that the proceeds were marital property and that the court properly considered the dissipation of the proceeds in the division of the remaining marital property.

Because Tennessee is a “dual property” state, a trial court must identify all of the assets possessed by the divorcing parties as either separate or marital property before dividing the marital estate. Separate property is not part of the marital estate and is  not subject to division. Tennessee Code Annotated § 36-4-121(b)(2) defines “separate property” as

(A) All real and personal property owned by a spouse before marriage, including, but not limited to, assets held in individual retirement accounts (IRAs) as that term is defined in the Internal Revenue Code of 1986 as amended;

(B) Property acquired in exchange for property acquired before marriage except when characterized as marital property under subdivision (b)(1);

(C) Income from and appreciation of property owned by a spouse before marriage except when characterized as marital property under subdivision (b)(1);

(D) Property acquired by a spouse at any time by gift, bequest, devise or descent;

(E) Pain and suffering awards, victim of crime compensation awards, future medical expenses, and future lost wages; and

(F) Property acquired by a spouse after an order of legal separation where the court has made a final disposition of property.

In contrast, marital property includes “all real and personal property, both tangible and intangible, acquired by either or both spouses during the course of the marriage up to the date of the final divorce hearing and owned by either or both spouses as of the date of the filing of a complaint for divorce.” Tennessee Code Annotated § 36-4-121(b)(1)(C) makes clear that marital property also

includes recovery in personal injury, workers’ compensation, social security disability actions, and other similar actions for the following: wages lost during the marriage, reimbursement for medical bills incurred and paid with marital property, and property damage to marital property.

Based on the foregoing, the Court concluded:

The parties were awarded the products liability settlement while they were married, creating a rebuttable presumption that the property was marital property. Additionally, the check was made payable to both parties and did not differentiate which portion was allotted to each party. Husband admitted that Wife did not proceed with her individual products liability claim because of the way in which they had negotiated the settlement. We hold that the settlement check represented the amount sought by both parties and ultimately awarded to both parties in fulfillment of each of their products liability claims. Accordingly, we conclude that the products liability settlement was properly classified as marital property and reject Husband’s contention that the settlement check was not marital property because it did not specifically include recovery for lost wages pursuant to Tennessee Code Annotated § 36-4-121(b)(1)(C). Likewise, we also conclude that the court did not err in considering the dissipation of the settlement proceeds in dividing the remaining marital property.

Valuation of unvested pension. Husband also challenged the trial court’s valuation of his unvested pension, which the parties agreed was marital property. Husband contended the trial court should have used the deferred distribution method in dividing the marital portion of his pension because he would not be eligible to receive the benefits for another nine years. He noted that his retirement was not likely to occur in the near future, that the pension was the greatest marital asset, and that they had no other cash assets to offset the award. Wife responded that use of the present cash value method was the most logical way to reach an overall equitable division.

In determining the way in which pensions should be divided, the two techniques commonly used in Tennessee are the present cash value method and the deferred distribution or retained jurisdiction method. The choice of valuation method remains within the sound discretion of the trial court to determine after consideration of all relevant factors and circumstances. Most importantly, an equitable division of marital property must reflect essential fairness in light of the facts of the case.

The present cash value method requires the trial court to place a present value on the retirement benefit as of the date of the final decree. Having determined the amount of the benefit, the court may then award the retirement benefits to the employee-spouse and offset that award by distributing to the other spouse some portion of the marital estate that is equivalent to the spouse’s share of the retirement interest. This method is preferable if the employee-spouse’s retirement benefits can be accurately valued, if retirement is likely to occur in the near future, and if the marital estate includes sufficient assets to offset the award.

In cases in which the vesting or maturation is uncertain or in which the retirement benefit is the parties greatest or only economic asset, courts have used the deferred distribution or retained jurisdiction method to distribute unvested retirement benefits. Using this method, the court may determine the formula for dividing the monthly benefit at the time of the decree, but delay the actual distribution until the benefits become payable. The advantage of this method is that it allows an equitable division without requiring present payment for a benefit not yet realized and potentially never obtained and it equally apportions any risk of forfeiture. There are disadvantages as well, namely the court must retain jurisdiction to oversee the payment. However, an administrative burden should not excuse an inequitable distribution of marital property.

After reviewing the record, the Court agreed with Wife, writing:

[W]e agree with Wife that use of the present cash value method was the logical way in which to reach an equitable division of the marital estate. Wife needed an immediate substantial judgment to offset her debt obligations given the continued refinancing of [marital residence] and the consolidation of debts into the mortgage, which benefitted Husband. Additionally, Husband’s dissipation of one of the parties’ greatest assets, namely the products liability settlement, also supported the decision to proceed with an immediate valuation of the marital portion of the pension. Thus, a delay of the actual distribution of the benefits would have been inappropriate given the circumstances of the case. Accordingly, we conclude that the trial court did not abuse its discretion in using the present cash value method to equitably divide the marital portion of Husband’s pension in light of the facts and circumstances presented in this case.

The trial court was affirmed in all respects.

Lane v. Lane (Tennessee Court of Appeals, Eastern Section, July 26, 2012).

Information provided by K.O. Herston: Knoxville, Tennessee Matrimonial, Divorce and Family Law Attorney.

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K.O. Herston is a family-law attorney in Knoxville, Tennessee whose practice is devoted exclusively to family law, including divorce, child custody, child support, alimony, prenuptial agreements, and other aspects of family law.

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