On July 18, 2011, the United States Court of Appeals for the Fifth Circuit handed down a decision in Brown v. Continental Airlines, Inc., 2011 WL 2780505, on appeal from the U.S. District Court for the Southern District of Texas, that clarifies a plan administrator’s duties in connection with reviewing QDROs that may have been obtained under false pretenses but which also may curtail an ERISA plan fiduciary’s ability to protect plan assets. In the case, Continental filed suit against 9 pilots and their spouses asserting claims for equitable relief under 29 U.S.C. §1132(a)(3). Continental sought restitution of pension benefits paid to the spouses on the basis of Domestic Relations Orders (“DROs”) that did not meet all of the statutory criteria for a Qualified Domestic Relations Order (“QDRO”) because they were based upon “sham” divorces. Continental alleged that the pilots and spouses obtained divorces for the sole purpose of obtaining lump sum pension distributions from the Continental Pilots Retirement Plan (“the Plan”) which they otherwise could not have received without the pilot’s separating from their employment. By getting divorced, the pilots and their spouses were able to obtain DROs from their respective state courts which assigned 90–100% of the pilots’ pension benefits to the then ex-spouses. The Plan provides that, upon divorce, if the pilot is at least 50 years old, an ex-spouse to whom pension benefits are assigned can elect to receive those benefits even though the pilot continues working at Continental. The pilots and ex-spouses presented the DROs to Continental and requested the payment of lump-sum pension benefits to the ex-spouses. After Continental qualified the DROs (as QDROs) and the benefits were paid, the couples then remarried.
Continental alleged that the reason behind this strategy was that the pilots were worried about financial troubles in the airline industry, and they feared that the Plan might be taken over by the federal Pension Benefit Guaranty Corporation (“PBGC”). A PBGC takeover might have resulted in the pilots receiving less than the full benefits that they expected upon their retirement and, additionally, a PBGC takeover would have prevented them from receiving lump sum distributions. Thus, by divorcing and having a state court assign their pension benefits to their ex-spouses, the pilots were able to ensure that they received their full benefits in a lump sum distribution without having to retire.
Continental alleged that these were “sham” divorces as the pilots did not otherwise intend to dissolve their marriages. They dissolved their marriages solely to receive their pension benefits. Once Continental paid out the benefits and discovered that the pilots and their spouses had remarried, it filed suit, seeking relief under 29 U.S.C. §1132(a)(3), which authorizes a fiduciary to bring suit “(A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other equitable relief (i) to redress such violations…” Continental sought equitable relief in the form of restitution of the lump sum benefits paid to the then ex-spouses.
The pilots filed a motion to dismiss for failure to state a claim, which was granted by the district court. The court held that, under ERISA’s QDRO provisions (29 U.S.C. §1056(d)(3)), a retirement plan’s administrator may not refuse to treat a DRO as a QDRO on the basis that the administrator believes that the DRO was not obtained in good faith. The district court reasoned that “under the plain language of the statute, the Administrator may not refuse to qualify a DRO except based on reasons enumerated in the statute,” and that “the motivation or good faith of the divorce and the resulting DRO is not an enumerated requirement.”
Continental appealed the ruling and the U.S. Court of Appeals for the Fifth District affirmed the lower court’s dismissal. The appellate court rejected Continental’s assertion that the plan administrator has the authority to refuse to qualify a DRO as a QDRO based on its determination that the underlying divorce is a “sham,” on the basis that ERISA § 206, 29 U.S.C.§1056(d)(3) “requires an administrator to determine that a DRO is a QDRO if it satisfies all the statutory criteria, and the participants’ good faith in obtaining a divorce is not among those criteria.” (italics added)
In its opinion, the court addressed two of Continental’s arguments but mysteriously failed to address, or at least elaborate on, a third argument that Continental raised in their Principal Brief. First, Continental argued that the DROs did not satisfy one of the statutory criteria under 29 U.S.C. §1056(d)(3)(D)(i) that provides that a QDRO must “not require [the plan] to provide any type or form of benefit, or any option, not otherwise provided under the plan.” Continental reasoned that although the plan permitted a lump sum to a former spouse, the DROs provided an “option… not otherwise provided under the plan” because it enabled individuals who were not bona fide former spouses to impermissibly obtain retirement benefits while the pilots continued to work at Continental (because the pilots did not obtain their divorces in good faith). The court rejected Continental’s broad interpretation of 29 U.S.C. §1056(d)(3)(D)(i). The court noted that Continental did not cite any authority, and the court did not find any on its own, which interpreted the subsection as authorizing an administrator to consider the good faith of the underlying divorce when determining whether a DRO is qualified.
Next, Continental argued that the so-called “sham transaction doctrine” should be adopted in connection with a plan administrator’s QDRO determination. Under the sham transaction doctrine, sham divorces may be disregarded for certain purposes under tax, immigration and bankruptcy law. The court rejected this argument stating “[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 also noted its reluctance to tamper with ERISA’s existing enforcement scheme and encouraged Continental to seek Congress’ help to make its requested change.
Unfortunately for Continental, upon review of Continental’s brief, the court failed to discuss what could be Continental’s most persuasive argument. That is, how could ERISA’s high fiduciary standards be read to prevent plan fiduciaries from uncovering and combating fraud against a plan? “Empowering administrators with such authority facilitates the plan fiduciary’s ability to protect plan assets from abusive practices that result in unequal advantage to some participants and beneficiaries, potentially at the expense of others.” Brief of Appellant at 22 Brown v. Continental Airlines, Inc. 2011 WL 2780505. Apparently, the court was convinced that since ERISA’s recipe for qualifying a DRO as a QDRO had no subjective component, Continental had no recourse under ERISA with respect to a DRO that otherwise satisfied the objective requirements of a QDRO.
Perhaps, Continental could have brought separate actions against each of the participants in state court to unwind the divorce. In any event, plan administrators can take some satisfaction in the fact that this court did not add to their already lengthy list of legal obligations.
