Heineman v. Bright

SALMON, Judge. In PaineWebber Inc. v. East, 363 Md. 408 , 768 A.2d 1029 (2001), the Court of Appeals affirmed this Court’s decision in East v. PaineWebber Inc., 131 Md.App. 302 , 748 A.2d 1082 (2000). The two main questions raised in the case sub judice arise as a consequence of the East decision, viz: 1. Was the issue decided in East either raised or decided in the lower court and thus preserved for our review? 2.

If the answer to Question 1 is “yes,” does application of the principles of law enunciated by the Court of Appeals in East require us to reverse the judgment in the case at hand? We hold that the issue discussed in East was neither raised by appellant in the trial court nor decided by the trial judge. Thus, the issue was not appropriately preserved for appellate review. See Md. Rule 8-131(a).

But even if the issue had been preserved, we would still have affirmed the decision of the trial judge when he granted summary judgment in favor of appellees, inasmuch as the East case is factually distinguishable from the case sub judice. I. PROCEDURAL BACKGROUND Appellant, Jacklyn Kay Heineman (“Kay”), is the widow of G. Wendel Heineman (“Wendel”), who died testate on July 11, 1992. In his will, Wendel bequeathed his entire estate to his four daughters, except for a beneficial interest in a trust given to his former wife, Doris Heineman (“Doris”), in compliance ⁶⁶² with a judgment of absolute divorce and property settlement agreement. On April 8, 1996, Kay filed an amended complaint in the Circuit Court for Baltimore County against the personal representatives of Wendel’s estate and Doris.

Count I of the amended complaint asked the court to declare her (Kay’s) rights under the Heineman Company, Ltd. Defined Benefit Plan and Trust (“the Trust” or “the Plan”), which the amended complaint described as “an ongoing pension plan as described in Section 401 et. seq. of the Internal Revenue Code of 1986, as amended.” In the amended complaint, Kay alleged that she and Wendel were married on October 27, 1989, and that, prior to the marriage, she and Wendel entered into a pre-nuptial agreement. Some of the relevant provisions of the pre-nuptial agreement were described in Kay’s amended complaint as follows: 13. In paragraphs 1, 2 and 4 of the Pre Nuptial Agreement, Plaintiff and Decedent waived, released and relinquished all right, title, estate and interest, statutory or otherwise, in all property owned by the other party at the time of their marriage or acquired by either of them at any time after their marriage and in the estate of the other party upon his or her death. Specifically, paragraph 4 of the Pre Nuptial Agreement included the following waiver: The parties hereby expressly waive any legal right either may have under any Federal or state law as a spouse to participate as a payee or beneficiary under any interest the other may have in any pension plan, profit sharing plan, or any other form of retirement or deferred income plan, including, but not limited to, the right either spouse may have to receive any benefit in the form of a lump sum death benefit, joint or survivor annuity or preretirement survivor annuity pursuant to any state or Federal law. 14.

It is the Plaintiff’s contention that the language and substance of the aforementioned Prenuptial Agreement is ⁶⁶³ insufficient as a matter of law to waive Plaintiffs rights and/or interests as the sole beneficiary of the Plan due to the fact that it fails to satisfy the statutory spousal right waiver requirements set forth in Internal Revenue Code, 26 U.S.C. § 417 (a). 15. That Article VII (Death Benefits), Section 7.01 of the Plan documents defines “beneficiary” in pertinent part: “Beneficiary shall mean any person or legal entity duly and properly designated by a participant to receive any benefits which may be payable under this Plan and Trust upon or after death; and, if there should be not such designation, or the designated beneficiary should predecease the participant, it shall mean the participant’s spouse, if married, or if not married, to his children equally. If the participant has no surviving spouse or children, then, the designated beneficiary shall be his estate.” (emphasis supplied) 16. That prior to his death on July 11, 1992, Decedent failed to designate any person or entity as the beneficiary of the Plan.

Consequently, under the express provisions of the Plan stated above, it is Plaintiffs contention that Plaintiff became the sole beneficiary at the time of Decedent’s death. (Emphasis added.) In her prayer for relief, Kay asked the court to “find and declare that notwithstanding the terms of the Pre Nuptial Agreement, Plaintiff is the beneficiary of the benefits due the Decedent, G. Wendel Heineman, under the terms of the ... Trust.” Kay’s allegations against Doris in the amended complaint were that Doris was guilty of a breach of trust (Count II) and a breach of fiduciary duty (Count III) because Doris failed to transfer to Kay “all Trust assets ... due [Kay] under the Trust” (Count III). The case was transferred to Baltimore City because of venue problems.

Thereafter, Kay moved for summary judgment against the defendants. The defendants filed a cross-motion for summary judgment, along with an opposition to ⁶⁶⁴ Kay’s motion. Defendants argued: (1) Kay’s claims were barred by issue preclusion and claims preclusion (due to a decision filed in the United States District Court for the District of Maryland in a related action concerning Kay’s rights to certain property owned by the Trust); (2) the Trust was not subject to Section 401 et seq. of the Internal Revenue Code because it was not a “qualified plan”; and (3) the Internal Revenue Code is a tax statute and did not grant any substantive rights to Kay as a beneficiary of the Trust. The circuit court entered summary judgment in favor of the defendants and denied Kay’s motion for summary judgment.

A panel of this Court reversed the circuit court and held that Kay’s action was not barred by principles of either issue preclusion or claims preclusion. See Heineman v. Bright, No. 1533, Sept. Term, 1997 (unreported, filed April 19, 1999). In reaching that result the panel did not address the merits of the defendants’ argument concerning Section 401 et seq. of the Internal Revenue Code. Once the case was remanded, both sides filed cross motions for summary judgment.

Following a hearing on March 28, 2000, the trial judge declared the rights of the parties and once again ruled that the defendants were entitled to summary judgment.

II

FACTS A. The Pre-Nuptial Agreement Wendel married Kay, his second wife, on October 27, 1989, which was seven days after he and Kay executed the prenuptial agreement mentioned in Kay’s amended complaint. The agreement stated that each party entered into the marriage with certain property that would remain his or hers, free from any claim of the other. The recitals, set forth at the beginning of the agreement, included the following: WHEREAS, each party owns certain real and/or personal property, which, pursuant to the terms and provisions of this Agreement, is to be and remain his or her respective ⁶⁶⁵ sole property, free from any claim, right, or interest therein in the other party; and WHEREAS, the parties acquired their separate assets and property independently and without the help of each other, and they intend to marry without any intent of gaining enrichment by any reason of any property rights, however large they might potentially be, which, in the absence of this Agreement, might arise by reason of their marriage; and WHEREAS, the parties have agreed that each is economically independent of the other; and WHEREAS, the parties hereto enter into this Agreement in order to define the interests which each of them shall have in the property of the other during and after marriage, and in the estate of the other after marriage, and in the estate of the other after the death of one of them;.... (Emphasis added.) Additionally, as alleged in the appellant’s amended complaint, in Paragraph 4 of the pre-nuptial agreement Kay expressly waived any right she had under any federal or state law “as a spouse to participate as a payee or beneficiary under any interest” she might have “in any pension plan ... or any other form of retirement or deferred income plan, including, but not limited to the right” she might have to receive any benefit in the form of a lump-sum death benefit, joint or survivor annuity or pre-retirement survivor annuity pursuant to any state or federal law.

The parties’ property interests disclosures were made in schedules attached to the pre-nuptial agreement. Schedule A listed the property owned by Kay, and Schedule B listed the property owned by Wendel. Wendel specifically listed the “Defined Benefit IRA,” which included the Trust property here at issue, as one of his assets. In other parts of the pre-nuptial agreement, Wendel and Kay waived all rights in all property owned by the other party at the time of the marriage or acquired by either of them at ⁶⁶⁶ any time after the marriage and in the estate of the other party upon his or her death. 1 B. Appellees’ Position Below Appellees stressed that (1) because Kay gave up any right she had as a spouse to participate as a beneficiary under any pension plan Wendel might have (see Paragraph 4 of prenuptial agreement quoted supra) and (2) because the Plan here at issue is specifically listed as property owned by Wendel in Schedtde B attached to the pre-nuptial agreement, (3) it does not matter that Article VII, section 7:01 of the Plan (quoted supra in Paragraph 15 of Kay’s amended complaint) provided that, if, as here, there was no designated beneficiary, then the surviving spouse would be the beneficiary of the Plan.

In short, appellees contended that because Kay was not a named beneficiary, the only right she had under the Plan was as a surviving spouse and Kay gave up all her rights in the Plan as a spouse when she signed the pre-nuptial agreement. In addition to the arguments already summarized, appellees also contended below that the provisions of 401 and 417 of the Internal Revenue Code were irrelevant because those provisions merely determined whether the Trust would get the benefits bestowed upon a qualified plan by the Internal Revenue Code, but those IRS (Internal Revenue Service) provisions were not intended to confer substantive rights to surviving spouses. C. Appellant’s Contentions Below The Internal Revenue Service, on January 23, 1983, determined that the Trust set up by the Heineman Company was a ⁶⁶⁷ qualified plan and entitled to favorable tax treatment under 26 U.S.C. Section 401 (a). Thereafter, Congress enacted the Retirement Equity Act of 1984 (“REA”), which, inter alia, amended certain sections of the Internal Revenue Code.

One of the new provisions was that in order to remain a qualified plan certain amendments were required to be made. The Heineman Trust, after 1984, continued to receive favorable tax treatment. 2 Section 417(a) of 26 U.S.C. was added to the Internal Revenue Code when the REA was enacted. Section 417(a) provided that the surviving spouse of a participant in a 401(a) qualified plan should receive the benefit of the Plan after the death of a participant unless, following the death, the spouse agreed in writing to waive the Plan’s benefits. It is undisputed that Wendel was the sole participant in the Trust (or Plan) and that, following his death, Kay never waived her right to receive benefits.

In arguing her motion for summary judgment in the trial court, Kay made exactly the same assertion as she made in Paragraph 14 of her amended complaint, i.e., that the waiver language used in Paragraph 4 of the pre-nuptial agreement was “insufficient as a matter of law to waive [Kay’s] rights and/or interests as the sole beneficiary of the [Trust] due to the fact that [the pre-nuptial agreement] failed to satisfy the statutory spousal right waiver requirements set forth in Internal Revenue Code, 26 U.S.C. § 417 (a).” In the trial court, Kay never contended that she had not waived the benefits of the Trust when she executed the prenuptial agreement; instead, she claimed that because the waiver was made before Wendel’s death it was an invalid waiver under section 417(a) of the Internal Revenue Code. In Kay’s “Proposed Finding of Facts and Conclusion of Law” — filed approximately five weeks after the motion for ⁶⁶⁸ summary judgment was argued — Kay’s attorney clearly articulated her position: 11. The Retirement Equity Act of 1984 (“REA”) amended various provisions of the ERISA and Internal Revenue Code. It is stipulated by the parties that, for purposes of this action (cross-motions for summary judgment), the Retirement Equity Act applies to the Plan. * * * 13. § 417 was added to the Internal Revenue Code by the REA.

Said Section provides that the surviving spouse of a participant in a § 401(a) qualified plan receives the plan benefits following the death of the participant unless the spouse consents in writing to waive the benefits. 14. Following the marriage of Wendel and Kay, Wendel did not obtain Kay’s consent to waive her rights as beneficiary of the Plan. 15. Under § 417 of the Internal Revenue Code and applicable Internal Revenue Code Treasury Regulations [Question and Answer 28 of Treas. Reg. 1.401(a)-20], since Kay’s waiver was not obtained after the marriage, but rather, was obtained in the Prenuptial Agreement, and since the waiver was not in proper form, the said Prenuptial Agreement was ineffective, as a matter of law, to waive Kay’s rights as beneficiary of the Plan.

(Emphasis added.) In short, Kay’s position below was that even though a waiver was obtained in the pre-nuptial agreement, the waiver was invalid because it was made too soon— prior to Wendel’s death. Earlier, when Kay’s counsel argued the summary judgment motions, he said: So, you start at that point. The Plan says Jacklyn Kay Heineman is the beneficiary. You then go to Step 2.

Therefore, she is beneficiary unless she waived her rights as beneficiary. So, Step Number 2 is then you have the prenuptial agreement. In the prenuptial agreement Jacklyn Heineman waives her rights as beneficiary of Wendel Heineman’s estate. That’s Step Number 2.

Step Number 3 ⁶⁶⁹ is well, is that a valid and effective waiver. If it’s a valid and effective waiver she has no rights. If it’s not a valid and effective waiver then we revert back to the Plan that she has rights and what we are alleging in this case and which we feel that is supporting by our argument is that the prenuptial agreement under Internal Revenue Service Section U17 of the Code is not effective, and I think the Code is very, very clear on that, is not effective, the prenuptial agreement to waive her rights as a beneficiary under a qualified plan. If that is true and it’s not an effective waiver then once again we revert back to the face of the Plan itself and Jacklyn Kay Heineman is entitled to the assets of the breakdown.

(Emphasis added.) Kay’s counsel went on to argue: It appears to me that if we are not right that the Internal Revenue Code, Section 417 — if we are not correct that the waiver that she made in the prenuptial agreement was ineffective to waive her rights under the Plan then it would seem to me that [appellees] are entitled to summary judgment. If on the other hand we are correct and 417 and the other applicable arguments 3 that we’ve made to render the prenuptial agreement an ineffective waiver then I believe that we are entitled to judgment as a matter of law. (Emphasis added.) Based on the above arguments, the trial judge was presented with a very narrow issue, which he correctly phrased as follows: “Whether Kay is entitled to the benefits of the ... Trust despite the fact that she waived her rights to those benefits in the pre-nuptial agreement.” D. Trial Court’s Decision After digesting the arguments summarized above, the trial judge filed a written opinion in which he said, inter alia, ⁶⁷⁰ Kay claims that her pre-nuptial waiver of Wendel’s pension benefits is ineffective under Sections 401 and 417 of the Internal Revenue Code because the waiver does not meet the requirements of those sections.

However, this court finds that Kay’s reliance upon the language of Sections 401 and 417 is misplaced. Sections 401 and 417 of the