KNOW THY EXPERT, BUT ALSO KNOW THY PLAN AND THY LAW

Eden v. Eden, No. 2012-CA-000819-MR (Ky. App. 2014)
Court Finds Pension Evaluator Did Not Follow the Law

Rendered: March 14, 2014
Not to be Published
Opinion Vacating and Remanding

The Kentucky Court of Appeals’ most recent QDRO-related case may be an occasion for pause for even the most careful and seasoned family law practitioner.  The facts are relatively simple.  Husband had a Kentucky Teachers' Retirement Systems (KTRS) pension in pay-status, and Wife had a Kentucky Lottery Corporation retirement account.  The family court adopted the expert opinion of Wife’s Certified Public Accountant (CPA) as to the valuation and proper division of the marital portion of both pensions.  Husband submitted no expert testimony in rebuttal.  See, that wasn’t so bad.  Now what could be the problem?

Bring on the math.  The CPA testified that the present value of Husband’s pension was $1,332,771.00, and of that amount $1,112,864.00 was marital.  The CPA found Wife’s retirement benefits, which were all marital, totaled approximately $385,603.00, and thus that the parties combined marital retirement benefits equaled $1,498,467.00.  The CPA then concluded that Wife should retain her retirement benefits in totem, and that an additional $363,631.00 would be required to equalize the parties’ retirement assets.  Relying on the CPA’s testimony, the family court determined that to effectuate the division of Husband’s account, Wife should receive 27.284% ($363,631.00 / $1,332,771.00 = 27.284%) of Husband’s KTRS pension via QDRO. 

Husband appealed, contending that the family court erred in its valuation and division of his KTRS pension.  Specifically, Husband asserted that the family court erroneously relied upon Wife’s expert because his opinion did not comport with 102 KAR 1:320 Section 7, which sets forth a very specific multi-step method of calculation for the valuation and division of KTRS benefits upon divorce.   Namely, 102 KAR 1:320 Section 7 requires that: (1) the participant’s “total service retirement allowance” must be obtained as of the date of divorce; then (2) the total service retirement allowance is reduced by the amount of benefits held by the non-KTRS spouse; and finally (3) the remaining amount of allowance is divided by a marital coverture fraction through the date of divorce.

The Court of Appeals agreed that the CPA didn’t follow the mandates of 102 KAR 1:320, and vacated the family court’s opinion, remanding to the family court for reconsideration of the valuation and division of Husband’s KTRS pension in accordance with 102 KAR 1:320. 

Insert author curiosity and a quick Google search of Husband's work history.  If Husband were to have had 33 years of creditable service with KTRS during the marriage, the difference in the amount awarded to Wife under the CPA’s methodology and 102 KAR 1:320 is substantial: $363,630 to Wife via CPA, versus $274,678 to Wife via 102 KAR 1:320.  That’s about $90,000 less for Wife.

And as Judge Clayton opines, a remand so significant in terms of dollars will likely cause a “ripple” effect on the equitable division of the remaining property pursuant to KRS 403.190.  Taking heed, this author also notes that the family court’s opinion was rendered in February of 2012, more than two years from the date of the Court of Appeals remand – plenty of time for assets to legitimately dissipate.   However, what we know is still left is the sting of superfluous expert fees and unnecessary post-litigation costs.  That is frustrating to this author, especially in this case, where counsel for Wife was apparently diligent in her representation.  But as always, instead of giving up, let’s peel back the onion (and fight the tears) together and figure out how to prevent a repeat of Eden.   

In some ways, experts tend to exist in a vacuum.  Each knows a great deal about one flower in the garden, but more than one expert might be necessary in order to see the entire garden.  Your expert team should know three areas: the actuarial mathematics to calculate present values; the federal and state law governing the plan being examined, as well as the plan's specific terms and internal QDRO procedures and rules; and your state's domestic relations law as it relates to those present values and the division of marital property rights (e.g., there are significant variations in such law amongst Kentucky, Ohio, and Indiana).  Few experts alone have a comprehensive knowledge of more than one of those areas.  And a deficiency in any one of those areas can end up blind-siding even the best expert witness.  As seen in the garden of Eden (sorry, couldn’t help it), after one has adopted the appropriate methodology for formulating present values, knowledge of the specific plan terms and the law become of paramount importance.

If the thought of putting together a “team” of knowledgeables scares you, or your client’s pocketbook, just reflect upon the famous idiom – penny wise and pound foolish.  Take care of the pennies and the pounds will take care of themselves.  I hate to even guess at this, because it makes my head hurt for the parties involved and the advice comes at their cost, but my take is that Wife would have spent less adding another member to her trial team to work in conjunction with the CPA, rather than what she ended up spending on unrewarding post-decree litigation.

* See my previous blog post from July 19, 2013 regarding recent legislative updates to KTRS, specifically to 102 KAR 1:320, which directly affects QDRO submissions.