RENDERED: JANUARY 16, 2015; 10:00 A.M. TO BE PUBLISHED
Commonwealth of Kentucky Court of Appeals NO. 2013-CA-001515-MR
RICHARD F. BROWN APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT v. HONORABLE SQUIRE WILLIAMS, III, JUDGE ACTION NO. 02-CI-00166
LISA G. BROWN (NOW ROBINSON) APPELLEE
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BEFORE: CLAYTON, DIXON, AND JONES, JUDGES.
JONES, JUDGE: This matter is on appeal from an order of the Franklin Circuit
Court awarding Appellee Lisa G. Brown (now Robinson), a pro-rata share of
Appellant Richard F. Brown’s gross monthly annuity under the Civil Service
Retirement System. On appeal, Richard argues that the circuit court erred as a
matter of law because its award to Lisa included cost-of-living adjustments
(“COLAs”) that Richard’s civil retirement account received after the parties
divorced. For the reasons more fully explained below, we AFFIRM.
I. Factual and Procedural Background
Richard and Lisa were married on June 22, 1984, and divorced by
final decree of the Franklin Circuit Court entered on October 18, 2002. The
dissolution decree reserved decision on certain financial issues, which remained
pending between the parties, including issues related to the division of Richard’s
civil and military retirement accounts. On July 2, 2004, the circuit court entered an
order directing that “the marital portion” of Richard’s retirement accounts was to be
divided equally between the parties. The circuit court further ordered that qualified
domestic relations orders (“QDROs”) were to be entered consistent with the court’s
order dividing the retirement accounts.
Richard’s military retirement account has been successfully divided.
The only disputed issue concerns how to appropriately divide the civil retirement
account with respect to the COLAs Richard received after the parties’ divorce. On
June 19, 2013, Lisa filed a motion with the circuit court requesting a QDRO order
be entered granting her an equal division of Richard’s civil retirement account
earned during the marriage, including the COLAs Richard received after the
parties’ divorce. Richard responded that entry of a QDRO directing payment of
half of the portion of the retirement account earned during the marriage to Lisa was
appropriate and consistent with the circuit court’s July 2004 order. Richard
maintained, however, that Lisa was not entitled to any portion of the COLAs that
he received after the parties divorced.
On August 7, 2013, the circuit court sustained Lisa’s motion. The
circuit court determined that Lisa was entitled to the portion of the COLAs, which
corresponded to her share of the marital portion of the account. The circuit court
concluded: “[b]ecause the court ordered a percentage share of [Richard’s]
retirement, the court finds that [Lisa] is entitled to include cost of living allowances
when calculating her portion of the retirement account.” The circuit court rejected
Richard’s argument that this was tantamount to awarding Lisa benefits earned after
the parties’ divorce. The circuit court concluded that Lisa’s “entitlement to this
benefit was earned at the time the parties agreed to a percentage division.” On
August 26, 2013, the circuit court entered a subsequent order, which is consistent
with its prior order regarding the COLA adjustments; this order directs the United
States Office of Personnel Management to pay Lisa’s share of the retirement
benefits directly to her.
This appeal followed.
II. Standard of Review
The question before us is whether inclusion of the COLAs is
consistent with the court’s 2004 order, which awarded Lisa fifty-percent of the
marital portion of Richard’s civil service retirement account. Questions relating to
the construction, operation, and effect of a dissolution order are governed by the
rules and provisions applicable to the construction of other contracts. Richey v.
Richey, 389 S.W.2d 914 (Ky. 1965). The interpretation of a contract is a matter of
law to be reviewed de novo. Cinelli v. Ward, 997 S.W.2d 474 (Ky. App. 1998).
Under Kentucky’s statutory scheme for the distribution of property at
dissolution, the trial court must first categorize each item of property as either
marital or nonmarital under the framework embodied in KRS 403.190. Kentucky
permits division as marital property of both vested and nonvested retirement
accounts accumulated during the marriage. Holman v. Holman, 84 S.W.3d 903,
907 (Ky. 2002). “Pension and profit sharing plans are valued as of the date of the
dissolution decree.” Clark v. Clark, 782 S.W.2d 56, 62 (Ky. 1990). However, “[i]t
is the pension, not the benefits, which is the marital asset which is [valued and]
divided by the court.” Brosick v. Brosick, 974 S.W.2d 498, 503 -04 (Ky. App.
1998). Courts generally use one of three methods to value the marital portion of
the pension: the net present value method, the deferred distribution method, and
the reserve jurisdiction method. Armstrong v. Armstrong, 34 S.W.3d 83, 85 (Ky.
The circuit court valued Richard’s pension at the time of the
dissolution decree and determined that Lisa was entitled to fifty-percent of the
marital portion of the pension. It is clear to us that the circuit court used the
deferred distribution method when it initially valued the marital portion of
Richard’s retirement in 2004. Under that method, “the court predetermines the
percentage of the pension income that the non-employee spouse will be eligible to
receive once the pension is vested and matured.” Id.
Citing Foster v. Foster, 589 S.W.2d 223, 225 (Ky. App. 1979), and its
progeny, Richard argues including the COLAs would violate the long-established
rule that the non-employee spouse shall not be permitted to “share in any pension
benefits earned after divorce and before retirement.” See also Armstrong v.
Armstrong, 34 S.W.3d 83 (Ky. App. 2000). In other words, Richard maintains that
inclusion of the COLAs is inappropriate because it would provide Lisa with
benefits that did not exist in 2004 when the circuit court valued and divided
There are no published Kentucky opinions directly on-point to guide
us on this issue. Thus, we have examined the federal statutes and interpretative
case law to gain an understanding of the nature and operation of the federal
retirement COLAs. Our examination convinces us that the circuit court correctly
determined that Lisa’s portion of the marital retirement should include the COLAs.
The COLAs are not “earnings” attributable to Richard’s post-decree efforts, and
therefore, their inclusion does not violate our case law or statutes. Moreover, we
believe that inclusion of the COLAs is most consistent with the 2004 order
awarding Lisa fifty-percent of the marital value of Richard’s pension.
Most civilian federal employees fall under the Civil Service
Retirement Act, 5 U.S.C. § 8331 et seq. In 1962, Congress amended the Act to
provide for automatic COLAs; the COLA portion of the Act has since been
amended numerous times. See Zucker v. United States, 758 F.2d 637 (Fed. Cir.
1985). Congress’ purpose of providing COLAs was to prevent any significant loss
of purchasing power due to inflation. National Ass’n of Retired Fed. Emp. v.
Horner, 633 F. Supp. 511, 512 -13 (D.D.C. 1986). “COLAs do not increase the
amount of the payments in real dollars but rather simply assure that inflation does
not decrease the value of the payment.” Hong-Yee Chiu v. United States, 18 Cl. Ct.
567, 571 (1989) aff’d in part, rev’d in part sub nom. Chiu v. United States, 948
F.2d 711 (Fed. Cir. 1991). “[T]here is no distinction between some ‘underlying’
annuity and the COLA. The COLA is merely part of the calculation of the current
annuity.” Horner, 633 F. Supp. at 513.
One cannot categorize federal retirement COLAs as separate “earned”
retirement benefits. Id. Federal employees do not have a property right in
scheduled cost-of-living adjustments to retirement annuities received under the
Civil Service Retirement Act. Zucker, 758 F.2d at 639 (“Until a retiree becomes
eligible to receive a particular COLA, his or her right to that adjustment is subject
to any lawful changes made to the section (5 U.S.C. § 8340) from which the claim
to entitlement arises.”).
We do not believe that the federal retirement COLAs can be
characterized properly as post-marital earnings. Federal retirement COLAs are not
“earned” based on one’s investment or labor. Under federal law, they do not even
give rise to a property right until such time as they are payable under statute. The
COLA portion of an annuity payment is “nothing more than a ‘government fostered
expectation’ that retirees will be provided retirement annuities which will not be
ravaged by inflation.” Zucker, 758 F.2d at 640.
Awarding Lisa the COLAs with respect to the marital portion of
Richard’s retirement is not tantamount to awarding her a benefit earned by Richard
after the marriage. Rather, consistent with the purpose of federal COLAs,
including the COLAs in Lisa’s portion of the marital property, is necessary to
ensure that the value of her marital portion of the retirement benefits keeps pace
with inflation and equals the value of Richard’s marital portion of the retirement.
Excluding the COLAs from Lisa’s portion of the payout would actually devalue her
marital interest and result in Richard receiving a greater percentage of the marital
portion than Lisa in direct contravention of the dissolution decree.
Thus, in the case, where the original decree used the deferred
distribution method to value the marital portion of a federal civil service
retirement, applying the COLA to the marital portion does not increase the corpus,
it simply equalizes and maintains the present value of the percentage that was
awarded to the parties at the time of dissolution. Had the court used the net present
value method and awarded Lisa a fixed dollar value, the result would be different
because there would be no logical connection between the COLA and the marital
portion awarded to Lisa.
We further observe that our result is in accord with the Federal Office
of Personnel Management’s interpretation of the COLA issue. Its guidelines
indicate that: “[u]nless the court order expressly directs that OPM not add COLA’s
to the former spouse’s share of the employee annuity, OPM will add COLA’s to
keep the former spouse’s share at the stated percentage.” See United States
Office of Personnel Management, A Handbook for Attorneys on Court-ordered
Retirement, Health Benefits, and Life Insurance Under the Civil Service
Retirement System, Federal Employees Retirement System, Federal Employees
Health Benefits Program, Federal Employees Group Life Insurance Program,
(Rev. July 1997) (emphasis added).
In conclusion, we believe that where the original decree made no
mention of the COLA and awarded Lisa a percentage of the retirement account
itself, the circuit court correctly concluded that Lisa was entitled to share equally in
the COLA as it applied to the marital portion of Richard’s retirement. This is not
allowing Lisa to enjoy a benefit Richard “earned” post-decree; it is maintaining the
value of her marital interest vis-à-vis inflation. Including the COLA is perfectly in
accord with the nature and purpose of the federal retirement COLA. Most
importantly, it is consistent with the original 2004 order equally dividing the
marital portion of the pension between the parties.
Thus, we conclude that where the original dissolution decree used the
deferred distribution method and made no mention of the exclusion of any future
COLAs, the circuit court was correct in holding that the former spouse was entitled
to inclusion of the COLA on her marital percentage of the retirement payout upon
distribution. This approach allows the former non-employee spouse to fully realize
the present-day value of the marital portion of the pension. To hold otherwise,
would result in a reallocation of the percentage values i.e. the non-employee
spouse would receive less than the fifty percent value of the marital portion and the
employee spouse would receive more.
For the reasons set forth above, we affirm the decision of the Franklin
BRIEF FOR APPELLANT:
James D. Liebman Frankfort, Kentucky
BRIEF FOR APPELLEE:
Stephen C. Sanders Frankfort, Kentucky