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Reply 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' REPLY BRIEF

ORAL ARGUMENT REQUESTED



TABLE OF CONTENTS

TABLE OF AUTHORITIES. i

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

ARGUMENT .....................................................................................................................................2

I. The State Misrepresents Mr. Okrie et al.'s Claims and Arguments on Appeal .............2

II. Winstar Supports Mr. Okrie et al.'s Breach of Contract Claim.. ..........................................5

III. The Attorney General's Position in the Davis Litigation and 1991 OAG No. 6697 Reinforced Mr. Okrie et al.'s Reasonable Reliance on the State's Promise to Pay Deferred Compensation. ......................................................................................................................................6

IV. The State's Retention of Mr. Okrie et al.'s Deferred Compensation Constitutes Unjust Enrichment. .........................................................................................................................................8

V. The State Violated the Contracts Clauses under the State and Federal Constitutions by Applying 2011 PA 38 to Mr. Okrie et al. Without Providing Alternative Financial Benefits Equivalent to the Value of Tax-Exempt Pensions.. ........................................................................8

VI. The State Violated the Takings Clauses under the State and Federal Constitutions by Taking Away the Deferred Compensation Earned by Mr. Okrie et al. for Their Years of Governmental Service......................................................................................................................... 9

VII. Mr. Okrie et al. Should Be Permitted to Amend Their Complaint to Allege Breach of Service Credit Contract, Breach of the Member Investment Plan (MIP) Contract, Fraud in the Inducement and Gross Negligent Misrepresentation. ..................................................................10

CONCLUSION AND RELIEF. ...........................................................................................................10






TABLE OF AUTHORITIES

Cases

Bailey v State, 500 SE2d 54 (NC 1998)........................................................... 5

Bd of Regents v Roth, 408 US 564 (1972)....................................................... 9

Cain v Allen Electric & Equipment Co, 346 Mich 568 (1956)....................... 3

Cunningham v 4-D Tool, 182 Mich App 99 (1989)......................................... 3

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

Davis v State of Michigan, 160 Mich App 98 (1987)............................ passim

Detroit v Detroit Police Officers Assoc, 408 Mich 410 (1980)...................... 6

E Grand Rapids Sch Dist. v Kent County Tax Allocation Bd, 415 Mich 381 (1982) 7

Frey v Dep't of Management & Budget, 429 Mich 315 (1987)...................... 7

Gentile v Detroit, 139 Mich App 608 (1984) ................................................. 1

Hay v Highland Park, 134 Mich App 624 (1984)........................................... 1

Hughes v State, 838 P2d 1018 (Ore 1992)....................................................... 4

In re Pension Reform Litig. Heaton v Quinn, 2015 IL 118585 (May 8, 2015). .. 9

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

Indiana ex rel Anderson v Brand, 303 US 95 (1938)...................................... 3

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

Paschke v Retool Indus, 445 Mich 502 (1994)................................................ 2

Pierce v State, 910 P2d 288 (NM 1995).......................................................... 9

Pineman v Oechslin, 488 A2d 803 (Conn 1985)............................................. 9

Schmidt v Bretzlaff, 208 Mich App 376 (1995)............................................... 6

State Bank of Standish v Curry, 442 Mich 76 (1993)...................................... 6

Toussaint v Blue Cross & Blue Shield of Michigan, 408 Mich 579 (1980).... 2

Traverse City School Dis v Attorney General, 383 Mich 390 (1971)............. 7

United States Trust Co of NY v New Jersey, 431 US 1 (1977).................... 8, 9

United States v Winstar Corp, 518 US 839 (1996....................................... 5, 9

Weymers v Khara, 454 Mich 639 (1997)....................................................... 10

Other Authority

Black's Law Dictionary (9th ed.). .................................................................. 1

1991 OAG No. 6697, 1991 Mich AG LEXIS 39.................................... passim

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

 

INTRODUCTION

The crux of this case is the payment of deferred compensation that Mr. Okrie and similarly situated retired state and public school employees born after 1945 ("Mr. Okrie et al.) earned for their years of governmental service rendered to the State of Michigan and its subdivisions. Michigan courts have consistently defined "compensation" in accordance with Black's Law Dictionary, which defines the term as "[r]emuneration and other benefits received in return for services rendered; esp., salary or wages." Black's Law Dictionary (9th ed); see also Gentile v Detroit, 139 Mich App 608, 617 (1984); Hay v Highland Park, 134 Mich App 624, 628 (1984); Stover v St Clair Shores Fire & Police Ret Bd, 78 Mich App 409, 415 (1977). "Deferred compensation" is thus defined in relevant part as "[p]ayment for work performed, to be paid in the future or when some future event occurs." Black's Law Dictionary (9th ed.).

As the Michigan Supreme Court held in a unanimous opinion in Kosa v State Treasurer, 408 Mich 356, 372 n 22, 372-373 (1980), tax-exempt pensions represent deferred compensation, which the State of Michigan consistently maintained in the Davis litigation to be "an integral part of the retirement benefits conferred upon state employees." See Davis v State of Michigan, 160 Mich App 98, 105 (1987)("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.") Thus, in the aftermath of the U.S. Supreme Court's decision against the State in Davis v Mich Dep't of Treasury, 489 US 803 (1989), the Attorney General, consistent with the proposition that the tax-exemption represented deferred compensation that was necessary to attract and retain state employees, issued 1991 OAG No. 6697 on December 18, 1991, stating that the State could eliminate the statutory tax-exemption for public pensions so long as "it provides alternative benefits in their place that are equal to or greater than pension benefits."

For decades, the State unfailingly paid deferred compensation earned by retired state and public school employees in Michigan for their years of governmental services to the State in the form of tax-exempt pensions. However, the elimination of the tax-exemption for public pensions, by the entry in force of 2011 PA 38 on January 1, 2012, did not eliminate the vested right of Mr. Okrie et al. to deferred compensation that they had earned for their years of governmental service to the State and its subdivisions. While the deferred compensation earned by Mr. Okrie et al. was no longer payable in the form of a tax-exempt pension after 2011 PA 38 went into effect, an equivalent value was nonetheless owed to them as deferred compensation, as set forth in 1991 OAG No. 6697. Although the Attorney General now wants to disavow this fundamental legal proposition argued in the Davis litigation and expressed in 1991 OAG No. 6697, it is judicially estopped from asserting a position in the present litigation that repudiates its previous views upon which Mr. Okrie et al. reasonably relied. See Pasche v Retool Indus, 445 Mich 502, 509-510 (1994). Notwithstanding the State's claims to the contrary, this case is not about the power to tax; rather, it is about the payment of deferred compensation earned by Mr. Okrie et al. in an amount equal to, or greater than, the value of a tax-exempt pension.

ARGUMENT

I. The State Misrepresents Mr. Okrie et al.'s Claims and Arguments on Appeal.

At the outset, it is necessary to correct the State's mischaracterization of the actual claims and arguments being made by Mr. Okrie et al. on appeal in this class-action lawsuit. For starters, the State's claim that the deferred compensation at issue is not part of any "employment contract" is contradicted by a long line of Michigan case law. (Df. Br., p 1). See Toussaint v Blue Cross & Blue Shield of Michigan, 408 Mich 579 (1980) and cases cited therein, e.g., Cain v Allen Electric & Equipment Co, 346 Mich 568 (1956). What created Mr. Okrie et al.'s contractual right to deferred compensation were the employment relationships with the State and its subdivisions in which "the employer makes an offer or promise which the employee accepts by performing the act upon which the promise is expressly or impliedly based." Cunningham v 4-D Tool, 182 Mich App 99, 106 (1989). Thus, the right to deferred compensation arises from the employment relationships in which Mr. Okrie et al. provided governmental service to the State in exchange for tax-exempt pensions, or their equivalent value. Accordingly, contrary to what the State claims, the contractual right to deferred compensation did not arise from any statute, but rather from the employment relationships themselves. Moreover, as the U.S. Supreme Court incisively stated 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 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 actions by individuals, become contracts between them and the State or its subdivisions within the protection of Art I, § 10. [Emphasis added.]

Further, contrary to the State's characterization, the crux of this case is not about the contractual right of Mr. Okrie et al. to receive tax-exempt pensions as such. (Df. Br, p 6). Rather, it is about the contractual or property right of Mr. Okrie et al. to receive deferred compensation in the form of a tax-exempt pension or its equivalent financial value. As 1991 OAG No. 6697 made clear, the State could eliminate the tax-exemption for retired state and public school employees provided that it paid them comparable financial benefits. Thus, what is at stake is not the preservation of tax-exempt pensions, but rather the payment of deferred compensation that was earned by Mr. Okrie et al. for their years of governmental service rendered to the State and its subdivisions. In this fundamental respect, it is no different than if the State had promised to pay a retirement bonus of $500 per year in deferred compensation as an inducement to attract and retain state and public school employees for their governmental services (in lieu of higher salaries when they worked), and then decided unilaterally one day after state and public school employees had retired not to pay the $500 annual bonus to them, despite having received the benefits of the bargain (years of governmental services at lower costs to the State). Here, Mr. Okrie et al. are simply asking that the State keep its end of the bargain by paying the deferred compensation that they earned in an amount that is equivalent to the value of tax-exempt pensions. See Hughes v State, 838 P2d 1018 (Ore 1992).

Thus, in its appeal brief, the State attacks a straw man by claiming that "the breach of contract claim fails as a matter of law and fact because Okrie [sic] cannot establish that he had a contract for a perpetual tax exemption." (Df. Br, pp 6-7). Let it be clear: Mr. Okrie et al. are not claiming that they are entitled to a "perpetual tax exemption" or a "vested right in a tax statute or the continuance of any tax law." (Df. Br., p 24). Rather, what they are claiming is a vested right to the payment of deferred compensation that is equivalent to the value of tax-exempt pensions. Nor are Mr. Okrie et al. challenging the authority of the Legislature to eliminate the state and local tax exemption for public pension income, as the State also claims. (Df. Br., pp 7-11). Rather, what Mr. Okrie et al. are claiming in this class-action lawsuit is that the State may not lawfully take away their earned deferred compensation, which was payable in the form of tax-exempt pensions prior to the entry in force of 2011 PA 38, without the payment of equivalent financial benefits. In short, Mr. Okrie et al. are simply asking to get paid what they had earned for their years of governmental service to the State and its subdivisions.

Consequently, Mr. Okrie et al. are challenging the State's application of 2011 PA 38 to them without providing financial benefits equal to, or greater than, the value of tax-exempt pensions eliminated by the Act. Here, it is important to underscore that In re Request for Advisory Opinion Regarding Constitutionality of 2011 PA 38, 490 Mich 295 (2011) (which, as an advisory opinion, is not binding on this Court) did not address the precise claims and arguments supported by legal authority being made by Mr. Okrie et al. in this case, which essentially presents an "as applied" challenge to 2011 PA 38.

II. Winstar Supports Mr. Okrie et al.'s Breach of Contract Claim.

The State (Df. Br., pp 12-13) also completely misses the obvious legal parallel to the U.S. Supreme Court's decision in United States v Winstar Corp, 518 US 839 (1996), which held that government cannot abrogate contractual promises of favorable tax treatment the government made to induce investors to buy failing savings and loans. Here, the legally relevant feature is offering deferred compensation in the form of tax-exempt pensions, which is used as an inducement or consideration to attract and retain state and public school employees to work for lower salaries, but then taking away their deferred compensation after retirement. See Daniel S. Goldberg, Government Precommitment to Tax Incentive Subsidies: The Impact of United States v. Winstar Corp. on Retroactive Tax Legislation, 14 Am J Tax Pol'y 1, 5 (1997)(noting that "Winstar is important with regard to tax legislation because in the opinion the Court embraces the principle that the government may not unilaterally renege on a promise relied upon by the intended beneficiary of the promise"). Quite simply, the same contract rules that apply to investors apply as well to Mr. Okrie et al. in the present case since both involve investments (capital and labor, respectively) in exchange for favorable tax-treatment. See Bailey v State, 500 SE2d 54, 65 (N Car 1998)("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.")

III. The Attorney General's Position in the Davis Litigation and 1991 OAG No. 6697 Reinforced Mr. Okrie et al.'s Reasonable Reliance on the State's Promise to Pay Deferred Compensation.

In State Bank of Standish v Curry, 442 Mich 76, 95 (1993), the Supreme Court noted:

Justice Cooley long ago explained the premise of promissory estoppel:

The doctrine of estoppel rests upon a party having directly or indirectly made assertions, promises or assurances upon which another has acted under such circumstances that he would be seriously prejudiced if the assertions were suffered to be disproved or the promises or assurances to be withdrawn. [Maxwell v Bay City Bridge Co, 41 Mich 453, 467; 2 NW 639 (1879).]

Specifically, a "promise is a manifestation of intention to act or refrain from acting in a specified manner, made in a way that would justify a promisee in understanding that a commitment had been made." Schmidt v Bretzlaff, 208 Mich App 376, 379 (1995). Here, there can be little doubt that the State, through the ORS, as legally reinforced by the Attorney General's statements in the Davis litigation and 1991 OAG No. 6697, made such "assertions, promises or assurances" that induced action of a definite and substantial character on the part of Mr. Okrie et al.

Contrary to the State's contention (Df. Br., p 15), the ORS was clothed with actual or apparent authority as an agent of the State to make such "assertions, promises or assurances" that their pensions were tax-exempt, which induced Mr. Okrie et al.'s reasonable reliance upon them in making employment and retirement termination decisions. See Detroit v Detroit Police Officers Assoc, 408 Mich 410 (1980)(noting that an official may be clothed with authority to make statements about the operation of the law). While the State claims that "Okrie [sic] neglects to mention that [1998 edition of the "MPSERS Guidelines" booklet] also contains specific disclaiming, language that expressly and unambiguously states that the benefit information provided is governed by the Retirement Act and is subject to change" (Df. Br, p 17), the cited paragraph contains no such disclaimer - it essentially states that "[i]f the provisions of the Act conflict this summary, the Act controls." But at the time that Mr. Okrie et al. retired in reasonable reliance upon the "assertions, promises or assurances" made by the ORS in retirement booklets, forms and seminars, there was no conflict at all, and certainly no reason to expect that the State would take away what they earned in deferred compensation (once they retired) in the form of tax-exempt pensions, without paying equivalent financial benefits.

The expectation upon which Mr. Okrie et al. reasonably relied that the State would not take away their deferred compensation after retirement was reinforced by the Attorney General's position in the Davis litigation relating to the legal status of tax-exempt pensions as deferred compensation and 1991 OAG No. 6697 that if the State eliminated the tax-exemption for retired state and public school employees, then it would have to pay financial benefits equal to or greater than the value of tax-exempt pensions. Although Attorney General opinions are not binding upon the courts, they are binding upon the state agencies and officers, and may be relied upon in good faith as carrying "great weight." Frey v Dep't of Management & Budget, 429 Mich 315, 338 (1987); Traverse City School Dis v Attorney General, 383 Mich 390, 407 n 2 (1971); see also E Grand Rapids Sch Dist. v Kent County Tax Allocation Bd, 415 Mich 381, 394 (1982) (noting that "it is universally recognized that among the primary missions of a state attorney general is the duty to give legal advice, including advice concerning the constitutionality of state statutes, to members of the legislature, and departments and agencies of state government.") Accordingly, there is no question that Mr. Okrie et al. reasonably relied upon the "assertions, promises or assurances" of the ORS since they were validated by the Attorney General himself.

IV. The State's Retention of Mr. Okrie et al.'s Deferred Compensation Constitutes Unjust Enrichment.

Because the State retained the deferred compensation earned by Mr. Okrie et al. for their years of governmental service by not paying financial benefits equivalent to tax-exempt pensions (while getting the benefit of the bargain - lower cost governmental service), there is no question that the State has enriched itself at Mr. Okrie et al.'s expense. Once again, the State misrepresents Mr. Okrie et al.'s actual claim. (Df. Br, pp 20-21)

V. The State Violated the Contracts Clauses under the State and Federal Constitutions by Applying 2011 PA 38 to Mr. Okrie et al. Without Providing Alternative Financial Benefits Equivalent to the Value of Tax-Exempt Pensions.

The State's contention that "the elimination of the statutory tax exemption for public-pension income does not violate the Contract Clauses of the State of United States Constitutions" (Df. Br., p 22) fails to address the legal force of Mr. Okrie et al.'s actual argument that the State impaired their contractual relationships by 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. (Pl Br, pp 42-46). Quite obviously, it is not the elimination of the statutory tax-exemption that violates the Contract Clauses, but rather the State's failure to pay the deferred compensation earned by Mr. Okrie et al. for their years of governmental service to the State, applying 2011 PA 38 to them without providing alternative financial benefits equivalent to the value of tax-exempt pensions. As the United States Supreme Court made abundantly clear in United States Trust Co of New York v New Jersey, 431 US 1 (1977), "particular scrutiny of legislative action is warranted when, as here, a state seeks to impair a contract to which it is party and its interest in avoiding the contract or changing its terms is financial." In re Pension Reform Litig. Heaton v Quinn, 2015 IL 118585 (May 8, 2015) at p 63. Specifically, as stated in United States Trust,

Whatever the propriety of a State's binding itself to a future course of conduct in other contexts, the power to enter into effective financial contracts cannot be questioned. Any financial obligation could be regarded in theory as a relinquishment of the State's spending power, since money spent to repay debts is not available for other purposes. Similarly, the taxing power may have to be exercised if debts are to be repaid. Notwithstanding these effects, the Court has regularly held that the States are bound by their debt contracts. [431 US at 24].

See also In re Pension Reform Litig, supra at p 69 ("[Winstar] has made clear that the United States Constitution 'bar[s] Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.'")

VI. The State Violated the Takings Clauses under the State and Federal Constitutions by Taking Away the Deferred Compensation Earned by Mr. Okrie et al. for Their Years of Governmental Service.

The State also completely distorts Mr. Okrie et al.'s "Takings" claim (Df. Br., pp 22-23). As explained, the right of Mr. Okrie et al. to the earned financial benefits can be characterized as a contract or property right. (Pl. Br., p 46). Under Bd. of Regents v Roth, 408 US 564, 577 (1972), "[t]o have a property interest in a benefit" requires a "legitimate claim of entitlement to it." Because Mr. Okrie et al. rendered governmental services, vested in the DB plans at issue and retired, they 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." (Pl. Br, p 47). In support, Mr. Okrie et al. referenced Pierce v State, 910 P2d 288, 292(NM 1995), Pineman v Oechslin, 488 A2d 803, 810 (Conn 1985) and Roth, supra at 408 US at 577. Clearly, the State simply ignores Mr. Okrie et al.'s actual argument, falsely asserting that "Okrie [sic] essentially alleges - without citation to any relevant legal authority - that subjecting his pension to state and local taxation amounts to a "confiscation" for which "just compensation" is owed. (Df. Br, p 23).

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

Contrary to the State's unfounded assertion, Mr. Okrie et al.'s proposed contract and tort claims are hardly "warmed over variations of the claims he has already raised." (Df. Br., p 24). Without any discussion or analysis, the State simply declares that the amended claims would be "futile." However, as set forth in Mr. Okrie et al.'s appeal brief (Pl. Br, pp 47-50), it is clear that the proposed counts do not restate allegations already made, but are qualitatively and materially different, resting upon different legal bases. Because they are not "futile," Mr. Okrie et al. have the right to amend their Complaint. Weymers v Khara, 454 Mich 639, 658 (1997).

CONCLUSION AND RELIEF REQUESTED

Accordingly, Plaintiff-Appellant Thomas R. Okrie and similarly-situated retired state and public school employees born after 1945 request that this Court reverse the opinions and orders dismissing their claims, grant their motion for summary disposition and their motion to file a 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 request 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: June 30, 2015 (734) 276-6561

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