Illinois Supreme Court Holds Board Can't Declare Enhanced Pension Forfeited

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Although the question presented in Prazen v. Shoop was limited to the field of public pensions, the case presented interesting aspects of fiduciary law and statutory construction as well. The question in Prazen was whether the Illinois Municipal Retirement Fund – a board with fiduciary duties under the Pension Code – had the authority to declare a portion of the plaintiff’s pension, his “early retirement incentives” (ERI), forfeited on the grounds that the corporation he created to take over his position was a mere “guise” for evading the return-to-work provisions of the statute. In an opinion by Justice Robert R. Thomas for a five-Justice majority, the Illinois Supreme Court held Friday morning that the Fund board had no such authority. Our detailed summary of the underlying facts and administrative and lower court rulings in Prazen is here. Our report on the oral argument is here.

Three years before his retirement, plaintiff – superintendent of the city’s electric department – formed a business in partnership with the then-mayor of his city to redevelop real estate. He intended to perform the necessary electrical upgrades and modifications through his as-yet-unincorporated business, Electrical Consultants, Inc. (“ECL”).

Two weeks before plaintiff’s 1998 retirement from the electric department, he incorporated ECL. A few days later – and still ten days before his retirement – ECL entered into a contract with the City. The contract provided that on January 1, 1999 – the day after plaintiff’s retirement – ECL would take over management and supervision of the electric department. The agreement was signed by plaintiff’s business partner, the Mayor, on behalf of the city. The agreement provided that the annual fee to ECL would be around $7,000 more than plaintiff’s final salary at the time of his retirement. The initial three-year contract was extended by one-year riders eight times following its initial execution.

The potential problem here is Section 7-141.1(g) of the Pension Code: “An annuitant who has received any age enhancement or creditable service under this Section and thereafter accepts employment with or enters into a personal services contract with an employer under this Article thereby forfeits that age enhancement and creditable service . . .”

Plaintiff repeatedly sought assurances from the Illinois Municipal Retirement Fund Board that his contract with the city didn’t imperil any part of his pension. His first letter was dated more than two months before ECL was incorporated and he retired. In that letter, an IMRF representative allegedly told him that he could contract with the city as an independent contractor, or the city could contract with a corporation like ECL, even though ECL employed the plaintiff. Four years later, the IMRF Board supposedly told plaintiff’s attorney that everything in the 1998 letter still applied. In late 2002, an IMRF representative allegedly said that a retiree receiving ERI benefits could work for a corporation contracting with the city as long as the corporation wasn’t just a guise to avoid the pension regulations. The representative suggested that if ECL worked for some member of the public rather than just the city, everything should be fine.

But in late 2010 – about eighteen months after plaintiff had finally terminated ECL’s contract with the city and completely retired – the IMRF suddenly changed its mind, informing plaintiff that his contract with the city had violated Section 7.141.1(g) after all. The IMRF benefit review committee confirmed the decision, holding that ECL was a “guise” to evade the return-to-work provisions of the statute and ordering the plaintiff to repay his ERI benefits. The IMRF Board of Trustees affirmed the committee determination, pointing to several facts, including the timing of ECL’s creation and dissolution, the timing of the agreement with the city, the de minimis nature of the work ECL did for anyone other than the city, the fact that plaintiff, his wife and daughter were the only employees of ECL, and the fact that plaintiff was the only employee qualified to do what the contract required. The Circuit Court affirmed. But the Appellate Court (Fourth District) reversed, holding that the Board of Trustees had no authority to forfeit plaintiff’s ERI benefits on such a basis.

The Supreme Court agreed with the Appellate Court. Before the Court, the Board argued that “employment with” and “personal services contract with” in Section 7.141(g) were ambiguous – even though the Board never held that plaintiff had run afoul of either of these limitations. The Supreme Court majority found both terms sufficiently clear. The majority concluded that plaintiff had not accepted employment with the city following his retirement, since he was an employee of ERI. The Court also found that the contract was not a personal services contract, since it was between two corporations, and did not identify any individual as being material to its performance. The Court also pointed out that even though only plaintiff was qualified to perform the necessary services among ERI employees, nothing in the contract required that plaintiff be the one carrying out ERI’s functions. In the alternative, the Board argued that its general authority to make “administrative decisions on participation and coverage” under the Fund was a sufficient basis for its decision, but the majority found that the Board’s power could not be stretched so far as to permit the Board to create a third, unenumerated grounds for forfeiture which the legislature had never mentioned. Since the Court found no evidence that the legislature intended to bar arrangements such as the one plaintiff entered into with the city, the plaintiff’s contractual relationship could not be grounds for forfeiture.

Justice Charles E. Freeman dissented, with Justice Anne B. Burke joining. Justice Freeman summed up his position succinctly: “[U]nder the majority’s decision the Board, a fiduciary, had no authority to perform its fiduciary function.” Justice Freeman pointed out that the city had paid ECL slightly over one million dollars during the life of the contract, while the plaintiff continued to receive his enhanced ERI pension. “[T]he Board determined that plaintiff committed a fraud against the IMRF,” Justice Freeman wrote. Given that the Board had fiduciary responsibilities under 40 ILCS 5/1-109 of the Pension Code, the Board necessarily had the authority to respond appropriately under such circumstances, Justice Freeman concluded.

 

Topics:  Forfeiture, Pensions, Retirement Plan

Published In: Business Organization Updates, Business Torts Updates, Civil Procedure Updates, General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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