If any of your cases involve defined benefit plans, you are probably relying on Bishop v. Bishop, 440 S.E.2d 591 (1994)—the North Carolina Court of Appeals’ classic. Bishop has been the divorce practitioners’ staple for almost twenty years. Bishop‘s five step approach has never been officially overruled—or received any negative treatment for that matter. But do not let the Westlaw’s Shepard lull you into a false sense of security. You will want to read the last week’s Court of Appeal’s opinion in Johnson v. Johnson. Although the Johnson Court does not explicitly distinguish Bishop, and even appears to follow Bishop and cite to it extensively, it looks like there are some changes after Johnson.
Let’s start from the beginning. If you are trying to get your client a piece of her husband’s pension, what is required of you under Bishop?
You must know the value of the lump sum which, if invested, would bring an equivalent of the marital portion of the total income which the owner of the plan would receive between the date of separation (or the date of retirement if that’s later) and the date he dies and stops receiving the money. Bishop sets out a five step calculation. Naturally, the trial court would need to somehow predict when the owner of the Plan will die. The trial court will also need to determine an acceptable discount rate—meaning at what interest rate the imaginary lump sum could be invested now to become the equivalent of the income stream later. Where does one get these numbers? The Bishop Court recommended to look to the Pension Benefit Guarantee Corporation website, saying:
The mortality and interest tables of the Pension Benefit Guaranty Corporation, a corporation within the United States Department of Labor, are well-suited for this purpose.
Also, one must not forget the coverture fraction—the North Carolina way of figuring out what portion of the pension is marital. It is also simple enough. Take the number of years of marriage during which the spouse was earning the pension and divide by the number of years of employment during which that spouse earned the pension. For instance, in Johnson, the employee spouse was hired in 1987 and was still employed in 2009, when the spouses separated, a total of roughly 22 years. The marriage lasted between 1991 and 2009, a total of roughly 18 years. Dividing 18 by 22, the coverture is 0.818 (I am rounding off the months).
All that seems like a straightforward math so far.
Here’s the rub. What evidence do you need to present to the court? The plain reading of Bishop suggests that once you presented the evidence of the amount of the monthly payment earned as of the date of separation, and the evidence of the date when the employee spouse starts receiving these payments, your job is done. The rest of the Bishop‘s five-step analysis is simply a math problem—plus the bother of looking up the mortality and interest rates on the PBGC website.
Who does the math? Here’s the Bishop’s five-step instruction:
First, the trial court must calculate the amount …
Second, the trial court must determine the employee spouse’s life expectancy …
Third, the trial court, using an acceptable discount rate, must determine . . .
Fourth, the trial court must discount . . . This calculation requires mortality and interest discounting. The mortality and interest tables of the Pension Benefit Guarantee Corporation [. . .] are well suited for this purpose.
Finally, the trial court must reduce . . . This calculation rests within the sound discretion of the trial court.
What with the Bishop’s plain language commanding that the trial court “must calculate,” “must discount,” “must reduce,” I always read Bishop to mean that making the calculation and looking up the numbers on PBGC website is the trial court’s prerogative (read job)—much the same way as the trial court calculates child support amounts by looking up the formulas under the Guidelines. The resulting numbers are the court’s findings of fact, are they not? Johnson caused me to adjust my reading.
In Johnson, a very capable attorney representing plaintiff Dalila Johnson—the non-employee spouse who wanted a piece of her husband’s pension—did two things.
First, she presented the evidence of the (a) amount and (b) starting date of the pension to be paid to Dalila’a husband.
Next, she prepared for the court a memo aimed to assist the court with the Bishop math. She also looked up the Bishop-recommended PBGC website numbers for the mortality rates and discounts and plugged them into the calculations. You will want to look at Johnson Record pp 114-21 for the painstaking faithful five-step Bishop calculation.
The trial court considered the testimony and the memo and refused to assign any value to the pension, saying that it did not have enough evidence. The Court of Appeals agreed, referring to the memo pejoratively as an “an elaborate calculation” and not evidence. Are you thinking what I was thinking: “Wait—wouldn’t you expect an elaborate calculation under the five-step Bishop plan? How do we put on evidence of math calculations? Is 2+2=4 a matter of judicial notice?” If you are thinking that, I am glad I have your ear.
First Problem: The Bishop analysis requires the starting point of the calculation to be the date of separation monthly amount of the pension. However, in Johnson’s particular case, there was no monthly payment on the day of separation because Mr. Johnson did not yet receive the pension. The date when the pension payments would start was in evidence. Nevertheless, the Court concluded that Ms. Johnson failed to produce a critical piece of evidence.
Solution: If your client’s husband has worked for twenty years while married, but needs to work another ten years after the date of separation until his payments of $3,000 a month kicks in, the question of the value of his monthly payment on the day of separation seems to be a math problem—two thirds of $3,000 is $2,000. Since the court requires evidence, I suggest presenting the math via expert testimony.
Second Problem. Even though the Bishop court told the trial courts to use the PBGC website tables for the mortality and discount rates, the trial court in Johnson refused to accept the PBGC website numbers when Ms. Johnson used them. The court insisted that Ms. Johnson was “asking the Court to research and select items via Internet . . . without any evidence in determining which tables are appropriate to value this pension.” On appeal, even though the Court of Appeals confirmed that the use of PBGC website was warranted in theory (Opinion at 10) it nevertheless characterized Ms. Johnsons’ use of the PBGC website as an improper reliance on “internet websites and other materials not before the trial court” (Opinion at 13-14, emphasis added). Neither court acknowledged that Ms. Johnson was using the PBGC website numbers.
Solution: Since the Court of Appeals criticized Dalila’s lawyer for referring to “internet websites not before the trial court,” I suggest expert testimony to introduce PBGC. An accountant (qualified as an expert in valuing pensions) would do. He could simply retrace the argument that the Court of Appeals itself had made in Bishop: an authoritative work by William M. Troyan, Valuation & Distribution of Marital Property, §45.23 suggested relying on the PBGC numbers.
Caveat: Is calling an expert an overkill? One cannot help but wonder whether the Johnson courts simply did not realize that Ms. Johnson was, in fact, using the Bishop-approved PBGC website. Both the trial court and the Court of Appeals insisted that Ms. Johnson used some unspecified “items via internet”—despite Ms. Johnson’s memo to the trial court and despite her appellate brief, both of which underscored her use of PBGC, and not some fly-by-night websites. Is it possible that this information just fell through the cracks? Hard to tell, but better safe than sorry.
Third Problem. Dalila’s lawyer elicited Mr. Johnson’s testimony as to his monthly pension amount and the starting date. Mr. Johnson testified that he’d receive approximately $3,500, give or take. Are you thinking what I was thinking—”nonexpert owner may give opinion on value of his property” under Allen v. Allen, 61 N.C. App. 716 (1983); Lawing v. Lawing, 81 N.C.App. 159 (1986). If you were thinking that, glad I have your ear. The Court of Appeals concluded that Mr. Johnson’s opinion was not competent evidence because Mr. Johnson did not explain “the basis” or “how he calculated” his $3,500 per month estimation. Does Johnson stand for the proposition that the “non-expert owner opinion” exception does not apply to pensions? Or was Mr. Johnson just an especially unreliable witness?
Solution: Seek testimony from the plan provider’s custodian, subpoena the employer.
Caveat: Is the non-expert owner opinion of pension value still alive? Would Mr. Johnson’s opinion be competent evidence if he were more certain? There is no way to be sure, but better safe than sorry.