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Plaintiffs' Brief in Opposition to the State's Motion for Summary Disposition

STATE OF MICHIGAN

IN THE COURT OF CLAIMS

______________________________________________________________________________

THOMAS R. OKRIE, et al.,

Plaintiffs,

Court of Claims No. 13-93-MK

v HON. Rosemarie E. Aquilina

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.

______________________________________________________________________

Gary P. Supanich (P45547)

LAW OFFICE OF GARY P. SUPANICH

Attorney for Plaintiffs

117 North First Street, Suite 111

Ann Arbor, MI 48104

(734) 276-656

www.michigan-appeal-attorney.com

Patrick M. Fitzgerald (P69964)

Joshua Booth (P53947)

Thomas Quasarano (P27982)

MICHIGAN DEPARTMENT OF ATTORNEY GENERAL

State Operations Division

Attorneys for Defendants

P.O. Box 30754

Lansing, MI 48909

(517) 373-1162

_____________________________________________________________________

PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION FOR SUMMARY DISPOSITION

PROOF OF SERVICE


TABLE OF CONTENTS

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

ARGUMENT......................................................... 5

I. THIS COURT SHOULD DENY THE STATE'S MOTION FOR SUMMARY DISPOSITION UNDER MCR 2.116(C)(8) AND (10) BUT RULE THAT PLAINTIFFS ARE ENTITLED TO JUDGMENT BECAUSE THERE IS AN ENFORCEABLE CONTRACT BASED UPON THE DOCTRINE OF PROMISSORY ESTOPPEL THAT ENTITLES PLAINTIFFS TO DEFERRED COMPENSATION IN THE FORM OF TAX-EXEMPT PENSIONS.............. 5

(A) While the State Legislature Has the Exclusive Power of Taxation, Plaintiffs Have an Enforceable Contractual Right to Deferred Compensation in the Form of a Tax-Exempt Pension, Which the State Breached When It Subjected Their Pensions to Taxation..... 5

 

(B) By Promising Tax-Exempt Pensions in the Context of Providing Guidance to State Employees and Public School Employees Making Irrevocable Retirement and Employment Termination Decisions, the State Assumed the Risk of a Breach of Contract If Their Pensions Were Subject to State and Local Taxation..... 8

 

II. EVEN IF THIS COURT GRANTS THE STATE'S MOTION FOR SUMMARY DISPOSITION AS TO PLAINTIFFS' BREACH OF CONTRACT CLAIM BASED UPON PROMISSORY ESTOPPEL, PLAINTIFFS WILL AMEND THE VERIFIED COMPLAINT TO ADD CLAIMS FOR UNJUST ENRICHMENT; BREACH OF AN EMPLOYMENT CONTRACT; IMPAIRMENT OF A CONTRACTUAL OBLIGATION IN VIOLATION OF CONST 1963, ART 1, § 10 AND US CONST, ART 1, § 10(1); VIOLATIONS OF THE TAKINGS CLAUSE UNDER 1963 CONST, ART 10, § 2 AND US CONST AM V; VIOLATIONS OF SUBSTANTIVE DUE PROCESS UNDER 1963 CONST, ART 1, § 17 AND US CONST AM XIV; AND VIOLATIONS OF PROCEDURAL DUE PROCESS UNDER 1963 CONST, ART 1, § 17 AND US CONST AM XIV.......................... 15


(A) The State's Retention of the Deferred Compensation Benefits of the Affected Public Employees Constitutes Unjust Enrichment...... 15

(B) The State's Retention of the Deferred Compensation Benefits of the Affected Public Employees Constitutes a Breach of Their Employment Contracts...... 16

(C) Application of the Amended Statutes At Issue to Plaintiffs Impairs a Contractual Obligation in Violation of 1963 Const, art 1, § 10 and US Const, art 1, § 10(1)...... 17

(D) Application of the Amended Statutes At Issue Constitutes a Taking under Const Art 10, § 2 and US Const Am V..... 17

(E) Application of the Amended Statutes At Issue to Plaintiffs Violates Substantive Due Process under 1963 Const, art 1, § 17 and US Const, Am XIV...... 18

(F) Application of the Amended Statutes At Issue to Plaintiffs Violates Procedural Due Process under 1963 Const, art 1, § 17 and US Const, Am XIV...... 18

CONCLUSION AND RELIEF............................ 20

INTRODUCTION

This case is analytically on all fours with Toussaint v Blue Cross & Blue Shield of Michigan, 408 Mich 579 (1980). In Toussaint, 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.[1] 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, 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. He 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.

The immediate question before this Court is whether there was a contract based upon the doctrine of promissory estoppel. The undisputed evidence leads to the unmistakable conclusion that the State, through the Office of Retirement Services ("ORS"), expressly promised tax-exempt pensions in Retirement Guidelines booklets and other publications issued to state employees and public school employees over the course of several decades. The promise that pensions are exempt from state income tax and local income tax represented deferred compensation. The evidence also conclusively shows that Mr. Okrie and other state employees and public school employees justifiably relied upon this promise in making irrevocable employment termination and retirement decisions based upon this promise, as the ORS explicitly directed them to do. This created a binding, enforceable contract, notwithstanding subsequent changes to the statutory scheme.

In other words, the unequivocal statements that pensions are exempt from state income tax and local income tax repeatedly and consistently made over decades by the ORS in the Retirement Guidelines and other publications issued to state employees and public school employees functioned as promises to the affected public employees whose reliance on them was reasonable and justifiable in the context of making irrevocable retirement and employment termination decisions. The fact that the Legislature, exercising its exclusive power of taxation, eliminated or reduced the statutory exemption for pension benefits, does not release the State from keeping its promise at the time to the affected public employees to provide the promised tax-exempt pensions as deferred compensation. The affected public employees' reliance upon the promise of deferred compensation in this form was a product of the State's well-established policy that endured for decades until the enactment of 2011 PA 38 and the related legislation. It was a matter of policy that gave rise to a common-law contractual obligation based upon the doctrine of promissory estoppel once the affected public employees relied upon this promise in making irrevocable employment termination and retirement decisions. Thus, by subjecting the promised tax-exempt pensions to state and local income tax beginning on January 1, 2012, the State breached its common-law contractual obligation, causing damages to the affected public employees who detrimentally relied upon the broken promise in making irrevocable retirement and employment termination decisions.

ARGUMENT

I. THIS COURT SHOULD DENY THE STATE'S MOTION FOR SUMMARY DISPOSITION UNDER MCR 2.116(C)(8) AND (10) BUT RULE THAT PLAINTIFFS ARE ENTITLED TO JUDGMENT BECAUSE THERE IS AN ENFORCEABLE CONTRACT BASED UPON THE DOCTRINE OF PROMISSORY ESTOPPEL THAT ENTITLES PLAINTIFFS TO DEFERRED COMPENSATION IN THE FORM OF TAX-EXEMPT PENSIONS.

A. While the State Legislature Has the Exclusive Power of Taxation, Plaintiffs Have an Enforceable Contractual Right to Deferred Compensation in the Form of a Tax-Exempt Pension, Which the State Breached When It Subjected Their Pensions to Taxation.

Throughout its brief, the State mischaracterizes Plaintiffs' claim as seeking "a contract for a perpetual [sic] tax exemption." (Br., p 4).[2] Contrary to the State's construal, it is important to understand that Plaintiffs' claim is that the State, through the ORS, promised to pay them deferred compensation in the form of tax-exempt pensions and that this promise was made in the context of providing retirement guidance to public employees making irrevocable retirement and employment termination decisions.[3] Because the State promised to provide the affected public employees with deferred compensation for services already rendered, this is, as in Toussaint, an enforceable, binding contractual obligation under the doctrine of promissory estoppel. Thus, it is not "a contract for a perpetual tax exemption," but rather a promise to provide deferred compensation in the form of tax-exempt pensions for services rendered by state employees and public school employees, who justifiably relied upon it at the time in making irrevocable retirement and employment termination decisions. This created enforceable common-law contractual rights that could not be altered or abolished by the Legislature through the enactment of 2011 PA 38 and the related acts, 2011 PA 38, 41-45.

The primary flaw in the State's position is its failure to apprehend that the common law, not the Michigan Constitution, is the source of the breach of contract action here. See Const 1963, art III, § 7 ("The common law . . . now in force, not repugnant to this constitution, shall remain in force until they expire by their own limitations, or are changed, amended or repealed."). Thus, it is of no moment whatsoever that "[a] perpetual [sic] tax exemption for public pension distributions can only be created in the Constitution itself, which contains no such provision." (Br., pp 6-7). The State's argument in this respect attacks a straw man.

Moreover, by basing their common-law contract claim upon the doctrine of promissory estoppel, Plaintiffs are not interfering with the State Legislature's exclusive power to tax.[4] Specifically, Plaintiffs' breach of contract claim does not rest upon the claim that the statutory tax exemption for public retirement benefits cannot be eliminated or reduced or that the Legislature improperly exercised its authority to eliminate the state and local tax exemption for public pension income. Thus, Plaintiffs' breach of contract claim does not contravene Const 1963, art 9, § 2, which states that "[t]he power of taxation shall never be surrendered, suspended or contracted away." Indeed, the State retains the full power to tax the pensions of all public employees, including the affected public employees.

What the State cannot do, however, is breach its contracts under the common law. Having done so, the State is liable for contract damages for the payment of deferred compensation to the affected public employees in the form of tax-exempt pensions. In this instance, the contract damages are equivalent to the amount that the State has taxed. Although the amount taxed is equivalent to the damages suffered by the affected public employees, it is essential to recognize that they represent analytically distinct concepts. Because the amended statutes at issue are valid, they apply to Mr. Okrie and the other affected public employees. However, the fact that Mr. Okrie and the other affected public employees must pay taxes on their pensions pursuant to 2011 PA 38 and the related legislation does not preclude them from bringing a breach of contract action against the State for damages based upon the promises made to them by the ORS. In short, while it is not contested that the State has the power to tax the pensions pursuant to 2011 PA 38 and the related legislation, it must pay damages for its breach of contract. Here, it so happens that the amount of the damages that must be paid to each affected public employee equals the amount that each pension is taxed.[5]

B. By Promising Tax-Exempt Pensions in the Context of Providing Guidance to State Employees and Public School Employees Making Irrevocable Retirement and Employment Termination Decisions, the State Assumed the Risk of a Breach of Contract If Their Pensions Were Subject to State and Local Taxation.

It is important to understand that the State's promise of a tax-exempt pension contained in the Retirement Guidelines issued to state employees and public school employees for decades was made in the context of giving advice to them in making irrevocable retirement and employment termination decisions. Contrary to the State's characterization (Br., p 15), these booklets were not mere "informational booklets." Indeed, the ORS (using our tax dollars) took the affirmative action of producing these booklets and issuing them to state employees and public school employees "to guide you through the details of your retirement plan." (Pl. BIS of SD Motion, EX. 3, p 3). 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 (Br., p 14), 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 amend its statements promising a tax-exempt pension at any time and apply any such change retroactively to public employees after they had already made irrevocable retirement and employment termination decisions in detrimental reliance upon the State's promise. In fact, nothing in the above-referenced clause contemplates possible future changes in the law. Thus, simply saying that "the book is a summary of the main features of the plan and not a complete description" and that "[i]f the provisions of the Act conflict with this summary, the Act controls" does not constitute an unambiguous statement qualifying the ORS's promise to provide a tax-exempt pension as deferred compensation, putting public employees on notice that the State could subsequently amend its promise and retroactively subject their pensions to state and local taxation. The terms of this contract, like any contract, are not changed with the enactment of subsequent legislation absent a specific contractual provision providing for such a change. Winstar, supra, 64 F3d at 1547.

In any event, there is no statement anywhere in any of the booklets issued by the ORS for decades telling public employees that the State may retroactively subject their pensions to state and local income tax after they had made irrevocable retirement and employment termination decisions based upon the promise of deferred compensation in the form of a tax-exempt pension. In this regard, it is important to underscore that for decades before the affected public employees made their irrevocable retirement and employment termination decisions in justifiable and reasonable reliance upon the ORS's promise contained in the Retirement Guidelines, there was no conflict with the provisions of the Act regarding the promise of a tax-exempt pension. Thus, there was objectively no reason to think that the pensions would be subject retroactively to state and local taxation after the ORS had clearly and definitely stated, without qualification, that their pensions were tax-exempt.

At best, the State's qualification that "the Act controls" is ambiguous, thus allowing that the retroactive application of any subsequent statutory amendments eliminating or reducing the tax exemption would constitute a breach of contract as to those public employees who had made retirement and employment termination decisions in detrimental reliance upon the promise of a tax-exempt pension. Assuming that there is such an ambiguity, the Court should construe it against the drafter of the written document under the rule of contra proferentem. Petersen v Magna Corp, 484 Mich 300, 312 n 31 (2009), citing 2 Restatement Contracts, 2d, § 206, p 105. Accordingly, it must be concluded that the State completely assumed the risk of breaching its contract with public employees if the State Legislature subjected their pensions to state and local taxation after they had made their retirement and employment termination decisions in justifiable reliance upon the ORS's promise of a tax-exempt pension as deferred compensation.

Thus, there is no legal basis whatsoever for the State's contention (Br., p 16) that Mr. Okrie and the other affected public employees "proceeded at [their] own peril in relying upon representations from state agents" promising them tax-exempt pensions as deferred compensation. Rather, the opposite is true. For it was the State that "proceeded at [its] own peril" by failing to state in clear terms in the Retirement Guidelines that the State may amend the statements promising a tax-exempt pension at any time and apply these changes retroactively to public employees after they had made irrevocable retirement and employment termination decisions in detrimental reliance upon the State's promise. Here, the allocation of all the risk falls squarely upon the State, which cannot allocate to Plaintiffs the risk that the Legislature might subsequently wish to avoid the expenses of the ORS' own contractual engagements.

At this juncture, it is instructive to consider case law arising under the Employment Retirement Income Security Act ("ERISA") in connection with the State's breach of contract based upon its failure to keep its promise to pay deferred compensation in the form of tax-exempt pension. [6] Although 29 USC § 1003(b)(1) of ERISA excludes state government plans from its scope, ERISA case law clearly supports Plaintiffs' position here. For an amendment to any ERISA plan may not operate retroactively if that amendment deprives a beneficiary of a vested benefit. 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. Curtis Wright, supra at 83. ("ERISA's statutory scheme is 'built around reliance on the face of written plan documents.").

Here, there is no question that Mr. Okrie and the other affected public employees reasonably relied upon the statements in the Retirement Guidelines that their pensions were exempt from state and local income tax, especially since these statements did not conflict with the corresponding statutory provisions. As a result, it was therefore perfectly reasonable for Mr. Okrie and the other affected public employees to rely upon the promise that their pensions were exempt from state and local income tax in making irrevocable retirement and employment termination decisions and in calculating their financial benefits in retirement. This reliance was further reinforced by the fact that there was no indication anywhere in any of Retirement Guidelines booklets issued for the decades that the State may subject their pensions to taxation after they had made irrevocable retirement and employment termination decisions in reliance upon the ORS' promise.

The present case is also parallel to the United States Supreme Court's decision in Lynch v United States, 292 US 571 (1934), where, in the midst of the Great Depression, Justice Brandeis incisively stated:

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." Sinking-Fund Cases, 99 U.S. 700, 719 [1879]. [Id. at 580] (Emphasis added.)[7]

This Court should heed the wise counsel of Justice Brandeis in this case. As in Lynch, the State of Michigan is bound by its contracts as much as any private party. See Toussaint, supra. Repudiation of its obligations is thus a breach of contract from which flow damages, whether the injured party is a commercial entity or a state employee or public school employee having dealings with the State.

Finally, the decision in United States v Winstar Corp, 518 US 839 (1996) supports Plaintiffs' breach of contact action.[8] 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. 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).

II. EVEN IF THIS COURT GRANTS THE STATE'S MOTION FOR SUMMARY DISPOSITION AS TO PLAINTIFFS' BREACH OF CONTRACT CLAIM BASED UPON PROMISSORY ESTOPPEL, PLAINTIFFS WILL AMEND THE VERIFIED COMPLAINT TO ADD CLAIMS FOR UNJUST ENRICHMENT; BREACH OF AN EMPLOYMENT CONTRACT; IMPAIRMENT OF A CONTRACTUAL OBLIGATION IN VIOLATION OF CONST 1963, ART 1, § 10 AND US CONST, ART 1, § 10(1); VIOLATIONS OF THE TAKINGS CLAUSE UNDER 1963 CONST, ART 10, § 2 AND US CONST AM V; VIOLATIONS OF SUBSTANTIVE DUE PROCESS UNDER 1963 CONST, ART 1, § 17 AND US CONST AM XIV; AND VIOLATIONS OF PROCEDURAL DUE PROCESS UNDER 1963 CONST, ART 1, § 17 AND US CONST AM XIV.

Whether this Court grants the State's motion to dismiss the breach of contract claim based upon the equitable doctrine of promissory estoppel, Plaintiffs will amend the Verified Complaint to add the following claims.[9]

A. The State's Retention of the Deferred Compensation Benefits of the Affected Public Employees Constitutes Unjust Enrichment.

Unjust enrichment requires showing (1) the 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 Auto Club Ins Ass'n, 437 Mich 521, 546 (1991). Because the affected public employees were entitled to the financial benefits of the promised tax-exempt pensions as deferred compensation for services rendered, see Davis, supra., the State cannot retain these benefits and unjustly enrich itself at their expense. Given the obvious inequity, Plaintiffs are entitled to restitution, for the State has an obligation to pay deferred compensation for the services rendered by the affected public employees.

B. The State's Retention of the Deferred Compensation Benefits of the Affected Public Employees Constitutes a Breach of Their Employment Contracts.

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). Because employment contracts are unilateral and may be accepted only by performance, a promisor does not receive a promise in return as consideration. Sniecinski v Blue Cross & Blue Shield, 469 Mich 124, 138 n 9 (2003). Here, the undisputed facts show that Mr. Okrie and the other affected public employees entered into a contractual bargain by which the State offered to pay deferred compensation in the form of a tax-exempt pension in exchange for the performance of services rendered. Having received the benefits of their employment in exchange for its promise of tax-exempt pensions, the State thus entered into an enforceable binding contract, which it breached by retaining the promised deferred compensation benefits.[10] Thus, the Legislature's subsequent enactment of the amended statutes at issue impermissibly altered the terms of the contractual agreement in effect at the time that Plaintiffs had binding, enforceable contract rights, causing a breach of contract.

C. Application of the Amended Statutes At Issue to Plaintiffs Impairs a Contractual Obligation in Violation of 1963 Const, art 1, § 10 and US Const, art 1, § 10(1).

Whether characterized as a breach of contract based upon promissory estoppel or a breach of an employment contract, the State's application of 2011 PA 38 and the related legislation, 2011 PA 41, 43-45, to Plaintiffs beginning on January 1, 2012, impairs a contractual obligation in violation of 1963 Const, art 1, § 10 and US Const, art 1, § 10(1). [11] In Lynch, the US Supreme Court declared that "[w]hen the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals." 292 US at 579. As stated in United States Trust Co v New Jersey, 431 US 1, 30-31 ((1977), "a State is not completely free to consider impairing the obligations of its own contracts on a par with other policy alternatives."

D. Application of the Amended Statutes At Issue Constitutes a Taking under Const Art 10, § 2 and US Const Am V

Whether characterized as a contract right or a non-contractual benefit of deferred compensation (property) that the State has retained without making restitution, the State's application of 2011 PA 38 and the related legislation, 2011 PA 41, 43-45, to Plaintiffs beginning on January 1, 2012, constitutes a taking in violation of 1963 Const, art 10, § 2 and US Const, Am V by confiscating property that belongs to Plaintiffs without just compensation. As Lynch, supra noted, "valid contracts are property, whether the obligor be a private individual, a municipality, a State or the United States," such that "rights against the United States arising out of a contract with it are protected by the Fifth Amendment." 292 US at 579 (Emphasis added.)

E. Application of the Amended Statutes At Issue to Plaintiffs Violates Substantive Due Process under 1963 Const, art 1, § 17 and US Const, Am XIV.

Whether characterized as a contract right or a non-contractual benefit (property) that the State has retained without making restitution, the State's application of 2011 PA 38 and the related legislation, 2011 PA 41, 43-45, to Plaintiffs beginning on January 1, 2012, constitutes a violation of substantive due process under 1963 Const, art 1, § 17 and US Const, Am XIV. See People v Sierb, 456 Mich 519, 522-523 (1998). Pursuant to Lynch, supra and Perry, supra, the application of the amended statutes abrogates Plaintiffs' rights to deferred compensation.

F. Application of the Amended Statutes At Issue to Plaintiffs Violates Procedural Due Process under 1963 Const, art 1, § 17 and US Const, Am XIV.

Alternatively, the retroactive application of the tax statutes at issue violates procedural due process under the state and federal constitutions because it is so harsh and oppressive as to transgress the constitutional limitation under the due process clause. United States v Hemme, 476 US 558, 568-69 (1986), quoting Welch v Henry, 305 US 134, 147 (1938).

The critical question is whether the taxpayer has reasonably relied to his detriment on the pre-amendment tax statute. Here, there is no question that Mr. Okrie and the other affected public employees reasonably relied to their detriment on the pre-amendment statutes at the time they made irrevocable retirement and employment termination decisions, given that there was no indication foreseeable at the time of their irrevocable retirement and employment termination decisions that amended statutes imposing wholly new taxes were in the offing so as to interfere with their settled expectations.[12] Further, the State Legislature, in seeking to pay for a corporate tax break, acted with an improper motive by targeting the affected public employees for taxation of their pensions after the ORS had deliberately induced them to believe over decades that their pensions were exempt from taxation.[13] Rather than electing to make up the anticipated revenue loss through general prospective taxation, the Legislature singled out the deferred compensation earned by much maligned state employees and public school employees for taxation. Thus, applying the amended statutes retroactively to the affected public employees is so arbitrary and capricious as to amount to confiscation in violation of the due process clause under the state and federal constitutions.

CONCLUSION AND RELIEF

Plaintiffs respectfully request that this Court deny the State's motion for summary disposition but render judgment in favor of Plaintiffs under MCR 2.116(I)(2) as to their Breach of Contract claim based upon the equitable doctrine of promissory estoppel, award damages and any equitable relief that this Court deems necessary and just, as well as Plaintiffs' attorney fees and costs. Alternatively, even if this Court grants the State's present motion for summary disposition as to Plaintiffs' breach of contract claim based upon promissory estoppel, this Court should not dismiss Plaintiffs' Complaint since they will amend to state claims for unjust enrichment and breach of employment contract based upon traditional contract principles, as well as claims under the state and federal constitutions for impairment of the contracts clause, violations of the takings clause, violations of substantive and procedural due process.

Respectfully Submitted,

LAW OFFICE OF GARY P. SUPANICH

__________________________

Gary P. Supanich (P45547)

Attorney for Plaintiffs

117 North First St., Suite 111

Ann Arbor, MI 48104

Dated: September 20, 2013 (734) 276-6561



[1] 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).

[2] Considering our mortality, it is ludicrous to characterize the promise of a tax-exempt pension as "perpetual," which is defined as "continuing or enduring forever; everlasting."

[3] In Davis v State of Michigan, 160 Mich App 98, 105 (1987), the State argued, and the Court of Appeals 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." The promise of a tax-exempt pension thus functions as deferred compensation, which the State is judicially estopped from disputing in this litigation. See Davis v Michigan Dep't of Treasury, 489 US 803, 808 (1989) ("We have no difficulty concluding that civil service retirement benefits are deferred compensation for past years of service rendered to the Government.").

[4] It is important to recognize that Plaintiffs are not claiming, as the State suggests, that the ORS could contractually bind the Legislature not to change the amended statutes at issue. What the ORS did, however, was to bind the State to keep its promise to these affected public employees who made irrevocable employment termination and retirement decisions in detrimental reliance upon the promise of deferred compensation in the form of a tax-exempt pension. Detroit v Detroit Police Officers Assoc, 408 Mich 410 (1980) (noting that an official may be clothed with authority to say when law shall operate, or as to whom, or upon what occasion, provided that standards prescribed for guidance are as reasonably precise as subject matter requires or permits). Thus, the Legislature's exclusive power to change the statutory scheme relating to the taxation of public pensions is consistent with the existence of a contract that promised a tax-exempt pension as deferred compensation.

[5]Consequently, administering the damages phase of this litigation is a mere bookkeeping exercise. For on monthly remittance advice issued by the State in the future, the taxed amount of the pension would appear as a deduction, while the amount owed as damages to the affected public employees would appear as a credit. Because these amounts are equivalent, they cancel each other out, obviating the need for an expensive procedure to administer the damages phase of this litigation. It also obviates the need for injunctive relief, thus eliminating any possible threat to the Legislature's exclusive power over taxation. See Winstar Corp v United States, 64 F3d 1531, 1547 (CA Fed Cir. 1995).

[6] 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).

[7]See 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.)

[8] It should be noted that Studier v Mich Pub School Employees Retirement Bd, 472 Mich 642, 660-61 (2005) relies upon Winstar only for the proposition that "this venerable principle that a legislative body may not bind its successors can be limited in some circumstances."

[9] Complaints may be amended once as a matter of course within fourteen days after the plaintiff is served with a responsive pleading. MCR 2.118(A)(1); In the Matter of the Dissolution of F Yeager & Culvert Co, 150 Mich App 386, 397 (1986). Because the State has yet to file a responsive pleading, Plaintiffs may amend the Verified Complaint at any time. In any event, a grant of summary disposition for the defendant does not preclude amendment of the complaint. Formall, Inc v Community Nat'l Bank, 166 Mich App 772, 783 (1988).

[10] Gaydos, supra, 54 Mich App at 143 (noting that the employer's adoption of severance pay constituted an offer of contract and work rendered by employees supplied consideration for a unilateral employment contract).

[11] It should be underscored that the Michigan Supreme Court's decision in In re Request for Advisory Opinion regarding Constitutionality of 2011 PA 38, 490 Mich 295 (2011) is not binding upon this Court. 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).

[12] See Welch, supra, 305 US at 147 (noting that "this Court has held invalid the taxation of gifts made and completely vested before the enactment of the taxing statute, decision was rested on the ground that the nature and amount of the tax could not reasonably have been anticipated by the taxpayer at the time of the particular voluntary act which the statute later made the taxable event").

[13] 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").

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