The Appellate Strategist

Insights on appellate issues, trial consultations, and evaluating appeals

Illinois Supreme Court Holds Guaranty Fund’s Indemnity Payments Not Limited By Statutory Cap

By Kirk Jenkins on Posted in Illinois

In Illinois (as in every other state), when an insurance company becomes insolvent and an order of liquidation is entered, the Illinois Insurance Guaranty Fund steps in and pays claims that the insolvent carrier could not pay. The Fund’s liability is capped at $300,000, but that cap isn’t applicable to “workers compensation claims.” Skokie Castings, Inc. v. Illinois Insurance Guaranty Fund presented an interesting variation on that rule. What happens when the insolvent carrier is the excess insurer, and the Fund’s liability is for contractual indemnity to the employer, rather than making direct payments to the injured employee? On Friday morning, a divided Illinois Supreme Court held that the result was the same – the claim was still one for workers’ compensation, and the statutory cap didn’t apply.

In Skokie Castings, the employer had chosen to partially self-insure against its workers compensation exposure, carrying excess coverage only in case of major losses. According to the excess policy, the insurer was obligated to indemnify the employer for any sums paid above a $200,000 threshold.

One of the employer’s employees was seriously injured in 1985; she was ultimately declared permanently disabled by the Commission and awarded lifetime workers’ comp benefits. The employer paid up to the $200,000 self-insured threshold, at which point the insurer began paying under the policy. It did so until it became insolvent, went into receivership and was liquidated. The Fund then took over, but once it had paid about $250,000 on the claim, it notified the employer that it believed that the liability was subject to the $300,000 statutory cap set on Fund obligations by Section 537.2 of the Illinois Insurance Code (215 ILCS 5/537.2).

When the Fund reached the $300,000 cap and refused to make further payments, the employer filed suit, seeking a declaratory judgment that the statutory cap was inapplicable and that the Fund had improperly terminated payments. The Circuit Court entered summary judgment in the employer’s favor, finding that the Fund’s liability to the employer was a “workers’ compensation claim,” making the cap inapplicable. The Appellate Court affirmed.

The Supreme Court agreed. Writing for a five-Justice majority, Justice Lloyd A. Karmeier found that it was “indisputable” that the covered claims at issue “arose out of and were within the coverage of policies which had been purchased to help insure” the employer “against liability for workers’ compensation awards.” The claim at issue was therefore a “workers’ compensation claim” under the statute, and was exempt from the statutory cap.

The Fund had argued on appeal that a “workers’ compensation claim” was limited to a claim for benefits brought directly by an injured employee. The Court disagreed. A workers’ compensation claim did not arise under an insurance policy, the Court pointed out, but rather under the Workers’ Compensation Act; it was made to the Workers’ Compensation Commission, not the employer or the employer’s insurer. Since the Fund’s obligations only extended to covered claims arising under insurance policies issued by insolvent insurers, the term “workers compensation claim” in the statute could not refer to claims for benefits directly made by workers. Nor did it matter, the majority found, that the policy at issue was for excess only, or that the excess carrier might be reimbursing the employer, rather than paying the employee.

The majority was unconcerned that potentially unlimited liability in similar situations might “place an undue burden on the Fund’s resources.” The majority pointed out that an insurer’s maximum assessment for any given year was subject to a 2% cap. If the Fund’s obligations for a given year could not be satisfied out of the total funds available through assessments, payment was simply delayed until enough money became available.

Chief Justice Kilbride dissented. The Chief Justice agreed with the majority’s initial steps: the case involved two distinct claims, the employee’s statutory claim for benefits filed with the Commission, and the employer’s contract-based claim, first against its excess carrier, and later against the Fund. Only the latter could possibly be a “covered claim” within the meaning of the statute. Therefore, the issue was the nature of that contractual claim by the employer against the Fund.

That claim, the Chief Justice found, was clearly one for indemnity only. The policy required that the employer submit a periodic statement to the excess insurer showing payments actually made by the employer, and the insurer would then reimburse the employer for those payments. The excess insurer never took on the obligation to pay the employee’s workers’ compensation claim, so the Fund didn’t have that obligation either. Therefore, the “covered claim” at issue wasn’t a workers’ compensation claim, and the statutory cap applied.

The Chief Justice disputed the majority’s view that any burden on the Fund was unimportant as well.   First, the Chief predicted that the majority’s holding would likely increase demand for cheaper excess-only workers’ compensation coverage, placing a greater potential burden on the Fund’s resources. Second, the Fund would be required to increase annual assessments, a cost increase which would be passed along to insureds in the form of higher premiums. Once the Fund’s obligations reached the 2% limit on annual assessments, payments on policy obligations would have to be stretched out (a fact the majority acknowledged). But if the Fund’s payments were “workers’ compensation,” such delays were contrary to the legislative purpose of securing prompt compensation for workers’ injuries, the Chief Justice noted.

Justice Robert R. Thomas filed a separate dissent. According to Justice Thomas, the purpose of exempting workers compensation claims from the statutory cap for Fund obligations was to ensure that injured workers receive all of the benefits to which they are entitled. “I simply cannot see how that public policy purpose is implicated in this case,” Justice Thomas wrote. Like the Chief Justice, Justice Thomas concluded that the key point in resolving the case was that the excess carrier’s liability – inherited by the Fund – was one to indemnify the employer, not to directly pay the employee. If the employer simply stopped making the payments, it would have no claim against the insolvent insurer or the Fund, since the policy was limited to payments actually made.

Illinois Supreme Court Strikes Down Amendment to Illinois Public Labor Relations Act

By Kirk Jenkins on Posted in Illinois

As I mentioned earlier this week in discussing Performance Marketing, the Illinois Supreme Court has been a somewhat cool audience over the past ten years for constitutional claims. That’s why it was mildly surprising late last week to see the Court strike down two statutes in a single morning. The first, of course, was Performance Marketing, in which the Click-Through Act fell to a challenge under the Supremacy Clause. The second was The Board of Education of Peoria School District No. 150 v. Peoria Federation of Support Staff, in which a six-Justice majority, led by Justice Lloyd A. Karmeier, voided the 2010 amendments to the Illinois Public Labor Relations Act (“IPLRA”). Our detailed summary of the facts and lower court rulings is here. Our report on the oral argument is here.

The defendant union had been first certified to represent the 26 full-time and part-time security officers employed by the plaintiff in 1989 by the Illinois Educational Labor Relations Board (“IELRB”), which administers the Illinois Educational Labor Relations Act (“IELRA”). But then came the 2010 amendments to the IPLRA, which removed “peace officers” employed by a “school district” in “its own police department in existence on the effective date of this amendatory Act” from the IELRA and placed them within the IPLRA. Why does it matter? Under the IELRA, the officers would have the right to strike. Under the IPLRA, the Board would not have the right to impose its final offer unilaterally, and labor disputes would go directly to interest arbitration. Since the officers’ union was so small – too small to have that much leverage in a strike – the union purportedly wanted interest arbitration rather than a right to strike.

But here’s the problem: on the day the 2010 amendments became effective, only one school district in Illinois employed its own police officers – the plaintiff. And since the statute appeared to open and close the affected class all on a single day, it seemed that the plaintiff was the only entity which would ever be subject to the Act. And the Illinois Constitution bans “special legislation” any time a “general law is or can be made applicable.”

The plaintiff school district sued the officers’ union, the IELRB and the Labor Relations Board (“ILRB”), which administers the IPLRA, seeking declarations that (1) the 2010 amendments were unconstitutional special legislation; and (2) the IELRA governed any labor disputes with the union, not the IPLRA. The Circuit Court granted the motion to dismiss filed by the two defendant Boards, holding that the amendments were not unconstitutional. The Appellate Court unanimously reversed, holding that the plaintiffs had made out a sufficient case that the amendments were unconstitutional to withstand a motion to dismiss (but not going the rest of the way and actually voiding the amendments).

The Supreme Court unanimously affirmed the Appellate Court and voided the 2010 amendments. The fatal problem, the Court held, was that even though there was nothing unique about the statute’s description of entities subject to its provisions – a school district employing its own security officers – the statute nevertheless closed the affected class on the date it became effective. School districts might opt to employ their own security officers in the future, and it was irrational not to extend the benefits of interest arbitration to them, the Court found. Since a “general law” could have been enacted, the 2010 amendments were necessarily void.

Chief Justice Kilbride added a short special concurrence, emphasizing that nothing about the Court’s opinion should be read as relaxing the Court’s holdings in a line of earlier authorities that the two boards have exclusive jurisdiction to hear disputes within their respective statutory schemes, subject to review only at the Appellate Court, not in the trial courts.

Illinois Supreme Court Bars Action Against Deceased Defendant

By Kirk Jenkins on Posted in Illinois

On Friday morning, the Illinois Supreme Court pointed out a trap for the unwary in an unexpected place – what happens if a complaint is filed, but unbeknownst to the plaintiff, the defendant had died several months earlier? In Relf v. Shatayeva, Justice Lloyd A. Karmeier, writing for a six-Justice majority, reversed the Appellate Court’s judgment and held that the action was barred by plaintiff’s failure to substitute the decedent’s personal representative before the expiration of the statutory period. Our detailed discussion of the underlying facts and lower court rulings is here. Our report on the oral argument is here.

In February 2010 – just before the expiration of the two-year statute of limitations – the plaintiff sued the defendant for injuries sustained in an automobile accident. One problem — the defendant had died twenty-two months earlier – an event which was published in the Chicago Tribune. Not surprisingly, the sheriff failed to effectuate service on the decedent. The plaintiff had a special process server appointed, who quickly informed the plaintiff that the defendant was no longer living.

The plaintiff took no immediate action in response to this news. Seven days later, the circuit court dismissed the action for lack of diligence in attempting to effectuate service. The plaintiff then waited five months before ultimately asking the trial court to take notice of the decedent’s death, reinstate the action, appoint a "special administrator" — the plaintiff’s counsel’s secretary — to defend the case, and grant plaintiff leave to file an amended complaint. In support of the motion, plaintiff alleged that she had not been aware of the defendant’s passing until informed of it by the special process server, and she was unaware of any personal representative having been appointed for the estate. In fact, the decedent’s son had been granted letters of office as administrator of the estate long before — only five months after decedent passed away. Nevertheless, the court granted each of plaintiff’s motions.

The special administrator moved to dismiss the action for failure to serve the complaint until the statute of limitations had run. The motion was denied, but after the plaintiff amended her complaint, defendant moved to dismiss the action as untimely. The defendant argued that although the action was filed just within the two year statute of limitations, it had been directed against the decedent, not his representative; that filing was void. As for the subsequent amendment naming the special administrator, the defendant argued that plaintiff had failed to comply with the requirements of Section 13-209 of the Code of Civil Procedure governing how to proceed against a deceased defendant.

Section 13-209 provides three options for such cases. If an estate had been opened and a personal representative appointed — subsection (a) of 13-209 — the plaintiff had six months after the decedent’s death to sue the personal representative. Then there was subsection (b) — if no petition had been filed for letters of office for a personal representative, the court could appoint a special representative after notice to the party’s heirs and legatees and without opening an estate. Finally, there was subsection (c) — if the plaintiff was unaware of the decedent’s passing, he or she could proceed against the personal representative so long as four conditions were satisfied: (1) the plaintiff substituted the personal representative with reasonable diligence; (2) the plaintiff served the personal representative with reasonable diligence; (3) if process is served more than six months after letters of office were issued, the estate’s liability is limited to any insurance coverage; and (4) plaintiff’s amended complaint was filed within 2 years of the end of the statute of limitations.

The circuit court granted defendant’s motion to dismiss. The Appellate Court reversed and remanded, holding that subsection (c), not (b), governed since plaintiff was unaware of the decedent’s death when the action was filed.

The Supreme Court majority reversed the judgment and reinstated the order of dismissal. The majority held that because the defendant had died by the time the initial complaint was filed, the plaintiff’s original complaint had not tolled the statute of limitations; thus, section 13-209 was implicated. Subsections (a) and (b) were out, since the plaintiff clearly wasn’t aware of the defendant’s death when the action was filed. So subsection (c) governed.

The majority pointed out that although why the plaintiff had been unaware of the defendant’s death was unclear, it didn’t matter; the mere fact that the plaintiff didn’t know was enough. So the only remaining question was whether plaintiff’s counsel’s secretary was his "personal representative." The majority held that she was not. The majority concluded that where petitions for letter of office have been filed, the resulting representative was consistently referred to in the statutes as either the "representative" or "personal representative" of the decedent. Plaintiff argued that "personal representatives" and "special representatives" were interchangeable, but the majority held that plaintiff’s theory was incompatible with section 13-209, which limited "special representatives" to individuals as to whom no petition for letters of office had been filed.

Therefore, under the plain language of the statute, plaintiff was obligated to substitute in the decedent’s personal representative immediately upon learning of his death. Since she did not, the action was barred. Plaintiff argued that the defendant had not been prejudiced by the appointment of a special administrator, but the majority pointed out that it was impossible to know that, since neither the representative, heirs or legatees had ever been informed of the litigation. The majority pointed out that there was one final problem with the defendant’s appointment: under Section 27-5 of the Probate Act, a special administrator could not be appointed based upon the recommendation of any person adverse to the special administrator. Since the special administrator had been appointed based upon the recommendation of the plaintiff’s counsel, she was by definition improperly appointed.

Chief Justice Thomas L. Kilbride dissented. The Chief Justice agreed with the majority that subsection (c) of section 13-209 was applicable. However, the Chief Justice argued that plaintiff had moved diligently to substitute a representative and to serve her. Plaintiff’s mistake in misnaming the appointed representative a "special representative" rather than a "personal representative" shouldn’t be fatal to the action, the Chief Justice argued. Finally, the Chief Justice concluded that the decedent’s estate had not been prejudiced by the plaintiff’s conduct.

Illinois Supreme Court Holds Internet Sales Tax Preempted by Federal Statute

By Kirk Jenkins on Posted in Illinois

On Friday morning, the Illinois Supreme Court handed down its opinion in one of its most high-profile pending cases. The Court held in Performance Marketing Association, Inc. v. Hamer that the federal Internet Tax Freedom Act (ITFA) preempted the Illinois "Click-Through" Act, also known as the "Amazon tax" – becoming (according to lone dissenter Justice Lloyd A. Karmeier) the first court of review in the country to do so. Our detailed summary of the underlying facts and Circuit Court holding in Performance Marketing is here. Our report on the oral argument is here.

Here’s how the Amazon tax works: many smaller websites display links allowing visitors to click and be taken directly to the website of a national retailer to buy books, music, or almost anything else. Typically, the small website owner is paid a commission according to how many visitors reach the national retailer’s website through his or her site. The business is called “performance marketing” – it happens in catalogs, magazines, newspapers, television and radio too, but these days, internet is the most high-profile form. Illinois’ Act imposes no new taxes; rather, it defines any out-of-state merchant with a contractual relationship with an Illinois-based performance marketer as an Illinois merchant, obligated to collect use taxes on online sales, as long as the performance marketer’s link generates $10,000 a year in sales.

After the Illinois statute was enacted, the Performance Marketing Association filed suit in Cook County Circuit Court.  The PMA alleged that the Act violated the dormant Commerce Clause by burdening interstate commerce and attempting to regulate commerce without a substantial nexus to the state. The PMA further claimed that the statute was preempted by the ITFA, which bars state statutes for a limiting time from singling out electronic commerce for special burdens. The Circuit Court granted PMA’s motion for summary judgment, holding that the statute was both a Commerce Clause violation and preempted. The appeal was directly to the Supreme Court.

Normally, one would have expected the plaintiff to have an uphill battle before the Court; over the past decade, the Illinois Supreme Court has been at least moderately hostile to constitutional claims (for any readers who aren’t lawyers – statutory preemption is technically a constitutional claim, since the reason a Federal statute trumps a state statute under the right conditions is the Federal Supremacy Clause). But it didn’t turn out that way; the Supreme Court affirmed the judgment, with Justice Anne M. Burke writing for the six-Justice majority.

The ITFA defines as a prohibited discriminatory tax any tax which impacts electronic merchants differently than similarly situated merchants in non-electronic goods, the Court noted. The plaintiff claimed that the Act was preempted because it was aimed solely at online performance marketers; there were no similar burdens placed on print or broadcast performance marketers. The defendant countered that Illinois law already placed comparable burdens on offline performance marketing, citing 35 ILCS 105/2(3), the definition section of the Use Tax Act.

The Court disagreed. Section 2(3) applies to performance marketers using advertising “which is disseminated primarily to consumers located in this State and only secondarily to bordering jurisdictions.” No burdens were placed on performance marketers whose ads were disseminated in Illinois as part of national or international distribution. But online performance marketers – whose ads are by definition visible worldwide – were required to collect use tax if they entered into contracts with Illinois-based advertisers. Thus, the Act had a differential impact on electronic commerce.

The defendant pointed to section 150.80(c)(2) of title 86 of the Administrative Code (86 Ill. Adm. Code 150.801(c)(2)), which requires out-of-state retailers with a relationship with an in-state representative soliciting or taking orders to collect use tax. Online performance marketing, defendant argued, is not pure advertising, but rather “active” solicitation of orders. Thus, the Act merely placed electronic performance marketers on the same basis as offline marketers. But once again, the Court disagreed. The online advertiser didn’t receive or transmit customer orders, process payments, deliver purchased products or provide customer services, the Court pointed out. Nor did it know the identity of internet users who click on the link, and after the user passes through the link to the retailer’s website, the referring advertiser has no further connection to the user. The Court concluded that this was not solicitation within the meaning of the regulation.

Ultimately, the matter was simple, the majority found. An electronic performance marketer with $10,000 in sales through the link was burdened, but a similarly situated print advertiser with the same volume of sales was not. Therefore, the Illinois Act was preempted by the ITFA. For that reason, the majority declined to address the Commerce Clause challenge.

Justice Lloyd A. Karmeier dissented. The Illinois Act was hardly unique, Justice Karmeier pointed out; Illinois’ statute was merely the local version of a bill enacted in at least half a dozen other states and modeled on a New York statute (which has recently been upheld against an ITFA challenge). Justice Karmeier had two procedural objections to the majority’s opinion. First, he pointed out that the case was before the Court under Supreme Court Rule 302 because the lower court had invalidated a statute; had preemption been the sole basis for the lower court’s ruling, the appeal would have been to the Appellate Court. Because the majority resolved the case on preemption grounds, declining to address the Commerce Clause challenge, Justice Karmeier argued that the opinion ultimately accomplished little. The Federal Act will expire, barring renewal, next November 1st. Since a preemption ruling merely suspends the operation of a law, rather than voiding it for all time, if the Federal Act is allowed to expire, the Illinois Act will immediately spring back to life, and the Commerce Clause challenge will begin all over again. Justice Karmeier argued that the Court should have addressed the constitutional challenge and held that because the Act only burdened businesses with a substantial nexus to Illinois, it was valid pursuant to the Commerce Clause. Justice Karmeier also concluded that the Act avoided preemption, arguing that it merely made it clear that the same obligation to collect use taxes imposed on offline entities with a substantial nexus to Illinois applied to similarly situated internet businesses.

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

By Kirk Jenkins on Posted in Illinois

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.

The Questions Log With One Term Left in 2013

By Kirk Jenkins on Posted in Illinois

With only one term left in 2013, it’s time to take another look at the Illinois Supreme Court questions log.

In its first four terms, the Court has heard argument in twenty-eight civil cases. Questioning continues to vary widely from case to case, from a low of eight questions in DeHart v. DeHart and Russell v. SNFA to highs of 49 in Board of Education of Peoria School Dist. No. 150 v. Peoria Federation of Support Staff and 35 in Performance Marketing Association v. Hamer (which is due to be decided tomorrow). So far, the distinction for the heaviest single session belongs to the appellant in Performance Marketing, who fielded 26 questions in opening statement. After having become progressively more active in each term until the summer break this year, the Court fell back to its second lowest figure this year in terms of average questions-per-argument during the September term.

As of the end of the September term, here’s how the questions log stands. The numbers in parentheses show how many times that Justice has been the first questioner during each phase of the arguments.

Justices

Burke

Garman

Freeman

Kilbride

Thomas

Karmeier

Theis

Appellant

43(3)

44(5)

49(9)

19

84(10)

38(1)

43(3)

Appellee

32(3)

38(3)

10(1)

16(1)

71(11)

36(6)

32(1)

Rebuttal

1(1)

3(2)

5(3)

2

28(6)

10(3)

21(3)

Total

76 (7)

85 (10)

64 (13)

37 (1)

183 (27)

84 (10)

96 (7)

Argument Report: Illinois Supreme Court Debates Status of Water Facility Contractor

By Kirk Jenkins on Posted in Illinois

When does an independent contractor become a public utility? That’s the question the Illinois Supreme Court debated during the September term in People ex rel. Department of Labor v. E.R.H. Enterprises, Inc. Based upon the heavy questioning of both sides, the Justices of the Court appear to be conflicted.

The Labor Department issued defendants a subpoena for product of certain employment records in 2008. The subpoena stated that the Department was investigating whether the defendant’s repair work on certain water mains for the Village of Bement had been done in compliance with the Prevailing Wage Act. Several months later, the Department filed a complaint seeking to have defendant held in civil contempt for failing to comply with the subpoena. The defendant defended on the grounds that it was a public utility and therefore exempt from the Prevailing Wage Act.   The trial court twice rejected the company’s position, holding that defendant was not a public utility. However, the Appellate Court reversed, holding that defendant satisfied the definition of a public utility from the Public Utilities Act, which it imported into the Prevailing Wage Act.

Counsel for the Illinois Department of Labor began by sketching the factual background of the case. Justice Freeman asked whether defendant was obligated to provide water services to the residents. Counsel responded that defendant was obligated to assist the village in providing water services. Justice Freeman asked whether that would indicate that defendant was operating the facility for public use. Counsel responded that it would not pursuant to the Court’s own precedent in Mississippi River Fuel Corp. v. Illinois Commerce Commission, where the Court defined public use as occurring where the company held itself out as the one providing the service. Defendant can walk away from its contract with the village in five years, counsel argued; a public utility can’t do that. Counsel argued that under Public Utilities Code Section 3-105, if a facility is municipally owned, it could not be a public utility, even if it was operated by a lessee or agent.   Part of the purpose of the Public Utilities Act is to get records and reports from the company, counsel argued. One doesn’t have that need when a municipality like the village owned the facility. Justice Burke asked whether defendant provided water to every resident, and counsel responded that the Department would say that the defendant helps the village do so. Justice Garman stated that the Prevailing Wage Act doesn’t apply to public utilities, and counsel confirmed that. Justice Garman pointed out that the Act doesn’t expressly incorporate the definition of a "utility" from the Public Utilities Act, and wondered why the Court should do so. Counsel argued that the legislature had adopted the Prevailing Wage Act in 1941 against a backdrop of the Public Utilities Act, which was enacted years earlier. Justice Burke asked whether the Court should look to the conduct of the parties – wasn’t the welfare of the entire community dependent on the conduct of the defendant in providing the water? Surely the village was intimately involved, working hand-in-hand with the defendant, then? Counsel conceded that there was a significant public benefit from the services defendant provides. The statute requires more, however; under Mississippi River Fuel Co., the company has to be holding itself out to the public as the entity providing the service. Justice Karmeier suggested that if the Court didn’t look to the Public Utilities Act, why shouldn’t it look to Black’s Law Dictionary for the definition of a utility, as the Appellate Court did? Counsel responded that the statutory exception which excluded a government-owned facility was a long-standing one, forming the law of the period which the legislature would have legislated against. It makes sense, counsel argued, to exclude public utilities if rates were subject to regulation by the Illinois Commerce Commission because otherwise, two agencies would be pulling in opposite direction. Here, the defendant is not regulated by the ICC. Justice Karmeier asked whether, if the village was doing exactly what the defendant was doing, the village would be subject to the statute. Counsel responded that government entities are never subject to the statute. Justice Karmeier clarified that counsel meant government entities were exempt whether they were technically public utilities or not, and counsel explained that government had once been classified as regulated utilities, but the Court struck that statute down in the early 1960s.

Counsel for the defendant began by pointing out that his client operates water and sewer systems for twenty different municipalities. Justice Thomas asked why the public utilities exception to the Prevailing Wage Act would be meant to apply to one who provides services not to the public, but to municipalities. Counsel responded that Bement was a small village; there was nobody else to operate the plant. The defendant didn’t assist the village in providing service; the defendant itself provides the service. If they don’t, service just doesn’t happen. Counsel argued that if the Prevailing Wage Act is applied to companies like the defendant, older, smaller cities may not be able to pay their contractors to run their systems anymore. Justice Karmeier wondered why Section 3-105(b) doesn’t take the defendant out of the definition of a public utility. Counsel responded that to accept the Department’s argument, one must shift from talking about companies in subsection (a) to talking about pipes, a plant and a delivery system in subsection (b). Justice Thomas asked whether the concept of the defendant being a public utility is based on the job it’s performing at a particular time — if the defendant walks away in five years at the end of its contract, is it no longer a public utility? Is the defendant a public utility for one facility and not another? Counsel responded that the defendant’s relationships tend to be long term; its business relationship with the village was lasted approximately twenty-six years. Justice Thomas asked whether the defendant is barred from work that would clearly not be that of a public utility. Counsel responded that defendant was not; from time to time, it did public works, and it bid and paid prevailing wages when it did. Justice Thomas proposed a hypothetical: what about a company that spent 90% of its time doing public works and ten percent as a public utility – was it still a public utility? Counsel said yes; the status went with what the defendant’s expertise and primary function is.  Justice Thomas asked if the defendant were filling out an application and it asked are you a public utility, would the company say "sometimes"? Counsel suggested that the defendant would say "primarily." Justice Garman asked whether, if the system was operated entirely by the village, it would qualify as a public utility. Counsel repeated that in that case, the system would be exempt from the Prevailing Wage Act pursuant to the Court’s former decisions.

In rebuttal, counsel for the Department argued that if the village owned the system, it would not be a public utility. The legislature made the decision to apply a different rule on these facts in order to protect the defendant’s workers, counsel argued. Justice Garman asked whether the issue was one of statutory interpretation, and equitable considerations didn’t inform the decision. Counsel responded that it was primarily a statutory question, and the policy issues had already been taken into account by the legislature. The fact that the Illinois Commerce Commission had no contact with the defendant and didn’t regulate it was significant, counsel argued.

 

Argument Report: Illinois Supreme Court Debates Chicago Firefighters’ Pensions

By Kirk Jenkins on Posted in Illinois

Although Kanerva v. Weems was the marquee case on public pensions for the September term of the Illinois Supreme Court, it wasn’t the only such case on the docket. But if the oral argument is any indication, the retirees in Hooker v. Retirement Fund of the Firemen’s Annuity and Benefit Fund of Chicago seem poised to prevail, unlike the plaintiffs in Kanerva. Hooker poses a simple question: in a defined benefit pension plan for Chicago firefighters’ survivors, is the survivor’s pension set for all time according to the salary the firefighter was receiving at the time of his or her death?

Hooker involves two decedents: one died in 1998, the other two years later. Both decedents’ widows were awarded the widow’s minimum annuity. Both women filed complaints and won judgments awarding line of duty benefits. In 2004, the General Assembly amended the Pension Act to require an award of Duty Availability Pay (DAP) for some pension and annuity calculations. Both widows amended their administrative complaints, arguing that they should have been awarded DAP in the calculation of their pensions – even though neither firefighter had ever received DAP in his salary. Plaintiffs sought leave to bring the DAP claim as a class action.

On remand after the line-of-duty issues had been settled, the Board declined to include DAP in its pension calculation for either survivor. The Circuit Court granted the Board summary judgment on administrative review, refusing to certify a class. The Appellate Court reversed the Circuit Court, holding that under Section 6-140 of the Pension Code, 40 ILCS 5/6-140(a), the amount of a widow’s annuity depends on the current annual salary attached to the decedent’s position, whether or not the firefighter ever actually received that salary. Accordingly, the Board was required to include DAP in the pension calculation. The Appellate Court reversed the denial of the motion to certify a class as well.

The Supreme Court seemed openly skeptical of the Board’s position on appeal. Counsel for the Board began, arguing that the case involved a straightforward issue of statutory interpretation. The Board interpreted the plain language of the 2004 legislative amendments to the code to impose two mandatory requirements for enhanced annuity payments for DAP. First, the husband must have actually received DAP. Second, the corresponding employee contribution must have been paid to the Fund. The decedents in Hooker neither earned nor made contributions on DAP. Justice Thomas asked whether, if the Court ruled for the widows, the Court would then contribute the DAP amounts. Counsel responded that the contributions were actually due from the annuitants, not the City. Further, the City believed that its own contribution obligations were capped by the statute. Justice Thomas asked whether inclusion of DAP benefits had ever been discussed in negotiating the collective bargaining agreement. Counsel responded that all parties had known that DAP was not pensionable. Justice Theis asked whether DAP was pensionable for a firefighter today who received it in his or her salary. Counsel said it was. Justice Theis pointed out that counsel had not addressed Kozak v. Retirement Board of Firemen’s Annuity & Benefit Fund, 95 Ill. 2d 211 (1983). Thirty years ago, Justice Theis said, the Court had held that "current annual salary" in Section 6140 meant the salary of a currently employed firefighter, not the salary at the time of death. At that time, the Court held that the widow’s annuity was not tied to the firefighter’s salary at the time of death. Counsel responded that the Kozak court had been clear that permitting unfunded benefits was anathema to a defined benefit plan. Justice Theis asked counsel whether he was advocating the overruling of Kozak. Counsel answered that Kozak was law, and that was why the distinction between DAP and salary was so critical. Justice Theis asked why the statute said any references to salary shall be deemed to include DAP – surely that language seems to indicate that the legislature was talking about Section 6140. Counsel argued that the legislative intent was that DAP could now be included to exempt rank employees as pensionable, and that the legislature did not intend to exempt Section 6140 widows from the requirement that any DAP for which the employee contribution was not paid should not be included in the pension calculation. Justice Theis suggested that the statutory language referred to survivors "caught in the middle" when DAP became pensionable after a ten-year period when survivors were receiving DAP pursuant to a collective bargaining agreement, but it wasn’t pensionable. Counsel argued that Justice Theis interpreted the statute too narrowly, disregarding subsection (i). Justice Thomas asked about the clause talking about the current annual salary attached to the position to which the fireman was certified at the time of his death – was that of any import? Counsel responded that the language simply set the salary schedule. If survivors are getting benefits, they must be paid for – otherwise, the Fund will go broke. Justice Theis suggested that Kozak had rejected many of the same arguments thirty years ago. Justice Burke asked counsel how he would explain the language "received by the fireman" in the statute. Counsel answered that survivors’ benefits are derivative of the fireman – the firefighter must receive the DAP pay in order for it to be included. Justice Freeman asked whether the decision regarding class certification had been preserved for review. Counsel answered that it was not before the court, with the exception that if the two putative class representatives weren’t entitled to the benefits, they certainly weren’t adequate class representatives.

The Court had far fewer questions for counsel for the claimants. Justice Thomas asked whether the claimants’ argument was, at least in part, that the contributions which had not been made should have been made? Counsel responded that in fact, the Board had asked the City to start paying this year. Justice Thomas pointed out that the City took the position that its liability is capped. Counsel agreed, but pointed out that the issue had never been extensively litigated. Justice Thomas asked what counsel’s response was to the argument that unfunded benefits equal insolvency. Counsel responded that the Fund certainly did need more money, and that various entities were seeking ways to solve the problem. Counsel concluded by briefly addressing his cross-appeal regarding abatement upon the death of one of the claimants. Justice Theis pointed out that the claimants already had the same issue involved in the cross-appeal pending in the First District Appellate Court.

In rebuttal, counsel for the Board again addressed the potential conflict with Kozak. Counsel argued that surely it wasn’t that law that Section 6140 survivors who got the enhanced pension would not be required to make contributions, but others must. Justice Theis pointed out that counsel made an argument that DAP was not really a pension; it was in the nature of workers comp. Counsel responded that there was no support for that; it wasn’t a distinction that made a difference. Justice Theis pointed out that one was taxable, one was not. Counsel responded that he didn’t believe the two were treated differently. Counsel concluded by urging the court to reject the cross-appeal.

We expect Hooker to be decided within two to four months.

Illinois Supreme Court Reaffirms Disgorgement of Advance Payment Retainers Under the Dissolution of Marriage Act

By Kirk Jenkins on Posted in Illinois

This morning, a unanimous Illinois Supreme Court strongly reaffirmed the "leveling the playing field" rules of the Marriage and Dissolution of Marriage Act in In re Marriage of Earlywine. The Act provides that a court can order disgorgement of one party’s attorneys fees in order to enable the other party to pay his or her attorney. A unanimous Court held that courts were free to order disgorgement of an advance payment retainer paid by one party to his or her atttorney in order to facilitate an interim attorneys’ fees award to the other party.

The ex-husband filed a petition for dissolution of marriage in August 2010. Not long after, the ex-wife filed a petition for an award of interim attorney’s fees, asking that the Court order disgorgement of fees previously paid to the ex-husband’s attorney in order to finance the award. In response, ex-husband showed that his parents had paid his legal bills; the money had not come from marital assets. Both parties claimed to be unable to pay their attorneys themselves. Following a hearing, the trial court ordered disgorgement by the ex-husband of a portion of the fees paid by his parents. The ex-husband sought reconsideration, attaching an a copy of his agreement with his counsel providing that counsel would be paid via an advance payment retainer, which would become the attorney’s property immediately upon payment. The agreement identified the "special purpose" for the advance payment retainer as avoiding the possibility of a fee allocation order requiring that funds be returned to the client’s ex-wife. The ex-husband filed an affidavit stating that his mother, her fiancé, his father and his father’s wife had paid all of the attorney’s fees on his behalf. The trial court denied reconsideration.

The trial court entered an order of "friendly contempt" in order to enable the ex-husband’s attorney to seek appellate review of the disgorgement order. On appeal, the Appellate Court affirmed the order of disgorgement, but the Court vacated the contempt finding on the grounds that the petitioner had refused to comply with the disgorgement order in good faith in order to seek review of unresolved questions of law.

The Supreme Court unanimously affirmed. The appellant attorney argued that the advance payment retainer was not subject to disgorgement because it became his property upon payment. The appellant argued that the "leveling the playing field" rules of the Marriage Act, pursuant to which the two parties are to be put on approximately equal footing as far as legal representation, make it difficult for a client to secure legal representation. Therefore, parties should be able to use an advance payment retainer to shelter attorneys fees from the opposite party.

The Court found that the legislature had enacted Section 501(c-1) of the Act – the leveling the playing field rules – in order to equalize litigation resources where it was shown that one party could pay and the other could not. Prior to the amendments, the Court wrote, divorce cases frequently involved attempts by one party to block access by the other side to litigation funds. Holding that advance payment retainers were effective to shield funds from such orders, the Court found, would "strip the statute of its power." If the Court were to accept counsel’s argument, an economically advantaged spouse could "stockpil[e] funds in an advance payment retainer held by his or her attorney." The Court held that nothing in the statute distinguished between marital and nonmarital property, so it made no difference that the advance payment retainer was allegedly financed by the ex-husband’s family, as opposed to by his own funds. Finally, the Court rejected the petitioner’s argument that the disgorgement order violated his First Amendment right of access to the courts and right to retain counsel, finding that counsel lacked standing to make the argument.

California Supreme Court Rejects Erosion of One Final Judgment Rule: “Final Means Final”

By Hall Marston on Posted in California

On October 3, 2013, the California Supreme Court handed down its opinion in Kurwa v. Kislinger, S201619, confirming that under settled California practice, as codified in Code of Civil Procedure section 904.1(a), to be appealable a judgment must dispose of all causes of action pending between the parties. The Court rejected arguments submitted by the California Academy of Appellate Lawyers, as amicus curiae, that permitting appeals under the circumstances presented would “allow parties as much autonomy and choice as possible,” thereby facilitating efficiency both at the trial and appellate levels.

Plaintiff and defendant were doctors who formed a corporation to serve patients of a health maintenance organization (“HMO”). Later, plaintiff’s license was suspended, and defendant notified the HMO that their corporation was ended and that defendant’s medical corporation would treat the HMO’s patients going forward. The HMO terminated its contract with the parties’ corporation and signed a new one with defendant’s corporation. 

Litigation ensued, with plaintiff alleging breach of fiduciary and defamation claims (among others), and defendant cross-complaining for defamation. On pretrial motions, the trial court held that the parties’ formation of a corporation relieved them of further fiduciary duties to one another. Since the ruling foreclosed prosecution of the fiduciary duty and related claims, those were dismissed with prejudice, as well as other counts he abandoned. But (and it is a big “but”), the parties agreed to dismiss the reciprocal defamation claims without prejudice together with a waiver of the limitations period, allowing them to test the fiduciary duty issue on appeal before disposing of the temporarily dormant defamation claims.

No can do, notwithstanding any claimed efficiency. In Morehart v. County of Santa Barbara, the Court expressly disapproved of a similar tactic, ruling that the parties’ desire to segregate claims—some for review and others not—was directly contrary to the one judgment rule. Instead, if parties who lacked a single final judgment were so inclined to seek appellate review, the proper procedural vehicle was a petition for a writ of mandate. (Note, the Court did not address the reality that such petitions are granted as frequently as Democrats and Republicans agree on fiscal issues.) The Court endorsed a considerable line of intermediate appellate authority, starting with Don Jose’s Restaurant, Inc v. Truck Ins. Exchange, holding that reservation of some issues from review will not be countenanced under settled California practice.

The unspoken driver of the opinion, for a Court that issues relatively few opinions a year, may well be the additional burden on appellate courts if such a policy were permitted. “We are busy enough without these cases being brought up for another level of scrutiny.”

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