Opposition Brief — Fun 'N Sun RV, Inc. v. Michigan

par 4 Supreme Court, U.S.

2 FILE D

APR 281

No. 94-1604 ,

IN THE

Supreme Court of the United States 4

OCTOBER TERM, 1994

FuN ‘N Sun RV, INC. ET AL.,

Petitioners,

Vv.

STATE OF MICHIGAN, ACCIDENT FUND DIRECTOR,

ACCIDENT FUND OF MICHIGAN,

AND STATE ADMINISTRATIVE BOARD,

Respondents.

On Petition For A Writ Of Certiorari

To The Michigan Supreme Court

RESPONDENTS’ BRIEF IN OPPOSITION

FRANK J. KELLEY

Attorney General, State of Michigan

THOMAS L. CASEY

Solicitor General, State of Michigan

Counsel of Record

Law Building — 7th Floor

525 W. Ottawa

P.O. Box 30212

Lansing, Michigan 48909

(517) 373-1110

DONALD S. YOUNG

Special Assistant Attorney General,

State of Michigan

DYKEMA GossETT PLLC

400 Renaissance Center

Detroit, Michigan 48243

(313) 568-6560

April 1995 Counsel for Respondents

i

QUESTIONS PRESENTED

1. Whether state legislation authorizing the sale of the Accident

Fund of Michigan, a state agency providing workers’ compen-

sation insurance, violates the constitutional prohibition against

impairment of contracts, where the state legislation provides

for an intact sale of the Accident Fund’s assets and liabilities,

including all obligations under existing insurance policies.

2. Whether holders of nonassessable workers’ compensation in-

surance policies issued by the Accident Fund of Michigan

have a vested right to the proceeds of the state’s intact sale of

the Accident Fund’s assets and liabilities, so that state legisla-

tion providing that the proceeds of the sale belong to the state

violates the constitutional prohibition against the taking of

private property without just compensation.

\

ii

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED .......---- +--+ eseeee: i

TABLE OF AUTHORITIES .........---0eeseeeeees iil

OPINION BELOW ........... 0c eee cece ee eeeeeee

JURISDICTION ..... 2... ccc ccc r ec ec cee rceeeeceees

|

l

STATUTORY PROVISIONS INVOLVED ........-. 2

STATEMENT OF THE CASE.........----:+0++08: 3

I. The Accident Fund of Michigan ............--- 3

Il. Procedural History.........-...eeee eee eeeeeee 5

REASONS FOR DENYING THE PETITION ....... 6

I. The Law Governing Petitioners’ Claims Of

Unconstitutional Takings And Impairment Of

Contracts Is Not Unsettled, And, In Any Event,

Petitioners Fail To State Such Claims .......... 6

II. The Michigan Supreme Court’s Decision Does Not

Conflict With Prior Decisions Of This Court...... 9

III. The Michigan Supreme Court’s Decision Does

Not Conflict With Decisions Of Other States’

Highest Courts. ......--..0seeeeeeeeeeeeeeees 12

CONCLUSION .... cc cccccccccccccsccccccccceress 14

iii

TABLE OF AUTHORITIES

CASES:

Accident Fund v. Baerwaldt, 579 F. Supp. 729

(W.D. Mich. 1984) .......... ee eee eee cere ees

American Mut. Liab. Ins. Co. v. Michigan Mut. Liab.

Co., 64 Mich. App. 315, 235 N.W.2d 769 (1975)...

Cox Broadcasting Corp. v. Cohn, 420 U.S. 469

REDE cv cece acrceyetevdrotenpensaseseccess

First English Evangelical Lutheran Church v. Los

Angeles County, 482 U.S. 304 (1987) ........--.

Graham v. Goodcell, 282 U.S. 409 (1931) .........

Insurance Comm'’r v. Advisory Bd., 173 Mich. App.

566, 434 N.W.2d 433 (1988), appeal denied,

433 Mich. 872 (1989) ........cccesrececeeees

Lawlor v. National Screen Serv. Corp., 349 U.S. 322

[| rey Perr et et Pe eee

Lynch v. United States, 292 U.S. 571 (1934) .....-.

Methodist Hosp. v. State Ins. Fund, 64 N.Y.2d 365,

476 N.E.2d 304, appeal dismissed, 474 U.S. 801

(1985) (memM.) 2.1... ccc cece eee eee eee eens

Morgan Guaranty Trust Co. v. Republic of Palau,

680 F. Supp. 99 (S.D.N.Y. 1988) .......----55-

Pennsylvania Coal Co. v. Mahon, 260 US. 393

CADE vc once shan vesccesnnvacnonecesssesscers

United States v. International Bldg. Co., 345 U.S. 502

CBDIED coc ciccsecntecascsnsecwednvearcceves:

Webb's Fabulous Pharmacies, Inc. v. Beckwith,

449 U.S. 155 (1980)......... ee ny

Williamson County Regional Planning Comm'n v.

Hamilton Bank, 473 U.S. 172 (1985) ........---

STATUTES AND RULES:

SE a er ere rey

iv

TABLE OF AUTHORITIES — (Cont'd)

Page

Mich. Comp. Laws § 418.700(b)

PE SI CIEE bid chen ce eankaeSabeberet 9

Mich. Comp. Laws § 418.701 et seg. (1979) ....... 3

Mich. Comp. Laws § 418.701 (2)

8 Pr re eee ere re 4

Mich. Comp. Laws § 418.70la (West Supp. 1994) .. 2,4

Mich. Comp. Laws § 418.711 (1979) ............. 4

Mich. Comp. Laws § 418.71la (West Supp. 1994) .. 8, 10

Mich. Comp. Laws § 418.712 (West Supp. 1994) ... 8

Mich. Comp. Laws § 418.715 (West Supp. 1994) ... 5, 10

Mich. Comp. Laws § 418.746 (West Supp. 1994) ... 8, 10

Mich. Comp. Laws § 418.751 (1979) ............. 8, 11

Mich. Comp. Laws § 500.2418 (West Supp. 1994) .. 10

Mich. Comp. Laws § 500.2419 (1979) ............ 10

Mich. Comp. Laws § 500.51(4(a)

Pe Ey SE Coxe Chie da eancdddudwesnese a

Mich. Comp. Laws § 500.7901 et seg. (1979) ...... 10

GEA. SUE SEE DAME sv ca becncibveweeseckaeaa wes 3

1912 Mich. Pub. Acts (Ist Ex. Sess.) 10, Part V.... 3

POP OU. BU PUNE ESE cnc ecccdcewsvcasetseces 4

1993 Mich. Pub. Acts 198, § 70la ................ 2

1993 Mich. Pub. Acts 200, § 5106(a) ............. 2

MISCELLANEOUS:

18 Wright, Miller & Cooper, Federal Practice &

Procedure, § 4443 (1981), pp. 383-85 ........... 13

l

IN THE SUPREME COURT OF THE UNITED STATES

October Term, 1994

Fun ‘N Sun RY, Inc. et al., Petitioners,

v.

State of Michigan, Accident Fund Director,

Accident Fund of Michigan, and State Administrative Board,

Respondents.

On Petition For A Writ Of Certiorari

To The Michigan Supreme Court

RESPONDENTS’ BRIEF IN OPPOSITION

OPINION BELOW

The opinion of the Michigan Supreme Court (Pet. App. at

A-14 to A-50) is reported at 447 Mich. 765, 527 N.W.2d 468

(1994).

JURISDICTION

The opinion of the Michigan Supreme Court was filed on

December 30, 1994. The jurisdiction of this Court is invoked

under 28 U.S.C. § 1257(a).

Although the Michigan Supreme Court has not yet entered

final judgment on petitioners’ claims, respondents share petition-

ers’ belief that this Court has jurisdiction to consider the petition

under Cox Broadcasting Corp. v. Cohn, 420 U.S. 469, 479-80

(1975). The Michigan Supreme Court’s opinion was issued in

response to a certified question from the Michigan Court of

Claims, which certification had been requested by Executive

Message of the Governor pursuant to Michigan Court Rule 7.305.

Respondents have moved for entry of judgment in the Court of

Claims based on the Michigan Supreme Court’s opinion, and

2

petitioners have conceded that judgment in accordance with the

opinion is appropriate.

STATUTORY PROVISIONS INVOLVED

The legislation authorizing the State of Michigan’s sale of

the Accident Fund states:

Sec. 701a. (1) The state administrative board. ..may

authorize the executive director of the state accident fund to

enter into and consummate, under terms and conditions

approved by the state administrative board, an agreement in

the name of the state of Michigan for the sale of all or

substantially all of the assets of the state accident fund to a

permitted transferee, and assumption of all or substantially

all of the liabilities of the state accident fund by the permit-

ted transferee... .

(2) The consideration in the transaction referred to in

subsection (1) shall be the property of the state of Michigan.

1993 Mich. Pub. Acts 198, § 70la (Mich. Comp. Laws

§ 418.701la (West. Supp. 1994)).

The legislation governing the requirements which must be

met by any purchaser of the Accident Fund states:

Sec. 5106. On and after the effective date of the trans-

fer, any acquiring insurer shall be subject to the following:

(a) The acquiring insurer shall assume, indemnify,

and hold the state of Michigan and any of its subdivi-

sions harmless from and against all existing liabilities of

the state accident fund under policies of workers’ com-

pensation and employers’ liability insurance issued by

the state accident fund before the effective date of the

transfer. ...

1993 Mich. Pub. Acts 200, § 5106(a) (Mich. Comp. Laws

§ 500.5106(a) (West Supp. 1994).

3

STATEMENT OF THE CASE

I. The Accident Fund Of Michigan.

The Accident Fund Of Michigan was created by the Michi-

gan Legislature as part of the first Worker’s Disability Compensa-

tion Act, 1912 Mich. Pub. Acts (lst Ex. Sess.) 10, Part V, to

provide worker’s compensation and employer’s liability insurance.

The Legislature directed that the Fund be “neither more nor less

than self-supporting.” In 1917, the Worker’s Disability Compen-

sation Act was amended to create an advisory board which was to

advise the Insurance Commissioner on administration of the

Fund. In 1969, the legislation creating the Fund was repealed and

new enabling legislation was passed (Mich. Comp. Laws

§ 418.701 et seg. (1979)), but the basic framework of the Fund

remained, including the mandate that it be neither more nor less

than self-supporting.

Over the last 15 years, disputes have arisen over whether the

State of Michigan, through the Insurance Commissioner, or the

advisory board controlled the Fund. In 1981, a federal lawsuit was

filed by the Fund against the Commissioner to prevent the

Commissioner from designating employees of the Fund as civil

servants. Accident Fund v. Baerwaldt, No. G81-224 (W.D.

Mich.). In this context, on January 9, 1984, the parties to that

case entered into a Consent Judgment which declared, in part,

that under then-existing law, the State could not borrow or take

the assets, monies and funds held for or by the Accident Fund,

and that the State had no known, ripe or outstanding claims to or

interest, other than as trustee, in the assets, monies and funds

held for or by the Fund. Pet. App. at A-74 to A-77.

On February 2, 1984, the federal court in Baerwaldt issued

an opinion holding that resolution of the issue before it turned on

whether the Accident Fund was a state agency, a matter of first

impression which depended on interpretation of Michigan stat-

utes, legislative history, attorney general opinions, and any analo-

gous case law. The court, therefore, abstained from deciding the

case and dismissed all but certain ERISA claims. Accident Fund

4

v. Baerwaldt, 579 F. Supp. 729 (W.D. Mich. 1984). The case was

ultimately dismissed in its entirety, with prejudice, in 1990.

In 1988, in another case over control of the Fund, /nsurance

Comm’r v. Advisory Bd., 173 Mich. App. 566, 434 N.W.2d 433

(1988), appeal denied, 433 Mich. 872 (1989), the Michigan

Court of Appeals held that the Accident Fund was a State agency

and not a mutual insurance company. Specifically relying on

Mich. Comp. Laws § 418.711, which contained the “neither more

nor less than self-supporting” restriction, the Court of Appeals

ruled that the State was not permitted to receive any “profits”

which the Fund might generate, and that it “holds the assets of

the Accident Fund in trust,” to be expended only “to further the

purpose of the Accident Fund.” 173 Mich. App. at 588, 434

N.W.2d at 443.

Effective June 29, 1990, Michigan Pub. Act 157 repealed

Mich. Comp. Laws § 418.711’s restriction that the Fund be

neither more nor less than self-supporting. At the same time,

control of the Accident Fund was transferred from the Insurance

Commissioner to an Executive Director appointed by the Gover-

nor. Mich. Comp. Laws § 418.701(2) (West Supp. 1994).

Effective April 1, 1994, the Michigan Legislature authorized

the State to proceed with an intact sale of the assets and liabilities

of the Accident Fund and provided that the proceeds of the sale

shall be the property of the State. Mich. Comp. Laws § 418.701a

(West Supp. 1994) (the “Sale Legislation”). The State was to

withdraw no money from the Fund; the Fund was not to be

dissolved or liquidated; and none of its assets were appropriated or

diverted in any way to the State.!

Under applicable statutes, holders of insurance policies is-

sued by the Accident Fund have no right to force the declaration

of dividends or other distributions of assets. Conversely, while the

' Petitioners assert as fact that the Sale Legislation was the result of a

“plan” by the State Legislature “to eliminate the [ petitioners’) rights to the

Accident Fund’s assets.” Pet. at 6. Whether any such “rights” exist was the very

issue before the Michigan Supreme Court. In any event, there is no evidence in

the record of any such “plan.”

5

law allows the Executive Director to make assessments on policy-

holders for additional premiums should existing premiums fail to

cover claims, Mich. Comp. Laws § 418.715 (West Supp. 1994),

the insurance policy contracts issued by the Fund to the petition-

ers expressly provide that they are nonassessable. Pet. App. at

A-67. The policies provide only that in return for premiums,

policyholders will receive worker’s compensation and employer’s

liability insurance under applicable state law and any dividends

which may be declared. Jd. Declaration of dividends is discretion-

ary with the Executive Director. Mich. Comp. Laws § 418.715.

The Sale Legislation was to expire on December 31, 1994 if

no sale transaction had been completed by that date. The sale

closed on December 28, 1994.

I. Procedural History.

The original complaint in this case was filed on Septem-

ber 21, 1993 in the Michigan Court of Claims. Petitioners made

no constitutional claims at that time, alleging only that a failure to

distribute funds to certain policyholders upon a sale of the Fund

would be contrary to state law.

On November 1, 1993, respondents filed a motion to dismiss

on the ground that petitioners had failed to state a claim upon

which relief could be granted. On March 9, 1994, the Court of

Claims issued an Opinion And Order denying respondents’ mo-

tion, declaring that “the assets” of the Accident Fund are held “in

trust for the benefit of the policyholders,” relying on Advisory

Board, supra, 173 Mich. App. at 588, 434 N.W.2d at 443.

Pet. App. at A-S.

On the same day that the Sale Legislation took effect

(April 1, 1994), petitioners filed their First Amended Class

Action Complaint, raising for the first time claims under the

Michigan and United States Constitutions.

On May 6, 1994, pursuant to Michigan Court Rule 7.305,

Governor John Engler submitted an Executive Message to the

Michigan Supreme Court, asking that the court consider the

constitutionality of the Sale Legislation. Pet. App. at A-100 to

6

A-102. After requesting and considering briefs submitted by the

parties, the court issued an order directing the Court of Claims to

certify the question. Argument before the Michigan Supreme

Court occurred on November 1, 1994.

The Michigan Supreme Court issued its opinion on Decem-

ber 30, 1994. In a 4-2 decision with one abstention, the court held

that petitioners had not established vested property rights in the

assets of the Accident Fund and that no contract rights would be

impaired by the sale. Pet. App. at A-14 to A-50.?

REASONS FOR DENYING THE PETITION

I. The Law Governing Petitioners’ Claims of Unconstitu-

tional Takings And Impairment Of Contracts Is Not

Unsettled, And, In Any Event, Petitioners Fail To State

Such Claims.

Most of the petition in this case is devoted to arguing the

merits of the decision below. At Pet. pages 28-29, however,

petitioners finally explain why they believe certiorari should be

granted: they contend that the Michigan legislation authorizing

an intact sale of the Accident Fund’s assets and liabilities is an

indirect way of accomplishing that which (they claim) would be

unconstitutional if accomplished directly, i.e., confiscation of the

Accident Fund’s assets. Petitioners assert that the Court should

grant certiorari because “federal constitutional law should clearly

preclude takings by indirection” and, according to them, the law

does not currently do so. Pet. at 28-29. Petitioners’ argument

should be rejected because (i) it overlooks an entire body of

Supreme Court precedent which demonstrates that this case

presents neither novel nor unsettled questions, and (ii) it assumes

that an unconstitutional taking in fact has occurred, when

2 The affidavit submitted at Pet. App. pages A-96 to A-97 was created after

the Michigan Supreme Court issued its opinion below and thus was not before

that court at the time of its decision. It should not be considered in reviewing the

petition.

7

petitioners have not established that they have vested property

rights under state law.

First, it is incorrect that this Court has not indicated that

indirect takings are unconstitutional. For example, “the entire

doctrine of inverse condemnation is predicated on the proposition

that a taking may occur without . . . formal proceedings.” First

English Evangelical Lutheran Church v. Los Angeles County, 482

U.S. 304, 316 (1987) (“ ‘[t]he general rule at least is, that while

property may be regulated to a certain extent, if regulation goes

too far it will be recognized as a taking,’” quoting Pennsylvania

Coal Co. v. Mahon, 260 U.S. 393, 415 (1922)). Thus, inverse

condemnation, where the government takes property by means

other than a formal exercise of eminent domain, is a recognized

example of indirect taking, and the Court need not take this case

to reaffirm that such species of takings are constitutionally pro-

scribed.

Moreover, regardless whether this Court has spoken on

“takings by indirection,” the Michigan Supreme Court opinion

which is the subject of the present petition in no way turned on

any purported distinction between direct and indirect takings. The

issue before the court was more basic than that; it was whether

petitioners had met the requirement of establishing legitimate

3 See also Morgan Guaranty Trusi Co. v. Republic of Palau, 680 F. Supp.

99, 105 (S.D.N.Y. 1988) (“Congress may not use its power to control jurisdic-

tion as an indirect means to impair rights” (emphasis added) (citing Graham v.

Goodcell, 282 U.S. 409, 431 (1931)). In Graham, the Court found that no

vested rights were put at issue by the passage of certain new tax legislation. 282

U.S. at 426-30. The Court noted that, had vested rights been established, a

provision of the legislation withdrawing the government’s consent to be sued

would not have avoided a takings claim:

If the Congress did not have the authority to deal by a curative statute

with the taxpayers’ asserted substantive right, in the circumstances

described, it could not be concluded that the Congress could accom-

; plish the same result by denying to the taxpayers all remedy both as

against the United States and also as against the one who committed

1 the wrong.

<

Id. at 431. In other words, the government could not have effected a violation of

vested rights indirectly by denying the remedy to enforce such rights.

8

contract or property rights in the first place. As stated by the

Michigan Supreme Court:

The arguments of [petitioners] can be grouped under

two constitutional headings: impairment of an obligation of

contract, and deprivation of property without compensation.

While these are separate theories, each requires that plain-

tiffs demonstrate ownership of specific contract rights or

property rights. Without such a demonstration, there can be

no impairment or deprivation. We hold that plaintiffs have

no such contract or property rights.

Pet. App. at A-23.

To arrive at this holding, the Michigan Supreme Court

applied settled constitutional law principles to adjudicate petition-

ers’ claims to vested property rights under state law (i.e., under

various provisions of Michigan’s worker’s disability compensation

statutes, Mich. Comp. Laws § 418.71 1a, 712. 746, and 751 [ Pet.

App. at A-23]; prior Michigan case law construing those provi-

sions; and the terms of the Accident Fund’s insurance contracts).

It then concluded, “[wJe find nothing, explicit or implicit, in the

policy contract or the governing statutes that gives rise to the

vested property interest asserted by [petitioners].” Pet. App.

at A-45.4 In such circumstances, i.e., where rights are alleged to

exist based on specific contract language and bits and pieces of

state statutes, and the state’s highest court has ruled that no rights

are violated, review by this Court through a writ of certiorari is

not warranted.5

‘ Petitioners’ assertion that the Michigan Supreme Court made a “finding

that the Michigan State Legislature had a right to statutorily abrogate [ petition-

ers’] proprietary interest in the Accident Fund” (Pet. at 29) is thus a mis-

characterization of that court’s opinion.

5 See Methodist Hosp. v. State Ins. Fund, 64 N.Y .2d 365, 476 N.E.2d 304,

appeal dismissed, 474 U.S. 801 (1985) (mem.), raising issues similar to those in

the present case. There, legislation transferring $190 million from New York's

State Insurance Fund, a state-run workers’ compensation insurer, to the state’s

General Fund was challenged by insured employers asserting, inter alia, claims

of impairment of contract and taking without just compensation. 476 N.E.2d

9

Il. The Michigan Supreme Court’s Decision Does Not

Conflict With Prior Decisions Of This Court.

Petitioners also assert that the Michigan Supreme Court’s

decision conflicts with prior decisions of this Court. They cite only

two cases: Lynch v. United States, 292 U.S. 571 (1934), and

Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155

(1980). Pet. at 23-28, 29. Neither is inconsistent with the present

case and both are readily distinguishable.

First, neither Lynch nor Webb’s is factually similar to this

case. Neither involved state legislation authorizing the sale of an

insurance entity. Neither involved construction of any state’s

workers’ compensation laws or contracts issued pursuant to such

laws.

While Lynch does involve insurance contracts to which one

party is the government (albeit the federal, not state, govern-

ment), any similarity to the present case ends there. The Lynch

decision struck down legislation repealing the War Risk Insurance

Act, which repeal would have had the effect of “abrogat[ing]

outstanding contracts” of the United States, “reliev[ing] the

United States from all liability on the contracts without making

compensation to the beneficiaries.” 292 U.S. at 579.

In contrast, the Michigan legislation expressly requires the

buyer to assume the Fund’s liabilities, including those under

existing insurance policy contracts (Mich. Comp. Laws

§ 500.5106(a) (West Supp. 1994)) and, under the sale, all

reserves and surplus of the Fund were transferred to the buyer to

cover such liabilities. Petitioners do not dispute that they will

receive the insurance coverage they bargained for, notwithstand-

ing Michigan’s sale of the Accident Fund.® Because petitioners’

at 307. The New York Court of Appeals upheld the statutes, and this Court

dismissed the employers’ appeal “for want of a substantial federal question.”

* In fact, as the Michigan Supreme Court noted in dictum, “there is reason

to believe that worker protection would be enhanced” by the sale of the

Accident Fund (Pet. App. at A-44), for the following reason: Mich. Comp.

Laws § 418.700(b) (West Supp. 1994) requires that any purchaser of the Fund

must be an insurer organized under Chapter 51 of the Michigan Insurance Code;

10

contracts will be honored, not abrogated, by the legislation au-

thorizing and governing the sale of the Fund, Lynch affords no

basis for review in this Court.

Nor does the Michigan Supreme Court’s decision conflict

with Lynch because of any impairment of contract rights allegedly

created by the statutory provisions cited by petitioners (Pet. at

16-19):

(a) Section 711(a) of the Worker’s Disability Com-

pensation Act (Mich. Comp. Laws § 418.711(a)) provides

that “premiums ... shall be at the lowest level possible,

consistent with sound insurance actuarial standards,” as

petitioners state. Petitioners fail to explain what contract

right they claim is conferred by this provision, however, or

how the sale of the Fund violates the provision or the right.”

(b) Neither the Accident Fund policies nor the provi-

sions of Mich. Comp. Laws § 418.746 (West Supp. 1994),

relating to the Accident Fund’s “revolving fund,” gives rise

to vested rights to any dividends. The policies provide for

distribution only of “any dividends declared” (see Pet. App.

at A-67), and the statute merely lists dividends as one use of

revolving funds. But whether to declare dividends is wholly

discretionary. Mich. Comp. Laws § 418.715. As the

such an insurer is required to be a member of the Michigan Property and

Casualty Guaranty Association, which exists to cover claims of insolvent

members. Mich. Comp. Laws § 500.7901 et seg. (1979). The Accident Fund

was not required to be a member of the Guaranty Association, and thus, before

the sale, its insureds had no protection in the event the Fund became insolvent.

See Pet. App. at A-44, n. 36.

7 Any takings claim based on an allegation that the Accident Fund’s

premiums were not “at the lowest level possible” would be unripe because

administrative remedies for such a claim are available in the Michigan Insur-

ance Code (see Mich. Comp. Laws §§ 500.2418 and 500.2419, which permit

policyholders to challenge rates and premium charges) and petitioners have not

availed themselves of these remedies. Williamson County Regional Planning

Comm'n v. Hamilton Bank, 473 U.S. 172, 195 (1985) (“if a State provides an

adequate procedure for seeking just compensation, the property owner cannot

claim a violation of the Just Compensation Clause until it has used the

procedure and been denied just compensation”).

11

Michigan Supreme Court correctly put it, “Because § 746

makes no promise that dividends will ever be paid, it does not

create a vested right.” Pet. App. at A-38.

(c) No rights under Mich. Comp. Laws § 418.751

(1979) are violated by the sale because that provision relates

to disposition of Accident Fund assets upon dissolution of the

Fund, and no dissolution has occurred. Pet. App. at A-34.

Moreover, even if dissolution of the Fund were taking place,

§ 751 “makes no mention of distribution to, or preference of,

the policyholders regarding the disposition of fund assets.”

Pet. App. at A-34.

The other case cited by petitioners, Webb’s Fabulous Phar-

macies, Inc. v. Beckwith, 449 U.S. 155 (1980), also presents no

conflict. In that case, the Court struck down as an unconstitu-

tional taking a Florida law which deemed interest earned on

monies deposited in interpleader accounts held by the clerk of the

county circuit court to be income of the clerk’s office, where

(1) the county concededly could make no claim to the deposits

themselves, which would “[e]ventually, and inevitably”

(449 U.S. at 161) be distributed back to the depositors; and

(2) the county already charged a separate fee for management of

the account. The Florida Supreme Court had upheld the statute

on the ground that the deposits should be “considered public

money.” [d. at 158. This Court’s holding was expressly limited to

“the narrow circumstances” of that case, however: “where there is

a separate and distinct state statute authorizing a clerk’s fee ‘for

services rendered’ based upon the amount of principal deposited;

where the deposited fund itself concededly is private; and where

the deposit in the court’s registry is required by state statute in

order for the depositor to avail itself of statutory protection from

claims of creditors and others. ...” Jd. at 164. No such circum-

stances are present here.

In summary, the Michigan Supreme Court’s opinion applied

basic constitutional tenets to issues governed by Michigan law.

The result does not conflict with prior decisions of this Court.

eT

12

Ill. The Michigan Supreme Court’s Decision Does Not

Conflict With Decisions Of Other States’ Highest

Courts.

Petitioners’ assertion that the Michigan Supreme Court’s

opinion conflicts with decisions of other states’ courts of last resort

(Pet. at 11-13) is incorrect. First, each of the state court decisions

cited by petitioners (id. at 12 & nn. 25-26) turns on a detailed

analysis of particular state insurance statutes, none of which

compares closely with the Michigan statutes at issue here. See

Pet. App. at A-44 n. 37, comparing cases. Moreover, it is

undisputed that “[n]one of the cases cited by plaintiffs as

authority for policyholder ownership of fund assets involved the

sale of a business with the buyer purchasing all assets and

assuming all liabilities.” Id. at A-44.

The only similarity among the cases is this: each involved the

proposition that, under applicable state law, monies held by state

insurance funds are in some sense held “in trust.” To that extent,

the Michigan Supreme Court’s opinion is in accordance with the

other states’ decisions. Pet. App. at A-38 to A-40. But the nature

of the trust in this context is a matter of state law. The Michigan

Supreme Court correctly concluded, in interpreting a prior deci-

sion of the Michigan Court of Appeals (/nsurance Comm'r v.

Advisory Board, supra, 173 Mich. App. 566 (1988)), that, under

Michigan law, Accident Fund policyholders’ premiums are held

“in trust,” not in the sense of a “formal trust relationship” (Pet.

App. at A-39), but rather “in the sense that the state’s receipt of

the policyholders’ premiums resulted in an obligation to manage

those premiums to assure the intended benefit, insurance cover-

age.” Id. at A-40.8 Here, the Sale Legislation ensures that this

obligation will be met.

® Petitioners assert that, in reaching this conclusion, the Michigan Su-

preme Court erred in interpreting Michigan law, by not following the consent

judgment entered in Baerwaldt, supra, the prior federal case (to which petition-

ers were not parties) which ultimately was dismissed on abstention grounds. Pet.

at 15-16 & n. 36. Such a claim — even if it were true — hardly would justify

review by certiorari in this Court. But it is false, regardless, because Baerwaldt

was not binding on the Michigan courts in this case. Absent a showing that the

13

This Court should not review this case for the inappropriate

purpose of comparing the Michigan Supreme Court’s interpreta-

tion of Michigan statutes on this point with the interpretations

other state courts have made of their states’ laws.

parties had a contrary intent, a consent judgment does not have collateral

estoppel effect. Lawlor v. National Screen Serv. Corp., 349 U.S. 322, 327

(1955); United States v. International Bldg. Co., 345 U.S. 502, 505-06 (1953);

American Mut. Liab. Ins. Co. v. Michigan Mut. Liab. Co., 64 Mich. App. 315,

327, 235 N.W.2d 769, 776 (1975). See also 18 Wright, Miller & Cooper,

Federal Practice & Procedure, § 4443 (1981) at pp. 383-85 (“Whatever form is

taken [by a settlement, whether it be by stipulation or consent judgment], the

central characteristic is that the court has not actually resolved the substance of

the issues presented. ...In most circumstances, it is recognized that consent

agreements ordinarily are intended to preclude any further litigation on the

claim presented but are not intended to preclude further litigation on any of the

issues presented.” The result is the same, “[h]owever close the [judicial]

examination may be,” because “the fact remains that it does not involve contest

or decision on the merits”).

14

CONCLUSION

The petition for a writ of certiorari should be denied.

April 1995

Respectfully submitted,

FRANK J. KELLEY

Attorney General,

State of Michigan

THOMAS L. CASEY

Solicitor General,

State of Michigan

Counsel of Record

Law Building — 7th Floor

525 W. Ottawa

P.O. Box 30212

Lansing, Michigan 48909

(517) 373-1110

DONALD S. YOUNG

THOMAS M. PASTORE

Special Assistant Attorneys

General, State of Michigan

Dykema Gossett PLLC

400 Renaissance Center

Detroit, Michigan 48243

(313) 568-6560

Counsel for Respondents

: MIE ED

———

No. 94-1604

CLERK

In The

Supreme Court of the United States

October Term, 1994

¢

FUN ‘N SUN RY, INC., et al.,

Petitioners,

STATE OF MICHIGAN AND

ACCIDENT FUND DIRECTOR,

Respondents.

4

Petition For Writ Of Certiorari

To The 30th Judicial Circuit/Court Of Claims,

Ingham County, Michigan

¢

REPLY TO RESPONDENTS’ BRIEF IN OPPOSITION

+

Douc tas W. VAN Essen (P33169)

Counsel of Record

Attorney for Petitioners

Law, WeatHers & RICHARDSON, P.C.

800 Bridgewater Place

333 Bridge Street, N.W.

Grand Rapids, Michigan 49504-5360

(616) 459-1171

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

TABLE OF CONTENTS

Page

STATEMENT OF QUESTIONS PRESENTED FOR

4 RASS rar eee eee Ter eee Ces. |

SET, SHEIEE boda bbs ch ca Se eden eres eat Sees eFestert |

STATUTORY PROVISIONS INVOLVED ...........-. I

STATEMENT OF FACTSS ... 2... 2 ccc cree cc ceceecee. 2

REASONS FOR GRANTING THE PETITION ........ 4

A. Michigan’s Unconstitutional Conversion is Novel

and Should be Firmly Rejected by this Court... 4

B. The Michigan Supreme Court’s Decision Conflicts

with the Courts of Last Resort in all States Where

this Issue Has been Decided................... 7

C. The Michigan Supreme Court’s Decision Confircts

with this Court’s Rulings in Lynch and Webb’s..

‘Oo

LG a Wa eb chek eh ene ee es eee eo ew ke os 10

INDEX OF AUTHORITIES

Page

CASES

Accident Fund v. Baerwaldt, 579 F. Supp. 729 (W.D.

er rre rere reer ae is

Charles River Bridge v. Warren Bridge, 36 U.S. (11

mee) 420 @ £ Be TIS (here sh kaceee sweeten 6

Chez v. Industrial Commission of Utah, 62 P.2d 459

TE Be cs ween Fe er ae PO gordi oy Set 7

Cox Broadcasting Corp. v. Cohn, 420 U.S. 469,

479-80 (1975)..... SC Gan inte ee oe ete cies |

English v. Saginaw County Treasurer, 81 Mich. App.

G6 49O7OR oc kcicc dcenke eee autai a eae ek 5

Insurance Commissioner v. Advisory Board, 173

Mich. App. 566, 434 N.W.2d 433 (1988), app. aon. n.

G33. Whiets, STZ CORE cok ee cn keweenes ap” x eat

Lynch v. United States. 292 U.S. 571 (1934).........9, 10

McArthur v. Smallwood, 281 S.W.2d 428 (Ark. 1955) ..... 7

Methodist Hospital of Brooklyn v. State Insurance

Fund 676 W.B.286 306. C.F. TRO oc ccc een scenascees 7

Minty v. Board of State Auditors, 336 Mich. 370, 58

he 8. £i, tere reer err er ee yr 6

Moran vy. State, 534 P.2d 1282 (Ok. 1975)....... 7

Senske v. Fairmont & Waseca Canning, 45 N.W.2d

7 5; @, . ) ewer er 7

State ex rel. Williams v. Industrial Commissioner of

Ohio. 196 ME. 36) CO TOBE cc ica cc cscuncss: 7

State v. McMillian, 136 P. 108 (Nev. 1913).. A

State v. Musgrave, 370 P.2d 778 (Idaho 1962) .......... 7

iil

INDEX OF AUTHORITIES - Continued

Page

State v. Olson, 175 N.W. 714 (N.D. 1919).............. 7

United States Trust v. New Jersey, 431 U.S. 17, 97

ee BOE, Pe RecA SE CF EE Ee can cee ence cenrass 6

Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449

ts eae kah'e be hae AWA eR A SOs OW OS 9, 10

STATUTES

RS oy CE a ne ea ear |

SE stig es 0) a Sra ara a ear a aa |

1969 Mich. Pub. Acts 317, §701........... Sei ay ee ued |

Sg ee ae. a | ee rr 2. 3, 4

re er Se ee ee is ec bea e eeu wews 5 pa ecee

rr rn ee ee PS Oe ccd tw cewn twee eee cere es 2

Mich. Comp. Laws §418.701(1)...............---06.. 1, 4

Mich. Comp. Laws §418.701(3)......... oi neta are) ae

Mich. Comp. Laws §418.701a(4) & (5)...............-. 9

OIG. Com. Laws S4EG.7TEE . www. cc cee cee ees 3

Mich. Comm. Laws $415.715 .. 2.22... ccc cece ree eeees 4

Mich. Comp. Laws §418.746 .............. . a & 9, 80

Mich. Comp. Laws §418.746(1)(h) & (1)............-.-. 5

STATEMENT OF QUESTIONS

PRESENTED FOR REVIEW

The Petitioners (“Policyholders”) incorporate by refer-

ence the Statement of Questions Presented for Review as

contained in their Petition for Writ of Certiorari.

JURISDICTION

The parties agree that this Court has jurisdiction to con-

sider the Petition under Cox Broadcasting Corp v. Cohn, 420

U.S. 469, 479-80 (1975), and 28 U.S.C. §1257(a). It should be

noted that prior to the 1988 amendment to 28 U.S.C. §1257(c),

this case would have been reviewable as a matter of right.

STATUTORY PROVISIONS INVOLVED

The State of Michigan has never put any of its money

into the Accident Fund, nor have its funds been at risk in

operating the Fund:

Sec. 701.(1) . . . The State shall not be liable or

responsible for the payment of claims for compen-

sation under the provisions of this Act beyond the

extent of the sums so collected and received.

1969 Mich. Pub. Acts 317, §701, being Mich. Comp. Laws

§418.701.

Prior to the effective date of the transfer of the Accident

Fund, which triggered its repeal under 1993 Mich. Pub. Acts

98, §2, the Accident Fund’s enabling legislation required

Accident Fund revenues to be deposited in a revolving fund to

be used exclusively for the benefit of the policyholders:

Sec. 746.(1) The Executive Director shall maintain

a revolving fund derived from premiums collected

from members of the fund. The revolving fund shall

be used exclusively for the following purposes:

(a) Payment, handling and servicing of claims.

(b) Payment of fees imposed by this Act or as

otherwise provided by law.

(c) Insurance expenses, including agent's

commissions.

+

(d) The operating budget of the fund.

(e) Investments.

(f) Transactions with the Michigan Worker's

Compensation Placement facility.

(g) Reinsurance.

(h) Refunds of premiums or applicant's funds.

(i) Dividends and similar payments to poll-

cyholders.

1990 Mich. Pub. Acts 157, §1; Mich. Comp. Laws §418.746

(West Supp. 1994).

Section 746 was repealed effective on the date the Acci-

dent Fund was sold, which was December 28. 1994:

Sec.701.(3). Except as otherwise provided in this

Chapter, after the effective date of the transfer, the

State Accident Fund shall not transact insurance in

this State. and all operations of the State Accident

Fund, pursuant to former sections, 705, 71a, 712,

714. 715, 722. 723, 725, 735, 742, 745, 746, 755,

and 756 shall cease .

1993 Mich. Pub. Acts 198, §1; Mich. Comp. Laws

§418.701(3).

STATEMENT OF FACTS

In reciting case history, Michigan omits an important

feature of the previous suit between the Policyholders and the

State of Michigan, the Baerwaldr case,' and distorts the

premise of the Michigan Court of Appeals’ Decision in /nsur-

ance Commissioner.2 Both efforts are designed to unfairly

discredit Michigan precedent preceding the inconsistent

December 30, 1994 Decision, which is up for review.

In truth, in 1982, two years before the Consent Decree

was executed, the Federal Court for the Western District of

Michigan issued summary disposition in Baerwaldt establish-

ing that the Accident Fund was a Trust, that the Policyholders

| Accident Fund v. Baerwaldt, 579 F. Supp. 729 (W.D. Mich. 1984)

2 Insurance Commissioner v. Advisory Board, \73 Mich. App. 566, 434

N W.2d 433 (1988). app. den., 433 Mich. 872 (1989)

3

were its beneficiaries, that its assets were not available for the

general state purposes, and that they were not subject to

appropriation by the Legislature:

The assets of the Accident Fund are held in Trust by

the Treasurer of the State of Michigan for the bene-

fit of the employer insureds. Consequently, these

monies are not available for general or other pur-

poses of the State of Michigan, nor are they subject

to appropriation by the Legislature.*

Michigan did not appeal this judgment. Accordingly, the

cases cited by the State for the proposition that consent

judgments are nonbinding since they are nonadjudicated dis-

positions are themselves inapposite.

Similarly, while the State acknowledges that the Michi-

gan Court of Appeals held that the Accident Fund was a Trust,

whose assets the State could not use for its own purposes,? it

implies that /nsurance Commissioner was no longer good law

in 1994, arguing that it was dependent on the “neither more

nor less than self-supporting” language of Section 711,°

which was subsequently repealed by 1990 P.A. 157 (“Act

157"). The State is wrong.

While the Court of Appeals in /nsurance Commissioner

cited the language of Section 711 as part of its rationale, the

heart of its reasoning lie in the fact that the State had no

lability for the Accident Fund's operation and, therefore,

could not profit from its activities:

We interpret this provision to mean that just as the

State does not subsidize the Accident Fund, neither

can it receive any “profits” from the fund to expend

for other purposes... °

Although the self-sustaining status of the Accident Fund

and the prohibition against a state subsidy may be inferred

from the self-sustaining obligation of Section 711, they were

* $45 F. Supp. at 1037

+ 173 Mich. App. at 588

+ Mich. Comp. Laws §418.711

© 177 Mich. App. at 588.

4

expressly mandated by Section 701(1),’ which was not

repealed by Act 157. In fact, Act 157 strengthened this

feature of the Fund by requiring that the Accident Fund's

insurance policies express, on the first page, in 10 point type,

that the State of Michigan is not liable for the Accident Fund

if the Fund is declared insolvent.*

The Accident Fund's obligation to stand alone, indepen-

dent of the State’s financial resources, was further fortified by

Act 157, which required the Fund to pay fees to local units of

government and to the State equivalent to the property taxes

or state income, sales, and single business taxes, it would

have paid if completely private.”

It defies logic to argue that Act 157, which made the

Accident Fund more like a private carrier, was intended to

emasculate Insurance Commissioner, dissolve the Fund’s pre-

viously existing “Trust” character, or to silently declare, for the

first time, that the Accident Fund’s assets are State property.

REASONS FOR GRANTING THE PETITION

A. Michigan’s Unconstitutional Conversion is Novel

and Should be Firmly Rejected by this Court

Failing to find a single United States Supreme Court

opinion that expressly prohibits takings by indirection, Michi-

gan argues that this Court has indirectly prohibited indirect

taking through inverse condemnation case law. This oblique

argument misses the point.

The essence of inverse condemnation is excessive gov-

ernment regulation that effectively denies the property owner

of property benefits. Even if inverse condemnation can be

considered a species of indirect taking, Michigan's actions

here are not analogous to an inverse condemnation. Michigan

is not acting here in a regulatory capacity, nor is it merely

7 Mich. Comp. Laws §418.701(1)

8 1990 Mich. Pub. Acts 157, §1.

9 Mich. Comp. Laws §418.713.

5

encroaching on the Policyholder’s exclusive rights to the

Accident Fund Revolving Fund.

Instead, Michigan is boldly confiscating privately dedi-

cated funds for general public operating purposes through

legislative fiat. The intention of the State is clear and direct.

The means are indirect and novel for a public entity: Micht-

gan is statutorily committing an “old-fashioned” conversion.

Michigan’s defense is limited to why the Policyholders

should not receive the $291 million sale proceeds. Michigan's

complete failure to justify its own entitlement to the sale

proceeds of assets developed without its money, without its

risk and after deducting fees and costs for every State service

provided is revealing. The very fact that Michigan Legislature

had to pass a statute declaring that it owns the proceeds is a

clear admission that before the sale it did not own the Acci-

dent Fund’s assets. Under Michigan law, the Legislature is

presumed never to pass useless legislation, and when it

amends a statute, it is presumed to intend a change.'° What

this means is that if the State owned the Accident Fund's

assets, it would not have had to pass a Statute saying that it

owned the proceeds from their sale.

Equally telling is that Michigan does not contest that

prior to the sale, it could not have directly taken the $150

million cash surplus in the Accident Fund Revolving Fund at

the sale closure. In this same vein, Michigan does not deny

that the Policyholders were the exclusive beneficiaries of this

surplus and were the only parties capable of receiving a

distribution of this money through dividend or policy refunds

under Section 746(1)(h) and (i).!! These tacit admissions are

tantamount to a concession that the Policyholders have a

contractual based property right in at least this portion of the

disputed amount.

The State of Michigan forgets what even its Supreme

Court superficially recognized, namely, that in situations where

a contract is enabled by a statute, a contractual property right

10 English v. Saginaw County Treasurer, 81 Mich. App. 626 (1978).

1! Mich. Comp. Laws §4!8.746(1)(h) & (i).