August Term, 2008 Argued: April 21, 2009 Final briefs submitted: April 28, 2009… v. - MAI V. HALLINGBY, now known as Mai V. Harrison

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# UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

August Term, 2008

(Argued: April 21, 2009
Final briefs submitted:
April 28, 2009

Decided: July 24, 2009)

Docket No. 08-1866-CV

JO DAVIS HALLINGBY, as Executrix of the Estate of
Paul Hallingby, Jr.,

Plaintiff-Appellant,

\- V. -
MAI V. HALLINGBY, now known as Mai V. Harrison,
Defendant-Appellee,

METROPOLITAN LIFE INSURANCE COMPANY,

Defendant.

Before: KEARSE, SACK, and HALL, Circuit Judges.

Appeal from a judgment of the United States District Court
for the Southern District of New York, Victor Marrero, Judge,
dismissing action to enforce divorce settlement provision for
waiver of spouse-survivor benefits, ruling that the waiver was
forbidden by the Employee Retirement Income Security Act,
29 U.S.C. § 1001 et seq. See 541 F. Supp. 2d 591 (2008) .

Vacated and remanded for adjudication under state law.

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RICHARD H. DOLAN, New York, New York
(Schlam Stone & Dolan, New York, New
York, on the brief), for Plaintiff-
Appellant.

JAMES G. McCARNEY, New York, New York
(Thomas E. Engel, Katherine B.
York, on the brief), for Defendant-
Appellee.

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KEARSE, Circuit Judge:

Plaintiff Jo Davis Hallingby ( "plaintiff"), as executrix
of the estate ("Estate") of her late husband Paul Hallingby, Jr.
("Hallingby"), appeals from a final judgment of the United States
District Court for the Southern District of New York, Victor
Marrero, Judge, dismissing her complaint against defendant Mai V.
Hallingby, Hallingby's former wife who is now known as Mai V.
Harrison ("Harrison"), for enforcement of a provision of the
divorce settlement between Hallingby and Harrison by which
Harrison is alleged to have waived her entitlement to survivor
benefits under Hallingby's annuities. The district court granted
summary judgment dismissing the complaint on the ground that
plaintiff's claims are foreclosed by the Employee Retirement
Income Security Act ( "ERISA"), 29 U.S.C. § 1001 et seq. On
appeal, plaintiff contends that New York State law, rather than
ERISA, governs and that under state law Harrison's waiver is
enforceable. For the reasons that follow, we conclude that
plaintiff's claims are not governed by ERISA, and we remand for
adjudication of her claims under state law.

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A. Hallingby's Marriages, Divorce, and Pension Benefits

The events are largely undisputed. Harrison and Hallingby
were married in 1983. At that time, Hallingby was a participant
in the pension plan ( "Plan") for employees of Merrill Lynch &
Co., Inc. and Affiliates ("Merrill Lynch") . Under the Plan,
Hallingby was to receive a monthly pension following his
retirement; after his death, the pension would continue to be
paid to his survivor beneficiary at a reduced rate. In 1984 and
1986, Hallingby named Harrison as his beneficiary. Hallingby
retired from Merrill Lynch on October 1, 1986, at which time his
benefits, and those of his beneficiary, vested.

In December 1988, the Plan was terminated. In order to
satisfy its obligations to its employees, as required by ERISA,
see 29 U.S.C. § 1341 (b) (3) (A) (i) ; 29 C.F.R. § 4001.2, Merrill
Lynch purchased group annuity ("Annuity") contracts from defendant
Metropolitan Life Insurance Company ( "MetLife") . These contracts
provided that " [i]n the case of any annuity that has provision for
payment to a beneficiary, the designation of beneficiary may be
changed by filing written notice of the change with Metropolitan
on an appropriate form" (Annuity [ 4.5) ; that "[i]f both the
Annuitant and the survivor annuitant are alive on the Annuity
Commencement Date, the Annuitant will not have the right to change
the survivor annuitant for any reason" (id. [ 3.3 (B) ) ; but that
25 MetLife "will honor any valid court order relating to . . .

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marital property rights to a Spouse . . . or other dependent of an
Annuitant covered under this Contract if such order does not
require payments under a form of benefit not otherwise available
under this Contract nor increase the present value of the benefit
payable" (id. [ 3.19) .

In June 1994, Harrison and Hallingby were divorced. They
had entered into a settlement agreement that provided, inter alia,
that "the parties acknowledge that they have no right, title or
interest in any of the bank accounts, securities, pension plans,
retirement plans, profit sharing plans, annuities or IRAs now in
the name of the other, whether in the other's sole name or jointly
or in trust for another." (Settlement Agreement between Paul
Hallingby, Jr., and Mai V. Hallingby dated May 5, 1994
("Settlement Agreement"), art. II., [ 2 (emphases added) . ) The
judgment granting Hallingby the divorce incorporated the parties'
Settlement Agreement and provided that the court "retains
jurisdiction in this matter concurrently with the Family Court,
for the purpose of specifically enforcing such of the provisions
of that agreement as are capable of specific performance."
Hallingby v. Hallingby, No. 300913/93 (Sup. Ct. N.Y. Co. June 7,
1994) , Judgment of Divorce at 3.

In November 1994, Hallingby married plaintiff and
submitted forms to MetLife designating plaintiff as his new
survivor beneficiary and revoking all previous beneficiary
designations. Hallingby died in June 2005. Thereafter, despite
requests by plaintiff that MetLife pay Hallingby's survivor

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benefits to his Estate, MetLife made the Annuity payments to
Harrison. MetLife took the position that ERISA and the terms of
the Annuities required it to make the payments to Harrison.

## B. Proceedings in the State and District Courts

After unsuccessful requests to Harrison that she cease
claiming the right to receive survivor benefits under Hallingby's
Annuities and that she pay over to the Estate the benefits she had
received, plaintiff, by order to show cause, commenced the
present action in New York State Supreme Court in May 2006. She
sought enforcement of Harrison's Settlement Agreement waiver of
any interest in Hallingby's pension benefits, as well as
disgorgement of the Annuity payments Harrison had received from
MetLife since Hallingby's death. Plaintiff also sought an order
bringing MetLife into the action and requiring it to make all
further payments of survivor benefits to Hallingby's Estate.

After MetLife was made a defendant, it removed the action
to federal court, contending that the issue of entitlement to the
Annuity benefits was governed by ERISA. Plaintiff filed a
complaint alleging causes of action against Harrison for breach
of contract and unjust enrichment and requesting, inter alia,
declaratory and monetary relief against Harrison and an
injunction directing MetLife to make the Annuity payments to
Hallingby's Estate. Both defendants, in their answers to the
complaint, asserted, inter alia, that plaintiff's claims were
preempted by ERISA.

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At pretrial conferences in 2007, MetLife informed the
court that MetLife has no interest in the outcome of the dispute
between plaintiff and Harrison and that MetLife will make the
payments under the Annuities to whichever party the court
determines should receive them. Following those representations,
the action against MetLife was dismissed with prejudice.

Thereafter, both plaintiff and Harrison moved for summary
judgment. Plaintiff contended principally that ERISA is
inapplicable, arguing that the Annuities are private contracts
between MetLife and the former participants in the Merrill Lynch
Plan and that, like other typical annuity contracts, they are
governed by state law. Harrison argued principally that because
the beneficiary interests under the Plan vested on the date of
Hallingby's retirement, and Harrison was then his spouse-survivor
beneficiary, her interest had become non-assignable under the
terms of the Annuities and irrevocable under the provisions of
ERISA.

In an opinion dated March 26, 2008, reported at 541
F. Supp. 2d 591, the district court denied plaintiff's motion for
summary judgment and granted the motion of Harrison. The court
found that "the Annuity contracts at issue
constitute the
pension plan, and the dispute

involve [s] benefits due to
plan participants." 541 F. Supp. 2d at 596. Pointing out that
ERISA preempts state-law causes of action to enforce rights under
employee benefit plans that are covered by ERISA, the court
concluded that it "must look to ERISA, rather than to New York

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State law, to determine the proper recipient of the beneficiary
annuity at issue here." Id. The court noted that "ERISA
requires that a pension plan prohibit the assignment or alienation
of benefits (the 'anti-alienation provision')," id. at 598 (citing
29 U.S.C. § 1056 (d) (1) ) ; and it therefore concluded that "the
anti-alienation provision of ERISA precludes enforcement of a
waiver of a vested interest by a non-participant beneficiary, " id.

Judgment was entered dismissing the complaint, and this
appeal followed.

## II. DISCUSSION

In their initial briefs on appeal, the parties have
adhered to the positions they took in the district court.
Harrison maintains that plaintiff's claims are preempted by
ERISA's prohibition against alienation of her rights as a Plan
beneficiary; plaintiff pursues her contention that the Estate's
dispute with Harrison is governed solely by state law. Prior to
oral argument, this Court instructed the parties to be prepared to
address the applicability of ERISA, citing Beck v. Pace
International Union, 127 S. Ct. 2310 (2007). At oral argument, we
instructed the parties to submit supplemental briefs addressing
the question of whether, if ERISA is inapplicable, federal
subject matter jurisdiction existed.

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Having reviewed all of the parties' submissions and
arguments, we conclude that ERISA does not apply to the present
dispute; that because MetLife had previously been dismissed from
the case, diversity of citizenship existed at the time the final
judgment was entered, and the district court then had
jurisdiction; and that because ERISA is inapplicable, the matter
should be remanded to the district court for adjudication of
plaintiff's claims under state law.

### A. The Inapplicability of ERISA

ERISA generally applies to "any employee benefit plan if
it is established or maintained" by an employer engaged in
commerce and/or an employee organization representing employees
engaged in commerce. 29 U.S.C. § 1003 (a). ERISA allows an
employee benefit plan to be terminated, under stated conditions.
See generally id. § 1341. One method of plan termination is the
"purchase [of] irrevocable commitments from an insurer to provide
all benefit liabilities under the plan, " id. § 1341 (b) (3) (A) (i),
i.e., the purchase of annuities. See generally Beck, 127 S. Ct.
at 2316-17.

When an employer terminates an employee benefit plan and
provides for the payment of benefits by purchasing annuities in
accordance with 29 U.S.C. § 1341 (b) (3) (A) (i), the annuities and
the benefits they provide are no longer covered by ERISA:

[T] erminating a

plan through

purchase

of

annuities

(like terminating

through

distribution

of

lump-sum

payments) formally

severs the

applicability

of ERISA

to plan assets and employer obligations.

Upon

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purchasing annuities, the employer is no longer
subject to ERISA's multitudinous requirements, such
as (to name just one) payment of insurance premiums
to the [Pension Benefit Guaranty Corporation
( "PBGC" ) ], § 1307 (a) . And the PBGC is likewise no
longer liable for the deficiency in the event that
the plan becomes insolvent; there are no more
benefits for it to guarantee. The assets of the plan
are wholly removed from the ERISA system, and plan
participants and beneficiaries must rely primarily
(if not exclusively) on state-contract remedies if
they do not receive proper payments or are otherwise
denied access to their funds.

Beck, 127 S. Ct. at 2318 ("are" emphasized in original; other
emphases added) .

There is no contention here that Merrill Lynch failed to
comply with the ERISA requirements for termination of the relevant
Plan. Thus, the district court erred in ruling that "the Annuity
contracts
constitute the pension plan, " 541 F. Supp. 2d at 596
(emphasis added). The purchase of the Annuities instead
terminated the Plan; and termination "formally sever [ed] the
applicability of ERISA." Beck, 127 S. Ct. at 2318. Plaintiff's
claims that MetLife should have been, and should be, paying the
surviving spouse benefits to plaintiff or to Hallingby's Estate,
rather than to Harrison, are claims under the Annuities. The
Annuities are not governed by ERISA, and plaintiff's claims must
be resolved on the basis of state-law principles.

## B. Federal Subject Matter Jurisdiction

Plaintiff commenced this action in state court. When
MetLife became a defendant, it removed the case to the district
court on the basis that the dispute was governed by ERISA, giving

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the district court federal question jurisdiction. Since we have
concluded that the dispute is governed instead by state law, there
is no federal question, and there is an issue as to whether the
suit may be entertained in federal court on the basis of diversity
jurisdiction. Diversity jurisdiction exists over "civil actions
where the matter in controversy exceeds the sum or value of
$75,000, exclusive of interest and costs, and is between
. . . citizens of different States." 28 U.S.C. § 1332 (a) (1) .
" [C]itizens of different States" means that there must be complete
diversity, i.e., that each plaintiff's citizenship must be
different from the citizenship of each defendant. See, e.g.,
Caterpillar Inc. v. Lewis, 519 U.S. 61, 68 (1996); Strawbridge v.
Curtiss, 7 U.S. (3 Cranch) 267 (1806). When this case was removed
to the district court, complete diversity did not exist: Harrison
was a citizen of Florida; but both plaintiff and MetLife were
citizens of New York. (In oral argument and in their supplemental
submissions, the parties informed us that Harrison remains a
citizen of Florida and that plaintiff remains a citizen of New
York.)

Although the existence of federal subject matter
jurisdiction over an action removed from state court to federal
court is normally to be determined as of the time of removal, see,
e.g., Caterpillar, 519 U.S. at 68, it is now established that if a
case was erroneously removed to federal court and a judgment was
subsequently entered on the merits, the jurisdictional flaw that
existed at the time of removal "is not fatal to the ensuing

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adjudication if federal jurisdictional requirements are met at the
time judgment is entered, " id. at 64. Thus, "we view the critical
issue to be whether the district court had subject matter
jurisdiction at any time before it rendered judgment." Briarpatch
Ltd., L.P. v. Phoenix Pictures, Inc., 373 F.3d 296, 301 (2d Cir.
2004).

In the present case, MetLife was dismissed from the case
after it informed the parties and the court that it viewed itself
as essentially only a stakeholder. Apparently having no interest
in contending that Hallingby had no right under the Annuity
contracts between himself and MetLife to change the designation of
his survivor beneficiary as he did, MetLife represented that it
will make the payments due under the Annuities to whichever party
the court determines should receive them. Accordingly, prior to
the district court's 2008 decision on the merits, MetLife was
dismissed from the case, with prejudice. With MetLife gone, there
was complete diversity. And as the complaint alleges that the
estimated present value of the Annuities is $150,000, the
prerequisites for diversity jurisdiction were met when MetLife
was dismissed in 2007. Accordingly, the case is now properly in
federal court.

## CONCLUSION

We have considered all of Harrison's arguments in support
of the district court's resolution of the present case under ERISA

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and have found them to be without merit. The judgment is vacated,
and the matter is remanded to the district court for adjudication
of plaintiff's claims in accordance with state law. Although
plaintiff urges that this Court should rule that the Estate is
entitled to judgment under state-law principles, we adhere to our
normal practice of allowing the merits to be resolved by the
district court in the first instance.

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Costs to plaintiff.