United Independent Flight Officers, Inc. v. United Air Lines, Inc.

• Decision Date: 29 January 1985
• Docket Number: No. 83-2572,83-2572
• Parties: 118 L.R.R.M. (BNA) 2474, 102 Lab.Cas. P 11,382, 6 Employee Benefits Ca 1075 UNITED INDEPENDENT FLIGHT OFFICERS, INC., et al., Plaintiffs-Appellants, v. UNITED AIR LINES, INC., & Air Line Pilots Association, International, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1262

756 F.2d 1262

118 L.R.R.M. (BNA) 2474, 102 Lab.Cas. P 11,382,

6 Employee Benefits Ca 1075

UNITED INDEPENDENT FLIGHT OFFICERS, INC., et al Plaintiffs-Appellants, v. UNITED AIR LINES, INC., & Air Line Pilots Association International, Defendants-Appellees.

No. 83-2572.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 24, 1984.

Decided Jan. 17, 1985.

As Amended Jan. 29, 1985.

Raymond C. Fay, Haley, Bader & Potts, Chicago, Ill., for plaintiffs-appellants.

Columbus R. Gangemi, Jr., Winston & Strawn, Chicago, Ill., Michael E. Abram, Cohen, Weiss & Simon, New York City, for defendants-appellees.

Before BAUER, WOOD and CUDAHY, Circuit Judges.

CUDAHY, Circuit Judge.

This is another in a series of appeals arising out of various disputes between United Independent Flight Officers, Inc. ("UIFO"), United Air Lines, Inc. ("United"), and the Air Line Pilots Association, International ("ALPA"). Plaintiff UIFO is a corporation whose members include current and former United pilots. ("Pilots" refers collectively to all flight deck personnel--pilots, co-pilots and navigators.) Defendant United is an airline having its principal place of business within the Northern District of Illinois. Defendant ALPA is the collective bargaining representative of the pilots of United and of members of UIFO. The individual plaintiffs are both members of UIFO and members or former members of ALPA.

This is a challenge by a group of retired United pilots to a collective bargaining agreement which retroactively amended and improved certain benefit plans available to United pilots including the plaintiffs. The complaint alleges that United and ALPA unlawfully failed to provide among the pension distribution options one which would permit pilots who retired between February 1, 1981, and December 31, 1981, to receive a lump sum distribution with the same tax consequences as pilots who retired on or after January 1, 1982. The plaintiffs complain in Count I that United and ALPA have breached their fiduciary duties under Secs. 404 and 405 of the Employee Retirement Income Security Act of 1974 ("ERISA"), codified at 29 U.S.C. Secs. 1104, 1105. They also allege, as Count II, that ALPA breached its duty of fair representation implied under the Railway Labor Act (the "RLA"), and that United was a party to that breach. In Count III they claim that they have also been injured by breaches of certain contracts between United and ALPA. Finally, the plaintiffs allege as Count IV of their complaint that the defendants are estopped to deny them the opportunity for a lump sum rollover or its financial equivalent.

The district court dismissed Count I for failure to state a claim for breach of fiduciary duty under ERISA, and Count II was dismissed as barred by the statute of limitations. The trial court went on to dismiss Counts III and IV without prejudice, since they are state law claims. We affirm.

I

This is an appeal of a grant of a motion under Rule 12(b)(6), FED.R.CIV.P., to dismiss for failure to state a claim upon which relief may be granted. For present purposes, we, of course, take the facts alleged by plaintiff to be true. Kugler v. Helfant, 421 U.S. 117, 125, 95 S.Ct. 1524, 1531, 44 L.Ed.2d 15 (1975); Haroco, Inc. v. American National Bank & Trust Co., 747 F.2d 384 (7th Cir.1984), cert. granted, --- U.S. ----, 105 S.Ct. 902, 83 L.Ed.2d 917 (1985).

The 1979 agreement between United and ALPA governing the terms and conditions of employment of United pilots, which was set to expire in early 1981, provided two benefit plans. One was the United Air Lines, Inc., Pilots' Fixed Benefit Retirement Income Plan (the "A" Plan), the other the United Air Lines, Inc., Pilots' Variable Benefit Retirement Income Plan (the "B" Plan). On March 20, 1981, negotiations for a successor labor agreement had not been completed, so United and ALPA agreed to extend the 1979 agreement while incorporating certain immediate wage improvements, and agreed to continue negotiations. United and ALPA also agreed that any improvements to the United pilot pension or disability plans resulting from these continuing negotiations would be made retroactive with respect to pilot participants to February 1, 1981. Negotiations continued and the new basic agreement was signed on August 14, 1981 (the "1981 Pilot Agreement"). However, agreement had not been reached on any pension improvements, so the parties agreed to continue negotiating with the understanding that improvements would be retroactive. In addition, the parties agreed that, if no agreement could be reached on the pension issues by August 1, 1982, the 1981 Pilot Agreement would be subject to reopening. Continued negotiations were successful, and on June 24, 1982, a "Supplemental Agreement" was signed. The Supplemental Agreement modified and improved both the A and B Plans, but only the changes to the B Plan are here in dispute. ¹

Under the Supplemental Agreement the United Air Lines, Inc., Pilots' Variable Benefit Retirement Income Plan (the B Plan) was converted to the United Air Lines, Inc., Directed Account Retirement Income Plan (the "Directed Account Plan"). This conversion was retroactive to an effective date of February 1, 1981. Under the terms of the Directed Account Plan each pilot could choose among a variety of investment funds in which to place his or her retirement account assets. In addition, the conversion supplemented the methods by which a retired pilot could receive his or her benefits. The normal form of receipt of benefit under the B Plan had been by a single life annuity. The Directed Account Plan provided a choice of any one of four alternate payment methods. ²

All of the mentioned improvements to, and changes in, the Directed Account Plan were, as plaintiffs concede, implemented retroactively. Pilots who retired on or after February 1, 1981, received the increased benefits under the A Plan and were entitled to transfer their Plan B assets into the Directed Account Plan. Further, they were allowed to elect distribution under the new options, and in particular could get a lump sum distribution of the remainder of their account assets pursuant to option (i). See supra n. 2. We shall also take it as true for purposes of this appeal that the lump sum option was "negotiated specifically for the purpose of a rollover into an IRA," District Court Memorandum Opinion and Order 7, UIFO App. 7; UIFO Br. 4 n. 1, though this is not alleged in the complaint.

The individual named plaintiffs (and those class members they seek to represent) are pilots who reached retirement age in 1981, whose normal retirement date was February 1st or later in 1981 and who received periodic pension benefits during 1981. This last fact is crucial to their difficulty, for receipt in that year may preclude tax-free rollover of a lump sum distribution (if that were elected) into an Individual Retirement Account (an "IRA"). It is for the value of the putatively lost tax-free status of the rollover that plaintiffs sue.

The problems of tax treatment involved in the rollover of a pension distribution into an IRA are somewhat complex. A lump sum distribution is an optional form of benefit payment which a pension plan need not provide in order to qualify for tax exempt status under Sec. 501(a) of the Code. See I.R.C. Sec. 401(a)(9). If available under a plan and elected by a plan participant, a lump sum distribution may be used for any purpose. Under usual circumstances the entire distribution is taxed to the recipient in the taxable year of distribution. An attractive way to defer the tax is to roll the distribution over into an IRA. In that case, since receipt of any money from the IRA may be deferred until age 70 1/2, the tax on the plan distribution may be similarly deferred. But, in order to defer taxation of the distribution by use of an IRA rollover, the recipient must, in general, receive the distribution within a single taxable year. I.R.C. Sec. 402(a)(5). However, the Internal Revenue Service (the "IRS") has made exceptions to this general rule in a number of situations not unlike that of the instant case. United Br. 9 n. 12 (collecting Private Letter Rulings).

Prior to the 1982 Supplemental Agreement neither the A Plan nor the B Plan provided as an optional form of distribution a lump sum payment. Each plan provided for monthly payment of benefits, starting the month after retirement. The Supplemental Agreement provided for optional lump sum distribution from the Directed Account Plan (the successor to the B Plan). ³ However, by the time the Supplemental Agreement was concluded pilots who had retired in 1981 had received distributions from the B Plan in both 1981 and 1982, and, under the general rule, would presumably be ineligible for a tax-deferring rollover into an IRA of the lump sum distribution of the remainder of their interest.

In August, 1982, United applied to the IRS for a ruling allowing the 1981 retirees to roll their remaining B Plan assets over into an IRA on a tax deferred basis. United Br. 11. During the months following conclusion of the Supplemental Agreement the United Pension Programs Department sent several letters and information packets to the 1981 retirees informing them of the changes, including those to the options under the Directed Account Plan. The letters also requested election between the prior plans and the new plans and, if the new plans were elected, a choice among the methods of payment available under the Directed Account Plan. The letters also informed retirees of the expected IRS position, and, later, of the actual ruling ⁴ and advised against a lump sum distribution for IRA rollover unless the retiree "wish[ed] to try the IRA route and pursue the matter through the courts." UIFO App. 19.

No plaintiff has alleged that he was prevented by United or ALPA from selecting any one of the four benefit payment options, that he attempted a lump sum tax-free rollover into an...