Mickey Fowler v. Tracy Guerin

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

MICKEY FOWLER; LEISA MAURER, No. 16-35052

and a class of similarly situated

individuals, D.C. No.

Plaintiffs-Appellants, 3:15-cv-05367-

BHS

v.

TRACY GUERIN, Director of the OPINION

Washington State Department of

Retirement Systems,

Defendant-Appellee.

Appeal from the United States District Court

for the Western District of Washington

Benjamin H. Settle, District Judge, Presiding

Argued and Submitted May 10, 2018

Seattle, Washington

Filed August 16, 2018

Before: Ronald M. Gould and Sandra S. Ikuta, Circuit

Judges, and John R. Tunheim, * Chief District Judge.

Opinion by Judge Gould

*

The Honorable John R. Tunheim, Chief United States District

Judge for the District of Minnesota, sitting by designation.

2 FOWLER V. GUERIN

SUMMARY **

Class Action / Constitutional Law / Ripeness

The panel reversed the district court’s denial of a

stipulated motion to certify a class and dismissal, as

prudentially unripe, of an action brought by Washington

public school teachers seeking the return of interest allegedly

skimmed from their retirement accounts.

Plaintiffs brought this class action seeking an order that

the Director of the Washington State Department of

Retirement Systems return interest that was allegedly

skimmed from their state-managed retirement accounts.

Specifically, plaintiffs alleged a takings claim in their suit in

federal court that the Director violated the Fifth and

Fourteenth Amendments by withholding some of the daily

interest earned on their accounts.

The panel held that the district court erred in dismissing

the plaintiffs’ takings claim as prudentially unripe. The

panel held that the Director’s withholding of the interest

accrued on the plaintiffs’ accounts constituted a per se taking

as to which Williamson County Regional Planning

Commission v. Hamilton Bank of Johnson City, 473 U.S. 172

(1985)’s prudential ripeness test did not apply. The panel

also held that the plaintiffs’ taking claim was per se because

the Director’s withholding of interest earned on funds in

interest-bearing accounts was a direct appropriation of

private property.

**

This summary constitutes no part of the opinion of the court. It

has been prepared by court staff for the convenience of the reader.

FOWLER V. GUERIN 3

The panel considered the Director’s alternative grounds

for summary judgment that were not reached by the district

court, and rejected them. First, the panel held that the

plaintiffs stated a takings claim for daily interest withheld by

the Director. The panel clarified that the core property right

recognized in Schneider v. California Department of

Corrections, 151 F.3d 1194 (9th Cir. 1988), covered interest

earned daily, even if payable less frequently. Second, the

panel held that the takings claim was not barred by issue

preclusion or by the Rooker-Feldman doctrine. The panel

held that no state-court judgment resolved the precise issue

presented in this case, and the plaintiffs did not complain of

any error by the state court or seek relief from the state

court’s judgments. Finally, the panel held that the plaintiffs’

takings claim was not foreclosed by the Eleventh

Amendment.

The panel also held that the district court erred in

denying the motion for class certification on the ground that

the plaintiff’s claim for “an indivisible injunction” for all

members was really one for individualized monetary

damages. The panel held that the plaintiffs’ claim could be

certified for class treatment under Fed. R. Civ. P. 23(b)(2)

because the relief of correcting the entire records system for

the class members accounts was in the nature of injunctive

relief.

The panel remanded for the district court to reconsider

class certification, and if necessary, to permit further

discovery before deciding if the class shall be given the

requested injunctive relief.

4 FOWLER V. GUERIN

COUNSEL

Stephen K. Festor (argued), Stephen K. Strong, David F.

Stobaugh, and Alexander F. Strong, Bendich Stobaugh &

Strong P.C., Seattle, Washington, for Plaintiffs-Appellants.

Jeffrey A.O. Freimund (argued) and Michael E. Tardif,

Freimund Jackson & Tardif PLLC, Olympia, Washington,

for Defendant-Appellee.

OPINION

GOULD, Circuit Judge:

Washington public school teachers Mickey Fowler and

Leisa Maurer bring this class action to order the Director of

the Washington State Department of Retirement Systems

(“DRS”) to return interest that was allegedly skimmed from

their state-managed retirement accounts. The district court

denied the stipulated motion to certify a class and then

dismissed the action as prudentially unripe. We conclude

that both of those decisions were in error.

I

Washington public school teachers participate in the

Teachers’ Retirement System, a public retirement system

managed by DRS. See Wash. Rev. Code §§ 41.32.010, .020,

.025. The Teachers’ Retirement System comprises three

retirement plans named “Plan 1,” “Plan 2,” and “Plan 3.”

This case concerns savings that were held in Plan 2. Plan

2 contributions are invested in a comingled trust fund by the

Washington State Investment Board. DRS does not handle

deposits, but rather tracks teachers’ contributions and credits

FOWLER V. GUERIN 5

their individual accounts for accumulated interest. See id.

§ 41.32.010(1)(b). Interest is credited at “such rate as the

director [of DRS] may determine.” Id. § 41.32.010(38).

Since 1977, DRS has credited Plan 2 accounts with a 5.5%

annual rate compounded quarterly. DRS determines the

amount of interest to credit to Plan 2 accounts based on the

accounts’ balances at the end of the prior quarter. Therefore,

DRS does not credit accounts with the interest earned on the

funds in the account during that quarter. In addition, if a Plan

2 account has a zero balance at the end of a quarter, the

account is not credited with interest earned on any funds in

that account during either that quarter or the prior quarter.

Fowler and Maurer (collectively, “Teachers”) were

originally members of Plan 2, but in 1996 they transferred

their holdings into newly created Plan 3 accounts. Because

the Teachers transferred their Plan 2 holdings mid-quarter,

and thus had a zero balance in their Plan 2 accounts at the

end of the quarter in which they transferred their holdings,

DRS did not credit their accounts for the interest earned

during that quarter or the prior quarter. Instead, DRS kept

the interest and used it to pay benefits to other members.

In 2005, another Washington State employee filed a

class action suit in state court challenging DRS’s interest rate

calculations. See Probst v. State Dep’t of Ret. Sys., 271 P.3d

966, 968 (Wash. Ct. App. 2012). When this employee

settled his claim, the Teachers became the class plaintiffs.

Id.

The Teachers’ state-court complaint alleged that DRS

deprived them of earned daily interest on their Plan 2

accounts by not providing interest through the date on which

their funds were transferred to Plan 3 accounts. Id. The

Washington Superior Court rejected the Teachers’

arguments, but on appeal the Washington Court of Appeals

6 FOWLER V. GUERIN

reversed in part. Without reaching the Teachers’

constitutional arguments, that court held that DRS’s interest

rate policy was arbitrary and capricious under state law

because there was no record showing the agency gave the

issue “due consideration.” Id. at 971–73. The Superior

Court subsequently remanded the case to DRS to initiate a

new rulemaking.

DRS began the rulemaking process in July 2013. The

Teachers appealed the Superior Court’s remand to the

agency, however, and the Washington Court of Appeals

affirmed the Superior Court’s order in an unpublished

decision. Probst v. Dep’t of Ret. Sys., No. 45128-0-II, 2014

WL 7462567 (Wash. Ct. App. Dec. 30, 2014).

The Teachers then filed this suit in federal court. The

complaint omits the Teachers’ state-law claims and alleges

solely that the Director of DRS (“Director”) violated the

Fifth and Fourteenth Amendments by withholding some of

the daily interest earned on their Plan 2 accounts.

The parties filed a stipulated motion to certify a class of

all active and retired members of the Teachers’ Retirement

System who had transferred from Plan 2 to Plan 3 before

January 20, 2002. The district court denied the stipulated

motion without prejudice, concluding that the parties’

explanation was not detailed enough for the court to fulfill

its independent responsibility to ensure that the requirements

of Rule 23 were met.

The district court then granted the Director’s motion for

summary judgment, concluding that this case was

prudentially unripe pending the conclusion of DRS’s new

interest calculation rulemaking.

FOWLER V. GUERIN 7

The Teachers timely appealed. Less than a month before

oral argument in this case, DRS’s new rule took effect and

retroactively affirmed its prior interest calculation method.

See Wash. Admin. Code § 415-02-150.

II

The first question presented is whether the Teachers’

takings claim is prudentially unripe. 1 We review a dismissal

for lack of ripeness de novo. MHC Fin. Ltd. P’ship v. City

of San Rafael, 714 F.3d 1118, 1130 (9th Cir. 2013). Because

the dismissal was entered on summary judgment, we view

the facts in the light most favorable to the Teachers. See

Millennium Labs., Inc. v. Ameritox, Ltd., 817 F.3d 1123,

1129 (9th Cir. 2016).

The district court held that the Teachers’ claim was

unripe under Williamson County Regional Planning

Commission v. Hamilton Bank of Johnson City, 473 U.S. 172

(1985). Williamson County sets forth two prudential hurdles

for takings claims. First, a takings claim is unripe until “the

government entity charged with implementing the

regulations has reached a final decision regarding the

application of the [challenged] regulations to the property at

issue.” Id. at 186. Second, the plaintiff must have sought

1

Unlike constitutional ripeness, prudential ripeness is a disfavored

judge-made doctrine that “is in some tension with [the Supreme Court’s]

recent reaffirmation of the principle that a federal court’s obligation to

hear and decide cases within its jurisdiction is virtually unflagging.”

Susan B. Anthony List v. Driehaus, 134 S. Ct. 2334, 2347 (2014)

(quoting Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S.

Ct. 1377, 1386 (2014)). The Court has not yet had occasion to “resolve

the continuing vitality of the prudential ripeness doctrine.” Id.

8 FOWLER V. GUERIN

and been denied “compensation through the procedures the

State has provided.” Id. at 194.

By its terms, Williamson County applies only to

regulatory, not per se, takings. In Williamson County, a land

developer obtained Planning Commission approval of a plat

for residential development. 473 U.S. at 177. When the

county changed its zoning ordinances, the Planning

Commission required the developer to change the plat. Id.

at 179. Instead, the developer filed suit, arguing that the

Planning Commission had taken its property without just

compensation by disapproving its original development

plan. Id. at 182. The Supreme Court granted certiorari on

“the question whether Federal, State, and Local governments

must pay money damages to a landowner whose property

allegedly has been ‘taken’ temporarily by the application of

government regulations.” Id. at 185. But the Court

ultimately determined that this issue of regulatory taking was

not yet ripe, because the developer had not sought variances

from the county’s ordinances, and therefore had “not yet

obtained a final decision regarding how it will be allowed to

develop its property.” Id. at 190. Nor had the developer

used state procedures for obtaining just compensation. Id. at

194.

Although Williamson County acknowledged that a

regulation that “goes too far” may constitute a taking, id. at

186 (quoting Pa. Coal Co. v. Mahon, 260 U.S. 393, 415

(1922)), this line of jurisprudence is not applicable when the

government directly takes a person’s property. The Court

explained the distinction in Horne v. Department of

Agriculture, 135 S. Ct. 2419, 2427 (2015). According to the

Court, before Pennsylvania Coal, “the Takings Clause was

understood to provide protection only against a direct

appropriation of property—personal or real.” Id.

FOWLER V. GUERIN 9

“Pennsylvania Coal expanded the protection of the Takings

Clause, holding that compensation was also required for a

‘regulatory taking’—a restriction on the use of property that

went ‘too far.’” Id. (quoting Pa. Coal, 260 U.S. at 415).

However, “a physical appropriation of property gave rise to

a per se taking, without regard to other factors.” Id. A per

se taking triggers a “categorical duty to compensate the

former owner” under the Takings Clause. Brown v. Legal

Found. of Wash., 538 U.S. 216, 233 (2003) (quoting United

States v. Pewee Coal Co., 341 U.S. 114, 115 (1951)).

Here, the Teachers bring a per se taking claim because

DRS’s withholding of interest earned on funds in interest-

bearing accounts is a direct appropriation of private

property. The Supreme Court addressed this issue in a pair

of cases concerning states’ Interest on Lawyers’ Trust

Account (“IOLTA”) programs. First, in Phillips v.

Washington Legal Foundation, the Court held that “the

interest income generated by funds held in IOLTA accounts

is the ‘private property’ of the owner of the principal.”

524 U.S. 156, 172 (1998). Then in Brown v. Legal

Foundation of Washington, the Court held that the law

requiring interest on those funds to be transferred to a third

party is evaluated not as a regulatory taking, but as a per se

taking. 538 U.S. at 235.

As a result, DRS’s withholding of the interest accrued on

the Teachers’ accounts constitutes a per se taking to which

Williamson County’s prudential ripeness test does not apply.

The district court erred in dismissing the Teachers’ takings

claim as prudentially unripe.

III

Given the many years that this case has been held up in

the courts, we proceed to consider the Director’s alternative

10 FOWLER V. GUERIN

grounds for summary judgment that were not reached by the

district court because those grounds may provide a basis to

affirm the district court. See Kohler v. Bed Bath & Beyond

of Cal., LLC, 780 F.3d 1260, 1263 (9th Cir. 2015). We

review the grant of summary judgment de novo. Id. We will

uphold the summary judgment if, viewing the evidence in

the light most favorable to the non-moving party, “there is

no genuine dispute as to any material fact and the movant is

entitled to judgment as a matter of law.” Id. (quoting Fed.

R. Civ. P. 56(a)).

The Director contends that the Teachers fail to state a

claim because there has been no taking of property, and that

even if the Teachers do state a claim, that claim is barred by

issue preclusion, the Rooker-Feldman doctrine, and the

Eleventh Amendment. We address each argument in turn.

A

The Director argues that the Teachers’ takings claim fails

on its merits because there has been no taking of private

property here. In the state-court litigation, the Washington

Court of Appeals held that the state statutory scheme “do[es]

not require the DRS to pay daily interest.” Probst, 271 P.3d

at 971. The Director asserts that there can be no federal

takings claim without this state-law property right.

We rejected a similar argument in Schneider v.

California Department of Corrections, 151 F.3d 1194 (9th

Cir. 1998). There we observed that “constitutionally

protected property rights can—and often do—exist despite

statutes . . . that appear to deny their existence.” Id. at 1199.

Citing the Supreme Court’s opinion in Phillips, we noted

that “a State may not sidestep the Takings Clause by

disavowing traditional property interests long recognized

under state law.” Id. at 1200 (quoting 524 U.S. at 167). We

FOWLER V. GUERIN 11

then held that there is “a ‘core’ notion of constitutionally

protected property into which state regulation simply may

not intrude without prompting Takings Clause scrutiny.” Id.

This “core” is “defined by reference to traditional

‘background principles’ of property law.” Id. at 1201. In

that case, we concluded that interest income earned on an

interest-bearing account falls within this class of

fundamental property rights. Id.

We now clarify that the core property right recognized in

Schneider covers interest earned daily, even if payable less

frequently. The rule that interest accrues de die in diem—

“from day to day”—has an impressive common law

pedigree, see, e.g., Wilson v. Harman, 2 Ves. Sen. 672, 672,

27 Eng. Rep. 189, 189, and has been widely adopted by

American courts, see, e.g., Mann v. Anderson, 32 S.E. 870,

871 (Ga. 1899); Owens v. Graetzel, 126 A. 224, 227 (Md.

1924); Clapp v. Astor, 2 Edw. Ch. 379, 384 (N.Y. Ch. 1834);

In re Flickwir’s Estate, 20 A. 518 (Penn. 1890). Indeed, in

the state-court proceedings, DRS did not dispute that “at

common law, interest was deemed to accrue daily, regardless

of when it was payable.” Probst, 271 P.3d at 970 n.6 (citing

32 Halsbury’s Laws of England § 127, p. 78 (4th ed. 2005)).

Because the right to daily interest is deeply ingrained in our

common law tradition, this property interest is protected by

the Takings Clause regardless of whether a state legislature

purports to authorize a state officer to abrogate the common

law. See Schneider, 151 F.3d at 1201.

We hold that the Teachers state a takings claim for daily

interest withheld by DRS.

12 FOWLER V. GUERIN

B

Next, the Director contends that the Teachers’ claim is

barred by two related doctrines: issue preclusion and

Rooker-Feldman.

Federal courts must give the same preclusive effect to

state-court judgments as would be given in the courts of that

state. Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S.

75, 81 (1984). In Washington, the issue preclusion doctrine

bars the relitigation of issues that were actually litigated and

necessarily decided in a prior proceeding involving the same

parties. Sprague v. Spokane Valley Fire Dep’t, 409 P.3d

160, 183 (Wash. 2018). Washington courts look to four

factors in determining whether issue preclusion applies,

including whether the issues decided are “identical.” Id.

In a related vein, and pursuant to the Rooker-Feldman

doctrine, federal district courts lack jurisdiction to hear

direct or “de facto” appeals from the judgments of state

courts. See Noel v. Hall, 341 F.3d 1148, 1156 (9th Cir.

2003). “It is a forbidden de facto appeal under Rooker-

Feldman when the plaintiff in federal district court

complains of a legal wrong allegedly committed by the state

court, and seeks relief from the judgment of that court.” Id.

at 1163. This doctrine occupies “narrow ground,” Exxon

Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284

(2005), however, and “does not preclude a plaintiff from

bringing an ‘independent claim’ that, though similar or even

identical to issues aired in state court, was not the subject of

a previous judgment by the state court,” Cooper v. Ramos,

704 F.3d 772, 778 (9th Cir. 2012) (quoting Skinner v.

Switzer, 562 U.S. 521, 532 (2011)).

According to the Director, the Washington Court of

Appeals has already adjudicated two issues on which the

FOWLER V. GUERIN 13

Teachers’ takings claim depends: whether the Teachers are

entitled to daily interest, and whether their takings claim is

premature. The Director also argues that the Teachers now

seek both a direct and de facto appeal of the state court’s

decisions on these issues.

We disagree. The Washington Court of Appeals’ first

decision expressly declined to reach the merits of the

Teachers’ constitutional takings claim. Probst, 271 P.3d at

967 n.1. Its discussion of the Teachers’ entitlement to daily

interest turned solely on an issue of Washington statutory

law, not federal constitutional law. See id. at 970–71. And

the state court’s subsequent decision did not decide the

issues before us either. It found premature only the

Teachers’ speculation that the forthcoming DRS rulemaking

would effect a taking, not their argument here that DRS

effected a taking by retaining some of their earned interest

years ago. See Probst, 2014 WL 7462567, at *2, *6.

No state-court judgment resolved the precise issues

presented in this case, and the Teachers do not complain of

any error by the state court or seek relief from the state

court’s judgments. The Teachers’ takings claim is not barred

by issue preclusion or by the Rooker-Feldman doctrine.

C

Finally, the Director contends that the Teachers’ takings

claim is foreclosed by the Eleventh Amendment. In the

Director’s view, the Teachers seek monetary damages,

which would mean that the State is the real party in interest

and that a money award would impermissibly be paid from

the State’s treasury. See Pennhurst State Sch. & Hosp. v.

Halderman, 465 U.S. 89, 101 & n.11 (1984).

14 FOWLER V. GUERIN

But as the Director previously has conceded, and as the

Teachers’ complaint plainly shows, the Teachers actually

seek an injunction ordering the Director to return savings

taken from them. Rather than requiring payment of funds

from the State’s treasury, see id., this relief “will likely

involve applying a computerized formula to DRS electronic

records to determine the amount of interest that should be

moved to the class members’ . . . [P]lan 3 accounts.”

Prospective injunctive relief of this sort is readily

distinguishable from a compensatory damages award. See

Taylor v. Westly, 402 F.3d 924, 935–36 (9th Cir. 2005).

Further, Washington’s sovereign immunity shields the

State’s general fund, not investment funds held for the

benefit of its employees. See id. at 932. “Money that the

state holds in custody for the benefit of private individuals is

not the state’s money, any more than towed cars are the

state’s cars.” Id. The Eleventh Amendment does not stand

in the way of a citizen suing a state official in federal court

to return money skimmed from a state-managed account.

See id. at 935.

In sum, none of the Director’s alternative arguments

justifies the district court’s grant of summary judgment in

this case.

IV

Before mistakenly granting summary judgment, the

district court denied the parties’ stipulated motion to certify

a class. We review the class certification decision for abuse

of discretion. Yokoyama v. Midland Nat’l Life Ins. Co.,

594 F.3d 1087, 1090 (9th Cir. 2010). We have often said

that “an error of law is an abuse of discretion.” Id. at 1091.

FOWLER V. GUERIN 15

The district court denied the stipulated motion based on

its concern that a Rule 23(b)(2) class would be inappropriate

here. As the district court pointed out, Rule 23(b)(2) “does

not authorize the class certification of monetary claims.”

Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 360 (2011).

But as explained above, the Teachers do not bring a claim

requiring individualized determinations of eligibility for

damages. The Teachers instead seek an injunction ordering

the Director to apply a single formula to DRS’s electronic

records to correct the amount of interest credited to class

members’ accounts. In the language of Dukes, DRS’s policy

of denying daily interest “is such that it can be enjoined or

declared unlawful only as to all of the class members or as

to none of them.” Id. (quoting Richard A. Nagareda, Class

Certification in the Age of Aggregate Proof, 84 N.Y.U. L.

Rev. 97, 132 (2009)). The district court erred in denying the

motion for class certification on the ground that the

Teachers’ claim for “an indivisible injunction benefitting all

its members at once” was really one for individualized

monetary damages. Id. at 362. The claim can be certified

for class treatment under Rule 23(b)(2) because the relief of

correcting the entire records system for the class member

accounts is in the nature of injunctive relief.

V

For the foregoing reasons, we reverse the decision that

this case is not ripe, and we remand for the district court to

reconsider class certification and, if necessary, to permit

further discovery before deciding if the class shall be given

the requested injunctive relief.

REVERSED AND REMANDED.