Northwest Airline Employees Denied Continuance of Fiduciary Breach Claim

December 31, 2008 (PLANSPONSOR.com) - The U.S. District Court for the Southern District of New York put a stop to a participant lawsuit alleging a breach of fiduciary obligations related to pension underfunding by Northwest Airlines Inc.
By PS

Judge John G. Koeltl granted Northwest Airline’s motion for a summary judgment on December 24, denying claims of participants of defined benefit plans sponsored by Northwest Airlines that the airline’s board of directors breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by failing to prevent underfunding. 

The court said it was only necessary for the defendants to prove that the pension plan was properly funded under ERISA. Broader claims by the plaintiffs that the fiduciaries did not act prudently were moot, according the court opinion.

Case Background

Seven Northwest Airlines employees brought the suit, claiming that three separate pension plans were underfunded by about $5.7 billion during the pre-bankruptcy period of October 1, 2000, to September 14, 2005. They also claimed that the plan fiduciaries knew or should have known that the underfunding would happen, and therefore be able to avoid that result. Northwest Airlines previously tried to dismiss the case, but that motion was denied by the court in June 2007.

Northwest Airlines was able to prove that it did not have fund delinquency. September 14, 2005, was when Northwest Airlines filed bankruptcy, and previous to that filing, there was no delinquency in the contributions required to be made to the plans under the ERISA funding standards, the court determined.

During the aforementioned pre-bankruptcy time period, the plan did at times accrue unfunded liabilities—but the court noted that ERISA did not require pension plans to be fully funded at all times.

The plaintiffs moved to continue the case, arguing that there may have been an "actionable funding delinquency even if there was no funding deficiency" under ERISA standards. They argued that the "prudent man" standard of ERISA imbues a broader fiduciary duty than just complying with minimum funding standards. The plaintiffs further said the fiduciaries knew of the financial health of the company and should have known about the underfunding. Also, the participants allege that a prudent fiduciary would have acted to protect participants, and should also have disclosed the funding shortfalls to participants.

However, the defendants said only ERISA minimum funding requirements can determine whether there was a funding delinquency, and the court agreed. The court also said that, absent a funding delinquency, the plaintiffs did not present any evidence as to how the defendants breached fiduciary duties.

The court further said the way to determine whether the plans were underfunded is only by judging whether the plan did not meet ERISA's minimum funding standards.

Koeltl wrote: "It is therefore plain from the text of ERISA and the absence of authorized alternatives that the exclusive way to determine whether the Plans were under-funded, and thus whether there was an actionable funding delinquency, is to determine whether there was a funding deficiency under the § 1082 minimum funding standards."

The case is Cress v. Wilson , S.D.N.Y., No. 06 Civ. 2717 (JGK), 12/24/08.

—Ellie Behling

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