District Court Finds ERISA Law Governed Life Insurance Proceeds Deposited with Court in Interpleader Action

In The Lincoln National Life Insurance Company v. Subramaniam, et al, No. 21-CV-12984, 2023 WL 1965430 (E.D. Mich. Feb. 13, 2023) Michigan Southern District Judge Judith E. Levy found that contrary to Defendant’s assertion, the Employee Retirement Income Security Act of 1974 (“ERISA”), and not state law, continues to apply when life insurance proceeds are deposited into the registry of the Court.  The Court overruled Defendant in Interpleader’s objections and adopted the Magistrate Judge’s report and recommendation granting summary judgment.

This interpleader litigation arose after decedent, upon divorcing and remarrying, failed to complete a new enrollment form to designate his new spouse as his life insurance beneficiary. Lincoln interpleaded naming both decedent’s ex-wife and his current wife, and depositing the life insurance proceeds with the Court. On the ex-wife’s motion for summary judgment, the Magistrate Judge’s report recommended that the Court grant the motion. Decedent’s wife objected on two grounds: (1) the report erred in failing to find sufficient evidence to impose a constructive trust; and (2) the issue of whether the life insurance proceeds are governed by ERISA is irrelevant given that once they are paid into the Court, they lose whatever protections may be afforded under ERISA.

As for the first objection, Defendant argued that the Magistrate Judge mistakenly relied on authority that applied Ohio law, which applied a stricter “clear and convincing” standard, instead of Michigan law, which did not. The Court determined that while Defendant was correct that Michigan law should have been applied, she did not demonstrate that a constructive trust was warranted, because she did not show that the subject property had been obtained through fraud, misrepresentation, concealment or any other circumstance which would render the result unconscionable, as required by Michigan law. The Court found that the ex-wife in no way contributed to the reasons for imposing a constructive trust.

In her second objection, Defendant argued that once the life insurance proceeds were deposited with the Court, ERISA no longer applied and both the divorce decree and Michigan contract law would govern. The Court found that Defendant was mistaken, citing Gray v. Aetna Life Ins. Co., 2012 WL 1252572 at *2 (W.D. Tenn. Apr. 13, 2012), that held “once the benefits [of an ERISA employee welfare benefit plan] have been released to the properly designated beneficiary, the district court has the discretion to impose a constructive trust upon those benefits in accordance with applicable state law if equity so requires.” The Court found that Gray did not support Defendant’s argument that the Court must apply state law over ERISA once the benefits are released, as it was in the Court’s discretion and not mandatory. Moreover, Defendant also failed to demonstrate that the Court was the “properly designated beneficiary” and that the benefits had therefore been released so as to justify the discontinued application of ERISA law. The Court granted summary judgment to the ex-wife.

As this case demonstrates, entitlement to ERISA life insurance proceeds can be a difficult arena to navigate, particularly in an interpleader action. If you are faced with competing claims to life insurance proceeds you believe are owed to you, contact us for assistance.