Opinion
No. 101479.
Dated: June 8, 2011.
Fred W. DeVore, III, Counsel of Record, DEVORE, ACTON STAFFORD, P.A., Charlotte, North Carolina, Counsel for Petitioners.
QUESTIONS PRESENTED
Whether by terminating a supplemental retirement fund promised to its police officers upon the condition of at least 15 years of service and retirement with the City of Gastonia, impermissibly impaired a state's obligation of contract in violation of the Contract Clause of the United States Constitution when the termination occurred after the officers were vested in their right to receive their pension?
Whether the District Court had jurisdiction to decide state claims of breach of contract, once it dismissed the federal question jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure, or in the alternative, should the Court have abstained from deciding the state law questions?
PARTIES TO THE PROCEEDING
Pursuant to Rule 14.1(b), the following list identified all of the parties appearing here and before the United States Court of Appeals for the Fourth Circuit.
The petitioners here and the appellants below are Dennis Crosby, Jackie Steven Postell, Danny Ray Cochran, Bobby Adams, Jim Anderson, Georgia Anderson, Eddie Atkinson, John Beam, William Becker, Allen Blalock, Jerome Briggs, James Carter, Earl Clemmer, Darrell Coggins, Rheta Conley, Freddie Crawford, James Deaton, Charles Elmore, Phillip Firrantello, Greg Floyd, A.E. "Rusty" Friday, Max George, David Gibson, Walter Griggs, Johnny Gridle, Luke Hamilton, Larry Hardin, Mary Hartness, Gary Harvell, Ronald Holt, Danny Hubbard, Charles Huffstickler, Bob Hulland, John Jarvis, Oris Johnson, Terry Jones, David Luoto, Steve Lynch, Butch Neal, Rodney Parham, Danny Parlier, Steve Pittman, Eugene Posey, Billy Posey, Jack Price, Ernest Pruitt, Dale Rivelle, Charles Roper, Bobby Sparks, Reggie Stanford, Don Wilbanks, Leo Williams, and George Wilson, III.
The appellee below and respondent here is the City of Gastonia, a municipality existing under the laws of the State of North Carolina.
CORPORATE DISCLOSURE STATEMENT
Pursuant to Rule 29.6, petitioners state that none of the petitioners have corporate affiliations.
The respondent is a municipal corporation existing under the laws of the State of North Carolina.
TABLE OF CONTENTS
Page Trust
QUESTIONS PRESENTED .............................. i PARTIES TO THE PROCEEDING ....................... ii CORPORATE DISCLOSURE STATEMENT ................. iii TABLE OF CONTENTS ............................... iv TABLE OF AUTHORITIES ........................... vii OPINIONS BELOW ................................... 1 JURISDICTION ..................................... 1 STATUTES INVOLVED ................................ 1 STATEMENT OF THE CASE ............................ 1 A. Factual Background ........................ 3 B. Proceedings Below ........................ 11 REASONS FOR GRANTING THE PETITION ............... 12 I. Neither the Fourth Circuit nor the Trial Court Applied the Analysis in Determining if a Violation of the Contract Clause had Occurred when the Police Officers' Vested Benefits were Unilaterally Terminated by the City of Gastonia ....................... 13 II. The Opinion of the Fourth Circuit is in Conflict with Other Circuits ............................... 16 III. The District Court Lacked Pendent Jurisdiction to Decide the State Claims After Dismissing the Constitutional Claim Pursuant to Rule 12(b)(1) and in the Alternative Should have Abstained from Deciding Issues Unique to North Carolina ........ 18 CONCLUSION ...................................... 24 APPENDIX Opinion and Judgment of The United States Court of Appeals For The Fourth Circuit entered March 10, 2011 ................. 1a Order and Judgment in a Civil Case of The United States District Court For The Western District of North Carolina entered January 7, 2010 ............... 27a S.B. 472 effective 1955 ........................ 51a H.B. 430 effective April 15, 1959 .............. 55a H.B. 1088 effective June 11, 1965 ............... 59a Report from House Pensions and Retirement Committee on Proposed S.B. 1219 dated August 14, 2002 ................. 67a S.B. 1219 effective October 2, 2002 ............. 71aTABLE OF AUTHORITIES
Page(s) CASES Anaya v. Crossroads Managed Care Systems, Inc. 973 F. Supp. 1228 reversed 195 F.3d 584 th Bailey v. State 348 N.C. 130 500 S.E.2d 54 Baker v. Baltimore 487 F. Supp. 461 Baltimore Teachers Union v. Mayor 6 F.3d 1012 th Bell v. Hood 327 U.S. 678 Carter v. Greenhow 114 U.S. 317 Colorado River Water Conservation Dist. v. U. S. 424 U.S. 800 96 S. Ct. 1236 47 L. Ed. 2d 483 County of Allegheny v. Frank Mashuda Co. 360 U.S. 185 79 S. Ct. 1060 3 L. Ed. 2d (1959 Crosby v. City Of Gastonia 2011 WL 818143 Crosby v. Gastonia 682 F. Supp. 2d 537 Estate of Harshman v. Jackson Hole Mountain Resort Corp. 379 F.3d 116th Faulkenbury v. Teachers' and State Employees' Retirement System of North Carolina 345 N.C. 683 483 S.E.2d 422 Indiana ex rel Anderson v. Brand, Trustee 303 U.S. 95 100 58 S. Ct. 443 82 L. Ed. 685 Pineman v. Oechslin 637 F.2d 601 S. Cal. Gas Co. v. City of Santa Ana 336 F.3d 885 Simpson v. North Carolina Local Government Employees' Retirement System 88 N.C. App. 218 363 S.E.2d 90 United States Trust Co. v. New Jersey 431 U.S. 1 97 S. Ct. 1505 52 L. Ed. 2d 92 passim Wiggs v. Edgecombe County 361 N.C. 318 643 S.E.2d 904 Winston v. City of New York 759 F.2d 242 Woodard v. North Carolina Local Governmental Employees' Retirement System 335 N.C. 161 435 S.E.2d 770 CONSTITUTIONAL PROVISIONS U.S. CONST. amend. IV U.S. CONST. art. I, § 10 1 STATUTES 28 U.S.C. § 1254 28 U.S.C. § 1331 28 U.S.C. § 1367 42 U.S.C. § 1983 RULES 12 12 LEGSLATIVE AUTHORITIES
, (D. Colo. 1997), , (10 Cir. 1999) ...................... 19 , , (1998) .............. 12, 22 , (D.C. Md. 1980) .................... 15 , (4 Cir. 1993) .......... 15 , (1946) ................................. 18 , (1885) ............................. 13, 16 , , , (1976) ......................... 22, 23 , , , ) .................................. 21 , 10-1153, (4th Cir. Mar. 10, 2011) .......................... 2, 16 , (W.D.N.C. 2010) .............. 18, 22 , (10 Cir. 2004) ....................... 19 , , (1997) ........................ 12, 15, 22 , , , , (1938) ................................. 17 , (2d Cir. 1981) ...................... 20, 21 , (9th Cir. 2003) .................. 2, 16, 17 , , (1987) ............................. 12, 22 , , , (1977) ......................... , , (2007) .............. 12, 22 , (2d Cir. 1985) .......................... 17 , , (1993) .............. 12, 22 .................................... 1 , cl. ...................... 1, 17 CJS CONSTLAW § 466 ...................................... 15 (1) ...................................... 1 ......................................... 1 (a) .................................. 1, 18 ..................................... 1, 11 N.C. Gen. Stat. § 159 .................................... 7 Fed.R.Civ.P. (b)(1) .................... 11, 18, 19, 20 Fed.R.Civ.P. (b)(6) ................................ 19 1955 N.C. Sess. Laws ch. 946, § 2 ..................... 3, 5 1955 N.C. Sess. Laws ch. 946, § 3 ..................... 1, 4 1955 N.C. Sess. Laws ch. 946, § 9 ..................... 4, 5 1957 N.C. Sess. Laws ch. 112 ............................. 4 1959 N.C. Sess. Laws ch. 301 .......................... 4, 6 1959 N.C. Sess. Laws ch. 301, § 9 ........................ 8 1959 N.C. Sess. Laws ch. 301, § 10 ....................... 6 1965 N.C. Sess. Laws ch. 198 ............................. 5 1965 N.C. Sess. Laws ch. 979 .......................... 5, 7 1965 N.C. Sess. Laws ch. 979, § 10 ....................... 8 1965 N.C. Sess. Laws ch. 979, § 11 ....................... 5 1965 N.C. Sess. Laws ch. 979, § 12 .............. 5, 6, 7, 8 1959 N.C. Sess. Laws ch. 979, § 13 ....................... 6 2002 N.C. Sess. Laws ch. 130, § 8.2 ...................... 8 House Bill 1088, § 11 (1965) ............................. 8OPINIONS BELOW
The opinion of the Court of Appeals is reported at ___ F.3d ___, 2011 WL 818143 and is reprinted in the Appendix to the Petition ("App.") at la-25a. The District Court's opinion is reported at 682 F. Supp. 2d 537, and is reprinted at App. 27a-49a.
JURISDICTION
The Court of Appeals entered its judgment on March 10, 2011. This Court has jurisdiction under 28 U.S.C. § 1254(1).
STATUTES INVOLVED
The case involves the provisions of 42 U.S.C. § 1983 and 28 U.S.C. § 1331 as the claim arose under the Contract Clause of the United States Constitution, Article I, section 10, clause 1, the Fourth Amendment of the United States Constitution; and pendent jurisdiction of state claims alleging breach of contract and fiduciary duty pursuant to 28 U.S.C. § 1367(a). Further implicated is An Act to Establish a Supplemental Pension Fund for Policemen in the City of Gastonia, 1955 N.C. Sess. Laws ch. 946, § 3 as amended in 1957, 1959, 1965, 1983, and 2002.
STATEMENT OF THE CASE
This case is necessary to protect not only the vested retirement rights of the named retired Gastonia police officers but to finally settle the dispute upon the federal circuits as to the protections afforded by the Contract Clause of the United States Constitution, the existence of which is conceded by the Fourth Circuit. "We acknowledge that one of our sister circuits has reached the opposite conclusion. See S. Cal. Gas Co. v. City of Santa Ana, 336 F.3d 885, 887 (9th Cir. 2003) (per curiam)." Crosby v. City Of Gastonia, 10-1153, 2011 WL 818143 (4th Cir. Mar. 10, 2011).
The decision of the Fourth Circuit essentially eviscerates the rights of citizens to be free from contractual breaches by state action — a holding that departs from this Court's previous zealous holdings enforcing the Contract Clause. But review is urgently needed to not only resolve the conflict between the Ninth and Fourth Circuit, but to re-establish citizens' constitution rights under the Contract Clause which are now eroded to meaningless constitutional dicta by the Fourth Circuit's opinion in this matter — a position never intended by the founding fathers. The Fourth Circuit has interpreted the Contract Clause in a manner never embraced or even suggested by this Court.
Unless the City of Gastonia, and other municipalities similarly situated, is held accountable, vested retirement pensions of police officers, firemen and other public servants are in jeopardy. This would leave these faithful workers relegated to a retirement based upon Social Security benefits, which, incidentally, the officers of Gastonia do not have. A. Factual Background
The petitioners are all retired former police officers of the City of Gastonia. The Police Department of the City of Gastonia is a department within the respondent, City of Gastonia. This is an action whereby the petitioners seek to recover past due supplemental retirement benefits and an injunction requiring the City of Gastonia to pay future supplemental retirement benefits in accordance with the statutes enacted by the North Carolina legislature.
In 1955 the Gastonia City Council proposed legislation to the North Carolina General Assembly to create a retirement fund for police officers of the City of Gastonia. The proposed fund was to be known as "The Supplemental Pension Fund" (hereinafter "SPF" or "Fund"). In 1955, the North Carolina legislature enacted Chapter 946, "An Act to Establish a Supplemental Pension Fund for Policemen in the City of Gastonia, N.C." (hereinafter "Act"). App. 51a-54a. The purpose of the Act was to establish an SPF for the Gastonia police officers. The Act provided, inter alia, the following:
Section 2 provided the following formula for the payment of the retirement benefits: "Any full-time paid member of [Gastonia] Police Department who retired or is retired under the provisions of this Act, shall receive monthly for the remainder of his life from the "Supplementary Pension Fund" an amount equal to two percent (2%) for each five years of service, not to exceed fourteen percent (14%) of his average monthly salary for the three highest salaried years while employed by the Gastonia Police Department."
Section 9. "At any time after the establishment of a "Supplementary Pension Fund," the City Council of Gastonia may adopt a resolution abolishing the "Supplementary Pension Fund" for policemen in the City of Gastonia. In such event, the funds then held in the "Supplementary Pension Fund" shall be transferred to the general fund of the City of Gastonia and the City of Gastonia then shall not be liable to any person who by reason of the Act has become, or may become, entitled to benefits hereunder."
In 1957, the SPF Act was amended (Chapter 112, Session Laws of 1957). J.A. at 22. The 1957 amendment provided, inter alia:
(a) A re-write of Section 2 so that non-police members of the Board of Trustees for the Fund [i.e. the Finance Director of the City of Gastonia who was appointed the Board] became eligible to become members of the SPF.
(b) Section 3: "Chapter 946 of the Session Laws of 1955 is amended by striking Section 9 in its entirety."
The Act was again amended by Chapter 301 of the 1959 N.C. Session Laws. App. 55a-58a. The Act was amended as follows:
(a) Section 3 of Chapter 946 of the Session Laws of 1955 was amended by adding the words "so long as funds are available" to line 6 of Section 2 of Chapter 946 from the 1955 Session Laws.
(b) Section 9 was re-written to allow the Board of Trustees of the Fund to call for an election whereby the current officers could vote by three-quarters approval to contribute to the Fund up to two percent (2%) of the gross salary of the active officers to help raise capital for the Fund.
On April 8th, 1965, the SPF legislation was again amended, by increasing the $1.00 contribution to the Fund from criminal court costs to $3.00. 1965 N.C. Sess. Laws ch. 198; J.A. at 26.
On June 11, 1965, the statute was amended for a second time that year and entirely rewritten with an Act entitled "An Act to Prescribe Rules for the Administration of the Gastonia Policeman's Supplementary Pension Fund and to Provide for the Support of Said Fund by Means other than Court Costs." App. 59a-66a. This Act, Chapter 979 of the 1965 Session Laws included these changes:
(a) Sec. 11. On and after July 1, 1965, the governing body of the City of Gastonia is hereby authorized to make such contributions from the General Fund of the City of Gastonia to the Gastonia Policeman's Supplementary Pension Fund as they shall deem appropriate and from whatever sources they deem desirable."
(b) Section 12 of the Act authorized the City of Gastonia to enact an ordinance requiring that 2% of each active police officer's salary be deducted to fund the supplemental retirement fund. Section 12 read: Sec. 12. "The City Council of the City of Gastonia, North Carolina, is hereby authorized and empowered to enact an ordinance deducting two per cent (2%) of the gross salary of each member of the Police Department of said city and to pay over such amounts so deducted to the Trustees of the Gastonia Policeman's Supplementary Pension fund who shall hold, invest, sell, reinvest, or disburse such funds so collected as provided for in this Chapter."
(c) Section 13 authorized the City of Gastonia to stop funding the SPF with the $3.00 criminal court costs, and instead to make those contributions to the State Law Enforcement Officers' Benefit and Retirement Fund, which was the primary state wide retirement system.
Other provisions of the earlier revisions, including Section 10 of Chapter 301 of the Session Laws of 1959 (which allowed the election of voluntary contributions by active officers), were incorporated into Chapter 979.
In 1983, the Act was amended again with minor revisions. J.A. at 96. For example, instead of the Assistant Chief of Police sitting on the Board of Trustees, the Commander of Police Operations was placed on the Board. Also the vesting period for the Secretary of the Board was changed from 15 to 12 years.
There were two other statutes that impacted the Supplemental Retirement Act. The first occurred in 1997 when the legislature passed Session Law 1997-161. J.A. at 98. This act reaffirmed the existence of the Supplemental Retirement Act, but exempted it from the reporting requirements of the Local Government Budget and Fiscal Control Act found in Chapter 159 of the North Carolina General Statutes.
However, this change was short lived when in 2002, the legislature struck the 1997 provision exempting the supplemental fund from Chapter 159. App. 71a-72a. This amendment also had two additional important provisions: (1) it stopped eligibility for the supplemental retirement for any police officers hired after October 1, 2002 (the date of enactment); and (2) it ordered the stoppage of the 2% contributions to the Fund made by active police officers and directed the return of their contributions.
As to this last point, under the 1959 amendment, the City was empowered to deposit 2% of non-retired (active) officers' salary into the Fund, from which interest could be used to help subsidize the Fund. J.A. at 24. This 2% could be deducted upon approval by three-quarters vote of the active police officers. Later, in 1965, Chapter 979 provided that the vote of the police department needed to approve the voluntary 2% contribution was reduced from three-quarters to a majority vote (Section 10). J.A. at 27.
Section 12 of the Act empowered the City Council to cause a mandatory 2% reduction of the active police officers' salary for the Fund purposes. The City of Gastonia never elected to enact the ordinance that mandated the 2% contribution by police officers under Section 12 of Chapter 979. However, under Section 10 of Chapter 979 (originally Section 9 of Chapter 301 of the Session Laws of 1959), in or about mid 1990's the active members of the Gastonia Police Department voluntarily voted to contribute 2% of their salary to help fund the SPF. J.A. at 138.
These elective contributions continued until approximately 2002-2003 when the decision was made to discontinue the funding from the active police officers and their contributions were returned to the active police officers pursuant to Session Law 2002-130, § 8.2. J.A. at 99 and J.A. at 144.
In addition to the funding provided by statute, additional contributions were made to the Fund from different municipal sources. For example, on behalf of its employees, the City of Gastonia contributed to the State Retirement fund called The Law Enforcement Officers' Benefit and Retirement Fund. If a police officer, as a city employee, left the force before vesting in the State Law Enforcement Officers' Benefit and Retirement Fund, the funds contributed by the City on behalf of that officer, were returned to the City and used as additional funding for the Gastonia Supplemental Retirement Fund for police officers. J.A. at 127-128.
From time to time, the City of Gastonia would also make direct contributions to the Fund as a line item in its annual budget. J.A. at 129-131. This was authorized by Section 11 of House Bill 1088, passed in 1965, which read:
On and after July 1, 1965, the governing body of the City of Gastonia is hereby authorized to make such contributions from the General Fund of the City of Gastonia to the Gastonia Policeman's Supplementary Pension Fund as they shall deem appropriate and from whatever sources they deem desirable. J.A. at 29.
From 1995 until approximately 2002, the City made annual contributions to the fund of $20,000 or more. J.A. at 173.
Pursuant to the Act, the Fund was managed by a Board of Directors consisting of the Chief of Police, the Assistant Chief of Police and the City Finance Director. From at least 1997 forward, the City of Gastonia audited the retirement fund on an annual basis. J.A. at 120. Sometimes the audit was paid for by the Fund, other times it was paid for by the City. J.A. at 122. The members of the Board did not receive additional compensation for their service. After a certain period of time, the City's Finance Director also became eligible for the supplemental retirement benefits intended for the police officers. J.A. at 155. The Supplemental Retirement Fund had no other employees or officers. J.A. at 123.
Despite contributions from various sources, as the number of retired police officers grew, the Fund did not receive enough assets to distribute supplemental retirement checks under the statutory formula. Until the Fund was terminated in 2005, the Police Department mailed out the retirement checks. J.A. at 124. Because of the lack of assets in the Fund, the last retirement checks were mailed to retired police officers on or about 1 August 2005. A relatively detailed history of the fund may be found in excerpts from the Gastonia City Council Meeting Minutes of May 7, 2002. J.A. at 215.
Each officer that the Appellee deposed testified that they were informed that they would receive the supplemental pension in lieu of Social Security benefits. Cochrane depo. at 14. J.A. at 490; Parham depo. at 20-21. J.A. at 496; Crosby depo. at 16. J.A. at 339; and Postell depo. at 15-16. J.A. at 363-364. With the termination of the Supplemental Fund, the police officers are limited to only their state retirement pension and many will need to seek alternative employment — even after reaching retirement age — just to maintain a reasonable standard of living.
The petitioners contend, and the respondent denies, that once officers became eligible for the supplemental retirement fund, they procured a vested right that entitled the officers to those benefits. The petitioners contend, and the respondent denies, that the responsibility for funding the supplemental retirement fund rests with the City of Gastonia. The rights of the individual petitioners are homogenous. The petitioners collectively have the same theory of recovery, even though the amount of recovery, if successful, will need to be determined on an individual basis. B. Proceedings Below
The petitioners are retired Gastonia police officers who seek compensation for terminated retirement benefits and proactive relief guaranteeing future promised retirement benefits. The action was originally filed in State Court in Gaston County, North Carolina alleging a breach of the Contract Clause of the United States Constitution and also state claims pertaining to breach of contract.
The respondent removed the case to the Western District of Federal Court for North Carolina based upon federal question. The ancillary pendent state claims were also removed. The District Court denied class certification.
Upon cross motions for summary judgment, the District Court granted the City of Gastonia's motion for summary judgment determining (1) there is no impairment of contract in this case because the plaintiffs have not claimed that the City is precluded from liability for damages, thus dismissing the claim under Rule 12(b)(1); and (2) then deciding the state claim by determining that the City had not breached its contract to provide supplement retirement benefit to its officers. App. 27a-49a.
The Fourth Circuit affirmed the trial judge holding (1) that the officers failed to state a cognizable claim under § 1983 for violation of the Contracts Clause; (2) District Court did not err in exercising supplemental jurisdiction over officers' state law claims; and (3) the city was not obligated under alleged contract to pay retirement benefits.
REASONS FOR GRANTING THE PETITION
In 1977, this Court issued its opinion in United States Trust Co. v. New Jersey, 431 U.S. 1, 97 S. Ct. 1505, 52 L. Ed. 2d 92 (1977). The holding in that case set forth the criteria by which courts could determine if state action impermissibly impaired an obligation of contract under the Contract Clause of the United States Constitution. Since that time, the Circuit Courts and various state courts, including North Carolina, have followed the Trust criteria in evaluating alleged constitutionally prohibited acts by states regarding their contractual obligations.
The Fourth Circuit's opinion below that the actions of the City of Gastonia, as a state actor, do not violate the Contract Clause, was derived without even a reference to Trust and in direct conflict with other Circuits, including the Ninth Circuit. A host of nearly identical North Carolina state cases involving vested rights of state employees have relied on the Trust analysis. See Bailey v. State, 348 N.C. 130, 138, 500 S.E.2d 54, 58 (1998); Faulkenbury v. Teachers' and State Employees' Retirement System of North Carolina, 345 N.C. 683, 483 S.E.2d 422 (1997); Simpson v. North Carolina Local Government Employees' Retirement System, 88 N.C. App. 218, 363 S.E.2d 90 (1987); Wiggs v. Edgecombe County, 361 N.C. 318, 324, 643 S.E.2d 904, 908 (2007); Woodard v. North Carolina Local Governmental Employees' Retirement System, 335 N.C. 161, 435 S.E.2d 770 (1993) (other citations omitted). The opinion of the Fourth Circuit, if left unaltered, will result in the closeting of the Trust precedent in lieu of a new and different view of the Contract Clause that conflicts with the prior holdings of this Court.
I. Neither the Fourth Circuit nor the Trial Court Applied the Trust Analysis in Determining if a Violation of the Contract Clause had Occurred when the Police Officers' Vested Benefits were Unilaterally Terminated by the City of Gastonia.
Whether state action violates the Contract Clause of the United States Constitution is determined by this Court's test set forth in United States Trust Co. v. New Jersey, 431 U.S. 1, 97 S. Ct. 1505, 52 L. Ed. 2d 92 (1977), the lodestar Supreme Court case on Contract clause challenges. However, both the District and the Circuit Court managed to dismiss the petitioner's first claim without performing a Trust analysis.
The test in Trust may be summarized as follows: (1) whether a contractual obligation is present, (2) whether the state's actions impaired that contract, and (3) whether the impairment was reasonable and necessary to serve an important public purpose. Id. Disturbingly and erroneously, neither decision from the lower courts referenced Trust.
The Circuit Court also misapplied the Supreme Court's prior ruling in Carter v. Greenhow, 114 U.S. 317 (1885), decided nearly 90 years prior to Trust. In his opinion, Judge King erroneously interpreted Carter in ruling that:
As a result of the Supreme Court's holding in Carter, then, recourse to § 1983 for the deprivation of rights secured by the Contracts Clause is limited to the discrete instances where a state has denied a citizen the opportunity to seek adjudication through the courts as to whether a constitutional impairment of a contract has occurred, or has foreclosed the imposition of an adequate remedy for an established impairment. Section 1983 provides no basis to complain of an alleged impairment in the first instance.
App. 12a
This interpretation effectively eviscerates the Contract Clause as written, applying only in the rare, and virtually non-existent instances when the state restricts an individual's access to the Courts. Said interpretation is more appropriately applied to the due process clause, not the Contract Clause, which is separate and distinct.
The Contract Clause was intended to prevent state and local governments from passing legislation that excused individuals and entities of certain debt obligations — a proactive strike against favoritism. A city's council voting to relieve Gastonia of its obligations promised to retired police officers exemplifies these nepotistic fears. Also see, i.e. Baker v. Baltimore, 487 F. Supp. 461 (D.C. Md. 1980); Baltimore Teachers Union v. Mayor, 6 F.3d 1012 (4th Cir. 1993). Scholars agree that the Contract Clause was well intended to address issues where municipalities renege on vested promises. "Generally, the retirement plans of state and local governments give rise to contractual rights which are protected against impairment." CJS CONSTLAW § 466. A city or county is a state actor. "The constitutional proviso against impairment of contract, (citation omitted), applies to a corporate municipality. . . ." Baltimore Teachers Union v. Mayor, 6 F.3d at 1016 (asserting that it is not open to question that the Contract Clause applies to municipal legislation).
A possible cause of action for simple breach of contract should not serve to invalidate any right to a Contract Clause claim. See Faulkenbury v. Teachers' and State Employees' Retirement System of North Carolina, 345 N.C. 683, 483 S.E.2d 422 (1997). In Faulkenbury and related cases, while perhaps the plaintiffs could have asserted common law breach of contract actions, they sought vindication of their rights under the United States Constitution only. Ultimately, in Crosby, the petitioners are being punished for pursuing simultaneous claims for breach of contract and violation of the Contract Clause.
Indeed, a Contract Clause violation begins with a breach of contract but not all breaches rise to the level of a Constitutional impairment. If Gastonia had failed to pay its power bill, for instance, that would be a simple breach of contract — yet not one that would rise to constitutional protection.
In the breach of contract alleged sub judice, the City of Gastonia did the following: (1) they promised the officers a supplemental retirement at the time of employment; (2) they advised the officers that they should not contribute to Social Security because of the supplemental benefit; (3) they told their officers that they only became eligible for the supplemental retirement benefit if they became vested in the benefits after retiring with the City after at least 15 years of service; (4) after the officers became vested, and retired, the City then breached their agreement with their officers and refused to pay their earned benefits.
The Fourth Circuit essentially treated all breaches of contract with the same lack of deference. Such a decision, if left unchecked, leaves the Contract Clause toothless.
II. The Opinion of the Fourth Circuit is in Conflict with Other Circuits
As previously referenced, the Fourth Circuit's own opinion in the prior proceeding conceded their ruling conflicted with a prior holding from the Ninth Circuit, particularly in regards to its improper application of Carter. "We acknowledge that one of our sister circuits has reached the opposite conclusion. See S. Cal. Gas Co. v. City of Santa Ana, 336 F.3d 885, 887 (9th Cir. 2003) (per curiam)." Crosby v. City Of Gastonia, 10-1153, 2011 WL 818143 (4th Cir. Mar. 10, 2011). In Gas Co. the issue was whether a municipality could pass an ordinance that required advance payment for trench cuts under a franchise agreement. In finding the ordinance unconstitutional, the Court wrote: "The right of a party not to have a State, or a political subdivision thereof, impair its obligations of contract is a right secured by the first article of the United States Constitution." Id. at 887.
A similar conflict is found in the Second Circuit. In Winston v. City of New York, 759 F.2d 242, 250 (2d Cir. 1985), the issue was whether a dismissed teacher had vested retirement benefits. While the matter was remanded for a determination of alleged misconduct of the discharged teacher, the dissent in the case made it clear that a Trust analysis would be required if vested rights were impermissibly diminished. "These are contract rights which article I, section 10 of the United States Constitution requires this Court to protect, not to abrogate. See United States Trust Co. v. New Jersey, 431 U.S. 1, 14-32, 97 S. Ct. 1505, 1513-1523, 52 L. Ed. 2d 92 (1977); Indiana ex rel Anderson v. Brand, Trustee, 303 U.S. 95, 100, 58 S. Ct. 443, 446, 82 L. Ed. 685 (1938). Id. at 250.
III. The District Court Lacked Pendent Jurisdiction to Decide the State Claims After Dismissing the Constitutional Claim Pursuant to Rule 12(b)(1) and in the Alternative Should have Abstained from Deciding Issues Unique to North Carolina.
The Fourth Circuit erred in holding that the District Court did not abuse its discretion in ruling on the state contract claim. Because the District Court found it lacked subject matter jurisdiction to hear the Contract Clause claim (Count I), it did not have jurisdiction to rule on the state contract claim. Thus, said claim should have been remanded to Gaston County Superior Court, where the Plaintiffs originally filed suit.
According to 28 U.S.C. § 1367(a), a district court has supplemental jurisdiction to hear all non-federal related claims provided it has original jurisdiction over the federal claim. In the case at bar, the District Court lacked original jurisdiction. "[T]his Court does not have subject matter jurisdiction over the Contract Clause claim, and the claim will be dismissed." Crosby v. Gastonia, 682 F. Supp. 2d 537, 545 (W.D.N.C. 2010). The Court then asserted that it had the option to exercise discretion discretion on the remaining claims. However, the District Court's rationale ignores the heart of § 1367(a). Before a federal district court can exercise supplemental jurisdiction, it must have assumed jurisdiction over the federal dispute. See Bell v. Hood, 327 U.S. 678, 683-84 (1946) (which was referenced in the Circuit Court opinion and states: "the complaint does in fact raise serious questions, both of law and fact, which the district court can decide only after it has assumed jurisdiction over the controversy").
In dismissing Count I under 12(b)(1), the District Court renounced its competency to hear the remaining state law claims. Therefore, the Circuit Court erred in upholding the District Court's grant of summary judgment with respect to said claims.
The Circuit Court proffers a "substance over form" argument in asserting that the District Court harmlessly erred and that it could have dismissed Count I according to 12(b)(6). A 12(b)(6) dismissal indicates the District Court has assumed jurisdiction over the dispute. The Circuit Court cites two cases where the Plaintiffs Contract Clause claim was dismissed under 12(b)(1). In neither case did the courts exercise supplemental jurisdiction to rule on related non-federal claims. Consider the case of Estate of Harshman v. Jackson Hole Mountain Resort Corp., 379 F.3d 116 (10th Cir. 2004). In this case, the Circuit Court unequivocally held that a district court's dismissal of action under Federal Tort Claims Act (FTCA), and of the government, for lack of subject matter jurisdiction, stripped the court of its original jurisdiction as to negligence and wrongful death claims occurring on federal land, and thus the court lacked supplemental jurisdiction as to pendant claims under Wyoming law. ... Id. See also Anaya v. Crossroads Managed Care Systems, Inc., 973 F. Supp. 1228 (D. Colo. 1997), reversed, 195 F.3d 584 (though ultimately reversed by the Circuit Court on the grounds that a federal claim was pled, the Circuit Court left undisturbed the District Court's reasoning that a federal district court would not exercise supplemental jurisdiction over state-law claims asserted along with civil rights claims where plaintiffs did not allege viable civil rights causes of action and therefore subject matter jurisdiction over state-law claims would be lacking in absence of federal claims). Thus, this is clearly a case of first impression regarding judicial authority and supplemental jurisdiction as it is applied to Contract Clause claims.
Additionally, the Circuit Court's decision reveals that there is not a uniform practice amongst the Circuits. Certiorari, if not granted for reasons enumerated in the previous section, should be allowed for the sole purpose of determining whether or not a district court can dismiss a federal claim pursuant to 12(b)(1) and retain supplemental jurisdiction over the remaining issues.
Perhaps of equal importance is that the Fourth Circuit has now placed itself in the position of deciding state law when abstention is the better course. In Pineman v. Oechslin, 637 F.2d 601 (2d Cir. 1981), the issue was whether certain pension rights of Connecticut state employees were vested and therefore protected by the United States Constitution. While acknowledging that a Trust analysis was appropriate, the Court abstained from the analysis, choosing instead to allow the Connecticut state court to make the determination of vesting.
The subject matter, the fixing of compensation benefits to state employees, is of vital importance to the State and its governmental functioning. See National League of Cities v. Usery, 426 U.S. 833, 96 S. Ct. 2465, 49 L. Ed. 2d 245 (1976). State autonomy and the relationship between state and federal authority would be impaired were the federal courts to set state policy independently and follow their own instincts as to state contract law. Considerations of comity that underlie our federal system of government make abstention appropriate. See Burford v. Sun Oil Co., 319 U.S. 315, 332, 334, 63 S. Ct. 1098, 1106, 1107, 87 L. Ed. 1424 (1943); Railroad Commission v. Pullman, 312 U.S. 496, 498, 501, 61 S. Ct. 643, 645, 85 L. Ed. 971 (1941).
Pineman v. Oechslin, 637 F.2d 601, 606 (2d Cir. 1981).
While clearly the Doctrine of Abstention is the exception rather than the rule, this Court has identified circumstances where it is warranted. "(a) Abstention is appropriate `in cases presenting a federal constitutional issue which might be mooted or presented in a different posture by a state court determination of pertinent state law.' County of Allegheny v. Frank Mashuda Co., 360 U.S. 185, 189, 79 S. Ct. 1060 at 1063, 3 L. Ed. 2d at 1166 (other citations omitted). ... (b) Abstention is also appropriate where there have been presented difficult questions of state law bearing on policy problems of substantial public import whose importance transcends the result in the case then at bar." Colorado River Water Conservation Dist. v. U.S., 424 U.S. 800, 814, 96 S. Ct. 1236, 1244, 47 L. Ed. 2d 483 (1976)
This Crosby action was initially filed in state court and removed by the respondent. Had the matter remained in North Carolina, there is little doubt that the plaintiff would have prevailed given the long precedent in North Carolina of protecting the vested state employee benefits. See Bailey v. State, 348 N.C. 130, 138, 500 S.E.2d 54, 58 (1998); Faulkenbury v. Teachers' and State Employees' Retirement System of North Carolina, 345 N.C. 683, 483 S.E.2d 422 (1997); Simpson v. North Carolina Local Government Employees' Retirement System, 88 N.C. App. 218, 363 S.E.2d 90 (1987); Wiggs v. Edgecombe County, 361 N.C. 318, 324, 643 S.E.2d 904, 908 (2007); Woodard v. North Carolina Local Governmental Employees' Retirement System, 335 N.C. 161, 435 S.E.2d 770 (1993).
In fact, when Gastonia introduced legislation to terminate the supplemental retirement fund, the North Carolina legislature refused to adopt the Bill. Counsel to the House Pension and Retirement Committee advised,
It appears that in dissolving the Fund in this manner the City of Gastonia proposed to pay vested members of the Policemen's Supplemental Retirement Fund amounts less than the benefit that they had been promised throughout their career with the Police Department. ... By electing to discontinue funding of the Gastonia Policemen's Supplemental Pension Fund, and dissolving the Fund as proposed in this bill, it appears that the City of Gastonia may impair the contractual rights f all of the vested and retired members of the Fund. If challenged, the City could be found to have violated the constitutional rights of its vested members and required by the court to hone its contractual obligation.
App. 67a-70a.
Despite the warning, the City of Gastonia nonetheless terminated the vested benefits of its loyal officers.
Therefore applying the abstention criteria set forth in Colorado, based upon North Carolina's precedent in dealing with vested state benefits, it is likely that (a) the federal constitution issue might be presented in a different light by a determination of pertinent state law; and (b) there are difficult issues of state law that bear upon not only the rights of the retired officers of Gastonia — but all North Carolina state employees.
CONCLUSION
The petition for a writ of certiorari should be granted.