ERISA-Fifth Circuit Holds That A Plan Administrator May Not Refuse To Treat A Court Order As Being A QDRO, Based On Its Determination That The Underlying Divorce Is A Sham

In Brown v. Continental Airlines Inc., No. 10-20015 (5th Cir. 2011), the issue was whether ERISA allows a retirement plan administrator to seek restitution of benefits that were paid to a plan participant’s ex-spouse, pursuant to a qualified domestic relations order (a “QDRO”), if the administrator subsequently determines that the QDRO is based on a “sham” divorce and is therefore not valid . The district court in this case had ruled that ERISA does not authorize an administrator to consider or investigate the subjective intentions or good faith underlying a divorce, so restitution may not be sought. The Fifth Circuit Court of Appeals (the “Court”) agreed and affirmed the district court’s decision.

Continental Airlines Inc. (“Continental”) had alleged that the pilots and spouses obtained “sham” divorces for the purpose of obtaining lump- sum pension payments from the Continental Pilots Retirement Plan (“the 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 QDROs, 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-in the form of a lump-sum payment- even though the pilot continues to work at Continental. The pilots and spouses presented the QDROs to Continental and requested the lump-sum payments to the spouses. After the spouses received the benefits, the couples remarried. Proceeding as such, a pilot could receive his entire benefit under the Plan, without having to end his employment with Continental.

Continental had maintained that the divorces were a sham, so that the QDROs were not valid and the benefits paid to the spouse should be returned to the Plan. In analyzing the case, the Court said that Continental’s claims depend on, among other things, the proposition that a plan administrator has the authority to refuse to treat a court order as being a QDRO, based on its determination that the underlying divorce is a “sham.” The Court rejected this proposition. It said that Section 206(d)(3) of ERISA requires an administrator to determine that a court order is a QDRO if it satisfies all the statutory criteria, and the participants’ good faith in obtaining a divorce is not among those criteria. As such, the Court rejected Continental’s claim for restitution to the Plan of the lump-sum payments made to the pilots’ spouses.

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