Metcalfe v. State

         Appeal from the Superior Court Nos. S-15528/S-15557 of the State of Alaska, First Judicial District, Juneau, Trevor Stephens, Judge.

          Jon Choate, Choate Law Firm LLC, Juneau, for Appellant.

          Kevin T. Wakley, Assistant Attorney General, and Michael C. Geraghty, Attorney General, Juneau, for Appellee.

          Before: Fabe, Chief Justice, Winfree and Maassen, Justices. [Stowers and Bolger, Justices, not participating.]

          OPINION

          WINFREE, Justice.

          I. INTRODUCTION

         We previously have held that the legislature cannot diminish a state employee's accrued retirement benefits.^[1] We also previously have held that if the legislature diminishes retirement benefits, those affected may choose between their existing benefits and the new benefits.^[2] The primary issue in this case is whether a breach of contract damages claim can arise when existing retirement benefits are diminished. We hold there can be no such claim. The secondary issue is whether a claim for declaratory and injunctive relief against the diminishment of existing retirement benefits is subject to a statute of limitations defense. We hold it is not. Here the superior court dismissed a contract damages claim and a claim for declaratory and injunctive relief based on a statute of limitations defense. We affirm dismissal of the contract damages claim on the alternative ground that no such claim exists; we reverse and remand the declaratory and injunctive relief claim for further proceedings.

         II. FACTS AND PROCEEDINGS

         Peter Metcalfe was employed briefly by the State in the early 1970s and contributed to the Public Employees' Retirement System (PERS). In 1981 Metcalfe took a refund of his PERS contributions. Under a statute in effect during Metcalfe's employment and when he took his PERS refund, if Metcalfe later secured State employment and returned his refund to PERS with interest, he was entitled to reinstate at his prior PERS service tier and credit.^[3] But in 2005 the legislature repealed that statute, leaving a five-year grace period for regaining State employment and reinstating to a prior PERS status.^[4] The State then sent notice to former PERS members that "[d]efmed benefit members who do not return to covered employment before July 1, 2010 will forfeit their defined benefit tier and all service associated with the refund."

         In 2012 Metcalfe inquired about his PERS status. He was informed that even if he were to regain State employment, he could not reinstate to his prior PERS service tier and credit because AS 39.35.350 had been repealed in 2005 and the grace period for reinstatement had ended in 2010. In June 2013 Metcalfe brought a putative class action lawsuit against the State, alleging that the 2005 legislation: (1) violated article XII, section 7 of the Alaska Constitution;^[5] (2) deprived a class of former employees of their vested interest in the contractual "benefit to be reinstated to state employment at the tier level they previously held";^[6] and (3) effectively breached the class members' employment contracts. Metcalfe sought damages, but he also asked for a seemingly mutually exclusive declaratory judgment that the State must comply with former AS 39.35.350.^[7] The class was never certified.

         The State moved to dismiss Metcalfe's lawsuit for failure to state a claim upon which relief could be granted, ^[8] arguing that: (1) Metcalfe did not have standing to sue because article XII, section 7 of the Alaska Constitution protects only PERS members and Metcalfe no longer was a PERS member after he took a refund of his contributions; (2) Metcalfe's claim was not ripe because he had not secured reemployment with the State and thus failed to meet former AS 39.35.350's PERS reinstatement requirements; and (3) the contract statute of limitations barred Metcalfe's claim because the legislation was passed in 2005 but Metcalfe did not sue until 2013.^[9]The superior court tentatively rejected the argument that Metcalfe failed to state a claim upon which relief could be granted, rejected the argument that Metcalfe's claim was not ripe and that he lacked standing, but dismissed Metcalfe's claim as time barred.^[10]

         Metcalfe appealed the superior court's dismissal of his claim based on the statute of limitations. The State cross-appealed the superior court's ruling that Metcalfe's claim was ripe and argued that the superior court's decision could be upheld on the ground that Metcalfe lacked standing to sue. After oral argument we requested supplemental briefing primarily addressing two questions: (1) can a claim for diminution in value of a contract right exist in this context, and (2) can a statute of limitations defense apply to a claim for declaratory and injunctive relief prohibiting the enforcement of a statute alleged to be in violation of article XII, section 7?

         III. DISCUSSION

         A. Arguments In The Superior Court

         Metcalfe's complaint contained a lengthy recitation of facts and law asserting that the 2005 legislation violated the Alaska Constitution. But Metcalfe's claim primarily was that he was entitled to damages because the 2005 legislation breached his PERS contract. A single reference to declaratory judgment was included in the ultimate prayer for relief, essentially asking the court to order the State to honor former AS 39.35.350.^[11]

         When the State moved to dismiss Metcalfe's claim, Metcalfe affirmatively asserted that his "claim is for breach of contract" and that it has "significant value, " without any reference to a separate declaratory judgment that the State must honor former AS 39.35.350. Metcalfe argued that former AS 39.35.350's provision for future reinstatement at previous PERS service and tier levels was a constitutionally based contract right that - despite his withdrawal from the PERS system - had not been relinquished, giving him standing to sue the State for impairment of that right. He contended that the State had breached the contract on June 30, 2010 when former AS 39.35.350 finally was extinguished based on the earlier 2005 legislation. He reasoned that the contract claim became ripe on July 1, 2010, and therefore that his June 27, 2013 lawsuit was within the three-year statute of limitations. Although acknowledging that "the value of [his contract right] may seem abstract, " Metcalfe argued that projected State savings from the statutory change, in excess of $100 million per year for medical insurance premiums alone, "grounds the financial value firmly in fact."

         The superior court made a "tentative" determination that Metcalfe had a vested reinstatement right under former AS 39.35.350, but noted need for further briefing on this issue if the case were to proceed. The court then concluded that this assumed vested right gave Metcalfe standing to sue and that, given the allegation that the 2005 legislation breached Metcalfe's PERS contract and diminished the assumed vested right's value, his claim was ripe. The court also noted that to the extent Metcalfe sought declaratory relief, it was for the court to determine whether the State had breached his PERS contract. But the court concluded that Metcalfe's breach of contract claim accrued in 2005 when former AS 39.35.350 was repealed - not at the close of the five-year grace period - because the alleged lifetime reinstatement right had been diminished immediately when the 2005 legislation limited it to the five-year grace period and Metcalfe reasonably should have discovered the ability to bring his claim then. The court noted that Metcalfe had at least constructive notice of his claim in 2005 and had not argued either that he did not have notice or that the statute of limitations should be tolled. The court therefore dismissed Metcalfe's claim as barred by the three-year statute of limitations.

         Metcalfe then filed a reconsideration motion asserting that the superior court had overlooked a critical proposition of law. Metcalfe argued specifically that the 2005 legislation actually had not been a breach of his contract but rather was a repudiation of that contract allowing him to sue either when he chose to assert the breach or when the State's performance was due. Metcalfe's new legal theory, based on Restatement (Second) of Contracts § 250^[12] and Franconia Associates v. United States, ^[13] was different from his pleaded allegations, his opposition to the State's dismissal motion, and his prior litigation position that the repeal of former AS 39.35.350 was a fait accompli supporting a contract damages claim. And Metcalfe still made no reference to declaratory judgment in connection with his new theory.

         The State opposed reconsideration, responding that Metcalfe's repudiation argument was inconsistent with his claim that "his rights were diminished immediately upon the enactment of SB 141." (Emphasis in original.) It also argued that Franconia was distinguishable and that Metcalfe's new repudiation argument was at odds with his position that the 2005 legislation had devalued his contract right and caused him immediate harm.

         The superior court denied Metcalfe's reconsideration motion. The court concluded Franconia was not controlling and was distinguishable because it did not involve retirement system contract rights, and noted the majority federal rule that a claim for wrongful changes to a retirement program accrues when a clear repudiation of retirees' rights is made known. More importantly the court did not believe that the 2005 legislation was a "mere anticipatory repudiation":

[I]n any event, the court is not persuaded that the passage of [the 2005 legislation] constituted a mere anticipatory repudiation. The gist of Mr. Metcalfe's claim is that [the 2005 legislation] violated [a]rticle XII, § 7. Such a violation would have occurred when [the 2005 legislation] was enacted as [it] would have immediately diminished an accrued retirement benefit. Moreover, if viewed in conventional contract terms, if Mr. Metcalfe has a state Constitution based retirement benefit accruing at the time of his initial State hire to repay his PERS contribution and be reinstated to his former retirement tier if ever rehired by the State at any time, [the 2005 legislation] breached the contract when enacted as it immediately removed this "any time" right. This view is consistent with Mr. Metcalfe's own arguments with respect to the State's lack of ripeness and lack of standing claims. To the extent that Franconia holds otherwise the court does not find it persuasive. (Footnote omitted.)

         The superior court stated that its order "appears to conclude this litigation, " and it concurrently entered a separate final judgment. Nothing in the record reflects that Metcalfe challenged the final judgment that concluded the superior court litigation; Metcalfe did not argue that he had any claims not yet litigated, such as a claim for a declaratory judgment that the State must honor former AS 39.35.350.

         B. Arguments On Appeal

         Metcalfe initially argued in his briefing to us that two theories prevent his contract damages claim being barred by the statute of limitations. One is that through the 2005 legislation the State violated its contractual obligation not to diminish or impair his reinstatement right without an equivalent offsetting benefit; this resulted in a contract breach on June 30, 2010, the final grace period day for reinstatement under former AS 39.35.350. The other is that the State has repudiated but not yet breached its contractual obligation to reinstate Metcalfe upon his future reemployment and repayment of his refunded PERS contributions - and that this repudiation allows him to sue for damages any time before the State's performance otherwise would be due and to seek contract damages even though he has not been rehired by the State (or tendered repayment of his withdrawn PERS contributions). But he nonetheless characterizes the damages for each contract claim in the same manner: the diminution in value of his alleged lifetime PERS reinstatement rights under former AS 39.35.350.

         The phrase "declaratory judgment" cannot be found anywhere in the argument sections of Metcalfe's opening and reply briefs. He did not contest the superior court's determination that his request for declaratory relief was only a reiteration of his contention that his contract had been breached and he was entitled to damages. Nor did he argue that the superior court erred by not entering a declaratory judgment that the State must honor former AS 39.35.350.^[14]

         On the other hand the superior court expressly noted that Metcalfe was bringing a claim for declaratory relief regarding the 2005 legislation. The court determined that Metcalfe had standing to seek declaratory relief because he presented an actual controversy ripe for decision-his claim was based on an asserted constitutional interest already subject to diminishment. And in its cross-appeal the State argued that if the superior court erred in its statute of limitations ruling, we should affirm the dismissal of Metcalfe's lawsuit because he did not have standing to bring a claim for declaratory judgment and his claim was not ripe for declaratory relief. Metcalfe disputed the State's arguments but his response did not focus directly on its argument against declaratory relief.

         In response to our order for supplemental briefing, Metcalfe directed us to article XII, section 7 cases in which we have either permitted a breach of contract claim alongside a claim for declaratory and injunctive relief or applied contract-law principles in deciding the case. Metcalfe characterized his claim for damages and declaratory and injunctive relief as seeking remedies for two separate harms: a remedy at law for one harm, a breach of contract and resulting injury occurring while the 2005 legislation has been in effect; and an equitable remedy for the other harm, a declaratory and injunctive relief prohibiting future enforcement of the 2005 legislation. Metcalfe asserted that no statute of limitations applies to his claim for declaratory and injunctive relief because such a claim seeks to prevent a future harm. The State countered that even if Metcalfe's declaratory and injunctive relief claim could survive dismissal based on the statute of limitations, the claim could not survive the State's other defenses. Both parties also urged us to decide the actual merits of Metcalfe's statutory diminution claim if we determine the claim was dismissed in error.

         C. Decision

         1. Metcalfe has no right to diminution of value damages based on a claim that the 2005 legislation was a breach of the PERS contract.

         We have not previously recognized a constitutional claim for damages for a violation of article XII, section 7.^[15] In Hammond v. Hqffbeck^[16]we interpreted article XII, section 7 to mean that members' retirement system rights accrue upon employment and enrollment^[17] and noted our view that the protected benefit rights include "requirements for eligibility."^[18] We recognized that retirement systems require some flexibility for successful operations, holding that the constitution does not preclude modifications to system rights after employment and enrollment, but that it does "require that any changes in the system that operate to a given employee's disadvantage must be offset by comparable new advantages to that employee."^[19]

         The merits of and remedies in Hammond wo, instructive. The case involved amendments to PERS eliminating distinctions between public safety employees and other PERS participants, effectively reducing certain occupational disability and death benefits and increasing certain eligibility requirements for occupational pension benefits for the public safety employees.^[20] A public safety employees' union sued, alleging the PERS changes were unconstitutional; the superior court agreed and prospectively enjoined the changes in their entirety.^[21] The State argued that any benefit diminishment had been offset by other advantages from the PERS amendments and that the changes were constitutionally sound.^[22]

         We noted that our task on appeal was to determine whether the PERS modifications had disadvantageous effects on the public safety employees and, if so, to weigh those disadvantages against any advantages that may have accompanied them.^[23] We concluded that the superior court correctly determined that the PERS modifications were an effective diminishment of vested system rights and violated article XII, section 7 as to those public safety employees adversely affected.^[24] But we explained that the ultimate determination whether vested rights have been diminished must be made on a case-by-case basis.^[25] We specifically concluded that the superior court had erred by prospectively invalidating the PERS modifications when there would be no constitutional infirmity in applying them to persons employed and enrolled after their effective date.^[26]We also noted that persons employed before the PERS modifications' effective date who wished to be covered by the new system could elect to do so.^[27] We held that the PERS modifications were only unconstitutional in relation to persons employed before the modifications' effective date who chose to receive benefits under the system in effect at the time they were hired.^[28] Thus the available remedy for the modifications' constitutional infirmity was an in-system benefits choice.^[29]

         More recently, in McMullen v. Bell we reiterated both that under the constitution the legislature may not impair accrued state retirement system benefits and that benefit rights vest on employment and enrollment.^[30] Further:

An employee's vested benefits arise by statute, from the regulations implementing those statutes, and from the division's practices. Where the state has changed the benefits system after an employee's enrollment in the system, the employee may choose to accept the new system or may opt to keep the benefits in effect at enrollment.^[31]

         This suggests Metcalfe's proper remedy is allowing him to keep the retirement benefits available to him-whatever those benefits might be-not breach of contract damages.

         Although we have used contract-law principles to decide article XII, section 7 cases^[32] and have even affirmed a related breach of contract finding in a case, ^[33] breach of contract damages are not an appropriate remedy for the alleged constitutional violation here: In Lowell v. Hayes we declined to allow "a constitutional claim for damages, 'except in cases of flagrant constitutional violations where little or no alternative remedies are available.' "^[34] We later stated that declaratory and injunctive relief are appropriate remedies with respect to potentially unconstitutional statutes if the circumstances of the case do not meet the exception described in Lowell v. Hayes and damages are unavailable.^[35] Our general reluctance to allow a constitutional claim for damages where other remedies exist, viewed in ...