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Appeal Brief - Pension Case

STATE OF MICHIGAN

IN THE COURT OF APPEALS

(On Appeal from the Michigan Court of Claims)

______________________________________________________________________________

THOMAS R. OKRIE, and SIMILARLY

SITUATED RETIRED STATE AND PUBLIC

SCHOOL EMPLOYEES BORN AFTER 1945,

Plaintiffs-Appellants,

COA No. 326607

LC No. 13-000093-MK

v

STATE OF MICHIGAN, GOVERNOR

RICK SNYDER, MICHIGAN DEPARTMENT

OF TECHNOLOGY, MANAGEMENT

AND BUDGET, OFFICE OF

RETIREMENT SERVICES,

STATE EMPLOYEES RETIREMENT

SYSTEM, MICHIGAN PUBLIC

SCHOOL EMPLOYEES RETIREMENT

SYSTEM, and MICHIGAN DEPARTMENT

OF TREASURY,

Defendants-Appellees.

______________________________________________________________________

Gary P. Supanich (P45547)

LAW OFFICE OF GARY P. SUPANICH

Attorney for Plaintiffs-Appellants

117 N. First Street, Suite 111

Ann Arbor, MI 48104

(734) 276-6561

www.michigan-appeal-attorney.com

Patrick M. Fitzgerald (P69964)

Matthew Schneider (P62190)

Aaron D. Lindstrom (P72916)

MICHIGAN DEPARTMENT OF

ATTORNEY GENERAL

State Operations Division

Attorneys for Defendants

P.O. Box 30754

Lansing, MI 48909

(517) 373-1162

_____________________________________________________________________

PLAINTIFFS-APPELLANTS' BRIEF ON APPEAL

ORAL ARGUMENT REQUESTED

EXHIBITS

PROOF OF SERVICE

TABLE OF CONTENTS

TABLE OF AUTHORITIES. i

STATEMENT OF JURISDICTION.. vii

STATEMENT OF QUESTIONS FOR REVIEW... viii

INTRODUCTION........................................................................................................................... 1

STATEMENT OF THE FACTS...................................................................................................... 5

A. Background Facts. 5

1. The State, Through the ORS, Regularly and Consistently Over Decades Promised Mr. Okrie et al. that Their DB Pensions Were Exempt from State and City Income Tax After They Retired. 5

2. In Making Irrevocable Employment Termination and Retirement Decisions and in Calculating Their Retirement Benefits, Mr. Okrie et al. Detrimentally Relied upon the State of Michigan's Promise that "Pensions . . . Are Exempt from Michigan State and City Income Tax.". 7

3. The Enactment of 2011 PA 38, and Related Legislation, Subjected the Pensions of Retired State and Public School Employees Born After 1945 to Taxation, Without the Payment of Equivalent Financial Benefits. 10

4. The Michigan Supreme Court's decision in the Advisory Opinion 11

B. Procedural Facts. 13

ARGUMENT 17

A. Standard of Review.. 17

B. Legal Discussion. 17

I. The State Breached the Employment Contracts of Mr. Okrie et al. By Taking Away Their Deferred Compensation Payable in the Form of Tax-Exempt Pensions, Without Providing Alternative Benefits in Their Place That Are Equal to or Greater Than Tax-Exempt Pensions. 17

1. Mr. Okrie et al. had contractual relationships with the State for deferred compensation payable in the form of tax-exempt pensions or equivalent financial benefits after retirment 18

2. The State breached Mr. Okrie et al.'s employment contracts by unilaterally altering the terms and conditions in effect depriving them of the deferred compensation already earned. 19

3. State Supreme Court decisions in Hughes and Bailey issued in the aftermath of U.S. Supreme Court's decision in Davis support Mr. Okrie et al.'s breach of contract claim for deferred compensation. 21

4. A tax-exempt pension was a term or condition of the public employment contracts in effect when Mr. Okrie et al.'s made their irrevocable employment termination and retirement decisions. 23

5. U.S. Supreme Court precedents - particularly the Winstar decision - support Mr. Okrie et al.'s claim for contract damages. 31

II. Alternatively, in the Absent of Express Employment Contracts, the State Breached the Implied Contracts with Mr. Okrie et al. under the Doctrine of Promissory Estoppel by Taking Away their Deferred Compensation Payable in the Form of Tax-Exempt Pensions, Without Providing Alternative Benefits in Their Place That Are Equal to or Greater Than Tax-Exempt Pensions, after they retired. 34

III. The State's Retention of Mr. Okrie et al.'s Deferred Compensation Payable in the Form of Tax-Exempt Pensions, Without Providing Alternative Benefits in Their Place That Are Equal to or Greater Than Tax-Exempt Pensions, Constitutes Unjust Enrichment. 41

IV. The Application of 2011 PA 38, and the Related Legislation, to Mr. Okrie et al. Violates the Contract Clauses of 1963 Const, art 1, § 10 and US Const, art 1, § 10(1) 42

V. The Application of 2011 PA 38, and the Related Legislation, to Mr. Okrie et. al. Violates the Takings Clauses under 1963 Const Art 10, § 2 and US Const Am V and US Const Am XIV. 46

VI. Mr. Okrie et al. Should Be Allowed to Amend Their Verified Class Action Complaint to Allege Claims for Breach of the Service Credit Purchase Contract, Breach of the Member Investment Plan (MIP) Contract, Fraud in the Inducement and Gross Negligent Misrepresentation. 47

VII. Mr. Okrie et al.'s Second Amended Verified Class Action Complaint Should Be Remanded to the Trial Court for Certification as a Class Action. 50

CONCLUSION AND RELIEF. 50

TABLE OF AUTHORITIES

Allied Structural Steel Co v Spannaus, 438 US 234 (1978)...................................................... 42, 44

Andrews v Anne Arundel County, Maryland, 931 F. Supp 1255 (D Md 1996), aff'd 114 F3d 1175 (CA4 1997). 44

Auto Club Ins Ass'n, 437 Mich 521 (1991)..................................................................................... 41

Bailey v State, 500 SE2d 54 (NC 1998)................................................................................... 21, 22

Bakenhus v City of Seattle, 296 P2d 536 (Wash 1956)................................................................... 20

Baltimore Teachers' Union v Mayor and City Council of Baltimore, 6 F3d 1012 (CA4 1997) . 43, 44

Bankey v Storer Broad Co, 432 Mich 438 (1989).......................................................................... 38

Barber v SMH (US), Inc, 202 Mich App 366 (1993)..................................................................... 41

Ben P. Fyke & Sons v Gunter Co, 390 Mich 649 (1973)............................................................... 47

Bd of Regents v Roth, 408 US 564 (1972)................................................................................ 46, 47

Booker v City of Detroit, 469 Mich 892 (2003) ............................................................................. 41

Cain v Allen Electric & Equipment Co, 346 Mich 568 (1956).................................... 17, 38, 39 n14

Centex Corp v United States, 395 F3d 1283 (CA Fed Cir 2005). ................................................ 33

Chiles v Ceridian Corp, 95 F3d 1505 (CA 10 1996).............................................................. 48 n12

Christensen v Minneapolis Mun Employees Ret Bd, 331 NW2d 740 (Minn 1983)........................ 41

City Nat'l Bank v Westland Towers Apartments, 107 Mich App 213 (1981).................................. 41

City of Frederick v Quinn, 371 A2d 724 (Md Ct Spec App 1977) ............................................... 44

Clarke v Brunswick Corp, 48 Mich App 667 (1973)............................................................... 39 n14

Couch v Administrative Committee of the Difco Laboratories, Inc, Salaried Employees Profit Sharing Trust, 44 Mich App 44 (1972)................................................................................................ 39 n 14

Crown Technology Park v D& N Bank, FSB, 242 Mich App 538 (2000)............................... 33, 34

Cunningham v 4-D Tool, 182 Mich App 99 (1989)....................................................................... 18

Curtiss-Wright Corp v Schoonejongen, 514 US 73 (1995)............................................... 28 n 12, 29

Davis v Mich Dep't of Treasury, 489 US 803(1989).................................................................. 2, 37

Davis v State of Michigan, 160 Mich App 98 1987)................................................................... 1, 37

Detroit v Detroit Police Officers Assoc, 408 Mich 410 (1980)....................................................... 30

Detroit v Walker, 445 Mich 682 (1994).......................................................................................... 24

Dumas v Dumas v Auto Club Ins Ass'n, 437 Mich 521 (1991)...................................................... 38

Energy Reserves Group v Kan Power & Light Co, 459 US 400 (1983) ..................... 42

Firestone Tire & Rubber Co v Bruch, 489 US 101 (1989)..................................................... 28 n 12

Ford Motor Co v Bruce Twp, 264 Mich App 1 (2004) ....................................................... 17

Formall, Inc v Community Nat'l Bank, 166 Mich App 772 (1988)................................................ 47

Frank W Lynch & Co v Flex Technologies, Inc, 463 Mich 578 (2001).......................................... 24

Gaydos v White Motor Corp, 54 Mich App 143 (1974)................................................... 18, 39 n 14

Gen Motors Corp v Romein, 503 US 181 (1992) .......................................................................... 42

Hetchler v American Life Ins Co, 266 Mich 608 (1934)................................................................. 29

Hickey v Pension Bd, 378 Pa. 300, 106 A2d 233 (1954)............................................................... 22

Home Bldg & Loan Ass'n v Baisdell, 290 US 398 (1934).............................................................. 43

Horowitz v United States, 267 US 458 (1925) ............................................................................... 31

Hughes v State, 838 P2d 1018 (Ore 1992)..................................................................................... 21

Huhtala v Travelers Ins Co, 401 Mich 118 (1977)......................................................................... 34

Hoye v Westfield Ins Co, 194 Mich App 696 (1992). ................................................................... 34

In re Certified Question (Bankey v Storer Broadcasting Co, 432 Mich 438 (1989)) .... 13 n 7

In re Certified Questions, 416 Mich 558 (1982)............................................................................. 24

In re DCT, Inc, 261 F Supp 2d 864 (ED Mich 2003). ................................................................. 34

In re McCallum Estate, 153 Mich App 328 (1986)........................................................................ 41

In re Request for Advisory Opinion regarding Constitutionality of 2011 PA 38, 490 Mich 295 (2011) 11

Indiana ex rel Anderson v Brand, 303 US 95 (1938)............................................................... 19, 27

Joerger v Gordon Food Serv, 224 Mich App 167 (1997) ............................................................. 34

Jones v United States, 1 Ct Cl 383 (1865) ................................................................... 31

Kosa v State Treasurer, 408 Mich 356 (1980).................................................................................. 1

Law Offices of Lawrence J Stockler, PC v Rose, 174 Mich App 14 (1989)................................... 49

Long v Chelsea Community Hosp, 219 Mich App 578 (1996) .................................................... 34

Lynch v United States, 292 US 571 (1934)............................................................................... 31, 46

McInerney v Detroit Trust Co, 279 Mich 42 (1937)....................................................................... 17

Mississippi ex rel Robertson v Miller, 276 US 174 (1928)........................................................ 30, 31

Northern Pac Ry Co v State of Minnesota, 208 US 583 (1908)..................................................... 43

O'Dea v Cook, 169 P 366 (Cal 1917)............................................................................................. 22

Opinion of the Justices, 303 NE2d 320 (Mass 1973)..................................................................... 19

Paschke v Retool Indus, 445 Mich 502 (1994)........................................................................... 4, 37

Payne v Bd of Trs of the Teachers' Ins & Ret Fund, 35 NW2d 553 (ND 1948)............................ 20

Perry v United States, 294 US 330 (1935) .......................................................................... 31

Pierce v State, 910 P2d 288 (NM 1995)............................................................................... 4, 46, 47

Pineman v Oechslin, 488 A2d 803 (Conn 1985)........................................................................... 47

Psutka v Michigan Alkali Co, 274 Mich 318 (1936)......................................................... 18, 39 n 14

Retired Public Employees of Wash v Charles, 148 Wash 2d 602 (2003)....................................... 44

Rood v Gen Dynamics Corp, 444 Mich 107 (1993)....................................................................... 38

Samuel D Begola Services, Inc v Wild Bros, 210 Mich App 636 (1995)........................................ 49

Seneca Nursing Home v Kansas, 490 F2d 1324 (CA10 1974)...................................................... 20

Sinking-Fund Cases, 99 U.S. 700 (1879)....................................................................................... 31

Sniecinski v Blue Cross & Blue Shield, 469 Mich 124 (2003)........................................................ 17

State Bank of Standish v Curry, 442 Mich 76 (1993)..................................................................... 34

Toussaint v Blue Cross & Blue Shield of Michigan, 408 Mich 579 (1980)......................... 38, 39, 40

United States v Carolene Prods Co, 304 US 144 (1938)............................................................... 45

United States Dep't of Agriculture v Moreno, 413 US 528 (1973)................................................. 45

United States Trust Co of NY v New Jersey, 431 US 1 (1977).................................................. 42-45

United States v Winstar Corp, 518 US 839 (1996.................................................................... 30-33

Weymers v Khara, 454 Mich 639 (1997)........................................................................................ 47

Wheeler v Dynamic Eng'g Inc, 62 F3d 634 (CA 4, 1995) ............................................................ 28

Winstar Corp v United States, 25 Cl Ct 541 (1992)....................................................................... 33

Constitutional Provisions

Const 1963, art I, § 10...................................................................................................................... 6

Const 1963, art 10, § 2..................................................................................................................... 6

US Const, Am V.............................................................................................................................. 6

US Const, Am VI............................................................................................................................. 6

US Const, Am XIV.......................................................................................................................... 6

US Const, Art I, §10(1) ................................................................................................................... 6

US Const, Art VI............................................................................................................................. 6

Statutes

MCL 38.1 et seq. ........................................................................................................... 11, 13 n 6

MCL 38.40 ............................................................................................................. 3 n1, 5, n4, 26

MCL 38.1346(1) .............................................................................................. 3 n 1, 5 n4, 13 n6, 26

MCL 38.1057(1) ............................................................................................................. 3 n1, 13, n6

MCL 38.705 ..................................................................................................................... 3 n 1, 26

MCL 206.30(1)(f) ................................................................................................................. 3 n1, 26

MCL 206.1 et seq 5 n4 ................................................................................................................................... 6

29 USC § 1003(b)(1) ................................................................................................................. 28

Court Rules

MCR 2.116(C)(8)..................................................................................................................... 14, 15

MCR 2.116(C)(10).............................................................................................................. 14-17, 33

MCR 2.116(I)(1)....................................................................................................................... 14-17

MCR 3.501 ........................................................................................................................... 14-15

MCR 7.203(A)(1).......................................................................................................................... viii

Other Authority

Jack M. Beerman, The Public Pension Crisis, 70 Wash & Lee L Rev (1983).......... 20 n 11, 28 n13

1 Corbin on Contracts, § 90 (1981)................................................................................................ 34

Lon Fuller, The Morality of Law (1964)......................................................................................... 30

HB 4361 ................................................................................................................................. 10

Eric Madiar, Is Welching on Public Pension Promises an Option for Illinois? An Analysis of Article XIII, Section 5 of the Illinois Constitution. 2 (Mar. 1, 2011) http://ssrn.com/abtract=1774163.. 17 n8

Eric M Madiar, Public Pension Benefits Under Siege: Does State Law Facilitate or Block Recent Efforts to Cut the Pension Benefits of Public Servants?, 27 ABA J of Lab & Emp 179 (2012) 17 n8

Raven Merlau The State Giveth And The State Taketh: Constitutional Pension Protections And The Retroactive Removal of Public Pension Tax Exemptions, 19 Geo Mason L Rev 1229 (2012)...... 23

Amy Monahan, Public Pension Plan Reform: the Legal Framework, 5 Educ Fin & Pol'y 617 (2010) 17 n8

1991 OAG No. 6697, 1991 Mich AG LEXIS 39................................................................ 3, 26, 27

Mark Petit, Modern Unilateral Contracts, 63 BU L Rev 551 (1983)...................................... 18 n 9

Restatement (Second) of Contracts, § 90 (1981)............................................................................. 34

Robert Tilove, Public Employee Pension Funds (1976),.................................................................. 1

2011 PA 38 ........................................................................................................................ passim

2011 PA 41 ........................................................................................................................ passim

2011 PA 42 ........................................................................................................................ passim

2011 PA 43 ........................................................................................................................ passim

2011 PA 44 ........................................................................................................................ passim

2011 PA 45 ........................................................................................................................ passim

2013 PA 164 .............................................................................................................................. 15 6on Const 1963, art 1, § 6 6


STATEMENT OF JURISDICTION

Plaintiff-Appellant Thomas R. Okrie, on behalf of similarly situated retired state and public school employees born after 1945 ("Mr. Okrie et al."), filed this timely claim of appeal on March 26, 205 from the trial court's opinion and orders dated November 5, 2013 (EX. 1), February 10, 2014 (EX. 2), April 21, 2014 (EX. 3), and June 17, 2014 (EX. 4). Accordingly, this Court has jurisdiction of this appeal as of right under MCR 7.203(A)(1).

STATEMENT OF THE QUESTIONS FOR REVIEW

I. Did the State Breach the Employment Contracts of Mr. Okrie et al. by Taking Away Their Deferred Compensation Payable in the Form of Tax-Exempt Pensions, Without Providing Alternative Benefits in Their Place That Are Equal to or Greater Than Tax-Exempt Pensions?

II. Alternatively, in the Absence of Express Employment Contracts, Did the State Breach the Implied Contracts with Mr. Okrie et al. under the Doctrine of Promissory Estoppel By Taking Away their Deferred Compensation Payable in the Form of Tax-Exempt Pensions, Without Providing Alternative Benefits in Their Place That Are Equal to or Greater Than Tax-Exempt Pensions?

III. Does the State's Retention of Mr. Okrie et al.'s Deferred Compensation Payable in the Form of Tax-Exempt Pensions, Without Providing Alternative Benefits in Their Place That Are Equal to or Greater Than Tax-Exempt Pensions, Constitute Unjust Enrichment?

IV. Does the Application of 2011 PA 38, and the Related Legislation, to Mr. Okrie et al. Violate the Contract Clauses of 1963 Const, art 1, § 10 and US Const, art 1, § 10(1)?

V. Does the Application of 2011 PA 38, and the Related Legislation, to Mr. Okrie et al. Violate the Takings Clauses under 1963 Const Art 10, § 2 and US Const Am V and US Const Am XIV?

VI. Should Mr. Okrie et al. Be Allowed to Amend Their Verified Class Action Complaint to Allege Claims for the Breach of the Service Credit Purchase Contract, Breach of the Member Investment Plan (MIP) Contract, Fraud in the Inducement and Gross Negligent Misrepresentation?

VII. Should Mr. Okrie et al.'s Second Amended Verified Class Action Complaint Be Remanded to the Trial Court for Certification as a Class Action?



INTRODUCTION

It is an incontestable juridical fact that tax-exempt defined-benefit ("DB") pensions represent deferred compensation for governmental services previously rendered by retired state and public school employees to the State of Michigan. That tax-exempt pensions represent deferred compensation was held by the Michigan Supreme Court in Kosa v State Treasurer, 408 Mich 356, 372 n22, 372-373 (1980), where, in a unanimous opinion the Court cited with approval Robert Tilove's treatise, Public Employee Pension Funds (1976), noting that "[a]n income tax exemption has precisely the same effect as a benefit." This fundamental proposition was also consistently defended by the State in the Davis litigation. Specifically, in Davis v State of Michigan, 160 Mich App 98, 105 (1987), the State argued, and this Court agreed, that the "income tax exemption is an integral part of the retirement benefits conferred upon state employees, which is an "economic inducement" for "attracting and retaining []qualified employees." In Davis, this Court stated:

The State Employees' Retirement Act, MCL 38.1 et seq.; MSA 3.981(1) et seq., which predates the MITA [Michigan Income Tax Act], also exempts from taxation the right of a person to a pension or retirement allowance accruing pursuant to the act. Further, the Michigan Constitution provides that the accrued financial benefits of each pension plan and retirement system of this state and its political subdivisions are declared to be contractual obligations thereof which cannot be diminished or impaired. Const 1963, art 9, § 24. Michigan law does not extend similar status to federal pensions. [160 Mich App at 102.]

As this Court explained:

Under the Michigan income tax system, a class distinction is made between retirees and all other retirees, including federal retirees. In our opinion, the attracting and retaining of qualified employees is a legitimate state objective which is rationally achieved by a retirement plan offering economic inducements. One such inducement to state employees is tax exempt status for their retirement benefits. The State of Michigan, as an employer, owes a special responsibility to its employees, which it does not owe to federal employees. The full tax emption permitted by the [Income Tax Act] is simply intended to recognize that income tax exemption is an integral part of the retirement benefits conferred upon state employees. . . . [Id. at 105.] (Emphasis added.)

When Davis was appealed to the U.S. Supreme Court, the State again maintained that it had an "interest in hiring and retaining qualified civil servants through the inducement of a tax exemption for retirement benefits." Davis v Mich Dep't of Treasury, 489 US 803, 816 (1989). While the U.S. Supreme Court found that "We have no difficulty concluding that civil service retirement benefits are deferred compensation for past years of service rendered to the Government," it rejected as invalid the Michigan statute exempting from income tax the retirement benefits paid by state or political subdivisions, but not by other employers, including the federal government. Id. Addressing the State's important financial incentive of providing tax-exempt pensions as deferred compensation to its employees, the Court noted:

We also take issue with the dissent's assertion that "it is peculiarly inappropriate to focus solely on the treatment of state government employees" because "[t]he State may always compensate in pay or salary for what it assesses in taxes". . . . In order to provide the same after-tax benefits to all retired state employees by means of increased salaries or benefit payments instead of a tax exemption, the State would have to increase its outlays by more than the cost of the current tax exemption, since the increased payment to retirees would result in higher federal income tax payments in some circumstances. [Id. at 815 n 4 (emphasis added)]

The decisions in the Davis case established that tax exemptions are important employment tools that promised substantial financial benefits in the form of deferred compensation to retired state and public school employees. Indeed, as reflected in the State's legal position taken in Davis litigation, the State financially benefited from this position for decades since the tax exemptions were relatively inexpensive financial inducements, at least compared to the equivalent increase in salaries or benefits that would have been necessary to attract, retain and pay state and public school employees for their governmental services. Thus, the tax-exempt pensions promised by the State to Mr. Okrie and other similarly situated retired state and public school employees born after 1945 ("Mr. Okrie et al.) simply represented deferred compensation for the governmental services payable once they retired, just like any contractually-protected annuity.

In the aftermath of the U.S. Supreme Court's decision in Davis, it was recognized that, if the State eliminated the tax-exemption for the pensions of retired state and public school employees, the State should have to pay comparable financial benefits to them, which were equal to or greater than financial benefits represented by tax-exempt pensions. As explained in an Opinion of the Michigan Attorney General issued on December 18, 1991 (OAG No. 6697, p 6; 1991 Mich AG LEXIS 39):

Analyzing the statutory exemptions here at issue,[1] there is little question that an exemption from taxation for pension benefits constitutes "financial benefits" within the meaning of Const 1963, § 24, since the exemption usually will result in greater net pension payments for the recipient. In Robert Tilove's treatise, Public Employee Pension Funds (1976), cited with approval by Justice Williams for the unanimous Court in Kosa v State Treasurer, 408 Mich 356, 372 n 22; see also pp 372-373; 292 NW2d 452 (1980), the author, Tilove, in referring to public pension income tax exemptions generally, states: "[a]n income tax exemption has precisely the same effect as a benefit." (Emphasis added.)

In answering the primary question at issue here, the OAG responded as follows:

It is my opinion, therefore, that the Legislature may, without violating Const 1963, art 9, § 24, limit or repeal the tax exemptions now found in the four retirement statutes as to current retirees and members if it provides alternative benefits in their place that are equal to or greater than the pension benefit[s] that would be limited or withdrawn since there would be no constitutionally cognizable impairment of the pension benefit[s]. [OAG No. 6697, p 6; 1991 AG LEXIS 39](Emphasis added.)

In the present case, Mr. Okrie et al. concur with the Attorney General's position expressed in 1991 OAG No. 6697, which was in effect at the time they retired, and request that the State of Michigan keep its word to them and their fellow citizens. Simply put, as a matter of law and justice, the Legislature cannot apply 2011 PA 38, and the related legislation, to Mr. Okrie et al. without providing alternative benefits in their place that are equal to, or greater than, the monetary value of the tax-exempt pension benefits of which they have been deprived. See Pierce v State, 910 P2d 288, 304 (NM 1995)(stating that "any action by the legislature that serves to terminate, diminish or alter the value of pension benefits must be compensated for by providing an equal or greater benefit"). By claiming that the statutes revoking the tax exemption for public pensions, which entered in force on January 1, 2012, may be applied to retired state and public school employees who made irrevocable retirement and employment termination decisions in detrimental reliance upon the State's unqualified promises for decades not to tax their pensions, the State is now impermissibly repudiating the position taken in the Davis litigation and thereafter. In fact, as a matter of judicial estoppel, the State should not be permitted by this Court to assert a position in the present litigation that is inconsistent with the position previously taken in Davis. See Paschke v Retool Indus, 445 Mich 502, 509-510 (1994). Rather, the State should be required legally (if not morally) to keep its word to Mr. Okrie et al. by not taking away their deferred compensation payable in the form of tax-exempt pensions, without providing financial benefits equal to, or greater than the financial benefits represented by pensions not subject to state and local taxation as promised when they retired. [2]

STATEMENT OF FACTS

A. Background Facts

1. The State, Through the ORS, Regularly and Consistently Over Decades Promised Mr. Okrie et al. that Their DB Pensions Were Exempt from State and City Income Tax When They Retired.

For decades, MSERS and MPSERS, administered by the ORS, issued Retirement Guidelines advising public school employees and state employees: "It's never too early to begin planning a secure retirement." [3] (BIS- Pl. SD Motion, EX. 1, Retirement Guidelines, May 1995). As explained in the Introduction to the MPSERS Retirement Guidelines dated April 1998:

Retirement. You look forward to it as a time to enjoy the good life you've earned. To enjoy retirement to its fullest, you need financial security. The State of Michigan established a retirement plan to begin building that security for you. This retirement plan, together with Social Security contributions and your personal savings, can help you ensure financial security during your retirement years. [Id. at EX. 3, p 3].

It also informs public school employees:

Use the MPSERS Retirement Guidelines throughout your career to help you plan for retirement. When you're ready to retire, use it to help you make benefits decisions. [Id.]

The Introduction further states:

Remember, this book is a summary of the main features of the plan and not a complete description. The operation of the plan is controlled by the Michigan Public School Employees Retirement Act (Public Act 300 of 1980, as amended). If the provisions of the Act conflict with this summary, the Act controls. [Id.] [4]

Significantly, as "your 'partner in retirement' throughout your lifetime," MSPERS constantly reminded public school employees of the "Irrevocable nature of retirement." (Id. at EX. 3, pp, 11, 26, 34). As the 1998 Retirement Guidelines made unambiguously clear, without qualification: "Pensions paid by MPSERS are exempt from Michigan state income tax and Michigan city income tax." (Id. at p 32)(Emphasis added.)[5] This statement accurately reflected the statutory language contained in PA 300 of 1980 exempting pensions from state and city income tax, and which was in effect at the time Mr. Okrie and similarly situated retired state and public school employees made irrevocable employment termination and retirement decisions.

In almost identical language, the ORS, administering the State Employees Retirement System ("SERA"), regularly and consistently promised state employees covered by SERA (civil service employees as well as appointed officials in the Executive branch and employees of the Legislature and Judiciary) that their pension benefits were exempt from state and city income tax. For example, the 2001 "Retirement Guidelines" booklet prepared by ORS ("your 'partner in retirement throughout your lifetime") that was furnished to state employees stated that the booklet should be carefully reviewed prior to retirement. (Id. at EX. 4, pp 3, 9, 28). Under the heading "Tax Obligations," the Guidelines booklet informed state employees:

TAX OBLIGATIONS

State and local income tax

Pensions paid by the State Employees' Retirement System are exempt from Michigan state and city income tax. Although you are exempt from paying Michigan income tax, you must file state and city (if applicable) tax returns acknowledging your state pension and claiming your exemptions. (Id. at 29)

The clear and unequivocal language in these statements conveys the unmistakable promise not to subject the pensions of retired state and public school employees to state or city income tax. Importantly, this promise to exempt pensions from state and city income taxes is in marked contrast to the statements making it clear that their pensions were subject to federal income tax.

2. In Making Irrevocable Employment Termination and Retirement Decisions and in Calculating Their Retirement Benefits, Mr. Okrie et al. Detrimentally Relied upon the State of Michigan's Promise that "Pensions . . . Are Exempt from Michigan State and City Income Tax."

Mr. Okrie, a public school teacher, retired effective July 1, 2000 from the Troy School District as a "Health/Social Studies Teacher." Mr. Okrie, who was born on October 16, 1946, was 53 years old when he retired for health reasons. (Id. at EX. 6, Affidavit, ¶ 1). After more than 33 years in service credit and being less than 55 years old, Mr. Okrie was eligible for the "30 and Out" plan. Id. In the years before retiring, while he was still a public school teacher, Mr. Okrie regularly received and consulted the MPSERS Retirement Guidelines published by the ORS. (Id. at ¶ 2). The ORS, through the MPSERS Guidelines, instructed him to "Use the MPSERS Retirement Guidelines" and "When you're ready to retire, use it to help you make benefit decisions." (Id. at EX. 3, p 3). It also reminded him of the "[i]rrevocable nature of retirement." (Id. at 26). The Guidelines that he regularly received and consulted while he was still a public school teacher made the unambiguous, unqualified statement that "Pensions paid by MPSERS are exempt from Michigan state income tax and Michigan city tax." (Id. at 32).

In July 1999, the ORS sent Mr. Okrie retirement application forms and informational materials that he had requested, including the 1998 MPSERS Retirement Guidelines and the Retirement Pension Estimate Workbook. (Id. at EX. 6 ¶ 3). Before making the irrevocable decision to retire, Mr. Okrie consulted the 1998 Guidelines, which made the unambiguous, unqualified statement that "Pensions paid by MPSERS are exempt from Michigan state income tax and Michigan city tax." (Id. at EX. 3, p 32; EX. 6, ¶ 3). Mr. Okrie thus reasonably expected that, after retiring, his pension would be exempt from state and city income tax, relying upon these unqualified, unambiguous statements in the Retirement Guidelines in making his irrevocable retirement decision and in calculating his financial security. (Id.)

On August 18, 1999, Mr. Okrie submitted papers to the ORS stating that the effective date of his pension was July 1, 2000. (Id. at ¶ 4). Among the forms that he submitted to the ORS was the form entitled "Income Tax Information" (Id. at EX. 7), which again stated:

MICHIGAN STATE AND CITY INCOME TAX

Pensions paid by MPSERS are exempt from Michigan state income tax and Michigan city income tax. Although you are exempt from paying Michigan income tax, you must still file state and city (if applicable) tax returns, acknowledge receipt of your MPSERS pension, and claim your exemptions on these forms. . . . (Emphasis in original).

Again, Mr. Okrie relied upon this unqualified, unambiguous statement by the ORS in making his irrevocable decision to retire and in calculating his financial security, as MPSERS directed him to do. (Id. at EX. 6, ¶ 4). Significantly, there was no statement anywhere in the documents or forms sent to him stating that "the tax exemption could be eliminated at any time, so figure that into your retirement decision." (Id.). Although his pension was exempt from state and city income tax, it was subject to federal taxation, and thus he had to fill out the "Pension Recipient's Federal Income Tax Withholding Authorization" form. Id. Mr. Okrie elected "the straight life" - no survivor pension provided option, providing him with a monthly lifetime pension of $3,290.15, with a 3% increase of $98.70. (Id. at ¶ 3).

On October 14, 1999, Mr. Okrie received a letter from the ORS informing him that his "retirement application is now being processed by the Michigan Public School Employees Retirement System (MPSERS)." (Id. at ¶ 5). The letter informed Mr. Okrie as follows:

Please contact MPSERS immediately if the data on the Benefit Application Summary is incorrect. The "Retirement Guidelines" booklet that accompanied your retirement application forms should be carefully reviewed prior to retirement. [Id. at EX. 8].

As the ORS directed him to do, Mr. Okrie again reviewed the Retirement Guidelines, which unambiguously state without qualification that "Pensions paid by MPSERS are exempt from Michigan state income tax and Michigan city income tax." (Id. at EX. 3, p 32; EX. 6, ¶ 5). The letter ends by congratulating Mr. Okrie "on your retirement" and telling him: "You will soon reap the rewards of your hard work over the years." (Id. at EX. 8). The rewards consisted of a pension exempt from state and city income tax.

On June 7, 2000, Mr. Okrie received a letter from the ORS stating that "[y]our application for retirement has been processed and you will receive your first pension check . . . at the end of July, 2000." (Id. at EX. 6, ¶ 6; EX. 9). On July 25, 2000, he received a "remittance advice" from the State, and no state tax was assessed against him, as promised. (Id. at EX. 6, ¶ 6; EX. 10). This continued uninterrupted every month for the next 11 years, as he received 132 check stubs confirming the promise that his pension was exempt from state and city income tax. (Id. at EX. 6, ¶ 6). However, it changed on January 1, 2012. With the entry in force of 2011 PA 38, and the related legislation, the State broke its promise to Mr. Okrie and similarly situated retired state and public school employees born after 1945 by subjecting their pensions to state and city income tax, despite the fact that they had already made irrevocable employment termination and retirement decisions in justifiable reliance upon the State's promise that their pension benefits were exempt from Michigan state and city income tax. (Id. at EX. 6, ¶ 7-8).

3. The Enactment of 2011 PA 38, and the Related Legislation, Subjected the Pensions of Retired State and Public School Employees Born After 1945 to Taxation, Without the Payment of Equivalent Financial Benefits.

2011 PA 38 was enacted in order to pay for Governor Snyder's proposal to replace the Michigan Business Tax with the corporate income tax - thereby reducing business taxes by $1.7 billion. 2011 PA 38 originated as House Bill (HB) 4361, which sought to amend the Income Tax Act, eliminating numerous credits, deductions and exemptions, as well as changing future tax rates. Bill Analysis, Senate Fiscal Agency dated May 9, 2011. As reported in Crain's Detroit Business on April 28, 2011:

"The Michigan House . . . passed a series of bills that would slash business taxes while raising taxes on retirees, the working poor and the other individual taxpayers."

* * *

Republican Gov. Rick Snyder proposed the changes. He says eliminating the Michigan Business Tax and replacing it with a 6 percent income tax on large corporations with shareholders is key to encouraging businesses to add jobs in a state with a 10.3 percent unemployment rate. Instead of paying about $2 billion annually into the state's general fund, businesses will pay about $300 million. Only about a third of businesses will pay the corporate income tax. [Michigan House Passes Business Tax Cut, Pension Tax Increases]

The Crain's article further notes,

Although angry seniors protested in recent months against having the state income tax apply to most retirement income, the governor wrapped the pension tax increase into the bill cutting business taxes, virtually ensuring passage in the GOP-controlled House. . . .

The governor's original proposal would have raised an estimated $900 million by ending exemptions for most retirement income, but lawmakers balked at supporting it. The current bill would raise about $300 million through retiree income tax changes.

With amendments, HB-4361 passed the Senate on May 12, 2011. On May 25, 2011, Governor Snyder signed 2011 PA 38 and a series of other laws, PA 41 through 45 of 2011, which amended elements of Michigan employee retirement laws to eliminate the tax exemption for the pensions of retired state and public school employees born after 1945.

Subsequently, on May 31, 2011, Governor Snyder requested an advisory opinion from the Michigan Supreme Court concerning the constitutionality of 2011 PA 38, which provided $343 million toward the financing of his $1.7 billion elimination of the Michigan Business Tax in order to pay for this huge corporate tax break. On June 15, 2011, the Court granted Governor Snyder's request to consider "the constitutionality of the reduction or elimination of tax exemption for pension incomes contained in 2011 PA 38" before it took effect on January 1, 2012. 489 Mich 954 (2011). On November 11, 2011, the Supreme Court issued the In re Request for Advisory Opinion regarding Constitutionality of 2011 PA 38, 490 Mich 295 (2011).

4. The Michigan Supreme Court's decision in the Advisory Opinion.

The principal issue in the Advisory Opinion was whether state employees' contractual rights as set forth in the State Employees Retirement Act ("SERA"), MCL 38.1 et seq. were impaired by the Legislature's enactment of 2011 PA 38 in violation of Const 1963, art 1, § 10 or the U.S. Const, art I, § 10(1). As the Supreme Court noted:

All public-pension benefits were completely deductible under the Income Tax Act. In addition, the State Employees Retirement Act, MCL 38.40, the Public School Employees Retirement Act, MCL 38.1346(1), the Michigan Legislative Retirement System Act, MCL 38.1057(1), the city library employees' retirement system act, MCL 38.705, and the Judges Retirement Act, MCL 38.2670(1), exempted certain public-pension benefits from taxation. Al these acts were amended to remove the statutory exemption from state taxes consistently with 2011 PA 38. See 2011 PA 41, 2011 PA 42, 2011 PA 43, 2011 PA 44, and 2011 PA 45. Although the Governor's request and our order in this case referred explicitly only to 2011 PA 38, because Public Acts 41 through 45 of 2011 are inextricably linked to the issues raised in this case, we make clear that we have considered these statutory amendments when reviewing the issues in this case, and our holding takes into account whatever effect each of these provisions may have on the issues raised . . . . [490 Mich at 306 n 9].

The Supreme Court further noted:

[T]he former tax exemption provision of the State Employees' Retirement Act, MCL 38.40(1), as amended by 2002 PA 99, which provided:

The right of a person to a pension, an annuity, a retirement allowance, any optional benefit, any other right accrued or accruing to any person under the provisions of this act, the various funds created by this act, and all money and investments and income of the funds, are exempt from any state, county, municipal, or other local tax. [Emphasis added.]

The fact that the language "are exempt" was put in the present tense indicates that the Legislature simply intended pension and retirement incomes to be exempt from taxation while this statutory language remained the law. However, it does not indicate any intent to forever prohibit a future Legislature from changing this law and making pension and retirement incomes subject to taxation. . . .

Similarly, the Public School Employees Retirement Act formerly provided:

A retirement allowance, an optional benefit, or any other benefit accrued or accruing to a person under this act, the reserved created by this act, and the money, investments, or income of those reserves are exempt from state, county, municipal, or other local tax and subject to the public employee retirement benefit protection act." [MCL 38.1346(1), as amended by 2002 PA 94 (emphasis added).]

The Michigan Legislative Retirement System Act formerly provided, "All retirement allowances and other benefits payable under this act and all accumulated credits of members, deferred vested members and retirants in this retirement system are not subject to taxation by this state or any political subdivisions of this state." MCL 38.1057(1), as amended by 2002 PA 97 (emphasis added). The city library employees' retirement system act formerly provided:

When a system of retiring allowances is adopted under the provisions of this act, the reserve fund thereby provided shall be free from all state, county, township, city, village and school district taxes and the annuities payable to the members of the staff shall likewise be free from all such taxes. [MCL 38.705, as added by 1927 PA 339.]

And the Judges Retirement Act provided, "Distributions from employer contributions made pursuant to [MCL 38.2664(1) and (3)] and earnings on those employer contributions, and distributions from employee contributions made pursuant to [MCL 38.2664714(3)] and earnings on those employee contributions, are exempt from any state, county, municipal, or other local tax." MCL 38.2670(1), as amended by 2002 PA 95 (emphasis added). [490 Mich at 325 n 29]

As the Court made clear: "This Court is not deciding whether 2011 PA 38 represents wise or unwise, prudent or imprudent public policy, only whether 2011 PA 38 is consistent with the constitutions of the United States and Michigan." Id. at 302. (Emphasis added.)[6] In the Advisory Opinion, the Court held in pertinent part:

· Reducing or eliminating the statutory exemption for public-pension incomes as set forth in MCL 206.30 does not impair accrued financial benefits of a "pension plan [or] retirement system of the state [or] its political subdivisions" under Const 1963, art 9, § 24; and

· Reducing or eliminating the statutory exemption for pension incomes as set forth in MCL 206.30 does not impair a contractual obligation in violation of Const 1963, art 1, § 10 or US Const, art I, § 10(1).

· Determining eligibility for income-tax exemptions on the basis of date of birth as set forth in MCL 206.30(9) does not violate the equal protection of the law under Const 1963, art 1, § 2 or the Fourteenth Amendment of the United States Constitution. [490 Mich at 301](Emphasis in original; footnote omitted).

As a result of the Supreme Court's decision, 2011 PA 38, and the related legislation, entered into effect on January 1, 2012, subjecting to state and local taxation the pensions of Mr. Okrie et al.[7]

B. Procedural Facts

On July 9, 2013, Mr. Okrie et al. filed a Verified Class Action Complaint with the Court of Claims, then "housed" in the Ingham Circuit Court, Judge Rosemarie E. Aquilina presiding, claiming that the taxation of the pensions of retired state and retired public school employees born after 1945 was a breach of contract based upon the equitable doctrine of promissory estoppel and also asking for equitable relief. On August 8, 2013, the State filed a Motion for Summary Disposition under MCR 2.116(C)(8) and (10) as to these claims. On August 14, 2013, Mr. Okrie et al. filed a Motion for Summary Disposition under MCR 2.116(C)(10) and MCR 2.116(I)(1) in support of their claim for breach of contract based upon the equitable doctrine of promissory estoppel. On the same date, Mr. Okrie et al. filed a Motion for Class Certification pursuant to MCR 3.501 and a brief in support of class certification on behalf of similarly situated retired state and public school employees born after 1945.

Subsequently, on September 23, 2013, Mr. Okrie et al. filed a brief in opposition to the State's Motion for Summary Disposition. On October 2, 2013, the State filed their response to Mr. Okrie et al.'s Motion for Summary Disposition under MCR 2.116(C)(10) and MCR 2.116(I)(1). On October 4, 2013, the State filed their response in opposition to the Motion for Class Certification. On October 9, 2013, Mr. Okrie et al. filed a Reply in response to the State's response to their Motion for Summary Disposition under MCR 2.116(C)(10) and MCR 2.116(I)(1), and also a Reply to the State's response to their Motion for Class Certification.

On October 9, 2013, a hearing was held in a packed courtroom before Judge Aquilina on the parties' cross-motions for summary disposition as to Mr. Okrie et al.'s breach of contract claim based upon the doctrine of promissory estoppel and equitable relief, and motion for class certification. On the same date, Judge Aquilina granted Mr. Okrie et al.'s Motion to file an Amended Verified Class Action Complaint adding claims for breach of employment contract and unjust enrichment under state law, as well as claims for violations of the Contract Clauses, the Takings Clauses, and Substantive and Procedural Due Process Clauses under the state and federal constitutions.

Thereafter, on November 1, 2013, Mr. Okrie et al. filed a Motion for Summary Disposition and Brief in Support of his motion as to these added claims, and noticed this motion for a hearing before Judge Aquilina on December 13, 2013 at 9:00 a.m. On November 6, 2013, the State likewise filed a Motion for Summary Disposition and Brief in Support of its motion as to these claims. In an Opinion and Order dated November 5, 2013, Judge Aquilina granted the State's Motion for Summary Disposition under MCR 2.116(C)(10), denied Mr. Okrie et al.'s Motion for Motion for Summary Disposition under MCR 2.116(C)(10) and MCR 2.116(I)(1), and denied his Motion for Class Certification under MCR 3.501 as "moot." (EX. 1). On November 25, 2013, Mr. Okrie et al. filed a Motion for Reconsideration of the Court's November 5, 2014 Opinion and Order.

In the meantime, however, on November 13, 2013, Governor Snyder, a party defendant in this matter, signed into law 2013 PA 164 transferring the Court of Claims from the Ingham Circuit Court to the Court of Appeals. On November 14, 2013, Court of Appeals Judge Talbot, acting as Chief Judge of the Court of Claims, issued an order staying the proceedings in the cases pending in the Court of Claims as of November 13, 2013, including this case. Thereafter, Court of Appeals Judge Servitto was assigned to act as a Court of Claims judge in this case. Subsequently, on February 10, 2014, Judge Servitto issued an Opinion and Order denying the Motion for Reconsideration of Judge Aquilina's November 5, 2013 Opinion and Order. (EX. 2).

Mr. Okrie et al. then filed a Second Amended Verified Class Action Complaint on February 24, 2014, adding claims for breaches of the purchase service credit contracts and Member Investment Plan (MIP) contracts. Mr. Okrie et al. also filed an Amended Motion for Class Certification as to their Second Amended Verified Class Action Complaint.

Subsequently, on March 13, 2014, Mr. Okrie et al.'s counsel received a letter dated March 12, 2014 from Judge Servitto stating that the State had filed a second motion for summary disposition on November 6, 2013, but that there was no record of an answer filed by Mr. Okrie et al., and that the State had yet to respond to their Second Amended Verified Class Action Complaint. The letter also informed Mr. Okrie et al.'s counsel that his Motion to file a Second Amended Verified Class Action Complaint and the State's Motion for Summary Disposition would be decided on March 25, 2014, without oral argument. In response, Mr. Okrie et al. filed a Response in opposition to the State's Motion for Summary Disposition on March 17, 2014, requesting that the State's Motion for Summary Disposition be denied, that their Motion for Summary Disposition be granted, that they be allowed to amend his complaint to add two claims for breach of the service credit purchase and breach of the Member Investment Plan (MIP) contract, and that this Court grant their Motion for Class Certification as to their Second Amended Verified Class Action Complaint.

In an Opinion and Order dated April 21, 2014, Judge Servitto granted the State's Motion for Summary Disposition under MCR 2.116(C)(10), denied Mr. Okrie et al.'s Motion for Summary Disposition under MCR 2.116(C)(10) and MCR 2.116(I)(1), their motion to file a Second Amended Verified Class Action Complaint and their Motion for Class Certification under MCR 3.501. (EX. 3). On May 7, 204, Mr. Okrie et al. filed a timely Motion for Reconsideration from the Court's April 24, 2014 Opinion and Order. On June 17, 2014, Judge Servitto denied Plaintiffs' Motion for Reconsideration but the order was not entered into the record until March 12, 2015 (EX. 4). Mr. Okrie et al. now appeal as of right the dismissal of their claims.

ARGUMENT

A. Standard of Review

MCR 2.116(C)(10) provides that judgment may be granted where "there is no genuine issue as to any material fact." In addition, MCR 2.116(I)(1) states that "If the pleadings show that a party is entitled to judgment as a matter of law, or if the affidavits or other proofs show that there is no genuine issue of material fact," then the court must "render judgment without delay." See Ford Motor Co v Bruce Twp, 264 Mich App 1, 15 (2004).

B. Legal Discussion[8]

I. The State Breached the Employment Contracts of Mr. Okrie et al. By Taking Away Their Deferred Compensation Payable in the Form of Tax-Exempt Pensions, Without Providing Alternative Benefits in Their Place That Are Equal to or Greater Than Tax-Exempt Pensions.

The Michigan Supreme Court has defined a contract as an agreement, supported by sufficient consideration, to do or not to do a particular thing. McInerney v Detroit Trust Co, 279 Mich 42, 46 (1937). See Cain v Allen Electric & Equipment Co, 346 Mich 568, 579 (1956), quoting 1 Corbin on Contracts, § 13. ("A promise is an expression of intention that the promisor will conduct himself in a specified way or bring about a specified result in the future, communicated in such manner to a promise that he may justly expect performance and may reasonably rely thereon."). As a general rule, employment contracts are considered to be unilateral and may be accepted only by performance, and thus a promisor does not receive a promise in return as consideration. Sniecinski v Blue Cross & Blue Shield, 469 Mich 124, 138 n 9 (2003). Specifically, as explained by the Michigan Court of Appeals in Cunningham v 4-D Tool, 182 Mich App 99, 106 (1989).

Employment contracts can generally be described as unilateral contracts, a unilateral contract being one in which the promisor does not receive a promise in return as consideration. 1 Restatement Contracts, §§ 12, 52; pp 10-12, 58-59. The employer makes an offer or promise which the employee accepts by performing the act upon which the promise is expressly or impliedly based. The employer's promise constitutes, in essence, the terms of the employment agreement; the employee's action in reliance upon the employer's promise constitutes sufficient consideration to make the promise legally binding. Toussaint [v Blue Cross & Blue Shield of Michigan, 408 Mich 579], 630-631 [1980]; In re Certified Question, 432 Mich 438, 444-447; 443 NW2d 112 (1989).[9]

Thus, in Psutka v Michigan Alkali Co, 274 Mich 318, 319 (1936), the Supreme Court held that pension and death benefit plan for employees to which they contributed no monetary consideration was a contract supported by ample consideration in order attract more competent workers, induce better and more continuous services and avoid expense of labor turnover. Similarly, in Gaydos v White Motor Corp, 54 Mich App 143, 148 (1974), this Court held that that the adoption by the employer of a policy of severance pay constituted an offer of contract and work thereafter by employees supplied consideration for unilateral contract, on which employees had right to rely. As this Court noted in Gaydos, "We cannot agree that the severance pay provision was merely a 'unilaterally promulgated policy' or a gratuity. The adoption of the described policy by defendant constituted an offer of a contract."

1. Mr. Okrie et al. had contractual relationships with the State for deferred compensation in the form of tax-exempt pensions or equivalent financial benefits.

In this case, the undisputed facts show that Mr. Okrie et al. entered into contractual relationships in which the State offered to pay deferred compensation in the form of a tax-exempt pensions once they had fully performed the requisite governmental services, vested in the DB plans administered by the ORS covering public school employees under MPSERS and state employees under MSERS, and retired. Having received the benefits of their employment in exchange for the promise of deferred compensation in the form of tax-exempt pensions, the State thus entered into an enforceable binding contract, which it breached by depriving Mr. Okrie et al. of the promised deferred compensation in the form of tax-exempt pensions without providing alternative benefits in their place that are equal to or greater than the financial benefits represented by tax-exempt pensions. See Opinion of the Justices, 364 Mass 847; 303 NE 320 (Mass 1973)(holding that a statute providing membership in the retirement system establishes contractual rights and benefits).[10]

2. The State breached Mr. Okrie et al.'s employment contracts by unilaterally altering the terms and conditions in effect depriving them of the deferred compensation that they earned.

Here, the State breached the employment contracts by unilaterally altering the terms and conditions governing the contractual relationships in force at the time that Mr. Okrie et al. made irrevocable employment termination and retirement decisions. As the U.S. Supreme Court observed in Indiana ex rel Anderson v Brand, 303 US 95, 100 (1938):

The principal function of a legislative body is not to make contracts but to make laws which declare the policy of the state and are subject to repeal when a subsequent to repeal when a subsequent legislature shall determine to alter that policy. Nevertheless, it is established that a legislative enactment may contain provisions, which when accepted as the basis of action by individuals, became contracts between them and the State or its subdivisions within the protection of Art I, § 10 [the contract clause of the United States Constitution]. (Emphasis added.) [11]

Thus, as a matter of contract law, the method of compensation set forth in the pertinent statutes in effect at the time of the retirement of Mr. Okrie et al. must be considered as part of the terms and conditions of their contractual relationships. See Seneca Nursing Home v Kansas, 490 F2d 1324 (CA10 1974) (holding that plaintiffs, by performing the required services, became entitled to the statutory payment amounts since the method of compensation set forth in the statutes was part of the terms and conditions of the contract); Payne v Bd of Trs of the Teachers' Ins & Ret Fund, 76 ND 278, 287; 35 NW2d 553, 556 (ND 1948)("The pension payments are added compensation for service that has been rendered. Such compensation is earned by reason of the service performed and becomes payable upon compliance with the provisions of the law authorizing payment to be made. Manifestly, the amount of compensation is measured by the terms of the law in force at the time the period of service is terminated.")(Emphasis added.); Bakenhus v City of Seattle, 296 P2d 536, 538 (Wash 1956)('"But, where . . . services are rendered under such a pension statute, the pension provisions become a part of the contemplated compensation for those services, and so in a sense a part of the contract of employment itself.'"), quoting O'Dea v Cook, 169 P 366, 367 (Cal 1917). Accordingly, by having performed the requisite governmental services, vested in the DB plans at issue, and retired, Mr. Okrie et al. are thus entitled to the deferred compensation payable in the form of tax-exempt pensions as specified in the DB plans at the time they made irrevocable employment termination and retirement decisions, or financial benefits equal to, or greater than, the financial value represented by pensions not subject to state or local taxation.

3. State Supreme Court decisions in Hughes and Bailey issued in the aftermath of U.S. Supreme Court's decision in Davis support Mr. Okrie et al.'s breach of contract claim for deferred compensation.

Mr. Okrie et al.'s position in this case is clearly supported by the other state supreme courts that have fully considered this question in the aftermath of the U.S. Supreme Court's decision in Davis, such as Oregon Supreme Court in Hughes v State, 838 P2d 1018 (Ore 1992) and the North Carolina Supreme Court in Bailey v State, 500 SE2d 54 (NC 1998). In Hughes, the Oregon Supreme Court addressed a challenge to the Oregon legislature's repeal of the tax exemption contained in the Public Employees' Retirement System ("PERS"), which had been in the Public Employees' Retirement Act since 1945. The Oregon Supreme Court found that the tax exemption, which induced retired public employees to accept the state's offer of employment, was part of the PERS contract between the state and the retired public employees. Id. at 1032. According to the court, the tax exemption had benefitted Oregon by allowing it to receive the services of workers for less upfront pay in exchange for deferred compensation in the form of tax-exempt pensions. As the Oregon Supreme Court recognized:

Government obtained its employees' services less expensively because the gross cost of providing a more nearly adequate pension amount was lowered by the tax exempt nature of the benefit payments and of the contributions put in trust to purchase annuities payable at the time of each employee's future retirement. . . . Less expense meant that less tax money was exacted from the taxpayers in general over past years to fund a public employee's salary and benefits. . . . Government proposes to keep the benefit of lower cost, but to take away the promise that its employees accepted in order to lower that cost, thereby keeping the benefit of its bargain but depriving the employees of the benefit of theirs. [Id. at 1042 n 7].

Similarly, Bailey supports Plaintiffs. There, the North Carolina Supreme Court ruled that capping the tax exemption deprived public employees of their vested contractual right to already earned benefits. The court based its decision on "the premise that retirement benefits are presently earned but deferred compensation to which employees have a vested contractual right" and that the tax exemption was a term of that contract. 500 SE2d at 60, 63. Specifically, the North Carolina Supreme Court held:

The necessity for the State to be bound to its contractual obligations is clear when the Act in question is compared with the long-established practice of the issuance of municipal bonds. The State regularly enters into contracts for tax exemptions in connection with its issuance of municipal bonds and the creation of its obligations thereunder. In exchange for paying a lower rate of interest, the State agrees by statutory exemption to forgo taxation of the income or gain on the bonds. The State's policy of entering into a contract for a tax exemption clearly serves a public purpose by inducing needed investment for important projects while paying a lower-than-market rate of interest.

The State's action here in changing the taxability of vested retirement benefits is no different than if the State issued tax-free bonds, collected hundreds of millions of dollars for their purchase, and then retrospectively repealed investors' tax-free interest and capital gain advantages. However, under application of defendants' premise, this is precisely what the State could do. The basis for prohibiting such action is fundamental fairness. As the Pennsylvania Supreme Court so eloquently stated:

According to the cardinal principle of justice and fair dealings between government and man, as well as between man and man, the parties shall know prior to entering into a business relationship the conditions which shall govern that relationship. Ex post facto legislation is abhorred in criminal law because it stigmatizes with criminality an act entirely innocent when committed. The impairment of contractual obligations by the Legislature is equally abhorrent because such impairment changes the blueprint of a bridge construction when the spans are half way across the stream.

Hickey v Pension Bd, 378 Pa. 300, 309-10, 106 A2d 233, 237-38 (1954).

Here, in exchange for the inducement to and retention in employment, the State agreed to exempt from state taxation benefits derived from employees' retirement plans. This exemption certainly was for a public purpose, as it was a significant difference between governmental and comparable private employment that helped attract and keep quality public servants in spite of the generally lower wage paid to state and local employees. Thus, the State entered into a contract for, inter alia, a tax exemption for a public purpose. [Id. at 65].

As Raven Merlau cogently observed in The State Giveth And The State Taketh: Constitutional Pension Protections And The Retroactive Removal of Public Pension Tax Exemptions, 19 Geo Mason L Rev 1229, 2256 (2012),

A tax-exempt pension is, without question, more valuable than a nonexempt pension. If public employees are willing to accept lower wages because of the prospect of receiving greater deferred compensation, public employees would be willing to accept even lower wages if the later compensation were of higher value. Tax exemptions create just such an increase, thus functioning as part of the consideration a public employee accepts in forming an employment contract with the state.

When states repeal their tax exemptions, they modify their employees' employment contracts - often years after employees rendered their service. In doing so, they retroactively change the structure of the original bargain that they struck with their employees. As the Oregon Supreme Court noted in Hughes [v State, 838 P2d 1018, 1042 n 7 (Ore 1990)], this unfairly allows the state to retain the benefit of the original bargain (receiving the employee's services at a lower wage than would otherwise have been paid), while depriving the employee of her half of the bargain (more pay later).

Noting this unfairness, the North Carolina Supreme Court in Bailey analogized a state's taxing of previously exempt public pensions to a state issuing tax-exempt bonds and then subsequently taxing them. The analogy is apt. When a purchaser of a tax-exempt municipal bond accepts a lower interest rate than is available on commercial bonds, he does so because the state's promise not to tax the bond's interest adds value to the investment; without this assurance, no rational investor would accept the lower municipal interest rate. Removing the tax exemption when the investor attempts to redeem the bond would fundamentally rework the original bargain and violate the terms of the original purchase contract. Removing a tax exemption from vested pension rights - years after the employee has performed the work - is no different. In both cases, the state has used a tax exemption to induce individuals to accept worse terms than are available elsewhere, and it is fundamentally inequitable for the state to later remove the future benefit it promised up front. (Id. at 1251-53; emphasis provided; footnotes omitted.)

4. A tax-exempt pension was a term or condition of the public employment contracts in effect when Mr. Okrie et al.'s made their irrevocable employment termination and retirement decisions.

Contrary to the State's claim, it was bound by the terms and conditions of the statutes in effect at the time that Mr. Okrie et al. made their irrevocable employment termination and retirement decisions based upon the promise of tax-exempt pensions. Accordingly, the State may not apply 2011 PA 38, and the related legislation, to Mr. Okrie et al., without providing alternative benefits in their place that are equal to or greater than the financial benefits represented by tax-exempt pensions. Indeed, to apply 2011 PA 38, and the related legislation, which went into effect on January 1, 2012, would abrogate contractually vested rights to deferred compensation earned for decades of governmental services. In determining whether a statute should be applied prospectively or retroactively, the intent of the Legislature is controlling. Frank W Lynch & Co v Flex Technologies, Inc, 463 Mich 578, 583 (2001). As a general rule, statutes and amendments are presumed to operate prospectively unless they are merely remedial or procedural, were adopted to clarify an existing statute and determine a question regarding its meaning, or the Legislature expressly or impliedly indicated an intent to give retroactive effect. Detroit v Walker, 445 Mich 682, 704 (1994). A statute that affects substantive rights is not remedial. Frank W Lynch, supra at 585. Statutes may not be applied retroactively if they abrogate or impair vested rights. In re Certified Questions, 416 Mich 558, 572 (1982). Accordingly, 2011 PA 38, and the related legislation, may not be applied to Mr. Okrie et al. since that would abrogate their vested rights to the already earned deferred compensation.

Further, there is no question that Mr. Okrie and the 100,000+ similarly situated retired state and public school employees made irrevocable decisions to retire before January 1, 2012 in reasonable reliance upon the advice contained in statements repeatedly made for decades by the ORS in Retirement Guidelines booklets, in seminars, and on retirement forms that their pensions were exempt from state and local income tax, where these statements accurately reflected the language of the statutory provisions in force at the time of their employment termination and retirement decisions "to guide you through the details of your retirement plan." For example, as the ORS clearly stated to the public school employees in the MPSERS Retirement Guidelines dated April 1998:

Use the MPSERS Retirement Guidelines throughout your career to help you plan for retirement. When you're ready to retire, use it to help you make benefit decisions. (Id.)(Bold print in original).

The ORS then remarked:

Remember, this book is a summary of the main features of the plan and not a complete description. The operation of the plan is controlled by the Michigan Public School Employees Retirement Act (Public Act 300 of 1980, as amended). If the provisions of the Act conflict with this summary, the Act controls. . . . (Id.)

Contrary to the State's contention, this above-quoted language was not an unambiguous expression stating that "the benefit information . . . is subject to change," let alone an expression that the State may apply any amended changes eliminating the term in their public employment contracts for deferred compensation payable in the form of tax-exempt pensions after they had retired. In fact, nothing in the above-referenced clause contemplated the elimination of deferred compensation in the form of tax-exempt pensions after Mr. Okrie et al. retired or put Mr. Okrie et al. on notice that the State could subsequently take away their deferred compensation by subjecting them to state and local taxation after they made irrevocable employment termination and retirement decisions in reasonable reliance that their pensions were exempt from state and local taxation. Indeed, there never was any statement at any time in any of the booklets issued by the ORS for decades alerting state and public school employees that the State may deprive them, after they retired, of their deferred compensation by subjecting their pensions to state and local income tax, without providing comparable financial benefits, equal to or greater than those represented by tax-exempt pensions.

Further, it is important to underscore that in the decades before and after Mr. Okrie and other similarly situated retired state and public school employees born after 1945 made their irrevocable retirement and employment termination decisions in justifiable and reasonable reliance upon the ORS's statements contained in the Retirement Guidelines, there never was any conflict with the relevant statutes in effect regarding the promise of deferred compensation in the form of tax-exempt pensions. Thus, there was objectively no reason to think or expect that their pensions would be subject to state and local taxation after they retired, without the provision of equal alternative benefits in their place, especially since the ORS had clearly and definitely stated, without qualification for decades, that their pensions were tax-exempt.

This was made abundantly clear in the AG's Opinion No. 6697 issued on December 18, 1991 (1991 Mich. AG LEXIS 39), which addressed whether "the statutory exemptions of state and local public pension benefits from state income tax constitute accrued financial benefits which are protected by Const 1963, art 9, § 24, from legislative limitation or repeal." (Id. at *2). As the OAG states in relevant part,

State statutes currently exempt from state income tax public pension benefits paid by the state and its political subdivisions. The general source of statutory exemption is the Income Tax Act of 1967, § 30(1)(f); MCL 206.30(1)(f). . ., as added by 1969 PA 332, which provides in pertinent part that a Michigan resident may:

(f) Deduct to the extent included in adjusted gross income:

(i) Retirement or pension benefits received from a public retirement system of or created by this state. (Footnote omitted).

This exemption, covering all Michigan state and local public retirement system benefits, was added by 1969 PA 332, effective for calendar year 1969 and subsequent years' returns. It also has been extended by decision of the Michigan Court of Appeals to retirement income received by retired federal employees who are residents of Michigan. Davis v Department of Treasury (On Remand), 179 Mich App 683; 446 NW2d 531 (1989)).

Additionally, however, four retirement system statutes each contain a provision broadly exempting benefits from the imposition of any state or local taxation. These cover state employees, public school employees, legislators, and city library employees. [FN 2: These retirement acts provide similar tax exempt status: (a) State Employees' Retirement Act, 1943 PA 240, § 40, MCL 38.40. . .(b) Public School Employees Retirement Act of 1979, 1980 PA 300, § 46(1); MCL 38.1346(1). . . See also predecessor act, 1945 PA 136, Ch I, § 25, providing an exemption for retirement benefits from state or local taxation for only Chapter I members since enactment in 1945; (c) Michigan Legislative Retirement Act, MCL 38.1057(1) . . . (exemption added by 1961 PA 1967); City Library employees' retirement systems, 1927 PA 339; MCL 38.705. . . (exemption since 1927)]. [Id. at *3].

* * *

It should be noted that the tax exemption provisions in the four retirement acts listed in n 2, supra, predate the Income Tax Act of 1967 . . .

* * *

It is my opinion, therefore, that the Legislature may, without violating Const 1963, art 9, § 24, limit or repeal the tax exemptions now found in the four retirement statutes as to current retirees and members if it provides alternative benefits in their place that are equal to or greater than the pension benefit that would be limited or withdrawn since there would be no constitutionally cognizable impairment of the pension benefit.

The remaining question is whether the Legislature may, without violating Const 1963, art 9, § 24, limit or repeal the tax exemptions in the four retirement statutes in n 2, supra, as to current retirees and members without providing equal alternative benefits in place thereof. The response to that question is still being researched. When the research is completed, my response will be forthcoming. [Id. at *15-16].

Based upon the OAG, which was in force at the time Mr. Okrie et al. made their irrevocable employment and retirement decisions, there is no rational legal basis for the State's present contention that Mr. Okrie et al. "proceeded at [their] own peril in relying upon representations from state agents" promising tax-exempt pensions as deferred compensation for their governmental services, without providing equal alternative benefits in their place if the tax exemptions were eliminated after they retired. More important, as the U.S. Supreme Court declared in Brand, supra, 303 US at 100,

Nevertheless, it is established that a legislative enactment may contain provisions, which when accepted as the basis of action by individuals, became contracts between them and the State or its subdivisions within the protection of Art I, § 10 [the Contract Clause of the U.S. Constitution].

That is precisely the case here. Under the Supremacy Clause, Article VI of the U.S. Constitution, this Court is bound by the U.S. Supreme Court's ruling in Brand holding that public contracts are established on the basis of legislative enactments that are accepted as the basis of action by individuals, and thus protectable under the Contract Clause of the U.S. Constitution. Moreover, the State is judicially estopped from asserting a position in the present case that is inconsistent with its position taken in the Davis litigation before the U.S. Supreme Court and the prior OAG on this matter. Accordingly, contrary its assertion, it was the State of Michigan, not Mr. Okrie et al., that "proceeded at [its] own peril" by taking away the promised deferred compensation payable in the form of tax-exempt pensions after Mr. Okrie et al. had already made irrevocable retirement and employment termination decisions in detrimental reliance upon the State's promises, without providing them comparable financial benefits, equal to or greater than those represented by tax-exempt pensions.

In this regard, it is instructive to consider case law under the Employment Retirement Income Security Act ("ERISA") in clearly demonstrating that the State breached its contract based upon its failure to keep its promise to pay deferred compensation in the form of tax-exempt pensions to Mr. Okrie et al. [12] Although 29 USC § 1003(b)(1) of ERISA excludes state government plans from its scope, the State should be treated like any private employer under the ERISA, which may not apply an amendment to an ERISA plan if it deprives a beneficiary of promised vested benefits.[13] See Wheeler v Dynamic Eng'g Inc, 62 F3d 634, 640 (CA 4 1995). That is because ERISA imposes an obligation on plan administrators to operate the plan according to current plan documents, ruling out amendments that alter a plan provision in effect at the time performance under the plan became due. Curtiss-Wright Corp v Schoonejongen, 514 US 73, 83 (1995) ("ERISA's statutory scheme is 'built around reliance on the face of written plan documents.") Given that the State was acting as an employer, it thus should be treated no differently than any private employer subject to the requirements of ERISA.

Moreover, contrary to the State's mischaracterization, the State's creation of such policies promising deferred compensation to retired state and public school employees in the form of tax-exempt pensions for services already rendered to the State does not bind the State in perpetuity. Rather, it only binds the State to Mr. Okrie and those similarly situated retired state and public school employees born after 1945 - all mortal creatures with actuarially limited time spans given their ages - who provided this State with their labor at below market cost during their productive years of governmental services, vested in the DB pension plans at issue, detrimentally relied upon the promise of deferred compensation in making irrevocable employment and retirement decisions, and retired before January 1, 2012. Finally, because the ORS, as "your partner in retirement," repeatedly directed public employees for decades to rely upon its representations in the Retirement Guidelines booklets for the purpose of making "benefit decisions" at the time of retirement, the State is now equitably estopped from contesting their actual reliance upon the State's unqualified promises not to tax their pensions after they retired. Hetchler v American Life Ins Co, 266 Mich 608, 613 (1934).

Finally, Mr. Okrie et al. are not challenging the Legislature's exclusive power to tax or eliminate the statutory tax exemptions for public pensions. Instead, what they are challenging is the State's breach of their employment contracts depriving them of their already earned deferred compensation, payable in the form of tax-exempt pensions or alternative financial benefits comparable to that represented by tax-exempt pensions. Thus, the Legislature's exclusive power to change the statutory scheme relating to the taxation of public pensions is consistent with their employment contracts promising them deferred compensation payable in the form of tax-exempt pensions since the ORS was clothed with actual or apparent authority as an agent to bind the State in this regard. See Detroit v Detroit Police Officers Assoc, 408 Mich 410 (1980) (noting that an official may be clothed with authority to say when, how, on whom and on what occasions the law shall operate). In short, Mr., Okrie et al. are not contesting whether the statutory tax exemptions were revocable as to active or current public employees as of January 1, 2012, but only whether the revocation of the statutory tax exemptions may be applied to them without the State providing equivalent financial benefits. See generally L. Fuller, The Morality of Law (1964). So if 2011 PA 38, and the related legislation, is applied to Mr. Okrie et al. after they made irrevocable employment termination and retirement decisions in reasonable reliance upon the State's promise of deferred compensation in the form of tax-exempt pensions, then they are entitled to what they earned as deferred compensation in the form of financial benefits equal to the value of their tax-exempt pensions. The State cannot have it both ways by enjoying for decades the fruits of their low cost productive labor, but not paying the corresponding deferred compensation owed to Mr. Okrie et al. for their governmental services after they retired.

5. U.S. Supreme Court precedents - particularly the Winstar decision - support Mr. Okrie et al.'s claim for contract damages.

As a fundamental proposition of law, the U.S. Supreme Court has recognized that public employees have a constitutionally-protected contractual right to compensation that has been earned through services rendered. Mississippi ex rel Robertson v Miller, 276 US 174, 178-79 (1928). This right is not based upon statutory language but rather is implied from the fact that the employee rendered services in exchange for the promised compensation. Id. at 179 ("But after services have been rendered by a public officer under a law specifying his compensation, there arises an implied contract under which he is entitled to have the amount so fixed."). Id. at 179.

This fundamental proposition of law was reinforced by the U.S. Supreme Court in Lynch v United States, 292 US 571, 579 (1934), which noted that "When the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals." As Justice Brandeis incisively observed in Lynch, quoting the Sinking-Fund Cases, 99 U.S. 700, 719 [1879]:

Punctilious fulfillment of contractual obligations is essential to the maintenance of the credit of public as well as private debtors. No doubt there was in March, 1933, great need of economy. In the administration of all government business economy had become urgent because of lessened revenues and the heavy obligations to be issued in the hope of relieving widespread distress. Congress was free to reduce gratuities deemed excessive. But Congress was without power to reduce expenditures by abrogating contractual obligations of the United States. To abrogate contracts, in the attempt to lessen government expenditure, would be not the practice of economy, but an act of repudiation. "The United States are as much bound by their contracts as are individuals. If they repudiate their obligations, it is as much repudiation, with all the wrong and reproach that term implies, as it would be if the repudiator had been a State or a municipality or a citizen." (Emphasis added.) [Id. at 580]

See also Horowitz v United States, 267 US 458, 461 (1925), quoting Jones v United States, 1 Ct Cl 383, 384 (1865) ("In this court the United States appear simply as contractors; and they are to be held liable only within the same limits that any other defendant would be in any other court."); Perry v United States, 294 US 330, 351 (1935) ("To say that the Congress may withdraw or ignore [its] pledge, is to assume that the Constitution contemplates a vain promise, a pledge having no other sanction than the pleasure and convenience of the pledger. This Court has given no sanction to such a conception of the obligations of our Government."). (Emphasis added.) To the same extent as any private party, the State of Michigan is bound by its contracts with Mr. Okrie and similarly situated retired state and public school employees born after 1945 as to their deferred compensation earned after decades of governmental services.

In particular, the U.S. Supreme Court's decision in United States v Winstar Corp, 518 US 839 (1996) lends constitutional protection to the contractual entitlement of Mr. Okrie et al. to deferred compensation in the form of tax-exempt pensions or comparable financial benefits, despite the subsequent changes in the tax laws eliminating tax exemptions for public pensions. In Winstar, the U.S. Supreme Court affirmed that, when acting in its contracting capacity, the government should be held to ordinary contract principles in order to remain a reliable contracting party. Specifically, Winstar stands for the proposition that the government will be liable for contract damages if, as a result of a subsequent change in the tax law, the United States denies a contractor the benefit of an earlier bargain. Thus, in Winstar, the U.S. Supreme Court held that the government is liable for damages when a subsequent, targeted change in the tax law is made that deprives a contracting party of favorable tax treatment that the government specifically used as an inducement or consideration. In Winstar, the U.S. Supreme Court held that the government cannot abrogate contractual promises of favorable tax treatment the government made to induce investors to buy failing savings and loan institutions. In particular, the government allowed acquiring institutions to count the excess of the purchase price over the failing S&Ls' assets as "supervisory goodwill," which could be used as capital toward meeting federal capital reserve requirements. When subsequent legislation forbade this treatment, Winstar and several other acquiring institutions sued for contract damages. The U.S. Supreme Court agreed with Winstar that the government breached its contract when Congress passed legislation specifically eliminating a deduction that induced the purchase of the failing S&Ls.

Accordingly, "the Supreme Court's decision in Winstar establishes that while a contract may not interfere with Congress' power to enact tax legislation, the contract may nonetheless bind the government to pay damages in the event such legislation is found to breach the contract." Centex Corp v United States, 395 F3d 1283, 1309 (Fed Cir 2005) (upholding a sizeable damage award for the government's breach of contract with Centex, an investment firm that agreed to help with the S&L bailout, when Congress passed legislation specifically eliminating a deduction for compensated losses). As the US Claims Court observed, "[a]ny alteration of this principle would undercut our democratic system. It would allow governmental policies to be paid for with a minority's rights." Winstar Corp v United States, 25 Cl Ct 541, 549 (1992)(Emphasis added).

The same principles hold here with even greater force. Specifically, a claim for breach of public employment contracts arises here since a subsequent change in the tax law by the State Legislature deprived Mr. Okrie et al. of favorable tax treatment that the State specifically used for decades as an inducement or consideration to attract and retain state and public school employees at lower salaries and wages. Here, Mr. Okrie et al.'s contract claim does not bar or interfere with the Legislature's exercise of its taxing power. It merely ensures that if the exercise of its taxing power breaches a particular contractual obligation, the injured party will have redress for the breach. See Centex, supra at 1309. Based upon that fundamental principle underlying Winstar, Mr. Okrie et al. request that this Court grant their motion for summary disposition under MCR 2.116(C)(10) and deny the State's cross-motion on their claim for breach of employment contract and remand this case for the calculation of the damages resulting from the State's breach of their employment contracts.

II. Alternatively, in the Absence of Express Contracts, the State Breached the Implied Contracts with Mr. Okrie et al. under the Doctrine of Promissory Estoppel by Taking Away Their Deferred Compensation Payable in the Form of Tax-Exempt Pensions, Without Providing Alternative Benefits in Their Place That Are Equal to or Greater Than Tax-Exempt Pensions.

"Promissory estoppel is a judicially created doctrine that was developed as an equitable remedy applicable in common-law contract actions." Crown Technology Park v D& N Bank, FSB, 242 Mich App 538, 548-49 n 4 (2000). The equitable remedy of promissory estoppel is a common-law rule of contract law that essentially makes a promise an enforceable contract, despite the lack of the necessary elements for the formation of a contract. Huhtala v Travelers Ins Co, 401 Mich 118 (1977); State Bank of Standish v Curry, 442 Mich 76 (1993). Thus, "a claim of promissory estoppel is akin to a contract claim." Long v Chelsea Community Hosp, 219 Mich App 578, 588 (1996). In applying promissory estoppel, courts must find that an implied contract exists between the parties in the absence of an express contract. In re DCT, Inc, 261 F Supp 2d 864 (ED Mich 2003). "Promissory estoppel . . . substitutes for consideration in a case where there are no mutual promises, enabling the promisee to assert a separate claim against the promisor, independent of any other claim he may have against the promisor." Huhtala, supra, 401 Mich at 133. Thus, "promissory estoppel can be used as a cause of action for damages." Hoye v Westfield Ins Co, 194 Mich App 696, 705 (1992). "The guiding principle in determining an appropriate measure of damages is to ensure that the promise is compensated for the loss suffered to the extent of the promisee's reliance." Joerger v Gordon Food Serv, 224 Mich App 167, 173-174 (1997) (citations omitted).

Specifically, the elements of promissory estoppel are: (1) a promise; (2) that the promisor should reasonably have expected to induce action of a definite and substantial character on the part of the promisee; (3) which in fact produced reliance or forbearance of that nature; and (4) the circumstances such that the promise must be enforced if injustice is to be avoided. Crown Technology, supra at 548-549; see also Restatement (Second) of Contracts, § 90 (1981). Accordingly, even in the absence of an express contract, the statutes and the historical record give rise to an implied contract requiring the State to discharge its obligation to pay the already earned deferred compensation to Mr. Okrie et al. in the form of tax-exempt pensions or the provision of alternative benefits that are equal to or greater than the value of tax-exempt pensions.

Here, there is indisputable evidence that the State, through the ORS, administering MPSERS and MSERA, expressly promised tax-exempt pensions as deferred compensation in Retirement Guidelines booklets and other publications issued to state employees and public school employees over the course of several decades. Indeed, there was nothing vague or uncertain about the State's unqualified promise that DB pensions were exempt from state and city income tax upon retirement. For example, the MPSERS Retirement Guidelines repeatedly stated for years in their brochures:

TAX OBLIGATIONS

State and local income tax

Pensions paid by MPSERS are exempt from Michigan state and city income tax. Although you are exempt from paying Michigan income tax, you must file state and city (if applicable) tax returns acknowledging your MPSERS pension and claiming your exemptions. (Emphasis in original).

In almost identical language, the ORS, administering the State Employees Retirement System (MSERA), regularly and consistently promised state employees covered by MSERA (civil Service employees as well as appointed officials in the Executive branch and employees of the Legislature and Judiciary) that their pension benefits were exempt from state and local (but not federal) taxation. For example, a booklet prepared by ORS, issued through MSERA, regularly promised state employees over the past several decades: "Your Pension is exempt from Michigan and local income taxes." See www.michigan.gov/ORSstateDB, p 29. The State also furnished its employees with booklets entitled "Retirement Guidelines," and told employees that "The Retirement Guidelines" booklet should be carefully reviewed prior to retirement. Under the heading "Tax Obligations," the Guidelines booklet informed state employees:

TAX OBLIGATIONS

State and local income tax

Pensions paid by the State Employees' Retirement System are exempt from Michigan state and city income tax. Although you are exempt from paying Michigan income tax, you must file state and city (if applicable) tax returns acknowledging your state pension and claiming your exemptions.

The clear and unequivocal language in these statements conveys the unmistakable promise not to tax pensions earned by state and public school employees after they retired. Importantly, this promise to exempt the pensions of retired state and public school employees from state and city taxes is in marked contrast to the statements making it clear that their pensions were subject to federal income tax.

Further, it is obvious that the State should have (for decades) reasonably expected these statements to induce action of a definite and substantial character on the part of Mr. Okrie et al. who justifiably relied upon this promise, as the ORS explicitly directed them to do, in making irrevocable employment termination and retirement decisions. Indeed, the State, through the Department of the Treasury, consistently and faithfully carried out this policy for decades by not taxing the DB pensions of retired state and public school employees. In fact, after the enactment of the Income Tax Act, the Legislature amended the SERA more than 17 times between 1968 and 2010, but never opted to repeal the SERA tax exemption (until 2011). The fact that this policy and practice went unaltered for decades clearly supports the proposition that the State should reasonably have expected to induce action of a definite and substantial character on the part of Mr. Okrie et al. and in fact did produce such actions on their part. Specifically, in deciding to terminate their public employment and making retirement plans, Mr. Okrie et al. calculated what income they expected to have in retirement based in part upon the State's explicit promises made to them for decades that their pensions were not subject to state and local taxation. It is indisputable that like other retired state and public school employees who came before them, Mr. Okrie et al. reasonably relied upon the State's repeated promises to exempt their DB pensions from state and city income tax because the promised exemptions provided them with financial benefits resulting in greater net monetary payments to them as retirees.

As recognized by the Court of Appeals in Davis, supra, 160 Mich App at 98, agreeing with the State's argument, the promise of tax-exempt pensions functioned as an economic inducement to attract and retain qualified state and public school employees at a lower cost because the State did not have to compensate public employees in pay or salary at the going market rates for their skill and experience. Further, when Davis was appealed to the U.S. Supreme Court, the State reiterated that it had an "interest in hiring and retaining qualified civil servants through the inducement of a tax exemption for retirement benefits." Davis, supra, 489 US at 816. The decisions in the Davis case recognized the undisputed fact that the State financially benefited from this arrangement for decades because the tax exemptions were relatively inexpensive inducements, at least compared to an equivalent salary or benefit increases for state and public school employees. Accordingly, as a matter of judicial estoppel, the State is barred from asserting a position in the present litigation that is inconsistent with the position taken in Davis. See Paschke, supra, 445 Mich at 509-510.

Given the incontestable juridical fact that tax exemptions represent deferred compensation for previously rendered governmental services, the doctrine of promissory estoppel is properly applicable here in determining that the State breached its implied contracts with Mr. Okrie and similarly situated retired state and public school employees born after 1945 when it began to tax their DB pensions pursuant to 2011 PA 38. As explained by the Michigan Supreme Court in Toussaint v Blue Cross & Blue Shield of Michigan, 408 Mich 579, 613-619 (1980), relying upon Cain, supra, 346 Mich at 568 among other cases, policy statements by the employer announcing a financial benefit concerning employee deferred compensation operate as inducements that an employer should reasonably have expected to induce reliance by the employee in joining or remaining in the employer's service. Specifically, as explained in Dumas v Auto Club Ins Ass'n, 437 Mich 521, 546 (1991),

While Toussaint created a "legitimate expectations" claim in the wrongful-discharge setting, earlier cases held that written policy statements could give rise to contractual obligations outside the discharge context. Although some of the cases dealt with compensation policies, those policies created contract rights with regard to deferred compensation.

Moreover, the promise was made to the public work force in general and was not merely a promise made to an individual state employee. Cf. Rood v Gen Dynamics Corp, 444 Mich 107, 136-138 (1993), quoting Bankey v Storer Broad Co, 432 Mich 438, 443 (1989). As the Supreme Court stated in Rood,

As stated in Toussaint, "having announced the policy, presumably with a view to obtaining the benefit of improved employee attitudes and behavior and improved quality of the work force, the employer may not treat its promise as illusory." [Rood, supra, quoting Toussaint, supra at 619] (Emphasis added).

Indeed, the present case is analytically on all fours with Toussaint where the Court observed:

While an employer need not establish personnel policies or practices, where an employer chooses to establish such policies and practices and makes them known to its employees, the employment relationship is presumably enhanced. The employer secures an orderly, cooperative and loyal work force, and the employee peace of mind associated with job security and the conviction that he will be treated fairly. No pre-employment negotiation need take place and the parties' minds need not meet on the subject; nor does it matter that the employee knows nothing of the particulars of the employer's policies and practices or that the employer may change them unilaterally. It is enough that the employer chooses, presumably in its own interest, to create an environment in which the employee believes that, whatever the personnel policies and practices, they are established and official at any given time, purport to be fair, and are applied consistently and uniformly to each employee. The employer has created a situation "instinct with an obligation." (Footnotes omitted; emphasis added) [Id. at 613]

Thus, an employer's statements of policy that give rise to "legitimate expectations" create enforceable contractual rights even if the employer can amend the policy unilaterally without notice to the employee. In this case, the State's policy of providing tax-exempt pensions as deferred compensation also gave rise to enforceable contract rights.

Toussaint rests upon the doctrine of promissory estoppel holding that employees could justifiably rely upon those stated expressions of policy and established procedures and conduct themselves accordingly, especially with regard to "bonuses, pensions and other forms of compensation as previously held by Michigan courts." Id. at 618-619.[14] As Toussaint noted:

An employer who establishes no personnel policies instills no reasonable expectations of performance. Employers can make known to their employees that personnel policies are subject to unilateral changes by the employer. Employees would then have no legitimate expectation that any particular policy will continue to remain in force. Employees could, however, legitimately expect that policies in force at any given time will be uniformly applied to all. If there is in effect a policy to dismiss for cause only, the employer may not depart from that policy at whim simply because he was under no obligation to institute the policy in the first place. Having announced the policy, presumably with a view to obtaining the benefit of improved employee attitudes and behavior and improved quality of the work force, the employer may not treat its promise as illusory. [Id. at 619] (Emphasis added.)

In Toussaint, even the dissenting opinion by Justice Ryan underscored that the doctrine of promissory estoppel gave rise to enforceable contractual rights in connection "with an employee's entitlement to benefits under bonus or pension plans as deferred compensation for services rendered." Id. at 648. Specifically, Justice Ryan noted:

The cases are concerned with claims for termination pay (Cain); death benefits (Psutka); severance pay (Gaydos and Clarke); and profit-sharing benefits (Couch). They stand for the familiar proposition that an employee may enforce ancillary contractual obligations of the employer to pay bonus and pension benefits upon performance by the employee of services required as a condition of eligibility, and that entitlement to such benefits cannot be defeated by termination of the claimant's employment.

In each of the cases cited, policy statements by the employer announced the existence of bonus, profit-sharing or pension benefits and the employer or the claimant-employee satisfied the burden of proof that work already performed was in consideration of the announced benefit and that what was sought was merely deferred compensation. . . The benefits involved in each case were properly regarded by the courts as inducements extended to employees to become employed or remain employed by the defendant employers. (Id.)(Emphasis added.)

As Justice Ryan pointed out, "[t]he legal theory upon which the employer in such cases is held bound is known as promissory estoppel," quoting from the then draft version of Restatement Contracts, 2d, § 90. Thus, a unanimous Supreme Court endorsed the application of the doctrine of promissory estoppel in connection with policy statements by the employer announcing the existence of deferred compensation for services already rendered, such as here.

Likewise, in this case, the unqualified promises to exempt pensions from state and city income tax was part of a longstanding policy and practice of the State of Michigan to provide retired state and public school employees with deferred compensation for their governmental services in the form of tax-exempt pensions. Indeed, as already stated, this well-established policy and practice remained in effect for decades, despite the fact that "[p]olicies, unlike contracts, are inherently subject to revision and repeal." 490 Mich at 320. The fact that this policy and practice went unaltered for many decades clearly supports the proposition that the State of Michigan should reasonably have expected to induce action of a definite and substantial character on the part of Mr. Okrie et al. that their pensions would not be subject to state or local taxation. Under the facts and circumstances presented here, enforcement of the promise not to tax their pensions is necessary to avoid injustice, i.e., unjust enrichment. See Christensen v Minneapolis Mun Employees Ret Bd, 331 NW2d 740 (Minn 1983)(applying a promissory estoppel approach in analyzing the relationship between the state and its employees). Accordingly, even in the absence of an express contract, Mr. Okrie et al. had implied contracts to deferred compensation payable in the form of tax-exempt pensions, or alternative equivalent benefits based upon the doctrine of promissory estoppel.

III. The State's Retention of Mr. Okrie et al.'s Deferred Compensation Payable in the Form of Tax-Exempt Pensions, Without Providing Alternative Benefits in Their Place That Are Equal to or Greater Than Tax-Exempt Pensions, Constitutes Unjust Enrichment.

"A plaintiff making a claim of unjust enrichment has the duty of establishing the nature of the transaction and the character of liability arising therefrom as a prerequisite to his right to recover at all." Booker v City of Detroit, 469 Mich 892, 897 (2003). Under Michigan law, the elements of a claim for unjust enrichment are (1) receipt of a benefit by the defendant from the plaintiff, and (2) an inequity resulting to the plaintiff because of the retention of the benefit by the defendant. Dumas v. Dumas, supra, 437 Mich at 546; Auto Club Ins Ass'n, 437 Mich 521, 546 (1991); Barber v SMH (US), Inc., 202 Mich App 366, 375 (1993). To support an action on the theory of unjust enrichment, the controlling equities must favor the party claiming to have been injured. In re McCallum Estate, 153 Mich App 328, 335 (1986); City Nat'l Bank v Westland Towers Apartments, 107 Mich App 213, 230 (1981). Mr. Okrie et al. clearly satisfy these conditions.

To begin, it is undisputed that the State received the benefits of the governmental services rendered for decades by Mr. Okrie et al. Further, an inequity has resulted because the State received the benefits of their labor but broke its word by retaining the deferred compensation earned by Mr. Okrie et al. payable in the form of tax-exempt pensions. Here, the controlling equities clearly favor Mr. Okrie et al. for after promising to pay deferred compensation in the form of tax-exempt pensions upon their retirement, the State brazenly broke its word to them and retained their deferred compensation, without providing alternative benefits in their place that are equal to or greater than the value of tax-exempt pensions. Simply put, the State unjustly enriched itself at the expense of Mr. Okrie et al. - their faithful former state and public school employees and citizens. Given the obvious inequity, Mr. Okrie et al. have clearly established their claim of unjust enrichment.

IV. The Application of 2011 PA 38, and the Related Legislation, to Mr. Okrie et al. Violates the Contract Clauses of 1963 Const, art 1, § 10 and US Const, art 1, § 10(1).

Whether the right to the earned financial benefits of deferred compensation in the form of a tax-exempt pension as specified in the DB plans at issue is characterized as a contractual right arising from an express contractual employment relationship or based upon the doctrine of promissory estoppel, the State's application of 2011 PA 38 and the related legislation, 2011 PA 41, 43-45, to Mr. Okrie et al. impairs contractual obligations in violation of 1963 Const, art 1, § 10 and US Const, art 1, § 10(1).[15] To establish a Contracts Clause violation against a state under the U.S. Constitution, it is necessary to show three elements: (1) a contractual relationship; (2) the change in the state's law has resulted in a "substantial impairment of a contractual relationship" and (3) the impairment is justified as "reasonable and necessary to serve an important public purpose." United States Trust Co of NY v New Jersey, 431 US 1, 25 (1977); Energy Reserves Group v Kan Power & Light Co, 459 US 400, 410-413 (1983); Gen Motors Corp v Romein, 503 US 181, 186 (1992).

"The threshold inquiry is 'whether the state law has, in fact, operated as a substantial impairment of a contractual relationship." Energy Reserves Group, supra at 459 US at 411, quoting Allied Structural Steel Co v Spannaus, 438 US 234, 244 (1978). "The severity of the impairment is said to increase the level of scrutiny to which the legislation will be subjected." Energy Reserves Group, supra at 411, citing Allied Structural Steel Co, supra at 245. In deciding whether an impairment is substantial as not to be "permitted under the Constitution," contracts are examined to determine whether the plaintiff had "reasonably relied" upon the abridged right and thus "substantially induced" the plaintiff to "enter into the contract." Id. at 246. An impairment may be substantial if the "Legislation [] deprives one of the benefit of a contract, or adds new duties or obligations thereto, necessarily impairs the obligation of the contract." Northern Pac Ry Co v State of Minnesota, 208 US 583, 591 (1908). Thus, an impairment appears to be substantial "where the right abridged was one that induced the parties to contract in the first place . . . or where the impaired right was one on which there had been reasonable and especial reliance." Baltimore Teachers' Union v Mayor and City Council of Baltimore, 6 F3d 1012, 1017 (4th Cir 1993).

In determining whether the substantial impairment was reasonable and necessary to serve an important public purpose, the U.S. Supreme Court in United States Trust held that reasonableness is judged on whether the prior state contractual obligations "had effects that were unforeseen and unintended by the legislature" when those obligations were created. 431 US at 25, 27, 31; see also Home Bldg & Loan Ass'n v Baisdell, 290 US 398 (1934)("The question is . . . whether the legislation is addressed to a legitimate end and the measures taken are reasonable and appropriate to that end."). To be considered necessary, the state must establish that (1) no less drastic modification could have been implemented to accomplish the state's goal; and (2) the state could not have achieved its public policy without the modification. United States Trust, supra at 29-30. Thus, "a State it is not free to impose a drastic impairment when an evident and more moderate course would serve its purposes equally well." Id. at 30. However, United States Trust made it crystal clear that state attempts to impair its own contracts, especially financial obligations, were subject to heightened scrutiny and afforded very little deference because the state's self-interest is at stake. Specifically, in United States Trust, the U.S. Supreme Court stated:

Merely because the government actor believes that money can be better spent or should not be conserved does not provide a sufficient interest to impair the obligation of contract. . . . In applying this standard . . . complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State's self-interest is at stake. A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contracts Clause would provide no protection at all. . . . Thus, a State cannot refuse to meet its legitimate financial obligations simply because it would prefer to spend the money to promote the public good rather than the private welfare of its creditors. [Id. at 25-26, 29).

Applying these principles, the U.S. Supreme Court in United States Trust and Allied Structural Steel found substantial impairments of public contracts in violation of the Contracts Clause of the U.S. Constitution. In United States Trust, the Port Authority of New York and New Jersey sold some bonds to private investors containing covenants expressly prohibiting the use of the sale proceeds for mass transit. Subsequently, the states enacted statutes allowing the proceeds to be used for mass transit, abrogating the covenants in violation of the Contract Clause. Similarly, in Allied Structural Steel, the U.S. Supreme Court held that Contract Clause prevented the State of Minnesota from retroactively modifying the pension law because it severely impaired established contractual relationships between employers and employees where the State had not acted to meet an important general social problem but improperly provided a benefit to special interests.

The same is true here. Unquestionably, legislation taking away the deferred compensation earned by Mr. Okrie et al. constitutes a substantial contractual impairment. See Retired Public Employees of Wash v Charles, 148 Wash 2d 602, 625 (2003) (finding that legislation that reduces the value of a contract is an impairment). As recognized in Andrews v Anne Arundel County, Maryland, 931 F. Supp 1255, 1275 (D Md 1996), aff'd without opinion, 114 F.3d 1175 (CA4 1997), citing Baltimore Teachers Union, 6 F3d at 1018 n 8, the reduction of retirement benefits is a substantial impairment "because the individual receiving pension benefits is typically already living on a reduced income as compared to her pre-retirement earnings." See City of Frederick v Quinn, 371 A2d 724, 726 (Md Ct Spec App 1977)(noting that "the employee must have available substantially the program he bargained for and any diminution thereof must be balanced by other benefits or justified by countervailing equities for the public welfare").

Further, the State's purported justification for the impairment of the contracts was neither reasonable nor necessary to serve an important public purpose. United States Trust, supra. Indeed, the State Legislature, in seeking to pay for a huge corporate tax break so thousands of businesses would not have to pay any taxes at all, acted with an improper motive by specifically targeting, in age-discriminatory fashion, Mr. Okrie and similarly situated retired state and public school employees born after 1945 for the taxation of their pensions after the State, through the ORS, had repeatedly represented to them for decades that, upon retirement, their pensions were exempt from taxation as deferred compensation. See United States Dep't of Agriculture v Moreno, 413 US 528, 534 (1973) (noting that "animus is not a legitimate state interest" and that "a bare desire to harm a politically unpopular group cannot constitute a legitimate government interest"); United States v Carolene Prods Corp, 304 US 144, 152 n4 (1938) (noting that "prejudice against discrete and insular minorities may be a special condition . . . which may call for a correspondingly more searching judicial inquiry"). Rather than fairly administering the financial affairs of this State or at least seeking a more moderate course of action, the Legislature specifically and purposefully targeted the class of retired state and public school employees born after 1945, taking away their deferred compensation in the form of a tax-exempt pension as specified in the DB plans at issue, without providing alternative benefits in their place that are equal to or greater than the value of their tax-exempt pensions. As the U.S. Supreme Court has cautioned, "a State is not free to impose a drastic impairment when an evident and more moderate course would serve its purposes equally well." United States Trust, supra 431 US at 31. Accordingly, Mr. Okrie et al. are entitled to summary disposition because the application of 2011 PA 38, and the related legislation, impairs their contracts in violation of the Contract Clauses under the state and federal constitutions.

V. The Application of 2011 PA 38, and the Related Legislation, to Mr. Okrie et. al. Violates the Takings Clauses under 1963 Const Art 10, § 2 and US Const Am V and US Const Am XIV.

Whether the right to the earned financial benefits of deferred compensation in the form of tax-exempt pensions as set forth in the DB plans at issue is characterized as a contract or property right, the State's application of 2011 PA 38 and the related legislation, 2011 PA 41, 43-45, to Mr. Okrie et al. constitutes a "takings" in violation of 1963 Const, art 10, § 2 and US Const, Ams V and XIV.[16] As the U.S. Supreme Court declared in Bd of Regents v Roth, 408 US 564, 577 (1972), property interests "extend well beyond actual ownership of real estate, chattels, or money." Specifically, in Roth, the U.S. Supreme Court stated:

[T]o have a property interest in a benefit, a person clearly must have more than an abstract need or desire for it. He must have more than a unilateral expectation of it. He must, instead, have a legitimate claim of entitlement to it. [Id.]

Moreover, as explained by Justice Brandeis in Lynch, supra, 292 US at 579, "valid contracts are property, whether the obligor be a private individual, a municipality, a State or the United States," and "are protected by the Fifth Amendment." (Emphasis added).

Having fully rendered governmental services, vested in the DB plans at issue and retired, Mr. Okrie et al. have property interests in the deferred compensation represented by tax-exempt pensions or the provision of alternative benefits that are equal to or greater than tax-exempt pensions. Because such financial benefits vested, they are immune from confiscation by the State without the payment of just compensation. See Pierce, supra, 910 P2d at 292 (finding that a retirement plan creates a property right in the amount of the benefit and requiring compensation for any reduction once the participant vests and "matures" once the participant has attained the age necessary to receive the benefits); Pineman v Oechslin, 488 A2d 803, 810 (Conn 1985) (finding that benefits created by public pension plan are entitled to constitutional protection as property). By taking away their earned deferred compensation, without providing alternative financial benefits in their place that have an equivalent monetary value, the State has illegally confiscated the property of Mr. Okrie et al. in violation of the Takings Clauses under the state and federal constitutions, without the payment of just compensation. Roth, supra, 408 US at 577; see Pierce, supra at 304 (noting that "any action by the legislature that serves to terminate, diminish or alter the value of pension benefits must be compensated for by providing an equal or greater benefit").

VI. Mr. Okrie et al. Should Be Allowed to Amend Their Verified Class Action Complaint to Allege Breach of the Service Credit Contract, Breach of the Member Investment Plan (MIP) Contract, Fraud in the Inducement and Gross Negligent Misrepresentation.

Leave to amend is freely granted when justice so requires; amendment is a matter of right rather than grace, and should be denied only for particularized reasons. Ben P. Fyke & Sons v Gunter Co, 390 Mich 649, 656, 659 (1973). Further, a grant of summary disposition does not automatically preclude amendment of the complaint. Formall, Inc v Community Nat'l Bank, 166 Mich App 772, 783 (1988). Thus, a court must give a party the opportunity to amend unless amendment would be futile. Weymers v Khara, 454 Mich 639, 658 (1997). An amendment would be futile it if merely restated the allegations already made or added allegations that failed to state a claim. Id.

Here, Mr. Okrie et al.'s proposed counts for breach of the service credit purchase contract and the MIP contract are not "futile." Specifically, Mr. Okrie et al. seek to amend their Verified Class Action Complaint to allege two claims involving breach of individual investment contracts, which are qualitatively different from the other claims being alleged. One claim involves individual investment decisions by Mr. Okrie and similarly situated retired state and public school employees born after 1945 who invested their own money to purchase tax-exempt service credit on the explicit promises by the State that the purchased service credit was tax exempt. The other breach of contract claim involves Mr. Okrie and similarly situated retired public school employees born after 1945 who used their own money to enter into Member Investment Plan (MIP) contracts with the State of Michigan, which guaranteed a tax-exempt annual escalator clause of 3% on their pensions after they retired. Notwithstanding the novelty of these claims, Mr. Okrie et al. were simply not given an opportunity to demonstrate that their proposed amendments were not "futile;" rather, it was falsely assumed - without any analysis, examination, briefing or argument - that "Plaintiffs' proposed new claims are simply variations on the theme of the previous two complaints." (EX. 4, p 11).

However, as explained in the document, Your Retirement Plan Choice: The MIP/Basic Choice ["The Booklet"], the proposed count for violation of the individual investment contract was qualitatively different in character than Mr. Okrie et al.'s other allegations. Specifically, in comparing alternative investments to MIP, such as Tax Sheltered Annuities and Individual Retirement Accounts, the State-issued Booklet makes the unqualified claim that the MIP investment is better because "MIP and Basic Benefits are exempt from Michigan state and local taxes by law, but income from the alternative investment is not." (Motion for Reconsideration dated May 7, 2015, EX. 2 - Your Retirement Plan Choice: the MIP/Basic Choice). Unlike the statements promising tax-exempt pensions arising from employment relationships with the State, both the service credit and MIP contracts involve individual investment contracts with the State in which Mr. Okrie et al. invested their own money on the explicit, unqualified condition that their investment returns were tax-exempt. Here, Mr. Okrie et al. should be treated just like any purchaser of tax-exempt bonds who accepts a lower interest rate than is available on commercial bonds because the promise not to tax the bond's interest adds value to the investment. These are hardly "futile" claims.

Finally, in the event that all the foregoing claims are dismissed, Mr. Okrie et al. should be permitted to amend their complaint to add counts for fraud in the inducement and gross negligent misrepresentation against the State. Fraud in the inducement occurs when a party materially misrepresents future conduct under circumstances in which the assertions may be reasonably expected to be relied upon and are in fact relied upon. Samuel D Begola Services, Inc v Wild Bros, 210 Mich App 636, 639 (1995). Negligent misrepresentation occurs when a plaintiff has justifiably and detrimentally relied on information provided without reasonable care by one who owed the plaintiff a duty of care. Law Offices of Lawrence J Stockler, PC v Rose, 174 Mich App 14, 33 (1989) . Here, there is no question that, in making irrevocable employment termination and retirement decisions, Mr. Okrie and 100,000+ similarly situated retired state and public school employees born after 1945 reasonably relied upon the unqualified statements made repeatedly for decades by the State, through the ORS, in the Retirement Guideline booklets, in seminars, and retirement forms that their pensions were exempt from state and local taxes upon retirement. Accordingly, Mr. Okrie et al. should be allowed to amend their Complaint to seek redress against the State for fraud in the inducement and gross negligent misrepresentation for any of the State's material misrepresentations upon which they detrimentally relied in making employment termination and retirement decisions promising tax-exempt pensions in retirement, without providing alternative benefits in their place that are equal to or greater than tax-exempt pensions.

VII. Mr. Okrie et al.'s Second Amended Verified Class Action Complaint Should Be Remanded to the Trial Court for Certification as a Class Action.

Given that Mr. Okrie et al. state cognizable legal claims for recovery, the trial court erred in declaring that their Amended Motion for Class Certification under MCR 3.501 was "moot." Since their Amended Motion for Class Certification has yet to be considered on the merits, Mr. Okrie et al. request that this Court remand to the trial court so that their Second Amended Verified Class Action Complaint be certified and proceed forward as a class-action complaint.

CONCLUSION AND RELIEF REQUESTED

Based upon the foregoing, Plaintiff-Appellant Thomas R. Okrie, on behalf of similarly-situated retired state and public school employees born after 1945, requests that this Court reverse the opinions and orders dismissing his claims, grant his motions for summary disposition, grant his Second Amended Verified Class Action Complaint adding claims for breach of service credit and the Member Investment Plan (MIP) contracts, fraud in the inducement and gross negligent misrepresentation, and remand this case to the trial court for certification as a class action. Mr. Okrie et al. also ask for attorney fees and costs.

Respectfully Submitted,

By: ____________________________

Gary P. Supanich (P45547)

Attorney for Plaintiffs-Appellants Thomas Okrie et al.

117 N. First Street, Suite 111

Ann Arbor, MI 48104

Dated: May 11, 2015 (734) 276-6561


[1] State Employees' Retirement Act, 1943 PA 240, § 40, MCL 38.40, providing the right to an exemption from state and local taxes since 1943; Public School Employees Retirement Act of 1979, 1980 PA 300, § 46(1); MCL 38.1346(1), amending predecessor act, 1945 PA 136, Ch 1, § 25, providing an exemption for retirement benefits from state or local taxation for only Chapter I members since enactment in 1945; Michigan Legislative Retirement System Act, MCL 38.1057(1), with exemption added by 1961 PA 167; and City Library Employees' Retirement Systems, 1927 PA 339, MCL 38.705, with an exemption since 1927. The Income Tax Act of 1967, MCL 206.30(1)(f), exempted retirement and pension benefits from taxation.

[2]For the purpose of this litigation, the class of retired state and public school employees consist of those born after 1945 whose state pensions have been subject to state and local taxation since January 1, 2012 pursuant to 2011 PA 38, and the related legislation. Essentially, this class of individuals consists of all those Tier I retirees and deferred (vested) public school employees (their spouses and surviving spouses) covered by MSPERS, administered by the ORS, and retired and deferred (vested) state employees (their spouses and surviving spouses) covered by MSERA, also administered by the ORS, who were born after 1945 and whose pension benefits had vested or accrued before January 1, 2012 when 2011 PA 38 went into effect. Thus, this class does not include those state and public school employees who were active or current public employees as of January 1, 2012 and thereafter, nor retired federal employees.

[3] According to the Retirement Guidelines:

MSPERS is the State agency that will process your retirement application and pay your pension. It will be your "partner in retirement" throughout your lifetime. [BIS- Pl. SD Motion, EX. 2, p 11].

[4] At all times relevant to this litigation, until 2011 PA 38 entered into effect on January 1, 2012, the Public School Employees Retirement Act ("PSERA"), MCL 38.1346(1) as well as the State Employees Retirement Act ("SERA"), MCL 38.40, exempted certain public-pension benefits from taxation, as did the Income Tax Act, MCL 206.1 et seq.

[5] This statement reiterated what was stated in the 1992 Retirement Guidelines (Id. at EX. 5, p 41) and repeated in many other years over the decades:

State and Local Income Tax Information

Pensions paid by MPSERS are exempt from Michigan state income tax and Michigan city income tax. Although you are exempt from paying Michigan income tax, you must still file state and city (if applicable) tax returns.

[6] See State Employees Retirement Act (SERA), MCL 38.1 et seq., as amended by PA 2011 No. 38. The 2011 legislation also partially terminated the tax exemption components set forth in several other pension statutes, the Public School Employees Retirement Act, MCL 38.3146; the Michigan Legislative Retirement Act, MCL 38.1057; the City Library Employees' Retirement System Act, MCL 28.705; and the Judges Retirement Act, MCL 38.2670. The present litigation only concerns retired state employees under SERA and retired public school employees under MSER both after 1945.

[7] As an advisory opinion, the Supreme Court's decision is not binding in the present litigation presenting different issues and/or arguments that were not previously raised or considered in an adversarial proceeding. See In re Certified Question)(Bankey v Storer Broadcasting Co, 432 Mich 438, 467-171 (1989) (noting that advisory opinions are not precedentially binding since the court addresses questions without having before it adverse parties to existing controversies and thus acts not as a court, but as the constitutional adviser of the other departments of government).

[8] See generally Eric M Madiar, Public Pension Benefits Under Siege: Does State Law Facilitate or Block Recent Efforts to Cut the Pension Benefits of Public Servants?, 27 ABA J of Lab & Emp 179 (2012)(Pl. BIS of SD Motion dated 11/1/2013, EX. 1); Madiar, Is Welching on Public Pension Promises an Option for Illinois? An Analysis of Article XIII, Section 5 of the Illinois Constitution. 2 (Mar. 1, 2011) http://ssrn.com/abtract=1774163. ; Amy Monahan, Public Pension Plan Reform: the Legal Framework, 5 Educ Fin & Pol'y 617 (2010)(see Pl. Reply Br. dated 10/9/13, EX. 2).

[9] See Mark Petit, Modern Unilateral Contracts, 63 BU L Rev 551, 563 (1983)("Most modern courts characterize employment benefits as forms of compensation (usually deferred compensation) that employees earn just as they earn wages or salaries.") (Footnotes omitted).

[10] As explained in Opinion of the Justices, 303 NE2d 320, 328 (Mass 1973),

When . . . the characterization 'contract' is used, it is best understood as meaning that the retirement scheme has generated material expectations on the part of employees and those expectations should in substance be respected. Such is the content of 'contract.'

[11] As Jack M Beerman, The Public Pension Crisis, 70 Wash & Lee L Rev 3, 51-52 (2013) noted:

Unlike the typical regulatory program, pension benefits are earned through government employment and, especially with regard to past services, are compensation for work already performed. In employment situations, perhaps the presumption [that the principal function of a legislature is not to make contracts, but to make laws that establish the policy of the state. Indiana ex rel Anderson v Brand, 303 US 95, 104-105 (1938)] should be flipped - it ought to be presumed that promises made based on employment are intended to be contractual. Otherwise, state and local employers would be free to take advantage of employees in exactly the way that the Contract Clause, as applied to the government's own contracts, is supposed to prevent. Further, allowing state and local governments complete freedom to alter employee benefits retroactively could hamper public employers' ability to attract high quality employees or reduce employers' flexibility regarding the timing of pay and benefits if employees refuse to accept insecure promises of deferred compensation. (Emphasis added; footnote omitted).

[12] ERISA regulates two types of benefit plans, pension benefit plans that create vested rights and welfare benefit plans that do not need to create vested rights. Chiles v Ceridian Corp, 95 F3d 1505, 1510 (CA 10 1996). As explained by the U.S. Supreme Court in Firestone Tire & Rubber Co v Bruch, 489 US 101, 113 (1989), "ERISA was enacted to promote the interests of employees and their beneficiaries in employee benefit plans, and to protect contractually defined benefits." Under ERISA, "every employee benefit plan shall be established and maintained pursuant to a written instrument" and "every employee may, on examining the plan documents, determine exactly what his rights and obligations are under the plan." Curtiss-Wright Corp v Schoonejongen, 514 US 73, 83 (1995)(citations omitted).

[13] Thus, in The Public Pension Crisis, 70 Wash & Lee L Rev at 58, Beerman observes:

[T]here are very good reasons to treat statutory promises to government employees different from promises contained in other regulatory statutes. Most people have multiple employment options at the outset and at various stages of their careers. Retirement promises form part of the inducement for individuals to choose and remain in government employment . . . . Employees cannot be expected to save two or three times for retirement or change jobs every so often so their retirement promises come from multiple employers. This recognition helps explain why federal law protects private pensions through the ERISA and the programs administered by the Pension Benefit Guaranty Corporation.

[14] The appended footnote references Cain v Allen Electric & Equipment Co, 346 Mich 568 (1956); Psutka v Michigan Alkali Co, 274 Mich 318 (1936); Gaydos v White Motor Corp, 54 Mich App 143 (1974); Clarke v Brunswick Corp, 48 Mich App 667 (1973); and Couch v Administrative Committee of the Difco Laboratories, Inc, Salaried Employees Profit Sharing Trust, 44 Mich App 44 (1972).

[15] 1963 Const, art 1, § 10 provides: "No bill of attainder, ex post facto law or law impairing the obligation of a contract shall be enacted." US Const, art 1, § 10(1) states in pertinent part: "No State shall . . . pass any . . . Law impairing the Obligation of Contracts. . . ."

[16] US Const Am V provides in pertinent part: [N]or shall private property be taken for public use, without just compensation."

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