Until Death er ... Pension Benefits Do Us Part

This is the case of "Until Death, er ... Pension Benefits Do Us Part."

Continental Airlines recently filed—and lost—a lawsuit in Texas alleging that nine of its pilots obtained “sham” divorces solely to get pension benefits.

The Employee Retirement Income and Security Act (“ERISA”) contains an anti-alienation provision which requires that “[e]ach pension plan shall provide that benefits provided under the plan may not be assigned or alienated.”  However, an exception to the anti-alienation provision allows retirement benefits to be assigned to an “alternate payee,” such as an ex-spouse, in accordance with a domestic relations order (“DRO”) issued by a court.

Meaning:

Nine Continental Airlines pilots got divorced in order to obtain a DRO (e.g., a state court order granting divorce), which assigned 100% (or, in one instance, 90%) of the pilots' pension benefits to their respective spouses.  The Plan provides that, upon divorce, if the pilot is at least 50 years old (as all the pilots in this case were), an ex-spouse to whom pension benefits are assigned can elect to receive those benefits even though the pilot continues to work at Continental.   Thus, the pilots and spouses presented DROs to Continental and requested the payment of lump-sum pension benefits to the spouses.  After the spouses received the benefits, the couples remarried.

After the Plan paid out the benefits and the pilots and spouses remarried, Continental found out about the scheme and called foul.  It filed suit against the pilots and spouses, seeking relief under ERISA.  Continental sought equitable relief in the form of restitution of the lump sum benefits it had paid to the spouses while they and the pilots were divorced.

According to Continental, the reason behind this stratagem was that the pilots were worried that financial troubles in the airline industry might result in the Plan being taken over by the federal Pension Benefit Guaranty Corporation (“PBGC”), and this might lead to their receiving less than the full amount of the benefits they expected to receive upon retiring.  Also, a PBGC takeover would prevent the pilots from receiving their benefits as a lump sum instead of an annuity.  Thus, by divorcing and having state courts assign their pension benefits to their spouses, the pilots were able to ensure that they would receive all the benefits owed to them, without having to retire at that time.

The pilots moved to dismiss the airline's lawsuit and won.

The Fifth Circuit Court of Appeals agreed with the dismissal, concluding that Continental Airlines—as the "administrator" of the pension plan—was not at liberty to question the good faith of their pilots' divorces, including their and their spouse' subjective motives and intentions when entering into their divorces.  At most, the airline was legally permitted determine that the pilots' DROs were not qualified if they required benefits to be paid in a specific manner or time frame that is not provided for in the terms of the plan.

Says the Court of Appeals:

If the divorces in this case were indeed shams, that would not mean the spouses received any type or form of benefit, or option, that the Plan did not provide for; rather, they received lump-sum pension benefits, as provided by DROs issued by state courts assigning those benefits to them, at a time when the pilots were at least 50 years old, as permitted by the terms of the Plan.

Continental Airlines argued that the "sham transaction doctrine" should have applied to this case.  That doctrine allows sham divorces to be disregarded in the arenas of tax, bankruptcy, and immigration law.  But, the court of Appeals differed, saying

[t]here is a significant difference between allowing federal tribunals such as the tax, bankruptcy, and immigration courts to consider whether a divorce is a sham, and authorizing a private entity such as Continental to make such a determination, which would involve independently investigating employees' private lives in order to judge the genuineness of the intentions behind their divorces.  The Court has “therefore been especially ‘reluctant to tamper with [the] enforcement scheme’ embodied in the statute by extending remedies not specifically authorized by its text.”

The airline is reviewing its options, which could include an appeal to the Supreme Court of the United States