Validity of Agreement and ERISA research

Author: LegalEase Solutions

BACKGROUND FACTS

Jerry Marshall (“Marshall”) and his girlfriend, Jeri Clark (“Clark”), lived together.  He died in a car accident.  He had a life insurance policy through his employer with his Clark as the named beneficiary.  Shortly after his death, Marshall’s adult son (who worked at the same place as his dad) and son’s wife contacted Clark. They met her at restaurant and over dinner (where Clark consumed three glasses of wine, whereas she normally did not drink at all) convinced her to assign the proceeds of the life insurance policy in exchange for a promise to pay off her car note and fix her porch roof.  The life insurance proceeds were $300,000.00 whereas the estimated total value of car note and roof are only $10,000.00. 

QUESTIONS PRESENTED

  1. Is the agreement/assignment valid under ERISA?
  2. Is the agreement valid on the grounds of indefiniteness or contingent nature?
  3. Can the agreement be invalidated for inducement or fraud?
  4. Whether the agreement can be invalidated for incapacity because of GF’s drinking while making the deal, and if possible, what is the standard of proof required?

 SHORT ANSWERS

  1. Generally, under ERISA, assignment is prohibited. In the rare instances where assignment is permitted, it can be only done if the insured person is alive. Accordingly, ERISA does not apply to these facts. However, per ERISA, once the decedent is no longer alive, a plan administrator must distribute the proceeds of the insurance policy only to the named beneficiary, here Clark.
  2. It has been held that an entitlement which may vest sometime in the future, which is one coupled with an interest and derived from contract, is a proper subject of assignment. The intention of the assignor is the controlling consideration while considering whether there is a valid assignment. So the agreement may or may not be considered valid in the context of indefiniteness or contingent nature.
  3. The agreement may be invalidated for inducement of fraud. Clark may raise the claim of an unconscionable contract due to the disparity in value and concealment of the amount involved, misrepresentation of the son’s knowledge of the beneficiary and the proceeds.
  4. In this case, it may be difficult to set aside the agreement on the basis of intoxication alone, because it may not be able to prove that intoxication was so excessive as to render the person incapable of exercising his judgment or understanding the nature of the agreement and the consequences of its execution. However, it may be considered along with other factors like disparity in value, weakness in mind due to partner’s death and inducement by a person in trust.

RESEARCH FINDINGS

Relevant Clauses from Agreement

ASSIGNMENTS: No assignment will be binding on the Company unless and until:

(1) it is made on a form furnished by the Company;

(2) the original is completed and filed with the Company at its Group Insurance Service Office;

and

(3) it is approved by the Company.The Company and the Group Policyholder do not assume responsibility for the validity or effect of an assignment.Pike Enterprises Life Policy, Assignments (p.66).

 

CHANGING THE BENEFICIARY. Only the Insured Person or his or her assignee may change the Beneficiary. Pike Enterprises Life Policy, Beneficiary (p.65).

Agreements and Assignments, Generally

Generally, “Virginia adheres to the “plain meaning” rule courts examine the plain language of an agreement, going beyond the written contract only when its meaning is ambiguous.” Shenk v. Shenk, 39 Va. App. 161, 173, 571 S.E.2d 896, 903 (2002).

“An assignment is a transfer, but a transfer is not necessarily an assignment.” Kelly Health Care, Inc. v. Prudential Ins. Co. of Am., Inc., 226 Va. 376, 379, 309 S.E.2d 305, 307 (1983). “If the transfer is less than absolute, it is not an assignment; the obligee must have intended, at the time of the transfer, to dispossess himself of an identified interest, or some part thereof, and to vest indefeasible title in the transferee.” Id. (citing Restatement (Second) of Contracts § 317(1) (1981)). The intention of the assignor is the controlling consideration. The intent to transfer a present ownership of the subject matter of the assignment to the assignee must be manifested by some word, written or oral, or by some act inconsistent with the assignor’s remaining as owner.” Id. “The assignor must not retain any control over the fund or property assigned, any authority to collect, or any form of revocation.” Id. (emphasis in original)

Thus, to constitute an equitable assignment, “there must be an assignment or transfer of the fund or some definite portion of it, so that the person owing the debt or holding the fund on which the order is drawn can safely pay the order, and is compellable to do so, though forbidden by the drawer.” Edmunds v. CBC Enterprises Inc., 261 Va. 432, 436, 544 S.E.2d 324, 326 (2001). “It is well settled in this jurisdiction that since equity disregards mere form, no particular words or acts are necessary to effect an equitable assignment. The intention of the assignor is the controlling consideration.” Id. “If the assignor retains any control whatsoever over the fund or property to be assigned, then an assignment has not been effected.” Id. at 437.

“Fraud is generally determined by reviewing the conduct of the parties in relation to their legal and equitable duties to one another; unconscionability is more concerned with the intrinsic fairness of the terms of the agreement in relation to all attendant circumstances, including the relationship and duties between the parties.” Drewry v. Drewry, 8 Va. App. 460, 472, 383 S.E.2d 12, 18 (1989).

“A party may be free of fraud but guilty of overreaching or oppressive conduct in securing the agreement which is so patently unfair that courts of equity may refuse to enforce it.” Drewry v. Drewry, 8 Va. App. 460, 472, 383 S.E.2d 12, 18 (1989). Further, “[u]pon the theory of implied or quasi-contract based on equitable principles, the law will not allow a person to be unjustly enriched at the expense of another.” Hamm v. Scott, 258 Va. 35, 38-39, 515 S.E.2d 773, 775 (1999).

Unconscionable Contracts

“When a court considers whether a contract is unconscionable, adequacy of price or quality of value transferred in the contract is of initial concern.” Drewry v. Drewry, 8 Va. App. 460, 472, 383 S.E.2d 12, 18 (1989). If a ‘gross disparity in the value exchanged’ exists then the court should consider ‘whether oppressive influences affected the agreement to the extent that the process was unfair and the terms of the resulting agreement unconscionable.’” Id.

A party alleging that the terms of the agreement are unconscionable “bore the burden of proving that allegation by clear and convincing evidence.” Pelfrey v. Pelfrey, 25 Va. App. 239, 244, 487 S.E.2d 281, 284 (1997). “Historically, a bargain was unconscionable in an action at law if it was ‘such as no man in his senses and not under delusion would make on the one hand and as no honest and fair man would accept on the other.’” Id. (quoting Derby, 8 Va.App. at 28, 378 S.E.2d at 78–79).

“If inadequacy of price or inequality of value are the only indicia of unconscionability, the case must be extreme to justify equitable relief.” Id. Derby, 8 Va.App. at 28, 378 S.E.2d at 79. Other unfair and inequitable incidents in addition to the inadequacy, however, may more readily justify relief. Derby v. Derby, 8 Va. App. 19, 28, 378 S.E.2d 74, 79 (1989).  Thus:

When the accompanying incidents are inequitable and show bad faith, such as concealments, misrepresentations, undue advantage, oppression on the part of the one who obtains the benefit, or ignorance, weakness of mind, sickness, old age, incapacity, pecuniary necessities, and the like, on the part of the other, these circumstances, combined with inadequacy of price, may easily induce a court to grant relief, defensive or affirmative.

Id. at 28-29 (citing Pomeroy, Equity Jurisprudence § 928 (5th ed. 1941)).

In Owens v. Owens, 196 Va. 966, 86 S.E.2d 181 (1955), “the complainant tried to set aside a deed which purported to grant his brother his entire interest in their father’s estate in consideration of $5,000 to settle some bad check charges.” Derby v. Derby, 8 Va. App. 19, 30, 378 S.E.2d 74, 80 (1989) (citing Owens v. Owens, 196 Va. 966, 86 S.E.2d 181 (1955)). The plaintiff’s interest in the estate totaled about $34,000, and he testified that he thought that the deed was to secure only that $5,000 advanced by the defendant. Eventhough the court noted that “‘[c]ourts cannot relieve one of the consequences of a contract merely because it was unwise,’” it set aside the deed further noting that “‘where inadequacy of price is such as to shock their conscience, equity is alert to seize upon the slightest circumstance indicative of fraud, either actual or constructive.’” Id. (quoting Owens v. Owens, 196 Va. 966, 974 86 S.E.2d 181 (1955)). The court found fraud and set aside the deed observing that “defendant’s brother was a trustee of the estate and that the parties were therefore in a confidential fiduciary relationship.” Derby v. Derby, 8 Va. App. 19, 30, 378 S.E.2d 74, 80 (1989).

 Constructive Fraud

“Constructive fraud is a ‘[b]reach of legal or equitable duty which, irrespective of moral guilt, is declared by law to be fraudulent because of its tendency to deceive others and violate confidence.’” Drewry v. Drewry, 8 Va. App. 460, 469, 383 S.E.2d 12, 16 (1989) (quoting Wells v. Weston, 229 Va. 72, 77, 326 S.E.2d 672, 675-76 (1985)). “The duty by which conduct is measured to determine fraud is established by the relationship and circumstances which exists between parties.” Id. (citing Blum v. Blum, 59 Md.App. 584, 594, 477 A.2d 289, 294 (1984).

Drewry v. Drewry, 8 Va. App. 460, 469, 383 S.E.2d 12, 16 (1989).

“[T]o establish constructive fraud one must prove the following by clear, cogent, and convincing evidence: that there was a material false representation, that the hearer believed it to be true, that it was meant to be acted on, that it was acted on, and that damaged was sustained.” Drewry v. Drewry, 8 Va. App. 460, 470-71, 383 S.E.2d 12, 17 (1989) (citing Nationwide Ins. Co. v. Patterson, 229 Va. 627, 629, 331 S.E.2d 490, 492 (1985)) (emphasis added). For constructive fraud to exist, the party seeking to avoid a contract need not show that there was an actual “intent to deceive” by the other party, but it is necessary to prove that there has been a material misrepresentation. Drewry v. Drewry, 8 Va. App. 460, 471, 383 S.E.2d 12, 17 (1989) (citing Moore v. Gregory, 146 Va. 504, 523, 131 S.E. 692, 697 (1925)).

Rules relating to a beneficiary under ERISA

“Although ERISA requires that benefits provided under the plan may not be assigned or alienated . . . , the Retirement Equity Act of 1984 (“REA”) . . . amended ERISA to allow designation of a beneficiary other than the surviving spouse in two narrow circumstances: first, pursuant to a QDRO, . . . and second, through spousal consent, . . . .” Griffin v. Griffin, 62 Va. App. 736, 770, 753 S.E.2d 574, 590 (2014) aff’d sub nom. Cowser-Griffin v. Griffin, 140350, 2015 WL 798707 (Va. Feb. 26, 2015).

“A spouse properly waives his or her surviving spouse beneficiary designation only when the spouse of the participant consents in writing to such election, such election designates a beneficiary (or form of benefits) which may not be changed without spousal consent . . . . Id. at 772, n.12. Further, the spouse’s consent must be “witnessed by a plan representative or a notary public.” Id.

The Virginia Court of Appeals has held that, the long line of precedent, including the Fourth Circuit and ERISA’s own provisions . . . provide that a surviving spouse’s benefits are vested at the time of the participant’s death.” Griffin v. Griffin, 62 Va. App. 736, 773, 753 S.E.2d 574, 592 (2014) aff’d sub nom. Cowser-Griffin v. Griffin, 140350, 2015 WL 798707 (Va. Feb. 26, 2015). It has also been held that, “[t]he insured’s beneficiary designation takes precedence over any court order for divorce, annulment, or separation unless that order has been received by the appropriate office prior to the insured’s death.” Id. at 41. Additionally, any “designation, change, or cancellation of beneficiary in a will or any other document not witnessed and filed as required by [5 C.F.R. § 870.802] has no legal effect with respect to [FEGLI] benefits.” Id. (citing 5 C.F.R § 870.802(c)).

“‘[U]nder ERISA preemption, [state] law cannot affect ERISA’s determination of the proper beneficiary,’ and ‘ERISA provides that a plan administrator must distribute the proceeds of the insurance policy to the named beneficiary.’” Maretta v. Hillman, 283 Va. 34, 55, 722 S.E.2d 32, 43 (2012) aff’d, 133 S. Ct. 1943, 186 L. Ed. 2d 43 (2013) (quoting Sweebe v. Sweebe, 474 Mich. 151, 712 N.W.2d 708 (2006)).  However, “after the benefits are properly distributed under ERISA,” the issue of whether such named beneficiary could “lawfully retain them was an issue governed exclusively by [state] law.” Id.

Courts have held that “a voluntary waiver did not override the beneficiary designation.” Van Den Broek v. Tang, 88 Va. Cir. 65, 2014 WL 7686264, at *9 (2014) (See Metro. Life Ins. Co. v. Thompson, 968 F. Supp. 312, 314 (S.D. Miss. 1997) (“[A]lthough this court is unaware of a case which specifically addresses a beneficiary’s purported waiver of FEGLI benefits through a prenuptial agreement, it is nonetheless clear that no matter what type of contract the insured executes to the contrary, a designated beneficiary prevails against all other claimant.”)(citing O’Neal v. Gonzalez, 839 F.2d 1437 (11th Cir.1988) (finding that an “insured’s designation of beneficiary under FEGLI prevails for all purposes” despite contractual agreement to do otherwise)).

 Validity of the agreement on grounds of indefiniteness or contingent nature

In the context of contract for the sale of real estate, court has held that “although a legally sufficient, signed writing may consist of any kind of writing, from a solemn deed down to mere hasty notes or memorandum in books or papers, the writing must nonetheless contain all the essential terms of the agreement.” Moorman v. Blackstock, Inc., 276 Va. 64, 75, 661 S.E.2d 404, 409 (2008). “If the court cannot ascertain from the letters themselves or from some other writing therein referred to the essential terms of the contract, the writing does not take the case out of the statute” of frauds. Reynolds v. Dixon, 187 Va. 101, 107, 46 S.E.2d 6, 8-9 (1948).

“The essential terms to a contract . . . include the names of the parties, the terms and conditions of the contract, and a description of the property sufficient to render it capable of identification.” Moorman v. Blackstock, Inc., 276 Va. 64, 75, 661 S.E.2d 404, 409 (2008). “Perhaps most importantly, ‘mutuality of assent—the meeting of the minds of the parties—is an essential element of all contracts. Until the parties have a distinct intention common to both . . . there is a lack of mutual assent and, therefore, no contract.’” Id. (quoting Phillips v. Mazyck, 273 Va. 630, 636, 643 S.E.2d 172, 175 (2007). “Mutual assent is determined ‘exclusively from those expressions of [the parties’] intentions which are communicated between them.’” Id. (quoting Lucy v. Zehmer, 196 Va. 493, 503, 84 S.E.2d 516, 522 (1954)).

It has been held that “[a]n assignment of a thing which has no existence, actual or potential, at the time of the execution of the deed is void at law.” First Nat. Bank v. Turnbull, 73 Va. 695, 701-02, 1880 WL 6146 (1880). However, it has also been held that “a valid equitable assignment may be made of things not in actual or potential existence at the time of the assignment. ” Lynch v. Com., 131 Va. 769, 109 S.E. 418, 419 (1921). “[T]he actual or potential existence of the thing sold is an essential element of a sale. Lynch v. Com., 131 Va. 769, 109 S.E. 418, 419 (1921). “While a mere possibility or contingency not founded on a right or coupled with an interest cannot be the subject of a present sale, * * * it may often be of an executory contract to sell.Id.

“The subject matter of the alleged assignment is a contingent entitlement to certain benefits, i.e., an entitlement which may or may not vest sometime in the future. That entitlement, however, is one coupled with an interest, an interest derived from contract. As such, it is a proper subject of assignment.”  Kelly Health Care, Inc. v. Prudential Ins. Co. of Am., Inc., 226 Va. 376, 379, 309 S.E.2d 305, 306-07 (1983).

Meeting of the minds

“A contract exists where the parties reach a meeting of the minds on the material terms of the agreement.” Robbins v. Lapteff, 870 F.2d 655, 1989 WL 21451, at *1 (4th Cir. 1989) (citing Chittum v. Potter, 219 S.E.2d 859, 863 (Va.1975)).  “‘It is elementary that mutuality of assent—the meeting of the minds of the parties—is an essential element of all contracts.’” Phillips v. Mazyck, 273 Va. 630, 636, 643 S.E.2d 172, 175 (2007) (quoting Lacey v. Cardwell, 216 Va. 212, 223, 217 S.E.2d 835, 843 (1975)). “Until the parties have a distinct intention common to both and without doubt or difference, there is a lack of mutual assent and, therefore, no contract.” Id. “It is crucial to a determination that a contract exists … that the minds of the parties have met on every material phase of the alleged agreement.” Id. (quoting Chittum v. Potter, 216 Va. 463, 467, 219 S.E.2d 859, 863 (1975)).

Validity of agreement as to inducement or fraud

Stated in general terms, equity will not enforce specific performance of a contract unless it be equitable, and free from fraud, misrepresentation, or mistake. The burden is on the assailant of the contract to establish the vice he relies on by clear, cogent and convincing evidence. Seaboard Ice Co. v. Lee, 199 Va. 243, 251, 99 S.E.2d 721, 727 (1957). “It is equally well settled that equity will not enforce specifically an agreement entered into under misapprehension or mistake of fact.” Id. (citing 17 M.J., Specific Performance, § 36, page 57; 81 C.J.S., Specific Performance, § 42, page 518 and § 88, page 605; 49 Am. Jur., Specific Performance, § 54, page 69; 76 C.J.S., Release, § 25, pages 645 et seq.; 45 Am. Jur., Release, § 20, page 685; Atlantic Greyhound Lines, Inc., etc. v. Metz, 70 F.2d 166). “It is difficult to formulate fixed rules relating to the avoidance of a release of a claim . . . on the ground of mistake. There are so many factors to be considered that general rules are likely to be inaccurate or misleading.” Seaboard Ice Co. v. Lee, 199 Va. 243, 251, 99 S.E.2d 721, 726 (1957). “Each case must be determined under the particular circumstances attending the formulation and execution of the contract.” Id. (citing Annotation 48 A.L.R., pages 1462 et seq).

Mental Capacity

“The law presumes that every adult party who executes an agreement is mentally competent to enter into a contract.” Drewry v. Drewry, 8 Va. App. 460, 467, 383 S.E.2d 12, 15 (1989) (citing Chesapeake & Ohio Ry. Co. v. Mosby, 93 Va. 93, 94, 24 S.E. 916, 916 (1896). “A party may rebut that presumption by proof that when the person executed the agreement he or she lacked the capacity to understand the nature and consequences of the transaction.” Id. (citing Lohman v. Sherwood, 181 Va. 594, 607, 26 S.E.2d 74, 79-80 (1943)).

However,“weakness of mind short of insanity; or immaturity of reason in one who has obtained full age; or the mere absence of experience or skill upon the subject of the particular contract affords per se, no ground for relief at law or in equity.” Drewry v. Drewry, 8 Va. App. 460, 467, 383 S.E.2d 12, 15 (1989). “The party’s capacity or condition before and after executing the agreement is relevant evidence to determine competency, but the dispositive question is the individual’s mental capacity to understand the nature of the agreement and the consequences of his or her act at the time the agreement is executed.” Id. “The party must have ‘sufficient mental capacity to understand the nature of and effect of the transaction . . . .” Id.

“While an . . . agreement is voidable due to intoxication, it is voidable only if the intoxication is so excessive as to render the person incapable of exercising his judgment or understanding the nature of the agreement and the consequences of its execution.” Lucy v. Zehmer, 196 Va. 493, 503, 84 S.E.2d 516, 522 (1954) “If his words and acts, judged by a reasonable standard, manifest an intention to agree, it is immaterial what may be the real but unexpressed state of his mind.” Id.

“When mental capacity is in issue, every case must depend on the circumstances surrounding the execution of the instrument involved, as the facts in one case seldom serve to illuminate or elucidate another.” McGrue v. Brownfield, 202 Va. 418, 424, 117 S.E.2d 701, 706 (1961) (citing Lohman v. Sherwood, 181 Va. 594, 594, 26 S.E.2d 74 (1943)).).

In the context of sale, it has been held that:

[Whenever] there is great weakness of mind in a person executing a conveyance of land, arising from age, sickness, or any other cause, though not amounting to absolute disqualification, and the consideration given for the property is grossly inadequate, a court of equity will upon proper and seasonable application of the injured party, or his representatives or heirs, interfere and set the conveyance aside, since from these circumstances, imposition or undue influence will be inferred.

Id.

CONCLUSION(S)

It is well-settled in Virginia that since equity disregards mere form, no particular words or acts are necessary to effect an equitable assignment. The intention of the assignor is the controlling consideration. It has been held that when the subject matter of the alleged assignment is a contingent entitlement to certain benefits, and when it is one coupled with an interest, it can be assigned. Thus, in equity, Clark properly assigned the insurance proceeds.

However, from the foregoing law, it can be seen that the agreement at issue may be invalidated as an unconscionable contract due to the disparity in value for which the right over the insurance proceeds has been assigned to the decedent’s son. A court of equity may interfere and set the assignment aside due to the circumstances in this case and may infer undue influence and fraud. A court may take into consideration the inadequacy of price or inequality of value to find unconscionability, and may readily grant relief of setting aside the agreement if other unfair and inequitable incidents along with inadequacy exist. Such factors which may be considered inequitable are concealments, misrepresentations, undue advantage, oppression on the part of the one who obtains the benefit, or ignorance, weakness of mind, sickness, old age, incapacity, or pecuniary necessities.

Here, Clark has several factors which she may raise in support of her claim, like concealment and misrepresentation on the part of decedent’s son, undue advantage, oppression on the part of the decedent’s son who obtained the benefit, her ignorance of the policy and the amount entitled to her as proceeds, weakness of mind due to the accidental death of her partner and the accompanying grief, intoxication due to the alcohol she consumed, and mental instability. These facts and circumstances, combined with inadequacy of price, may easily induce a court to grant relief. This agreement may not be voidable on the ground of intoxication alone because to be voidable on the intoxication, it should be so excessive as to render the assignor incapable of exercising her judgment or understanding the nature of the agreement and the consequences of its execution, at the time the agreement is executed.

Further, under ERISA, a beneficiary can be changed by the insured person only through a Qualified Domestic Relations Order (a QDRO) or through spousal consent which can only be executed when the insured party is alive. Clearly, neither of these exceptions apply to the instant case. However, it is mandatory that the insurance proceeds can only be distributed to the named beneficiary in the policy, which is Clark. Moreover, Courts have held that an insured’s designation of beneficiary prevails for all purposes despite contractual agreement to do otherwise. This is a limitation on the insurance company, however, and not Clark.

Further, per the provisions in the concerned life policy with regard to assignment and change in beneficiary, Clark is entitled to the insurance proceeds.