JAMES LEE HOLMAN V. SUE RODES HOLMAN
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RENDERED : JUNE 13 ,2002
HED
TO BE PUB
JAMES LEE HOLMAN
V.
ON APPEAL FROM THE COURT OF APPEALS
97-CA-000736-MR
FAYETTE CIRCUIT COURT NO. 95-CI-2775
APPELLEE
SUE RODES HOLMAN
OPINION OF THE COURT BY JUSTICE KELLER
REVERSING AND REMANDING
! . ISSUE
This appeal presents an issue of first impression in Kentucky . After thirteen (13)
years of service as a firefighter, but before his pension vested, Appellant became totally
and permanently occupationally disabled. Appellant retired and began receiving
monthly disability retirement benefits . When his marriage to the Appellee was dissolved
several years later, the trial court classified Appellant's future entitlement to disability
retirement benefits as marital property and awarded Appellee a portion of those
benefits . Were Appellant's disability retirement benefits properly classified as marital
property? We hold that disability retirement benefits are properly classified as marital
or nonmarital property according to the character of the property they replace .
Accordingly, Appellant's future, post-dissolution disability retirement benefits, which
replace his future nonmarital earnings as a firefighter, constitute Appellant's separate
nonmarital property.
II . BACKGROUND
The material facts regarding Appellant's pension were stipulated to by the parties
and are therefore undisputed . In 1974, the Appellant went to work as a firefighter with
the Lexington-Fayette Urban County Government (LFUCG) . The parties married seven
(7) years later in 1981 . Six (6) years later, in 1987, Appellant retired from his firefighter
position due to total and permanent occupational disability' and began receiving
monthly benefit payments that will continue throughout his lifetime so long as his
disability continues . The parties' marriage was dissolved in 1997.
At the time of his marriage, Appellant had contributed $6,859 .00 towards his
pension with LFUCG, and he contributed an additional $11,206.40 during his marriage
for a total contribution of $18,065.40 . At the time of his retirement, his pension had not
vested3 because he had not "completed at least twenty (20) years of total service .
,4
'KRS 67A.360(16) ("'Total disability' shall mean a disability which substantially
precludes a person from performing with reasonable regularity the substantial and
material parts of any gainful work or occupation in the service of the department that he
would be competent to perform were it not for the fact that the impairment is founded
upon conditions which render it reasonably certain that it will continue indefinitely[ .]"
(emphasis added)) .
2KRS 67A.462(1) ("Any member whose medical examination reveals that he is
no longer totally and permanently disabled within the meaning of KRS 67A.360(16)
shall be disqualified from further receipt of disability benefits.") .
'See Grace Ganz Blumberg, "Marital Property Treatment of Pensions, Disability
Pay, Workers' Compensation, and Other Wage Substitutes : An Insurance, or
Replacement," 33 UCLA L. Rev . 1250, 1259 (1986) (hereinafter "Blumberg") ("A
pension vests when an employee completes the period of employment required to
secure an indefeasible entitlement to a pension payable upon retirement. Once the
pension vests, the employee may leave his job for any reason and still receive benefits
when he eventually retires.") Until the employee fulfills the time period requirement, the
pension is classified as "nonvested ." Id . at 1260 ; L . Graham & J . Keller, 15 Kentucky
Practice, Domestic Relations Law (2nd e ed .) § 15 .21 at 527 (West 2000) (hereinafter
"Graham & Keller") ("[P]ension benefits are vested when the plan participant has a right
to receive the benefits on termination for any cause, with only the amount to be fixed .").
(continued...)
Accordingly, if Appellant had terminated his employment with LFUCG in 1987 without
being found occupationally disabled, he would have been entitled to receive only his
$18,065 .40 contribution .
The parties disagreed as to whether Appellant's future entitlement to retirement
disability benefits from LFUCG constituted marital property . The trial court recognized
the issue as one of first impression and characterized Appellant's retirement disability
payments as marital property subject to equitable division because Appellant was able
to work
in
another capacity despite his disability :
It appears to the Court that a determination must be made
whether or not this disability retirement fund should be
viewed differently than other retirement funds . This Court
also believes that a determination must be made on a caseby-case basis.
Case law indicates that disability payments are different in
that it is compensation for the inability to earn wages from
that occupation in the future . In many cases, this may be
true in that the party receiving the disability payments may
not be able to work in his chosen field and often can not
work in any field in which he could earn approximately the
same income . The case under submission is distinguished
in that [Appellant] has been able to earn a living by owning
and operating his own business .
This Court holds that the retirement account is marital
property, subject to division and distribution by the Court,
( . . .continued)
Although a pension is vested, until the employee satisfied all of the conditions for
receipt of benefits, the pension is classified as vested but immature . Blumberg, supra,
at 1259-60 . However, "[o]nce [the employee] satisfies these conditions, [the
employee's] pension matures: [the employee] has an immediate right to the benefits .
Blumberg, supra, at 1260 ; Graham & Keller, supra at 527 ("If a plan participant has a
current right to the benefits, they are known as 'mature' benefits .") .
4 KRS 67A.410(2)
5 KRS 67A .500(1) ("Upon withdrawal from service prior to retirement, a member
shall be entitled to receive a refund of the amount of contributions made by the member
. . . without interest .").
even though it is based on a disability . It was serving as
income since the retirement and can not be viewed only as
compensation for the [Appellant] not being able to work or
as payment for pain and suffering due to an occupational
disability .
Therefore, the [Appellee] is entitled to one-half of the
marital contribution, which is 31 % of the monthly payments.
On appeal, the Court of Appeals held that "[a]bsent a specific statutory exemption,
disability payments must be deemed marital" and affirmed the trial court. We disagree
and reverse.
III. STANDARD OF REVIEW
Appellee argues that this Court may review the trial court's determination that
Appellant's disability benefits were marital property only for clear error. We disagree .
Whether a disability retirement is classified as marital or nonmarital property involves an
application of the statutory framework for equitable distribution of property upon divorce
and therefore constitutes a question of law subject to this Court's independent
determination . 6
IV. CLASSIFICATION OF DISABILITY BENEFITS
While the classification of disability pension benefits is an issue of first
impression for Kentucky appellate courts, other jurisdictions have resolved similar
issues using widely different approaches . The Tennessee Supreme Court recently
outlined the various approaches that courts have utilized in determining the character of
disability payments :
6See Hardin County Schools v Foster and News-Enterprise, Ky., 40 S.W .3d 865
(2001) (opining that questions of statutory interpretation are questions of law and that
the standard of review involves examining plain meaning and legislative intent) ;
Uninsured Employers' Fund v . Garland , Ky., 805 S .W .2d 116 (1991) (holding that on
questions of law a reviewing court has greater liberty to discern whether conclusions
were supported by evidence) ; 5 Am .Jur .2d, Appellate Review §§ 684, 698 (1995) .
Like Tennessee, no other state has a statute that either
specifically designates disability benefits as marital property
or specifically excludes such benefits from the definition of
marital property . Although this lack of explicit statutory
guidance has produced a substantial body of case law on
the subject, given the differing purposes of disability
benefits, courts are split on the proper classification .
Those courts which hold that disability benefits constitute
marital property have advanced several rationales for this
conclusion . Under one approach, which has been referred
to as the "mechanistic approach," courts consider whether
disability benefits have been specifically excepted from the
definition of marital property by statute . Disability benefits
will be considered marital property unless there is a statutory
provision specifically excluding disability benefits from the
marital estate .
Another rationale given in support of the mechanistic
approach is that disability benefits should be considered
marital property because the policy premiums were paid with
marital funds or the marital estate acquired the benefits as a
form of compensation for spousal labor during the marriage,
much like a pension .
However, the majority of courts considering the proper
classification of disability benefits have adopted the
analytical approach which focuses on the nature and
purpose of the specific disability benefits at issue. Under
this approach, benefits which actually compensate for
disability are not classified as marital property because such
benefits are personal to the spouse who receives them and
compensate for loss of good health and replace lost earning
capacity . However, where the facts warrant, courts utilizing
the analytical approach will separate the benefits into a
retirement component and a true disability component, with
the retirement component being classified as marital
property and the disability component being classified as
separate property. This approach has been applied both to
disability benefits paid in connection with insurance
coverage maintained by the disabled spouse's employer and
to disability benefits paid in connection with a private policy
of disability insurance acquired with marital funds during the
marriage .'
7Gragg
v. Graqa , 12 S.W .3d 412, 417 (Tenn. 2000) (footnotes and internal
citations omitted) .
In addition to the approaches noted by the Tennessee Supreme Court is an
approach recommended by the American Law Institute which, similar to the "analytical
approach" or "purpose analysis," $ classifies such benefits according to the nature of the
property they replace rather than by the source of the funds used to acquire the benefit:
"Disability pay and workers' compensation benefits are marital property to the extent
they replace income or benefits the recipient would have earned during the marriage
but for the qualifying disability or injury ."9 Such benefits are therefore classified "as
marital property to the extent they replace earnings during the marriage, and as
separate property to the extent they replace earnings before or after the marriage,
without regard to how or when the benefit was acquired ."'°
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 :
"[M]arital property" means all property acquired by either
spouse subsequent to the marriage except:
(a) Property acquired by gift, bequest, devise, or descent
during the marriage and the income derived therefrom
unless there are significant activities of either spouse which
contributed to the increase in value of said property and the
income earned therefrom;
(b) Property acquired in exchange for property acquired
before the marriage or in exchange for property acquired by
gift, bequest, devise, or descent;
(c) Property acquired by a spouse after a decree of legal
separation ;
'See "Classifying Disability Benefits," 14 No. 9 Equitable Distribution J . 97, 99
(National Legal Research Group, Inc. 1997) .
'PRINCIPLES OF THE LAw OF FAMILY DISSOLUTION: ANALYSIS AND RECOMMENDATIONS
§ 4 .08(2)(b) (American Law Institute, Proposed Final Draft, Part I, 1997).
'O ld . at § 4 .08(2)(b), comment (b) .
(d) Property excluded by valid agreement of the parties ;
and
(e) The increase in value of property acquired before the
marriage to the extent that such increase did not result from
the efforts of the parties during marriage ."
Kentucky permits division as marital property of both vested and nonvested
12
Retirement benefits are classified as
retirement benefits earned during the marriage .
marital property not because the General Assembly failed to include them within the
exclusions, but rather because they are a form of deferred compensation or savings
earned during the marriage" similar to income earned or savings accumulated during
'4
In contrast, disability benefits are not a form of deferred compensation
the marriage .
or savings. Post-dissolution disability benefits replace wages or income loss after the
marriage, and, accordingly disability benefits should be treated differently from
retirement benefits :
11 KRS 403.190(2) . See also Travis v. Travis , Ky., 59 S.W.3d 904, 908-909
(2001) ("Thus, in dissolution of marriage actions, a trial court's division of the parties'
property requires a three-step process : (1) the trial court first characterizes each item of
property as marital or nonmarital ; (2) the trial court then assigns each party's nonmarital
property to that party; and (3) finally, the trial court equitably divides the marital property
between the parties .") ; Louise Everett Graham, "Using Formulas to Separate Marital
and Nonmarital Property : A Policy Oriented Approach to the Division of Appreciated
Property Upon Divorce," 73 Ky.L .J . 41,45 (1984) (explaining that KRS 403 .190 requires
the determination of the separate assets of each spouse prior to the equitable division
of the marital estate) .
"Graham & Keller, supra note 3 at § 15.21 .
13Brosick v . Brosick, Ky.App., 974 S .W .2d 498 (1998) ; Graham & Keller, supra
note 3 at § 15 .21 .
Historically, Kentucky case law has treated income during the marriage,
including income from nonmarital property, as marital property . See Brunson v.
Brunson , Ky.App ., 569 S.W.2d 173 (1978) ; Sousley v. Sousley , Ky., 614 S .W.2d 942
(1981) ; Dotson v. Dotson , Ky., 864 S.W.2d 900 (1993); Graham & Keller, supra note 3
at § 15.6 (2002 Pocket Part). However, in 1996, the General Assembly amended KRS
403 .190(2)(a) so that income from gifted or inherited property will be marital only if one
spouse's activities contribute to the production of the income. Id.
14
Pension and retirement benefits compensate individuals
who live past retirement age . Such benefits constitute
deferred compensation for services rendered and function
as a substitute for life savings. Like any joint savings
accumulated during the marriage, pension and retirement
benefits are subject to distribution as marital property upon
divorce . On the other hand, disability benefits do not
substitute for savings but instead 'protect against the inability
of an individual to earn the salary or wages to which he or
she was accustomed in the immediate past.' Generally,
therefore, disability benefits replace income which is lost
before retirement . Logic dictates that disability benefits and
income should be treated in the same manner since
disability benefits are income replacement . Since the future
income of each spouse is not classified as marital property,
disability benefits which replace future income should not be
'5
classified as marital property .
We recognize that marital funds were used to acquire Appellant's disability
coverage, but that does not change the character of the property the disability benefits
replace. Disability coverage itself has been analogized to a form of term insurance
"from which the marital partnership derived a full measure of protection during the
marriage ."'6 Like the proceeds of property insurance that take their character from the
nature of the property they replace and not from the source of the funds used to pay the
insurance premium," Appellant's disability benefits should be classified according to
the nature of the wages they replace rather than the source of the funds used to
acquire his disability coverage .
' SGrag_a v. Graaa , supra note 7 at at 418-419 (citations omitted) .
"Blumberg, supra note 3 at 1296 .
"Id. at 1281-82 ("All jurisdictions that directly address this issue classify
insurance proceeds for property damage according to the nature of the underlying
property . Thus, they ignore the source of the premiums and characterize insurance
proceeds according to the classification of the damaged property .").
Here, the Court of Appeals - following the "mechanical" or "mechanistic"
approach - based its decision on its observation that the General Assembly has not
specifically excluded disability benefits from the statutory definition of marital property.
In support of its holding, the Court of Appeals relied upon Glidewell v . Glidewell,' 8
where the Court of Appeals held that a firefighter's retirement pension was properly
classified as marital property . The Glidewell Court reasoned that "had the legislature
intended to exempt the police and firefighters' pension from division as marital property,
they could have used . . . express language" as it had in the statute exempting
teachers' retirement from division as marital property,'9 and "[s]ince they did not, it
remains classified as marital property."
2° The Court of Appeals in this case applied the
same rationale to Appellant's firefighter's disability benefits .
This leap of logic falls short of its intended landing. The fact that the legislature
did not expressly exempt a firefighter's disability benefits from classification as marital
does not mean that the legislature intended that disability benefits - like a firefighter's
retirement pension - constitute marital property under KRS 403 .190(2) . First, the lack
of express exclusion demonstrates only that the legislature gave no consideration to the
issue. Second, and more important, prior decisions of this Court and the Court of
Appeals contradict this assumption .
In Weakley v. Weaklev,2' this Court considered the question of whether a
personal injury award to a married person should be considered as marital or as
"Ky . App ., 859 S.W .2d 675 (1993) .
'9KRS 161 .700.
2°Glidewell v. Glidewell , supra note 18 at 678 .
2'Ky., 731 S .W.2d 243 (1987)
nonmarital property in the event of a dissolution of the marriage . Although personal
injury awards are not among the enumerated exceptions in KRS 403 .190, this Court
stated :
To the extent that a personal injury award for loss of
earnings and permanent impairment of ability to earn money
is applicable to the years while the marriage existed, it is
marital property . To the extent that the award can be
prorated to the remaining years of life expectancy following
the dissolution of the marriage, it is nonmarital .
However, any portion of the recovery which constitutes
damages for pain and suffering must stand on a different
footing because it is in no sense the replacement of
earnings that otherwise would have accrued during the
marriage ."
The Weaklev Court cited with approval Mosley v. Mosley 'wherein the Court of
Appeals, after first noting that none of the statutory exceptions were applicable, held
that compensation payments due to a worker following the dissolution of marriage were
the individual property of the worker and not subject to division as marital property. The
Mosle Court reasoned :
A workers' compensation award differs from a pension . A
pension accrues while one is working and, to the extent that
it has accrued and is vested prior to the dissolution of a
marriage, it must be considered with the marital estate .
Workers' compensation benefits are based on something
that happened while one was employed and, although the
event may have occurred during the time of the marriage,
the compensation is awarded to replace the injured or
diseased employee's loss of ability to work in the future .
The benefits are not earned as compensation for working ;
they are paid to assist workers who will have diminished
future earnings due to a work-caused injury or disease.
Payments that are received, or weekly benefits that have
actually accrued but have not yet been paid as of the date of
the dissolution of the marriage, are to be included as marital
22
Id . at 244-245 .
23Ky .
App., 682 S.W .2d 462 (1985) .
- 1 0-
property, just as earned income. But, payments which
accrue and are paid after the dissolution of the marriage are
not part of the marital property any more than the worker's
future earnings would be. Compensation benefits, together
with other income of a spouse, may be considered when
determining what, if any, maintenance to award to the other
spouse, but the nonworking spouse is not entitled to any
specific portion of the future income from the worker's
disability compensation ."
Accordingly, as demonstrated by Weakley and Mosle - both involving payments
analogous to disability benefits - property can be nonmarital even if not expressly
exempted from the definition of marital property.
The Court of Appeals also concluded that KRS 403.190(4) supports its holding .
Again we disagree . KRS 403 .190(4) protects a party when that party's spouse's
pension benefits are excepted from division upon dissolution of the marriage :
If the retirement benefits of one spouse are excepted from
classification as marital property, or not considered as an
economic circumstance during the division of marital
property, then the retirement benefits of the other spouse
shall also be excepted, or not considered, as the case may
be. However, the level of exception provided to the spouse
with the greater retirement benefit shall not exceed the level
of exception provided to the other spouse. Retirement
benefits, for the purposes of this subsection shall include
retirement or disability allowances , accumulated
contributions, or any other benefit of a retirement system or
plan regulated by the Employees Retirement Income
Security Act of 1974, or of a public retirement system
administered by an agency of a state or local government,
including deferred compensation plans created pursuant to
KRS 18A.230 to 18A .275 or defined contribution or money
purchase plans qualified under Section 401 (a) of the Internal
Revenue Code of 1954, as amended .
24
Id . at 463 .
25
KRS 403 .190(4) (emphasis added).
-11-
The Court of Appeals reasoned that the fact that KRS 403 .190(4) includes "disability
allowances" within its definition of retirement benefits "plainly dispels any notion that the
General Assembly intended to exempt disability allowances generally from distribution
as part of the marital estate ."
We find this reasoning flawed for two reasons. First, the definition is limited by
its own terms solely to subsection (4) and has no application to subsection (2). Second,
the more reasonable interpretation is that the General Assembly, being mindful that
"disability allowances" are properly classified as nonmarital property under subsection
(2) and therefore exempt from division, provided the same protection to a spouse
whose spouse was receiving disability benefits.
Therefore, after considering Kentucky's statutory framework for the classification
and division of property, the various approaches taken by other courts addressing this
issue, and prior appellate decisions of this state addressing personal injury and workers'
compensation awards analogous to disability benefits, we find that the better approach
is to classify disability benefits according to the nature of the wages they replace rather
than whether or not they are one of the excepted categories or whether the source of
the funds used to acquire the benefits was marital. Accordingly, we reject the
mechanical approach utilized by the Court of Appeals and
we
adopt the approach
recommended by the American Law Institute that determines the character of disability
benefits according to the character of the property those benefits replace
.26
Because
Appellant's disability benefits replace post-dissolution wages that he would have
26
See supra note 9 and surrounding text .
-12-
received as a firefighter, such benefits are appropriately classified as Appellant's
separate nonmarital property .
Finally, we would note that the trial court based its decision to classify the
benefits as marital property primarily because it found significant the fact that Appellant
was able to work at another occupation after his disability retirement . We view as
irrelevant to the classification of Appellant's disability benefits as a firefighter whether he
earned a living from another type of employment subsequent to his retirement .
Appellant's disability benefits replaced post-dissolution wages as a firefighter, and
because of his continuing disability, he still cannot earn wages as a firefighter.
For the reasons mentioned, we reverse the decision of the Court of Appeals and
remand to the trial court for it to assign Appellant's LFUCG disability benefits to him as
his nonmarital property and to reconsider its marital property distribution .
Lambert, C.J . ; Stumbo and Wintersheimer, JJ ., concur. Cooper, J ., concurs by
separate opinion in which Graves and Johnstone, JJ ., join .
COUNSEL FOR APPELLANT :
Catesby Woodford
Miller, Griffin and Marks
700 Security Trust Building
271 West Short Street
Lexington, Kentucky 40507-1292
Michael J . Cox
Miller, Griffin and Marks
700 Security Trust Building
271 West Short Street
Lexington, Kentucky 40507-1292
Susan Y. W. Chun
Miller, Griffin and Marks
700 Security Trust Building
271 West Short Street
Lexington, Kentucky 40507-1292
COUNSEL FOR APPELLEE :
Martha A . Rosenberg
308 Security Trust Building
271 West Short Street
Lexington, Kentucky 40507
RENDERED : JUNE 13, 2002
TO BE PUBLISHED
*uprtutt Tourt of
uturkV
1999-SC-0525-DG
JAMES LEE HOLMAN
V.
APPELLANT
ON APPEAL FROM THE COURT OF APPEALS
97-CA-000736-MR
FAYETTE CIRCUIT COURT NO . 95-CI-2775
SUE RODES HOLMAN
APPELLEE
CONCURRING OPINION BY JUSTICE COOPER
The only issue presented to this Court by this case is whether a disability annuity
payable to a disabled firefighter pursuant to KRS 67A .460 is divisible as marital
property in a divorce proceeding . The answer is found in KRS 67A.620, which provided
at the time of this divorce :
The right to a retirement annuity, disability annuity , survivor's annuity or
benefit, death benefit, or any other benefit under the provision hereof, by
whatever name called, or refund, is personal with the recipient thereof,
and the assignment, garnishment, execution or transfer of such benefit or
any part thereof shall be void, except as herein provided . Any such
annuity, benefit or refund shall not answer for debts contracted by the
person receiving the same, and it is the intention of this section that they
shall not be attached or affected by any judicial proceeding . (Emphasis
added .)
Similar, though less explicit, language in the United States Code pertaining to
social security benefits, 42 U .S .C . § 407(a),' military retirement benefits, 10 U .S .C . §
1440, 2 and railroad retirement benefits, 4:5 U .S .C . § 231m(a) ,3 has consistently been
held to preclude a division or setoff of those benefits as marital or community property
in a divorce action, e.g . :
Social security benefits : Gross v . Gross, Ky. App., 8 S.W.3d 56, 58 (1999)
(though such benefits can be considered in determining the "economic circumstances"
of the respective parties pursuant to KRS 403.190(1)(d)) ; see also In re Marriage of
Boyer, 538 N .W.2d 293 (Iowa 1995) ; Pongonis v . Pongonis , 606 A.2d 1055 (Me . 1992) .
Military retirement benefits : McCarty v. McCartv, 453 U .S . 210, 226-28, 101
S.Ct . 2728, 2738-39, 69 L .Ed .2d 589 (1981), further holding that such benefits are also
"'4
not subject to division because "retired pay is a 'personal entitlement (compare that
language with "personal with the recipient" in KRS 67A.620).
The right of any person to any future payment under this title
shall not be transferable or assignable, at law or in equity,
and none of the moneys paid or payable or rights existing
under this title shall be subject to execution, levy,
attachment, garnishment, or other legal process, or to the
operation of any bankruptcy or insolvency law.
2
[N]o annuity payable under this subchapter is assignable or
subject to execution, levy, attachment, garnishment, or other
legal process .
3
[N]o annuity or supplemental annuity shall be assignable or
be subject to any tax or to garnishment, attachment or other
legal process under any circumstances whatsoever, nor
shall the payment thereof be anticipated .
4 Congress subsequently enacted The Uniformed Services Former Spouses
Protection Act (Public Law 97-252), 10 U.S .C . 1408, to permit division of "disposable
retired or retainer pay," but not disability retirement pay. Davis v . Davis , Ky., 777
S.W.2d 230 (1989).
Railroad retirement benefits : Hisquierdo v . Hisquierdo , 439 U .S . 572, 583-87, 99
S .Ct. 802, 809-11, 59 L.Ed .2d 1 (1979) ; Frost v. Frost, Ky. App., 581 S.W.2d 582
(1979) .
Any doubt as to whether KRS 67A.620 was intended by the General Assembly to
shield a firefighter's retirement annuity from division or attachment in a divorce
proceeding was erased when the General Assembly amended the statute in 1998 to
permit attachment for court ordered child support but, significantly, omitted any
language permitting attachment for court ordered division of marital property or spousal
maintenance . 1998 Ky. Acts, ch. 255, § 33 . Thus, this case could and should be
decided solely within the framework of the statutory scheme of KRS 67A.360-.690 .
And, even if the General Assembly had not enacted KRS 67A.620, this case could be
decided by application of existing Kentucky law established in Mosley v. Moslev , Ky .
App., 682 S.W .2d 462 (1985) (post-dissolution installments of workers' compensation
benefits are not marital property because they replace diminished future earnings due
to a work-related injury or disease) .
Kentucky has long adhered to the principle that the determination of whether
property is classified as marital or nonmarital depends primarily on "the time at which
equity is acquired and the source of the funds used to acquire that equity ." Louise E .
Graham and James E. Keller, 15 Kentucky Practice Domestic Relations Law § 15 .62,
at 598 (2d ed . West 1997) ; see also Louise E. Graham, Using Formulas to Separate
Marital and Nonmarital Property : A Policy Oriented Approach to the Division of
Appreciated Property on Divorce , 73 Ky. L .J . 41, 44 (1984-85). Thus, in Newman v.
Newman , Ky., 597 S .W.2d 137, 139 (1980), the investment of the husband's
$52,000 .00 inheritance in the purchase of the marital residence was held to create a
proportionate nonmarital interest in that same residence upon dissolution of the
marriage ; in Daniels v. Daniels, Ky. App., 726, S.W.2d 705 (1986), overruled on other
grounds, Neidlinger v. Neidlinger , 52 S.W.3d 513 (2001), common stock purchased
during the marriage was classified as the husband's nonmarital property because the
funds used to purchase the stock were traceable to the husband's inheritance; in
Brandenburg v. Brandenburg , Ky. App ., 617 S .W .2d 871, 872 (1981), "nonmarital
contribution" was defined as creation of equity by amounts expended after the marriage
by either spouse from traceable nonmarital funds; and in Jessee v. Jessee , Ky . App.,
883 S .W.2d 507 (1994), expenditure of the husband's lump sum workers'
compensation settlement to purchase the parties' residence was held to be a
nonmarital contribution insofar as the settlement represented lost wages that accrued
prior to the marriage .
If it were necessary to decide this case without reference to KRS 67A.620 (and it
is not), I would simply hold that the principle adopted in Mosley, supra, creates an
exception to the "source of funds" rule for disability pensions and avoid the multiplicity
of dicta in the majority opinion that could lead a reader to believe that our decision here
represents a departure from the "source of funds" rule in favor of a general "nature of
property replaced" rule. Further, the statement of the holding, i.e., "we adopt the
approach recommended by the American Law Institute that determines the character of
disability benefits according to the character of the ro ert [emphasis added] those
benefits replace," citing Principles of the Law of Family Dissolution: Analysis and
Recommendations § 4 .08(2)(b) (A.L .I ., Proposed Final Draft, Part I, 1997), is
misleading . Section 4 .08(2)(b) of the A.L.I . proposed final draft does not state that the
character of disability benefits is determined by the property those benefits replace but
that "[d]isability pay and workers' compensation payments are marital property to the
extent they replace income or benefits [emphasis added] the recipient would have
earned during the marriage but for the qualifying disability or injury ." Id . Substitution of
the word "property" for "income or benefits" could lead some readers to conclude that
our holding here is broader in scope than its presumed application only to disability
retirement benefits .
Accordingly, I concur in the result reached in this case because that result is
mandated by KRS 67A.620 . I do not join in the rationale articulated by the majority
opinion in support of that result .
Graves and Johnstone, JJ ., join this concurring opinion .
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