5th Circuit Affirms Decision in Continental Sham Divorces Case

July 20, 2011 (PLANSPONSOR.com) – A federal appellate court has agreed with a district court’s holding that the subsection of the Employee Retirement Income Security Act (ERISA) dealing with Qualified Domestic Relations Orders (QDROs) does not authorize an administrator to consider or investigate the subjective intentions or good faith underlying a divorce.

In affirming the district court’s dismissal of Continental Airlines’ claims, the 5th U.S. Circuit Court of Appeals said its reading of § 1056(d)(3)(D)(i) is in harmony with the reasoning of the Supreme Court, its court, and other federal appellate courts, which have described the determination of whether a DRO is qualified as a straightforward matter that requires the administrator to take DROs at face value and not to engage in complex determinations of underlying motives or intent.  

The court pointed out that ERISA “qualified domestic relations order” as a domestic relations order which creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and it must clearly specify certain information and must not require benefits to be paid in a way that would be inconsistent with the plan or with a previous QDRO.  

Continental alleges that the pilots and spouses obtained “sham” divorces for the purpose of obtaining lump sum pension distributions from the Continental Pilots Retirement Plan, which they otherwise could not have received without the pilots’ separating from their employment with Continental. By getting divorced, the pilots and spouses were able to obtain DROs from state courts, which assigned 100% (or, in one instance, 90%) of the pilots’ pension benefits to the 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 the DROs to Continental and requested the payment of lump-sum pension benefits to the spouses. After the spouses received the benefits, the couples remarried.  

Continental found out about the scheme and filed suit against the pilots and spouses (see Airline Alleges Sham Divorces are Pension Scam), seeking 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.   

The pilots filed a motion to dismiss for failure to state a claim, which the district court granted, holding that under § 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 the DRO was not obtained in good faith from the court that issued it (see Case Sensitive: Sham How?). 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 resulting DRO is not an enumerated requirement.”  

The appellate court said Continental does not cite any authorities, and it has not found any, which have interpreted the subsection as authorizing an administrator to consider the good faith of the underlying divorce, or any similar question, when determining whether a DRO is qualified. On the contrary, the courts that have interpreted § 1056(d)(3)(D)(i) have understood it as simply allowing an administrator to determine that a DRO is not qualified when it would require benefits to be paid in a specific manner or time frame that is not provided for in the terms of the plan.   

The opinion in Brown v. Continental is here