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Vaughn v. Air Line Pilots Association

July 24, 2008


The opinion of the court was delivered by: Townes, United States District Judge


This case arises from the recent dire financial quagmire of US Airways, Inc. ("US Airways"). Since 2002, US Airways has filed for bankruptcy protection on two separate occasions, and has been in constant financial turmoil. During the first reorganization, begun in August 2002, the United States Bankruptcy Court for the Eastern District of Virginia approved the termination of US Airways' then-effective pilot pension plan, a defined benefit plan, and the implementation of a replacement defined contribution plan. US Airways once again filed for bankruptcy protection in September 2004, and during this second reorganization, the defined contribution plan was modified to ensure the company avoided liquidation. With each change to the pilot pension plan, pilots were promised significantly fewer retirement benefits, which has led to the instant action.

Plaintiffs, who number nearly 300 individuals, are pilots presently or formerly employed by US Airways and US Airways Group, Inc. (collectively, "US Airways") who have either reached their sixtieth birthday or are close to doing so.*fn1 Some of the plaintiffs have already retired, but they remain involved in this dispute because of significant losses to their pension plans. They commenced this action against defendants US Airways, Air Line Pilots Association, International ("ALPA"), Duane Woerth, as President of ALPA, Retirement Systems of Alabama ("RSA"), and Retirement Systems of Alabama Holdings LLC ("RSA Holdings"). Through the Fourth Amended and Supplemental Complaint (the "FAC"), plaintiffs assert several claims against defendants: (1) that ALPA and Woerth allegedly breached their duty of fair representation, engaged in discrimination based upon age in violation of the Age Discrimination in Employment Act ("ADEA"), and violated the Racketeering Influenced and Corrupt Organizations Act ("RICO"); (2) that US Airways discriminated against plaintiffs based upon age in violation of the ADEA, breached its fiduciary duties and conducted "prohibited transactions" under the Employment Retirement Income Security Act ("ERISA"), and violated RICO; and (3) that RSA and RSA Holdings violated RICO.

On or about November 22, 2006, plaintiffs voluntarily dismissed all of their claims against US Airways, and now ALPA and Woerth (collectively, "ALPA") and RSA and RSA Holdings (collectively, "RSA") separately move to dismiss the FAC. For the reasons set forth below, both ALPA's and RSA's motions are granted.


A. US Airways' Financial Problems and the First Concession

In 2001, US Airways was the seventh largest airline in the United States and employed nearly 49,000 active employees, including 6,200 pilots. Following corporate moves that decreased its stock price, including an approximately $1.9 billion stock buyback, and the terrorist attacks of September 11, 2001, US Airways began experiencing significant financial problems. US Airways' financial predicament was exacerbated by the company's significant underfunding of its employees' four pension plans. In February 2002, US Airways reported that the pilots' pension plan, a defined benefit plan (the "DB Plan") -- which was the costliest of the four pension plans -- was only funded at 64% of the required level, which obligated US Airways to immediately and significantly contribute to the DB Plan.*fn3 In March 2002, David Siegel was appointed president and CEO of US Airways. Soon thereafter, the company publicly announced that its financial position required immediate improvement.

Claiming that employee concessions were necessary to stave off bankruptcy, in mid-2002, prior to filing its first petition for bankruptcy protection, US Airways sought substantial cuts to employee wages and benefits from all of the unions representing its employees. ALPA, the pilots' exclusive negotiating agent, was the only employee union to agree to the substantial cuts at that time, but did not negotiate to have the savings earmarked to correct the DB Plan's funding deficit (the "First Concession").*fn4 The other unions eventually agreed to the substantial cuts requested by US Airways approximately one month after the company filed its first petition for bankruptcy protection.

In August 2002, shortly before US Airways filed for bankruptcy protection, it managed to obtain tentative approval of a $1 billion loan package guaranteed by the Air Transportation Stabilization Board ("ATSB"). The ATSB loan guarantee, however, was conditioned on US Airways demonstrating that it could achieve certain revenue and cost reduction targets in accordance with a seven-year business plan.

B. US Airways' First Bankruptcy and Termination of the DB Plan

On or about August 11, 2002, US Airways filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia (the "2002 Bankruptcy"). To maintain its cash liquidity during the reorganization, as the ATSB guarantee was substantially a form of exit financing, US Airways obtained $500 million from RSA through a debtor-in-possession loan. RSA also agreed to become a "plan sponsor," whereby it agreed to invest $240 million in US Airways once it exited bankruptcy in exchange for a 37% interest in the company. RSA's investments enabled US Airways to pursue a "fast track" reorganization and to emerge from Chapter 11 during the first quarter of the next year.

However, two substantial problems arose during the bankruptcy case that threatened the business plan upon which the ATSB-guaranteed loan and RSA investments were conditioned. First, US Airways determined that it could not meet the revenue targets outlined in the business plan because of reduced passenger revenue and increased fuel costs. Although US Airways agreed during the First Concession not to seek any additional relief regarding its obligations to the pilots pursuant to any provision in the Bankruptcy Code -- which the pilots understood to mean that US Airways would not seek any additional concessions from them -- US Airways attempted to negotiate further with ALPA. In December 2002, US Airways and ALPA engaged in a second round of negotiations to further reduce pilot wages and benefits. At the conclusion of these negotiations, ALPA agreed to a significant amount in annual wage and benefits concessions, including modifications to the DB Plan (the "Second Concession"). These concessions were memorialized in two documents referred to as Letter of Agreement ("LOA") No. 83 and LOA No. 84.

During the Second Concession's negotiations, ALPA did not audit the DB Plan to determine the accuracy of US Airways' statements regarding the financial health of the DB Plan despite having the express power to do so pursuant to LOA No. 9. When confronted by its members regarding this failure, ALPA erroneously stated that it could not compel the company to disclose the financial condition of the DB Plan. ALPA eventually hired an actuarial firm to perform an audit of the DB Plan, but this analysis -- which confirmed the accuracy of US Airways' calculations -- was not reported until after the Bankruptcy Court had approved the DB Plan's termination. Another concern for ALPA's members during this time was the fact that ALPA was the only employee union to agree to the full amount of US Airways' requested concessions.

The Second Concession, however, did not address the second problem threatening US Airways' business plan -- a serious funding shortfall for the company's four defined benefit plans, including the pilots' plan, over the seven-year period of the business plan. This shortfall was the result of both poor stock market performance that reduced the value of plan assets and historically-low interest rates that increased the plan's liabilities. Under the terms of the DB Plan, US Airways was obligated to regularly contribute funds to ensure that each pilot would receive his or her guaranteed benefit upon retirement. Although the contributed funds were invested and subject to gains and losses, each pilot's promised benefits remained constant, and US Airways was responsible for ensuring that each pilot's pension was sufficiently funded. Given the significant funding deficit, US Airways' responsibility to maintain a specific funding level for the DB Plan had substantially increased.

Both US Airways and ALPA attempted to find a solution to the shortfall in the DB Plan, which was projected to be nearly $1.7 billion during the term of US Airways' seven-year business plan. They pursued various solutions -- including petitioning for funding waivers from the Internal Revenue Service ("IRS"); requesting restoration funding from the Pension Benefit Guaranty Corporation ("PBGC"); and seeking Congressional legislation that would provide funding relief -- but each of these efforts failed. Given the failure of these solutions, the DB Plan's termination appeared imminent.

In December 2002, around the same time US Airways and ALPA negotiated the Second Concession, they also conducted confidential negotiations. These negotiations produced an agreement in which US Airways agreed to negotiate and create a follow-up pension plan if the varied funding solutions failed and caused the DB Plan to be terminated (the "Side Letter Agreement"). The Side Letter Agreement was meant to remain confidential if and until the DB Plan was terminated, but ALPA's members soon learned of the agreement and questioned whether the agreement represented ALPA's consent to the DB Plan's termination. ALPA, in defending its decision to enter into the Side Letter Agreement, stated that the agreement was intended to provide the pilots with protection in the event that the DB Plan was terminated, and did not constitute consent to the plan's termination.*fn5

On or about January 30, 2003, US Airways sent to ALPA members and the PBGC a sixty-day notice of its intention to terminate the DB Plan, and also moved the Bankruptcy Court to terminate the DB Plan under the "distress termination" provisions of ERISA. The PBGC, the entity responsible for paying the insured benefits under the terminated plan, neither supported nor opposed the DB Plan's termination. ALPA opposed the motion, primarily arguing that such a termination would violate the collective bargaining agreement that required US Airways to maintain the DB Plan. After a four-day hearing on US Airways' motion, on March 1, 2003, Bankruptcy Judge Mitchell ruled from the bench that US Airways met the requirements for a distress termination, and allowed it to terminate the DB Plan. On March 7, 2003, the Bankruptcy Court issued a Memorandum Opinion both memorializing that decision, and explaining that US Airways' ability to meet the conditions outlined in the ATSB-guaranteed loan was dependent upon resolving the DB Plan's funding deficit. See In re US Airways Group, Inc., 296 B.R. 737. According to the Bankruptcy Court, the DB Plan had to be terminated because there were no other realistic options for resolving the funding deficit. The Bankruptcy Court also ruled that it was not deciding whether the DB Plan's termination violated the collective bargaining agreement between US Airways and ALPA because that issue could only be determined through the dispute mechanisms established by the Railway Labor Act, 45 U.S.C. § 151, et seq.

Prior to the Bankruptcy Court's oral decision approving the DB Plan's termination, ALPA refused to negotiate the creation of a follow-up pension plan, and instead sought to save the DB Plan, which the union repeatedly led its members to believe could be saved. Contradistinctively, following the Bankruptcy Court's decision, ALPA and US Airways began negotiating the termination of the DB Plan and the creation of a follow-up pension plan. During these negotiations, a number of ALPA's members received two separate letters from two union officials assuring the pilots that they would have an opportunity to ratify or reject proposals to terminate the DB Plan and implement a replacement plan. On March 22, 2003, without any membership vote, US Airways and ALPA agreed to implement a defined contribution plan ("DC Plan I") to replace the terminated DB Plan. The agreement creating DC Plan I was memorialized in LOA No. 85, and approved by the Bankruptcy Court on March 28, 2003. Three days later, on March 31, 2003, US Airways emerged from bankruptcy.

The new pilot pension plan, DC Plan I -- in contrast to the original DB Plan -- required US Airways to make promised contributions to the plan based upon each pilot's unique contribution rate, but the company was not obligated to ensure that the plan maintained a sufficient level of assets so that each pilot would receive a guaranteed amount of money upon retirement. The company's contribution rate for each pilot was calculated through a complex formula designed to help pilots achieve a target benefit upon retirement.*fn6 In large part, the target benefit was calculated by projecting a pilot's earnings during the end of his or her career less the projected amount of annuities from the PBGC. Under DC Plan I, US Airways was required to provide greater contributions to pilots approaching the mandatory retirement age of 60 than to younger pilots who had a longer time period in which to accumulate contributions and achieve their target benefits. The higher contributions, however, were limited to 100% of a pilot's salary, with the result that older pilots were still unlikely to achieve their target benefits upon retirement.*fn7 Both US Airways and the PBGC indicated a willingness to correct the inequities that would affect pilots close to retirement age, but ALPA did not renegotiate any portion of DC Plan I. ALPA's members nearing retirement were further dissatisfied with ALPA's actions when they later learned from an investment document associated with DC Plan I that the union was to serve as a manager of the funds contributed to DC Plan I.

C. US Airways' Second Bankruptcy and Modifications to DC Plan I

Despite the substantial cost-saving measures achieved immediately before and during US Airways' first bankruptcy, the company soon found itself again facing serious financial difficulties. On or about September 12, 2004, US Airways filed its second petition for bankruptcy protection under Chapter 11 (the "2004 Bankruptcy"), in the Eastern District of Virginia. During the second reorganization, ALPA and US Airways agreed to further reduce costs associated with the pilot's pension plan by amending DC Plan I. The amended plan ("DC Plan II") eliminated the target benefit concept and instead required US Airways to make contributions to each pilot's individual account at the same rate -- at 10% of the pilot's salary -- regardless of age, seniority, or any other factor. Under DC Plan II, however, pilots nearing retirement age had less time to accumulate contributions and would likely receive fewer benefits upon retirement than younger pilots.

On or about January 11, 2005, several pilots received a Summary Annual Report regarding the funding levels of the original DB Plan for the year 2002 which was attached to the 2003 Summary Annual Report. The report revealed that the DB Plan, as of December 31, 2002, was funded to the ERISA minimum, which directly conflicted with numerous statements made by US Airways and ALPA regarding the DB Plan's severe underfunding. In addition, the report was provided outside the ERISA-required time frame for publishing the status of pension plans, and it was not provided to every plan participant. The FAC fails to indicate whether, and to what extent, these issues were raised with ALPA or during US Airways' 2004 Bankruptcy. In July 2005, US Airways' second reorganization plan was confirmed by the Bankruptcy Court.

D. Commencement of This Action

On September 22, 2003, a number of current and retired pilots commenced this action against ALPA and various ALPA officials.*fn8 The initial complaint alleged only that ALPA violated the duty of fair representation ("DFR") because of the manner in which it negotiated the termination of the DB Plan and created DC Plan I. Subsequently, plaintiffs filed three more versions of the complaint before filing, on June 22, 2006, the current version of their complaint, the FAC, which consumes nearly 100 pages and over 700 paragraphs. With each amendment to the complaint, plaintiffs made various changes, such as adding more plaintiffs, removing the ALPA officials as defendants (with the exception of Woerth), naming new defendants (i.e., US Airways and RSA), and asserting new claims under the ADEA, ERISA, and RICO. However, the FAC is essentially the same as the immediately-preceding complaint, with a DFR claim against ALPA; ADEA claims against ALPA and US Airways; and RICO claims -- which were first raised in the immediately-preceding complaint -- against ALPA, US Airways, and RSA. The only substantive change is that plaintiffs have asserted a new ADEA claim against ALPA and US Airways, arising from the creation of DC Plan II.

On August 11, 2006, the Court held a pre-motion conference regarding ALPA's and RSA's proposed motions to dismiss, during which separate briefing schedules for the respective motions were set. Due to differing briefing schedules and delay caused by plaintiffs' decision to change counsel, RSA's motion was filed on November 6, 2006, and ALPA's motion was not filed until May 31, 2007. On November 24, 2006, plaintiffs voluntarily dismissed all of their claims against US Airways. Thereafter, on January 4, 2008, the Court held argument on both of defendants' motions.*fn9


A. Rule 12(b)(6) Legal Standard

In considering a motion to dismiss pursuant to Rule 12(b)(6), a court must accept all of the factual allegations in the complaint as true and must draw all reasonable inferences in the plaintiff's favor. See Erickson v. Pardus, --- U.S. ----, 127 S.Ct. 2197, 2200 (2007); OforiTenkorang v. Am. Int'l Group, Inc., 460 F.3d 296, 298 (2d Cir. 2006). At this stage, "[t]he Court's task is 'not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient.'" In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d 611, 623 (S.D.N.Y. 2007) (quoting Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985)). In conducting this inquiry, the Court must determine whether plaintiffs have stated "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, --- U.S. ----, 127 S.Ct. 1955, 1974 (2007).

While a complaint "does not need detailed factual allegations," id. at 1964, it nonetheless must give the defendant(s) "fair notice of what the . . . claim is and the grounds upon which it rests." Erickson, 127 S.Ct. at 2200. "[A] plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic, 127 S.Ct. at 1964-65 (citing Papasan v. Allain, 478 U.S. 265, 286 (1986)); see also Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir. 1996) (holding that bald assertions and conclusions of law are inadequate to survive a motion to dismiss). As the Second Circuit recently stated, the "flexible 'plausibility standard'" enunciated in Bell Atlantic "obliges a pleader to amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible." Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007).

As aforementioned, this Court will consider documents outside the complaint that may properly be considered in connection with a motion under Rule 12(b)(6), see Roth, 489 F.3d at 509; Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002), and "[i]f these documents contradict the allegations of the [FAC], the documents control and this Court need not accept as true the allegations in the [FAC]." Rapoport v. Asia Electronics Holding Co., Inc., 88 F. Supp. 2d 179, 184 (S.D.N.Y. 2000). However, "the bottom-line principle is that 'once a claim has been stated adequately, it may be ...

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