Opinion
NO. 2015-CA-001185-MR NO. 2015-CA-001245-MR
06-16-2017
CARL REESOR AND STEPHANIE LEE-WILLIAMS APPELLANTS/CROSS-APPELLEES v. CITY OF AUDUBON PARK APPELLEE/CROSS-APPELLANT
BRIEF FOR APPELLANTS/CROSS-APPELLEES: Thomas E. Clay Andrew Thomas Lay Louisville, Kentucky ORAL ARGUMENT: Thomas E. Clay BRIEF FOR APPELLEE/CROSS-APPELLANT: Jeffrey C. Mando Jennifer H. Langen Covington, Kentucky Stephen Emery LaGrange, Kentucky ORAL ARGUMENT: Jeffrey C. Mando Katherine Reisz
NOT TO BE PUBLISHED APPEAL AND CROSS-APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE AUDRA J. ECKERLE, JUDGE
ACTION NO. 14-CI-001876 OPINION
AFFIRMING WITH RESPECT TO APPEAL NO. 2015-CA-1185-MR AND CROSS-APPEAL NO. 2015-CA-001245-MR
** ** ** ** **
BEFORE: KRAMER, CHIEF JUDGE; MAZE AND STUMBO, JUDGES. KRAMER, CHIEF JUDGE: Carl Reesor and Stephanie Lee-Williams filed suit in Jefferson Circuit Court asserting claims of wage and hour law violations, breach of contract, and promissory estoppel against the City of Audubon Park, Kentucky. The circuit court summarily dismissed their claims, and they subsequently appealed. For the reasons discussed below, we AFFIRM.
Kentucky Revised Statutes (KRS) Chapter 337 et seq.
The City counterclaimed for the amount of payments it had made to Reesor and Lee-Williams under a mistake of law theory, arguing that it had made the payments in question under the auspices of a contract that was void for illegality and was entitled to recover them back. The parties filed cross motions for summary judgment; the circuit court denied the City's motion and summarily dismissed the City's claims; and the City subsequently cross appealed. For the reasons discussed below, we likewise AFFIRM.
FACTUAL AND PROCEDURAL BACKGROUND
The circuit court's July 10, 2015 order of summary judgment aptly sets forth the undisputed facts and procedural history of this matter as follows:
Reesor began working as a police officer for the City in 1984. He became Police Chief in 1987, a position he held until his retirement in 2011. Lee-Williams began working as City Clerk in 2003, a position she held until she retired in 2013. On November 17, 2003, the City's Council passed Municipal Order Number 1 Series 2003 (hereinafter "2003 Municipal Order"), which stated, in relevant part:
RETIREMENT
Benefit if a full-time employee of the City remains employed with the City for a period of five (5) or more consecutive years, the Mayor of the City shall then enter
into a contractual agreement with such employee for the following retirement program.
(1) If the employee has at least five (5) but less than ten (10) consecutive years of employment with the City, he or she shall be entitled, for each of the two (2) 10-months periods beginning on the tenth day of the month following the month when he or she terminates employment, to receive an amount equal to twenty percent (20%) of his or her gross salary during the last full calendar year preceding his or her termination of employment with the City. Such an amount shall be paid monthly.
(2) If the employee has at least ten (10) but less than fifteen (15) consecutive years of employment with the City, he or she shall be entitled, for each of the two (2) 10-months periods beginning on the tenth day of the month following the month when he or she terminates employment, to receive an amount equal to twenty percent (20%) of his or her gross salary during the last full calendar year preceding his or her termination of employment with the City. Such an amount shall be paid monthly.
(3) If the employee has at least fifteen (15) but less than twenty (20) consecutive years of employment, he or she shall be entitled, for each of the four (4) 12-month periods beginning on the tenth day of the month following the month when he or she terminates employment, to receive an amount equal to forty percent (40%) of his or her gross salary during the last full calendar year preceding his or her termination of employment with the City. Such amount shall be paid monthly.
(4) If the employee has twenty (20) or more consecutive years of employment with the City, he or she shall be entitled to the following:
a. If the employee has twenty (20) consecutive years of employment with the City, he or she shall be entitled, for each of the five (5) 12-month periods beginning on the tenth day of the month following the month when he or she terminates employment, to receive an amount equal of fifty percent (50%) of his or her gross salary during the last full calendar year preceding his or her termination of employment with the City. Such amount shall be paid monthly.
b. If the employee has more than twenty (20) consecutive years of employment with the City, he or she shall be entitled to receive the benefit described in subsection (a) for an additional six (6) months for each additional full year of employment up to seven (7)additional[total][FN] full years.
[FN] In the 2003 Municipal Order, the word "additional" is marked out and the word "total" is handwritten beside it in ink.
On February 17, 2009, the City passed Municipal Order No. 1, 2009 (hereinafter, "2009 Municipal Order"), which ordered "That the City's Personnel/Civil Service manual as attached to this order in its updated and revised version be the official policy manual of the City." In May of 2009, the City executed Retirement Agreements with Reesor and Lee-Williams, which called for retirement to be provided in "accordance to Municipal Order Number 1, Series 2009." The 2009 Retirement Agreements are identical to [the] 2003 Municipal Order except: Section 4(b) has been removed, and Section 4(a) holds that an employee with twenty consecutive years employment with the City shall receive "an amount equal to fifty percent (60%) [sic] of his or her gross salary during the last full calendar year preceding his or her employment with the City." It is not clear
whether fifty or sixty percent reflected the parties' intentions.
There is no evidence that the City appropriated any funds during the 2008-2009 fiscal year to cover the costs for Reesor or Lee-Williams's potential retirement benefits. A June 30, 2009, audit of the City's budget noted that:
Personnel/Civil Service Policy. The City has adopted an unfunded program to pay a retirement benefit to each employee with at least five years consecutive employment. The program pays a monthly amount that is determined by the length of consecutive employment and the gross pay earned in the calendar year preceding the date of termination of employment. This benefit ranges from a low of 20% gross pay for 24 months to a high of 60% gross pay for 120 months.
One person became eligible for this benefit during the prior fiscal year. The cost of this benefit during the current fiscal year was $5,970. As required by GASB 45 the City will be required to include in its financial statements, starting June 30, 2010, an actuarially computed amount of its unfunded obligation.
Reesor retired in December of 2011. Mayor Scalise testified in his deposition that any salary or retirement benefits due to Reesor in 2011 would have been included in the City's budget as a line item or included in its payroll. The City had a budget surplus for the 2012-2013 fiscal year, and Mayor Scalise testified that funds to pay Reesor's post-retirement benefits were included in the budget passed by the City Council that year. Lee-Williams resigned in August 2013. The Budget passed by the City Council for the 2013-2014 fiscal year
included a line item appropriating $80,962.09 for "Payroll Exp.-pensions."
On February 6, 2014, Reesor emailed Charlie Veeneman (hereinafter, "Veeneman"), the City's Treasurer, requesting information on characterizing the payments he was receiving for his W-2. Veeneman replied that the payments should be considered deferred compensation. Reesor's and Lee-Williams's payments ceased in March 2014 after the City sent them the following notice:
You have been drawing pension benefits from the City of Audobon Park based on a 'retirement' program based on 'policies' adopted in 2009, which you did not contribute during your employment with the City. In the course of careful legal research and discourse over the last several months, it's become clear that this 'retirement' program was invalid from the outset; that contracts and agreements executed under the program are void; that expenditures paid out to you under this 'retirement' program are recoverable by the City; and, that a failure to seek redress could leave current City officials personally liable for restitution.
(Internal citations to pleadings and evidence of record omitted.)
On April 2, 2014, Lee-Williams and Ressor filed a complaint against the City, alleging violation of Kentucky's Wage and Hour Statute, breach of contract, and promissory estoppel. The City counterclaimed, alleging that payments made to Reesor and Lee-Williams under the Retirement Agreements were recoverable by the City.
As indicated, the circuit court ultimately dismissed Reesor's and Lee-Williams's claims. The circuit court held the amounts they claimed the City owed them under their retirement agreements did not qualify as "wages" and were consequently not actionable under Kentucky's wage and hour statutes. It further held that the City could not be held liable under theories of breach of contract and promissory estoppel because (consistently with what is discussed below) the retirement agreements were illegal and unenforceable.
The circuit court also dismissed the City's counterclaim because, based upon its reading of KRS 92.340 (discussed below), it did not believe the City had a right to recover back the funds paid to Reesor and Lee-Williams under the retirement plans it held were void. These appeals followed.
STANDARD OF REVIEW
On appeal, we must consider whether the circuit court correctly determined that there were no genuine issues of material fact and that the moving party was entitled to judgment as a matter of law. Scifres v. Kraft, 916 S.W.2d 779 (Ky. App. 1996). Because summary judgment involves only questions of law and not the resolution of disputed material facts, an appellate court does not defer to the circuit court's decision. Goldsmith v. Allied Building Components, Inc., 833 S.W.2d 378 (Ky. 1992). Likewise, we review the circuit court's interpretations of law de novo. Cumberland Valley Contrs., Inc. v. Bell County Coal Corp., 238 S.W.3d 644, 647 (Ky. 2007).
ANALYSIS
We have divided our analysis, and we will address Reesor's and Lee-Williams's appeal first.
APPEAL NO. 2015-CA-001185-MR
I. Wage and Hour Claims
The circuit court dismissed Reesor's and Lee-Williams's claims for damages pursuant to Kentucky's wage and hour statutes because what Reesor and Lee-Williams believed the City owed them under the terms of their retirement agreements did not qualify as "wages" within the meaning of KRS 337.010(1)(c)1. Reesor and Lee-Williams argue the circuit court erred. We find no error on this point.
In relevant part, KRS 337.010(1)(c)1 defines "wages" as follows:
"Wages" includes any compensation due to an employee by reason of his or her employment, including salaries, commissions, vested vacation pay, overtime pay, severance or dismissal pay, earned bonuses, and any other similar advantages agreed upon by the employer and the employee or provided to employees as an established policy.
As discussed, Reesor and Lee-Williams first characterized what they believed the city owed them, due to their respective voluntary decisions to cease employment with the city, as "severance or dismissal pay." This argument has no merit. KRS Chapter 337 et seq. does not define "severance or dismissal pay," nor have those terms acquired any peculiar and appropriate meaning in the law or in any contract before us. As such, we construe those terms according to their common and approved usage. KRS 446.080(4). And, the common and approved usage of both terms is only consistent with pay owed due to involuntary cessation of employment:
Money (apart from back wages or salary) paid by an employer to a dismissed employee. Such a payment is often made in exchange for a release of any claims that the employee might have against the employer.—Also termed separation pay; dismissal compensation.[]BLACK'S LAW DICTIONARY 1379 (7th ed. 1999) (defining "severance pay").
We see no meaningful difference between "dismissal compensation" and, as used in KRS 337.010(1)(c)1, "dismissal pay."
Alternatively, Reesor and Lee-Williams characterized what they believed the city owed them as "retirement benefits." They argued "retirement benefits" qualified as "wages" within the meaning of KRS 337.010(1)(c)1 because, in their reading of the statute, "retirement benefits" qualify as "any other similar advantages agreed upon by the employer and the employee or provided to employees as an established policy." Id.
However, that phrase is not broad enough to include retirement benefits. To explain,
[B]enefits, which include such things as retirement plans, health and disability insurance, and even life insurance, are commonly known as "fringe benefits." While these benefits certainly cost the employer, they are not considered to affect the pay, wages, or compensation of the employee but are considered an additional benefit.Caldwell County Fiscal Court v. Paris, 945 S.W.2d 952, 954 (Ky. App. 1997).
Consistently with this principle, our Court held in Rainey v. Mills, 733 S.W.2d 756 (Ky. App. 1987), that employer pension plan contributions, health insurance benefits, and life insurance premiums were not contemplated in a statute defining "wages" as including not only money payment for services rendered, but:
the reasonable value of board, rent, housing, lodging, and fuel or similar advantage received from the employer, and gratuities received in the course of employment from others than the employer to the extent the gratuities are reported for income tax purposes.Id. at 758 (quoting KRS 342.140(6); emphasis added). As to why, we reasoned:
The general phrase "or similar advantage received from the employer" follows the specific items of board, rent, housing or lodging. The "similar advantage received" must be of the same class as those specifically delineated, accordingly to general principles of statutory construction. Nelson v. SAIF Corporation, 78 Or. App. 75, 714 P.2d 631 (1986). Where specific items or classes are followed by more general language, the general words should be restricted by the specific designations so that they encompass only items of the same class or those specifically stated. State v. Brantley, 201 Or. 637, 271 P.2d 668 (1954). The express language of the statute and the failure of the legislature to include fringe benefits in any of the Act's amendments compels us to conclude that they were not intended to be encompassed within the Workers' Compensation scheme. It would be impermissible to extend the Act beyond its legitimate scope. Lovell v. Osborne Mining Corporation, Ky., 395 S.W.2d 596 (1965). Nelson, supra, (Involving definition of wages virtually identical to Kentucky's; Employer-paid medical insurance and pension benefits held not encompassed in definition of wages for workers' compensation purposes). Wengler v. Druggists Mutual Ins. Co., Mo.App., 616 S.W.2d 859 (1981), (Blue Cross payments held not to be included as part of weekly
earning. Their omission in statutory provisions creates presumption of their exclusion).
There is no reason to interpret the phrase "any other similar advantages agreed upon by the employer and the employee," as it appears in KRS 337.010(1)(c)1, differently from how we interpreted "similar advantage received from the employer," as it appears in KRS 342.140(6). In both statutes, these general phrases immediately follow lists of items falling into classifications that do not include fringe benefits. Therefore, we must presume the General Assembly intended to exclude fringe benefits from the definition of "wages" set forth in KRS 337.010(1)(c)1. Indeed, when the General Assembly intends for items typically considered fringe benefits to be treated in the same manner as items typically considered wages, it has done so clearly and unequivocally.
See, e.g., KRS 403.212(2)(b), defining "gross income" as including:
[I]ncome from any source, except as excluded in this subsection, and includes but is not limited to income from salaries, wages, retirement and pension funds, commissions, bonuses, dividends, severance pay, pensions, interest, trust income, annuities, capital gains, Social Security benefits, workers' compensation benefits, unemployment insurance benefits, disability insurance benefits, Supplemental Security Income (SSI), gifts, prizes, and alimony or maintenance received. Specifically excluded are benefits received from means-tested public assistance programs, including but not limited to public assistance as defined under Title IV-A of the Federal Social Security Act, and food stamps.(Footnote omitted.) See also KRS 205.710(11), defining "earnings" as:
[C]ompensation paid or payable for personal services, whether denominated as wages, salary, commission, bonus, or otherwise, and notwithstanding any other provision of law exempting such payments from garnishment, attachment, or other process to satisfy support obligations and specifically includes periodic payments from pension and retirement programs and insurance policies of any kind. Earnings shall include all gain derived from capital, from labor, or both, including profit gained through sale or conversion of capital assets and unemployment compensation benefits, or any other form of monetary gain. The term "disposable earnings" means that part of earnings remaining after deductions of any amounts required by law to be withheld[.]
With that said, there is an additional reason why the amounts Reesor and Lee-Williams contend the City owes them under the terms of their agreements--regardless of what Reesor and Lee-Williams have decided to label those amounts--are not cognizable as "wages" within the meaning of KRS 337.010(1)(c)1. As discussed below-- and in the context of our analysis of their breach of contract and promissory estoppel claims-- the "compensation" or consideration contemplated in their retirement agreements with the City was illegal and, thus, not lawfully "due."
II. Breach of Contract and Promissory Estoppel Claims
Reesor and Lee-Williams argued their retirement agreements with the City were enforceable contracts or were enforceable through principles of equity. The City, on the other hand, argued its agreements with Reesor and Lee-Williams were prohibited by statute; the City therefore had no authority to enter the agreements; the agreements were therefore void; and, similarly, principles of equity and estoppel could not save the agreements. As to why, the City argued that, through its enactment of the 2003 and 2009 Municipal Orders, it had attempted to create a "defined benefit retirement system, which by its nature can have an unfunded liability," which is specifically prohibited by KRS 65.156(6). In relevant part, that statute provides:
No city or county, except an urban-county, or special district, nor any agency or instrumentality of a city or county or special district shall create or maintain for its officers or employees a defined benefit retirement system, which by its nature can have an unfunded liability. The provisions of this subsection shall not preclude employer contributions for city managers or other appointed local government executives who participate, pursuant to KRS 78.540, in a retirement system which operates in more than one (1) state, nor the continuation of a local government defined benefit retirement system which has been closed to new members but which must fulfill its obligations to current active members, retirees, and beneficiaries.
The circuit court agreed with the City, held that the agreements Reesor and Lee-Williams entered with the City were accordingly illegal, and, as such, held the agreements were unenforceable in either law or equity. Reesor and Lee-Williams believe the circuit court erred on this point. We disagree.
Like any other municipality, the City is a creature of statute and "possesses such powers, and such only, as the state, either expressly or by necessary implication, confers upon it, subject to addition or diminution at its supreme discretion." Walker v. City of Richmond, 173 Ky. 261, 89 S.W. 1122, 1124 (1916). To that end, the General Assembly has broadly delegated to cities all power necessary to effectively pursue a public purpose within their boundaries, so long as the public purpose in question is not in conflict with a statute or constitutional provision. KRS 82.082; see also Section 156b of the Kentucky Constitution.
Thus, a municipal ordinance may cover an authorized field of local laws not occupied by general laws, but a municipal ordinance is void if it forbids what a statute expressly permits, or runs counter to the public policy of the state as declared by the Legislature. City of Harlan v. Scott, 290 Ky. 585, 162 S.W.2d 8, 9 (1942); Louisville & N. R. Co. v. Commonwealth, 117 Ky. 350, 78 S.W. 124, 125 (Ky. 1904). Likewise,
[t]he persons who contract with municipal corporations must, at their peril, know the rights and powers of the officers of such municipalities to make contracts and the manner in which they must make them. Any other rule would destroy all the restrictions which are thrown around the people of municipalities for their protection by the statute laws and the Constitution, and would render abortive all such provisions. The rule in certain instances may be harsh, but no other is practical.Louisville Extension Water Dist. v. Diehl Pump & Supply Co., 246 S.W.2d 585, 587 (Ky. 1952) (internal citations and quotation marks omitted).
. . .
The law does not imply any obligation or promise upon the part of a municipal corporation to pay on account of having received benefits. The only powers such a corporation has arise from the laws creating it, and the municipality cannot be bound by the contracts of its officers which they have no power to make; and if the municipality receives benefits under such void contracts, the law does not raise any promise to pay for the benefits.
In short, if the City's agreements with Reesor and Lee-Williams were an attempt to "create or maintain for its officers or employees a defined benefit retirement system, which by its nature can have an unfunded liability," the agreements were prohibited by statute; they were outside the scope of the City's power and authority; and they were accordingly void. If that is indeed the case, principles of equity, estoppel, or apparent authority cannot save the agreements because a municipality cannot do indirectly what it is forbidden from doing directly. Cohen v. City of Henderson, 182 Ky. 658, 207 S.W. 4, 8 (1918).
With that said, the phrase "defined benefit retirement system" is not defined in the Kentucky Revised Statutes. However, it refers to a general pool of assets in which employees have no individual ownership interest, rather than individual dedicated accounts, from which an employee upon retirement is entitled to a fixed periodic payment based upon a formula that includes such factors as years of service and compensation. "Unfunded liability" is also not statutorily defined; but, as the words of the phrase imply, it generally refers to any payments that retired employees will predictably be owed from the fund for which savings have not yet been set aside. The asset pool may be funded by employer or employee contributions, or a combination of both, but a decline in the value of asset pool does not alter the employee's right to the fixed periodic payment, and the employer must cover any underfunding as the result of a shortfall that may occur.
See Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999) (explaining "defined benefit plans" in the context of ERISA); see also Karem v. Board of Trustees of Judicial Form Retirement System, 293 S.W.3d 401, 404 (Ky. App. 2009) (explaining that a plan consisting of a general fund in which participants have no ownership interest, and from which participants are promised a specific monthly benefit at retirement based upon a definite formula factoring in past salary and years of service, was a "defined benefit plan.")
For an example of an actuarial calculation of a defined benefit fund's "unfunded liability," see Gurnee v. Lexington-Fayette Urban County Government, 96 S.W.3d 852, 855 n. 4 (Ky. App. 1996).
See Hughes, 525 U.S. at 439-40.
With this in mind, the agreements that the City executed with Reesor and Lee-Williams provided for systematically determinable benefits based upon a formula that factored prior compensation and years of service to be paid after retirement from a fund in which Reesor and Lee-Williams had no ownership interest. These are the hallmarks of a defined benefit retirement plan and interpreting these agreements any other way would be contrary to reason. Thus, we agree with the circuit court's conclusion that the agreements the City executed with Reesor and Lee-Williams were prohibited by KRS 65.156(6) and accordingly void.
Nevertheless, Reesor and Lee-Williams offer three reasons (aside from untenable claims of equity and estoppel) why, in their view, the agreements they executed with the City should be enforced.
First, they argue their agreements with the City also could have qualified as "deferred compensation" agreements, which do fall within a municipality's scope of authority. See KRS 18A.270. In support, they argue that their agreements must have been deferred compensation because at some point in time a City official told them the agreements qualified as such, and they relied upon that representation.
As noted, however, principles of equity, estoppel, and apparent authority cannot validate these agreements or render them enforceable.
Moreover, there is no legal basis for regarding Reesor's and Lee-Williams's agreements as "deferred compensation" agreements. The statute upon which they rely, KRS 18A.270, is a provision of Kentucky's Public Employees Deferred Compensation Plan. The statutory meaning of "deferred compensation" is "a method which allows employees to authorize income to be deducted from their current earning and set aside to be paid at a later date[.]" KRS 18A.230(5). Moreover, to participate in Kentucky's Public Employees Deferred Compensation Plan, the employee and the Kentucky Public Employees' Deferred Compensation Authority must both agree, and "[p]articipating employees must authorize that such deductions be made from their wages for the purpose of participation in such program." KRS 18A.250(1). Here, the agreements that the City executed with Reesor and Lee-Williams did not provide for any portion of their pay to be set aside at a later date, nor did the agreements require compliance with the Public Employee Deferred Compensation Plan.
See KRS 18A.230 to 18A.275.
Second, Reesor and Lee-Williams argue that certain notes set forth in the Senate bill which ultimately amended KRS 65.156 to include subsection (6), and which passed in 1992, demonstrate that the General Assembly did not intend KRS 65.156 to impair any contracts creating defined retirement obligations. Specifically, they contend:
KRS § 65.156 was amended to include subsection six (the subsection at issue) by Chapter 238 of the Regular Session of the General Assembly in 1992. Section 2 of Acts 1992, ch. 238, provides:
It is not the intention of the General Assembly to impair any contract by the provisions of this Act. Any city, county, or special district, or agency or instrumentality of a city, county, or special district, which maintains a defined benefit retirement system in violation of the provisions of this Act shall terminate the retirement system in a manner which does not violate a contract which it may have with any of its officers or employees."
Section 2 of Acts 1992, quoted above, was included in the Senate bill passed on the very day when the subsection of KRS § 65.156 upon which the Appellee relies was added to the statute. Nothing could be a clearer or more resounding expression of the legislature's purpose than the contemporaneous expression of the General Assembly's intent on the day it passed the statutory amendment at issue.
We agree with Reesor and Lee-Williams that the Senate bill notations are a clear expression of the General Assembly's intent. The notations do not, however, support their argument that the General Assembly intended for courts to enforce defined benefit retirement plans in violation of KRS 65.156(6) which came into being after the statute became effective. To paraphrase the circuit court's reasoning on this point, a plain reading of the language of the statute and its legislative history show that the General Assembly intended for municipalities to maintain obligations created before the passage of the act, and expressly exempted plans "closed to new members but which must fulfill its obligations to current active members." KRS 65.156(6). There would be no need for language protecting retirement plans created before the statute if the General Assembly did not intend for any contract creating a defined benefit retirement plan to be declared unenforceable.
Third, Reesor and Lee-Williams argue they are owed the payments promised in their agreements, and should likewise be permitted to keep the monies already paid to them pursuant to their agreements, because they provided valuable services to the City.
But, in the words of our former high court, "The law provided another compensation for these services. The Compensation which they received was unlawfully paid. The fact of services being rendered for which the law did not allow compensation cannot constitute consideration for the illegal payment[s]." Commonwealth v. Carter, 21 Ky.L.Rptr. 1509, 55 S.W. 701, 702 (1900).
In conclusion, the breadth of Reesor's and Lee-Williams's arguments fail to indicate the circuit court committed reversible error in granting summary judgment in favor of the City regarding their claims.
CROSS-APPEAL NO. 2015-CA-001245-MR
The circuit court's order effectively describes and resolves each of the issues raised under the unique set of circumstances presented in the City's cross appeal. We agree with the circuit court's resolution of this matter; our opinion is likewise limited to the unique set of circumstances presented; and we therefore adopt the reasoning of the circuit court's order in this respect:
The City claimed that it could recover the payments already made to Reesor and Lee-Williams because statutory language provides that "No . . . employee of a city agency, may bind the city in any way to any extent beyond the amount of money at that time appropriated for the purpose of the agency" and that [a]ll contracts, agreements, and obligations . . . beyond existing obligations are void." KRS 91A.030(13). The City argued that the 2009 Retirement Agreements went beyond existing appropriations because they were contracted for in 2009 even though the City budget for the 2008-09 fiscal year did not appropriate any funds to pay for the benefits. KRS 92.340.
Reesor and Lee-Williams moved for summary judgment on the City's counterclaim for four reasons: (1) when the obligations arose to pay their respective retirement benefits, those payments never exceeded existing appropriations; (2) it is irrelevant that the City's 2008-09 budget did not include appropriations to pay for the retirement benefits because no benefits were due in that year; (3) even if the statute did require the City to appropriate funds to pay for obligations before they arose, the City has not produced the 2008-09 budget to show that no such appropriations were actually made; and (4) they are not among parties whom recovery is available. KRS 92.340.
The City responded that the prohibition against obligations "beyond existing appropriations" did not mean that it had to prove that it paid retirement benefits
that "exceeded appropriations for a particular year." (See the City's Reply to Mo. For Summary Judgment, p. 8.) ([E]mphasis added). Rather, it argued that the question before the Court "is whether the indebtedness was contracted beyond existing appropriations. In other words, did the contract run for more than the appropriations period that existed when the contract was entered into by the parties." Id. at 8-9. Accordingly, the City argued that the Retirement Agreements exceeded existing appropriations because they created contractual obligations before any appropriation had been approved to pay for them.
Municipalities in Kentucky do not have unlimited discretion to expend public funds. One limitation provides that:
No city agency, or member, director, officer, or employee of a city agency, may bind the city in any way to any extent beyond the amount of money at that time appropriated for the purpose of the agency. All contracts agreements, and obligations, express or implied, beyond existing appropriations are void; nor shall any city officer issue any bond, certificate, or warrant for the payment of money by city in any way to any extent beyond the unexpected balance of any appropriation made for the purpose.
KRS 91A.030(13). The parties did not cite, and the Court did not find, any Kentucky case that interprets that statutory provision. Furthermore, the meaning of the phrase "beyond existing appropriations" is unclear. However, the statute does not appear to use the term "appropriations" to refer to a particular time period. Rather, the term appears to be used according to its ordinary definition, that is, as "[a] legislative body's act of setting aside a sum of money for a public purpose" or "[t]he sum of money so voted." BLACK'S LAW DICTIONARY 110 (8th ed. 2004).
The statute does appear to be based upon Section 2820 and Section 2821 or the old Kentucky Statutes, which provided that "all obligations beyond existing appropriations shall be void," and that delineated "a penalty for city officers issuing bonds, etc., for the payment of money upon the city, beyond the unexpected balance of any appropriation made for that purpose." Gosnell v. City of Louisville, 46 S.W. 722 (Ky. 1898); KRS 91A.030(13). "These provisions of the statutes refer only to expenditures which arise out of contract, the aim and object being to prevent extravagance on the part of the public officers." City of Louisville v. Gorley, 80 S.W. 203, 203 (Ky. 1904).
Case law explaining the meaning of Sections 2820 and 2821 is scant. However, one case, stemming from an ordinance that created property liens to pay for improvement to Oak Street, in Louisville, provides some guidance. Fehler v. Gosnell, 35 S.W. 1125, 1125 (Ky. 1896). [FN]
[FN] The Court of Appeals addressed this same on three different occasions. In the first appeal, the City of Louisville had yet to be added as a party, but was later the party titled. All three cases will be referred to as Gosnell in this opinion, despite their different case names and citations.
The ordinance required the contractor to keep the street in repair for five years and deposit a bond ten percent of the contract price to pay for the repairs. Id. at 1127. The Court of Appeals held that the City was liable for ten percent of the contract price, the amount set aside for future repairs. Id. at 1128. In a subsequent appeal, the City argued that it had no liability based upon Sections 2820 and 2821. Gosnell v. City of Louisville, 46 S.W. 722, 724 (1898). The Court of Appeals responded that "We see no reason why the City, if not exceeding the amount of its revenue which it is authorized to expend,
may not expend its money for objects the benefit of which it will receive in subsequent years." Id. at 725. On a third appeal, the City argued that was not obligated under Section 2820 to pay the ten percent for the repairs because "no specific amount had been appropriated for the payment of street repairs for that year." City of Louisville v. Gosnell, 61 S.W. 476, 476(Ky. 1901). The Court of Appeals held that this defense failed because "the answer show[ed] that over $95,000.00 had been appropriated for the payment of street repairs for that year." Id.
Three statutes "prohibit the city from diverting or using tax revenues in any manner or for any purpose other than provided in the ordinance levying taxed." Utz v. City of Newport, 252 S.W.2d 434, 435 (Ky. 1952). In its entirety, one such statute provides that:
If, in any city of the home rule class, any city tax revenue is expended for a purpose other than that for which the tax was levied or the license fee imposed, each officer, agent or employee who, by a refusal to act, could have prevented the expenditure, and the members of the city legislative body who voted for the expenditure, shall be jointly and severally liable to the city for the amount so expended. The amount may be recovered of them in an action upon their bonds, or personally. The city attorney shall prosecute to recovery all such actions. If he fails to do so for six (6) months after the money has been extended, any taxpayer may prosecute such action for the use and benefit of the city. A recovery under this subsection shall not bar a criminal prosecution. Any indebtedness contracted by a city of the home rule class in violation of this subsection or of KRS 92 .330 or 91A.030(13) shall be void, the contract shall not be enforceable by the person with whom
made, the city shall never assume the same, and money paid under any such contract may be recovered back by the city.
KRS 92.340 (emphasis added).
The parties disagree on the meaning of the phrase "beyond existing appropriations." However, the first statutory sentence prohibits a city officer or employee from binding a city "beyond the amount of money at that time appropriated for the purpose of the agency." KRS 91A.010(13). In this sentence, it is clear that "beyond" means a city officer or employee cannot bind a city to any contract that exceeds the amount of money already appropriated for the purpose of the agency. If the word "beyond" has the same meaning in the second sentence of the statute as it does in the first, then a contract is void if it binds the city for an amount of money that exceeds the amount currently appropriated for that purpose. There is no case law that suggests "beyond existing appropriations" means after a particular appropriations period. Moreover, Gosnell suggested that a city may bind itself to contracts that create obligations for subsequent years. Therefore, the Court does not believe that a contract is void simply because it runs "for more that the appropriations period that existed when the contract was entered into by the parties." (See the City's Reply to Mo. for Summary Judgment, p. 8-9.)
The Gosnell case does provide some support for the proposition that a City cannot bind itself to a fixed, certain obligation to be paid in future years unless it had already appropriated sufficient sums, or approved a levy to pay for it. However, the Retirement Agreements in this case did not create any obligations for the City in 2009, or ever, unless certain conditions precedent were met. While the City argued that any defined benefit retirement plan exceeded existing appropriations if it was passed before funding for the plan had been approved, such a reading of the statute would render void any contract created under a "defined benefit retirement
system, which by its nature can have an unfunded liability." See KRS 65.156(6). However, such contracts are legal so long as they were created before the statute became effective, and are "closed to new members but which must fulfill its obligations to current active members, retirees, and beneficiaries." Id. The Court does not believe the General Assembly would have ensured that certain contracts are legal under one provision if they were already void under another. KRS 65.156(6); KRS 91A.030(13).
The City has not produced any evidence that it appropriated a certain amount of money to pay Reesor and Lee-Williams retirement benefits for a certain year, and then subsequently bound itself to an extent that exceed the amount of money appropriated for that purpose. Rather, the City's counterclaim depends upon its argument that the Retirement Agreements were void on their face because they created obligations "for more than the appropriations period that existed when the contract was entered into by the parties" or were unfunded at the time the Retirement Plans were passed. (See the City's Reply to Mo. for Summary Judgment, p. 8-9.) Based upon the Court's reading of the relevant statutes and the law, the City's Counterclaim must fail as a matter of law.
CONCLUSION
For the reasons discussed, we AFFIRM with respect to Appeal No. 2015-CA-001185-MR and Cross-Appeal No. 2015-CA-001245-MR.
ALL CONCUR. BRIEF FOR APPELLANTS/CROSS-
APPELLEES: Thomas E. Clay
Andrew Thomas Lay
Louisville, Kentucky ORAL ARGUMENT: Thomas E. Clay BRIEF FOR APPELLEE/CROSS-
APPELLANT: Jeffrey C. Mando
Jennifer H. Langen
Covington, Kentucky Stephen Emery
LaGrange, Kentucky ORAL ARGUMENT: Jeffrey C. Mando
Katherine Reisz