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John Council
Texas Lawyer
10-26-2009
An Oct. 19 ruling by a U.S. District Court judge in an Employee Retirement Income Security Act (ERISA ) case demonstrates that retirement plan administrators are in a bad spot when confronted with beneficiaries whom they suspect of gaming the system to access retirement payments, several experts say.
The case, The Continental Pilots Retirement Administrative Committee, et al. v. Glenn Brown, et al., involves a group of Continental Airlines senior pilots who allegedly obtained "sham divorces" to receive early payment of benefits from their retirement plan.
But according to an order by U.S. District Judge Gray Miller of Houston dismissing the airline plaintiffs' claim, nothing in ERISA allows a plan administrator to question or thwart such suspected actions by plan beneficiaries.
According to Miller's order, which the judge writes is based on the facts pled by Continental that he accepted as true for the purposes of the motion to dismiss, the background to the dispute is as follows. In 2005, a series of pilots became concerned about the health of their retirement plan. The pilots had already reached retirement age but had not retired or been otherwise separated from their employment at Continental.
The pilots allegedly engaged "in a scheme" -- which their lawyers strongly dispute -- to obtain their money through the exception to the anti-alienation provision of ERISA for divorce.
The pilots all obtained divorces from various states with domestic relations orders (DROs) that assigned 100 percent (in one case 90 percent) of their retirement benefits under the plan to their spouses -- the alternative payees. The Continental Pilots Retirement Administrative Committee (the administrator) qualified the DROs. Because the pilots in question were of retirement age when the alternative payees requested a lump sum disbursement, the plan paid the benefits. Some payments were up to $900,000. The administrator later came to believe that the pilots had allegedly obtained divorces for the specific purpose of withdrawing their pensions early.
Many of the pilots continued to cohabitate with their former spouses, some remarried soon after obtaining the lump sum payout, and all essentially conducted themselves as if the divorce had never happened, the order continues.
The Continental Pilots Retirement Administrative Committee and its related plaintiffs filed a complaint in federal court seeking equitable remedies from the pilots in an attempt to retrieve the money they claim claims were erroneously paid.
The pilots responded, the order continues, by filing a motion to dismiss the Continental plaintiffs' equitable relief claim, arguing that the Continental plaintiffs could not point to any provision of ERISA that the pilots violated and that the Continental plaintiffs sought monetary damages not available to them under ERISA, among other things.
In his order, Miller agreed with the pilots' arguments and dismissed the Continental plaintiffs' claims for equitable relief with prejudice.
"The court certainly does not condone the pilots' alleged actions of engaging in these divorces for the sole purpose of obtaining DRO's that would allow immediate access to their pension funds," Miller writes in his order.
But Miller wrote that the plan administrator "may not refuse to qualify a DRO except based on reasons enumerated in the statute. And, the court further finds that the motivation or good faith of the divorce and resulting DRO is not an enumerated requirement. Therefore, Continental may not refuse to qualify or retroactively disqualify DRO's that meet the specific criteria set out by Congress."
"[A]ccordingly, the court declines to read into the statute criteria Congress did not include," Miller concluded in the order.
Steven Mitby, a partner in Houston's Ahmad Zavitsanos & Anaipakos who represents the pilots, applauds Miller's ruling.
"Continental and its lawyers made a mistake by drafting a plan that provided for lump sum distribution for a former spouse when a pilot would not be eligible. But having created that provision, Continental shouldn't be able to come back and take that money back based on no evidence of a sham," Mitby says.
"One of the most important things that has been lost is our clients strongly dispute that they got phony divorces. The divorces were very real," Mitby says. "And five different family courts found that their divorces were legitimate."
W. Carl Jordan, a partner in the Houston office of Vinson & Elkins who represents the Continental plaintiffs, says he plans to appeal the order.
"We remained convinced that there must be a means under ERISA for a plan administrator to avoid being forced to recognize domestic relation orders that were obtained ... in order to secure lump-sum pension benefits that the pilots would not otherwise be entitled to receive while they remain employed," Jordan says. "This issue impacts not only Continental's pension plan but many pension plans like theirs and the industry and other industries around the country."
TIED HANDS
While plan administrators may be suspicious of divorce orders submitted for the purpose of withdrawing money early from a retirement plan, there is little that they can do but approve the order and cash out the money -- something Miller's ruling makes clear, say three ERISA lawyers who are not involved in the case.
"I don't see that this changes the way I would advise a client to review certain administrative transactions under their plan. There's no way that the plan can determine intent, and the law does not require it," says Gary A. Nagler of Houston's Gary A. Nagler & Associates.
"There are certain provisions under ERISA where the law specifically provides that if a transaction on its face appears appropriate the plan administrator may rely on it," Nagler says. "I see this as no different."
Linda Wilkins of Dallas' Wilkins Law Group, who is also an adjunct law professor at Southern Methodist University's Dedman School of Law and teaches ERISA litigation, agrees with Nagler.
"On its face this is the right decision. And I think, unfortunately for this pension plan, it has increased its immediately liability, and it harms the plan. And the only way to protect against this is to not allow a lump-sum option," says Wilkins, who notes that the lump-sum option is common in many corporate retirement plans.
"You must allow an administrator to rely on the face of a qualified order. And it's really not appropriate for a plan administrator to investigate the facts underlying every divorce decree that the administrator receives," Wilkins says.
"It would be a worse situation had these pilots lost," Wilkins says. "If the plan were able to say 'You gave us an order, and we should have been able to investigate the validity of the order,' that would be a heavy burden on the administrator."
Ed Perrin, a partner in Dallas' Hallett & Perrin, doesn't believe that the ruling will encourage other people to withdraw their money from a retirement plan in a similar fashion.
"First of all, you're going to have to find someone that's willing to get divorced," Perrin says. "From a practical perspective and the obstacles and consequences of doing this, I would not see this being a widespread phenomenon. But it is an issue that needs to be addressed."
"And maybe the only remedy is through Congress. ERISA has been around since 1974, and, believe me, there are still issues like this," Perrin says.
Randy Catterton, a longtime family court judge in Tarrant County, Texas, says he's never heard of a couple getting a divorce for the purpose of accessing retirement money. But even if he had seen such a case, there's nothing he could do to stop it, he says.
"If two people don't want to be married anymore, I can't say 'I don't want to grant it for the sake of a plan,'" says Catterton, judge of the 231st District Court. "There is nothing in the law that says I have the right to deny them the divorce."
And Catterton wonders if such an issue would ever come to the attention of the family law attorneys representing a couple that sought a divorce to get retirement money.
"I doubt that the issue would even come up, unless it was volunteered," Catterton says. "If it's all agreed to, the lawyer is not going to ask, 'Do you really want to get a divorce and is this a sham?'"
Carol Wilson, a Dallas family law solo, says it is more common for people to get divorces for the purpose of increasing their Social Security payments or to hide assets from creditors in bankruptcy proceedings.
But if a client comes to a lawyer with such a plan, the family lawyer has options: Advise the client what is legal and what is not. And if the client's intentions are not legal, she says, the lawyer has to decide whether or not to take the case.
