Supreme Court finds appellate court ‘jumped the gun’ in lawsuit over MSA provision

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The Wisconsin Supreme Court has found the Court of Appeals “short-circuited” a circuit court by issuing a constructive trust in the absence of fact-finding.

The high court issued a decision in Pulkkila v. Pulkkila on Tuesday. The case assessed how life-insurance payments should be distributed in cases when a provision is breached in a marital-settlement agreement.

James and Joan Pulkkila divorced in 2009. As part of their MSA, the two had to maintain life insurance and have their two children listed as beneficiaries. If either party breached the provision, there would be a lien against the violator’s estate in favor of the specified beneficiary. The lien would be for an amount equal to the difference between the insurance required and the actual death benefits received.

Before his divorce, James had named Joan as a primary beneficiary of a $250,000 life-insurance policy. He remarried in 2013 and named his new wife, Lynnea Pulkkila, the sole beneficiary of the policy.

After James’ death in 2015, Lynnea received the proceeds of the life-insurance policy. Joan then filed a motion in the divorce action, asking the court to require Lynnea to return the proceeds paid to her in violation of the divorce agreement and to establish a constructive trust for the children’s benefit.

The circuit court denied Joan’s motion for a constructive trust, reasoning that the MSA had unambiguously provided that a lien on James’ estate was the exclusive remedy for breaches of the life-insurance provision.

Joan appealed, and the Court of Appeals reversed and remanded the lower court’s decision. The appellate court said the lien was not exclusive and was “meaningless” in this case because James’ estate hadn’t enough money to provide for his children in the way the life-insurance proceeds would have been able to do. The Court of Appeals mandated the establishment of a constructive trust in favor of the children.

Lynnea petitioned the state Supreme Court for review, saying a constructive trust couldn’t be applied to the life insurance proceeds because the MSA provided that a lien on James’ estate was the exclusive remedy for any breach of the life insurance provision.

The majority disagreed. Justice Ann Walsh Bradley delivered the majority opinion, joined by Chief Justice Pat Roggensack and justices Dan Kelly and Annette Ziegler.

The justices said the MSA provides that a lien is a remedy in case of a breach, but the language in the MSA did not indicate that a lien is the exclusive remedy. Walsh Bradley said the court’s reasoning holds up whether the MSA is called a judgment or a contract.

“If we call the MSA a judgment, we follow this court’s precedent indicating that ‘[a] divorce judgment that is clear on its face is not open to construction,'” Walsh Bradley wrote. “Similarly, if we call the MSA a contract, Lynnea’s argument fares no better. ‘Although the parties may, in their contract, specify a remedy for a breach thereof, that specification does not exclude other legally recognized remedies … ‘”

Lynnea also argued the Court of Appeals erred by applying a constructive trust in the absence of additional proceedings in the circuit court. The majority agreed.

Walsh Bradley said the Court of Appeals “jumped the gun” by imposing the trust in the absence of fact-finding by the circuit court.

“The court of appeals’ decision effectively short-circuits the circuit court’s well-reasoned expectation and opportunity to consider such an issue,” Walsh Bradley wrote.

The state Supreme Court remanded the case to the circuit court to conduct an evidentiary hearing and decide whether to impose a constructive trust.

Justice Rebecca Bradley dissented, saying the majority had erred by dismissing the MSA’s contractual provisions as non-exclusive. She said the decision leaves negotiated marital settlements subject to the whim of judges.

“Divorced Wisconsinites beware: from this day forward, a court may at any time rewrite the terms of your marital settlement agreement if your former spouse comes to court pleading ‘unfair,'” Bradley wrote.

She said she wrote separately to clarify three points about MSAs: That they are contracts; that incorporating an MSA into a divorce judgment doesn’t alter its contractual nature; and that the remedy provided by an MSA and approved by a circuit court should be enforced.

“By implying that an MSA loses its contractual nature after its incorporation into the circuit court’s judgment, the majority destabilizes black letter divorce law,” Bradley wrote.

Bradley said she would have reinstated the decision of the circuit court. She said she would hold the lien against James’ estate as the exclusive remedy for the breached MSA provision.

Justices Rebecca Dallet and Brian Hagedorn did not participate in the decision. Follow @WLJReporter