Federal Regulations Preempt State Law in Disposition of Federal Bonds

In the Matter of Estate of Jones, No. A-2944-21, 2023 WL 7509426 (N.J. Super. Ct. App. Div. Nov. 14, 2023)

This case reflects the intersection between estate disputes and divorce.  Defendant Jeanine Jones (“Jeanine”) appealed from an April 23, 2020 trial court order granting partial summary judgment and dismissing her creditor’s claim against the estate of her deceased ex-husband, Michael Jones (“Michael”).  The creditor’s claim arose from a 2017 Divorce Settlement Agreement (“DSA”) between Jeanine and Michael.

During their separation, Jeanine and Michael attempted reconciliation pursuant to various stipulations, but the reconciliation ultimately failed.  The parties divorced pursuant to the DSA under which Michael agreed to pay Jeanine $200,000 over two initial installments followed by three annual payments.  The DSA further gave Michael the marital residence and required him to pay any remaining balance he owed to Jeanine if he sold the residence.  Moreover, if Michael predeceased Jeanine his estate was obligated to pay any remaining balance.  Id. at *2.

After making $100,000 in payments, Michael died unexpectedly. Id.  Jeanine alleged that among other things she was responsible to organize Michael’s funeral, wind up his affairs, and maintain the marital home.  She also redeemed treasury bonds totaling more than $77,864 that designated her as the pay-on-death (“POD”) beneficiary and acknowledged that the bonds were stored in the office of Michael’s home. Id. at *3.

In February of 2020 Michael’s daughter from another relationship was appointed administrator of the estate and sought an accounting from Jeanine.  Jeanine cross-filed creditor claims as to the remaining balance owed under the DSA and reimbursement for Michael’s final expenses that she allegedly paid.  Id.  The estate disputed Jeanine’s accounting of payments on behalf of the estate, claiming that Jeanine actually owed the estate money, and asserted that the DSA had already been satisfied because Jeanine had received $216,864.40 from Michael as follows:  $17,000 withdrawal from Michael’s bank account prior to his death; (2) $122,000 in settlement payments from Michael, including the payments Michael made during the reconciliation period; and (3) $77,864.40 from redeeming Michael’s U.S. Series EE Bonds that belonged to Michael but designated Jeanine as the POD beneficiary.

The trial court dismissed Jeanine’s creditor’s claim on summary judgment, ruling that Michael’s obligations under the DSA were satisfied by means of withdrawal from Michael’s bank account and redemption of the treasury bonds. Id. at *4.

On appeal, the Appellate Division reversed and remanded.  The Appellate Division ruled that the trial court had erred in crediting the bonds against Michael’s DSA obligations because under federal regulations, Jeanine became the sole owner of the bonds upon Michael’s death.

Federal regulations govern the nature of the rights and obligations created by government bonds and preempt state law where state law fails to give effect to a term or condition under which a federal bond is issued.  The Appellate Division assessed whether the application of N.J.S.A. § 3B:3-14 is preempted by federal law.

N.J.S.A. § 3B:3-14 provides, in pertinent part:

Except as provided by the express terms of a governing instrument, a court order, or a contract relating to the division of the marital estate made between the divorced individuals before or after the marriage, divorce or annulment, a divorce or annulment:

(1) revokes any revocable:

(a) dispositions or appointment of property made by a divorced individual to his former spouse in a governing instrument …;

The bonds at issue were Series EE Bonds, and the Treasurer is specifically authorized by Congress to prescribe the conditions for savings bonds, including restrictions on transfer to which they will be subject as well as conditionings governing their redemption.  31 U.S.C. §3105(c)3-(4).  Pursuant to the regulations, a bond’s registration must express the actual ownership of and interest in the bond and registration is inclusive of ownership.

The Appellate Division found that the regulations governing bond registration and ownership conflict with the provisions of N.J.S.A. § 3B:3-14, which would automatically revoke the bond’s beneficiary resignation disposition upon divorce.  As a result, the federal regulation preempted state law under the circumstances of this case.  Therefore, once Michael died, in the absence of fraud or breach of trust, neither of which was alleged in this case, Jeanine became the sole and absolute owner of the bonds. Id. at * 8.

Further, the Appellate Division found no indication that the DSA divested Jeanine’s rights in the bonds.  The trial court’s decision to credit the bond proceeds against Jeanine’s DSA claims was premised on an unsubstantiated assumption that Michael intended to remove Jeanine as a beneficiary after the divorce as well as the mistaken belief that all issues held had been resolved by the DSA.  Id. at *9

In sum, the Appellate Division found that the trial court erred as a matter of law in concluding that the bonds should be credited to the estate’s DSA obligation.

Id. at 21.