Airline: Pilots Divorced to Defraud Pension Plan

May 24, 2009— -- Some people may marry for money, but recently several airline pilots have been accused of divorcing for cash.

Continental Airlines claims nine pilots divorced their spouses, who were named as the benficiary for their pensions, and then remarried the same spouse after the payouts began. It's essentially a form of alimony in reverse.

According to the suit, filed in U.S. District Court in Houston, the pilots and their spouses divorced so that they could take advantage of a provision in federal pension law that allows an ex-spouse who was named as a beneficiary in a pension to receive all or a portion of the funds in case of divorce.

The suit alleges that even if the divorces were legal by the letter of the law, they were "subterfuges or sham transactions in that the Defendant-pilots and their respective Defendant-spouses had no intention of disassociating as marital partners but obtained the divorce decrees ... for the purpose of providing the Defendant-pilots access to lump sum distributions of their pensions without having to retire or otherwise separate from active employment."

The suit seeks to have the pensions that were paid out returned to airline, as well as any interest that might have been earned on the money that was paid out.

All of the pilots named in the suit have either been fired or resigned, Continental said, except for one, who agreed to repay the money.

"The one exception ... recanted his fraud and signed an agreement to make restitution to the plan and consequently was reinstated to active employment," Continental said in the suit.

ABC News Aviation expert John Nance says this isn't the first time something like this has happened.

"Some of the shenanigans that have been pulled with airline pensions in the past, you can see how people would be anxious, but it certainly doesn't justify this kind of action," Nance said.

Pilots at United, Delta and US Airways lost most of their pensions when those airlines filed for bankruptcy, which Nance said sent ripples of anxiety across the industry.

Airline Claims Divorces Were Shams to Claim Pensions

When United filed for bankruptcy in May 2005, for example, it became the biggest pension defaulter in U.S. history.

The airline asked for a cancellation of pension benefits, claiming it was $10 billion in arrears on its plan. As a result, pilots who were supposed to receive pensions of $11,000 to $12,000 per month were left with just 10 percent of that.

Continental said that four years ago -- around the time of the United bankruptcy -- it started receiving a significant number of requests for lump-sum pension payouts to ex-spouses.

The issue this raises is a loophole in a major federal pension law that allows a worker to be paid their benefits before they retire, only if they get divorced.

"If these were real divorces, even if they had the intent to remarry, I don't think Continental has much of a chance of getting their money back," Nance said.

The average Continental pilot qualifies for up to $900,000 upon retirement. The airline says it paid out close to $11 million in suspicious pension benefits.

Now the airline is suing this group of pilots, made up of two women and seven men, to get its money back. The lawsuit alleges the pilots were motivated by fear as a result of the other airlines terminating their pension plans.

"A number of years ago, United Airlines was the first to walk away from their pensions in bankruptcy court," Nance said. "That profoundly scared every pilot in the country with any sort of pension rights."

In a statement released by Continental Airlines, the company said this improper activity threatens pension assets and that "the law requires that Continental and other fiduciaries of the pension plan take appropriate steps to protect these assets."

Nance said it may clearly be manipulation, but manipulation that may work.

"This had to do with getting money right now from this fund that they were entitled to if that had been a real divorce, but doing so because they didn't have faith the fund was going to be around in the future," Nance said.