In Brown v. Continental Airlines, the Fifth Circuit held that when determining if a domestic relations order (DRO) meets ERISA’s requirements to be a qualified DRO (QDRO), the plan administrator is to take the DRO at face value and not investigate the parties’ underlying motivations or intent – even when the plan administrator believes that the divorce is a sham. 

In the lawsuit, Continental alleged that nine pilots and their spouses obtained divorces so that the “ex-spouse” could obtain a lump sum pension distribution from Continental’s defined benefit pension plan pursuant to a QDRO.  According to Continental, the divorces were shams because the pilots and their wives continued to live together even after they were divorced, in many instances the couple did not inform their family or friends of the divorce, and the pilot and ex-spouse remarried once the pension benefits had been distributed as a lump sum payment (in most cases the payment was for 100% of the pilot’s pension) to the ex-spouse pursuant to the QDRO. 

While defined benefit pension plans generally do not permit “in-service” distributions (all of the pilots were still employed), Continental’s plan provided for an exception for distributions made to an ex-spouse, pursuant to a QDRO, after the participant attained age 50.  Continental claimed that the pilots and their wives went to great lengths to obtain divorces to circumvent the plan’s ordinary distribution rules because of concerns that financial troubles in the airline industry might cause the Pension Benefit Guaranty Corporation (“PBGC”) to take over the Continental defined benefit pension plan.  If the PBGC took over Continental’s plan, the participants and beneficiaries could have received less than the full amount of benefits they had accrued under the terms of the plan and would have been unable to receive the monies as a lump sum.

Continental filed suit, under ERISA Section 502(a)(3), against the pilots and their wives to obtain restitution of the pension benefits that had been paid out pursuant to the QDROs.  The Fifth Circuit affirmed the dismissal of Continental’s claim, noting that ERISA Section 206(d)(3) does not authorize a plan administrator to determine that an otherwise valid DRO is not a QDRO because it is based on a “sham” divorce.  Rather, the Fifth Circuit reiterated that ERISA provides a plan administrator with an entirely objective “statutory checklist” for determining if a DRO qualifies as a QDRO, which works to “spare [an administrator] from litigation-fomenting ambiguities.”

For plan administrators and employers, this decision has both good and bad attributes.  On the one hand, to the extent that the Fifth Circuit reaffirmed the Department of Labor’s position (see DOL Adv. Op. 99-13A, Sept. 29, 1999) that it is not the duty or obligation of the plan administrator to look beyond the contents of a valid DRO, it is beneficial for plan administrators to have confidence that they are complying with their statutory duty by following the prescribed QDRO “statutory checklist” contained within ERISA.  On the other hand, in declining to apply the “sham divorce doctrine” applicable to tax, bankruptcy and immigration law to ERISA, the court rejected federal common law theories of equitable relief for plans that discover – after the distribution to an ex-spouse – that the divorce was a “sham.”  Beyond legislative amendment, the court provided plan administrators and employers caught up in a “sham” divorce distribution scenario with only one avenue for judicial redress: a plan potentially may recover benefits under a res judicata theory if a divorce is actually declared a sham (or a DRO was otherwise invalidated) by a court or agency in another proceeding.